The contractor registry – the blue book of building and construction – was sold to a benefit plan in 2012, according to the federal government, for far more than it was worth.
The U.S. Department of Labor sued Blue Book consultant Professional Fiduciary Services LLC on August 22 in federal court in White Plains alleging he used patently unrealistic revenue projections to price $ 26.7. millions of dollars.
PFS’s failure to fully analyze the transaction, the complaint claims, caused the employee’s plan to “overpay tens of millions of dollars above fair market value.”
The Entrepreneur Registry, based in the Jefferson Valley section of Yorktown, is also known as the blue book for the name of regional publications and databases that it distributes to the construction industry.
In 2012, James O’Malley, the owner, CEO and chairman, decided to sell the company to an employee share plan. With an ESOP – like a pension fund or profit-sharing plan – employees receive shares in the plan; when they leave, the company must buy back their shares at their fair market value.
ESOP had 473 participants at the end of 2017, according to a report from the Ministry of Labor, including employees, retirees and survivors of deceased beneficiaries.
O’Malley hired PFS of Milwaukee, Wisconsin to act as ESOP’s trustee and independent trustee and to close the deal. The consultant’s job was to close the deal if he found the purchase of company stock to be prudent and in the best interests of ESOP participants.
PFS, which received $ 27,500 to close the deal and then $ 16,000 per year for ongoing services, hired Prairie Capital Advisors to establish the fair market value of the Blue Book.
But Prairie, according to the Labor Department, said he would accept Blue Book’s financial information “as accurate without independent verification.” Prairie reportedly received a feasibility report from another consultant hired by O’Malley who estimated the company to be worth $ 26,765,000.
Prairie then allegedly used figures from the Blue Book which significantly inflated the valuation. He cited a 4-year compound annual growth rate of 0.4%, but the growth rate for the previous two years had fallen to a negative rate of 10.5%.
The decline was not simply a cyclical phenomenon, according to the complaint. The Blue Book’s print advertising revenue was disrupted by Internet competitors charging less for online advertising.
Prairie also accepted Blue Book’s projections of a compound annual sales growth rate of 2.2% for five years, then 6.3% for the next five years, without explaining how the company would achieve such growth. .
Prairie used low capital spending projections that assumed Blue Book would grow without replacing depleted assets, and low working capital count without “any explanation as to how this change would be possible.”
Prairie added a 10% “control premium”, the extra amount a buyer pays to control a business. But Prairie’s valuation model had already factored in a control premium, the complaint says. And ESOP wouldn’t actually control the company, as O’Malley had retained the right to appoint the majority of directors to the board.
PFS President Mickey Maier did not respond to an email request for comment.
Neither Prairie nor O’Malley are named as defendants in the lawsuit. The problem, according to the Department of Labor, is that PFS accepted Prairie’s assessment without questioning the glaring assessment errors.
PFS’s duty was to act cautiously and only in the best interests of ESOP and its beneficiaries, according to the complaint, but PFS did not negotiate material aspects of the transaction, including the price.
PFS got ESOP to buy 100% of the shares in O’Malley for $ 26.7 million, “the price that had been contemplated by the parties from the start.”
The Blue Book had also agreed to indemnify PFS for liability and attorney fees that could require ESOP to cover the costs of legal proceedings regarding PFS’s performance, even when the company violated its fiduciary obligations.
The Ministry of Labor accuses PFS of violating its fiduciary obligations and engaging in a prohibited transaction. The government is asking the court to demand that PFS return all the losses it caused to ESOP and rescind the compensation agreement.