Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 1 of 63 UNITED STATES DISTRICT COURT DISTRICT OF NORTH DAKOTA

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1 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 1 of 63 UNITED STATES DISTRICT COURT DISTRICT OF NORTH DAKOTA RAYMOND HANS, GAYLE HERBERT, JEREMY JACKEY, CHUCK LEBLANC, LARRY RICHMAN, DONNA WALKER and MICHAEL WEBSTER on behalf of themselves, individually and on behalf of all others similarly situated in the Former Employee Class; and CARLOS GONZALES, DONALD KLAIN, JOLENE MATHESON-GODSCHALK, and SIDNEY LEIN, on behalf of themselves individually and on behalf of all others similarly situated in the Current Employee Class; Plaintiffs, Civil Action No. 3:05-CV RRE-KKK v. GARY D. THARALDSON, CONNIE THARALDSON, ROGER THARALDSON, RAYMOND BRAUN and JAMES LOCHOW as the Trustees of the MICHELLE THARALDSON TRUST and as Trustees of the MATTHEW THARALDSON TRUST, SOUTH DAKOTA TRUST COMPANY, LLC as Trustee of the MICHELLE LYN THARALDSON LEMASTER DYNASTY TRUST, as Trustee of the MATTHEW THARALDSON DYNASTY TRUST and as Trustee of the MICHAEL THARALDSON DYNASTY TRUST, and LINDA THARALDSON individually and in her capacity as Trustee for the MICHAEL THARALDSON TRUST, FIFTH AMENDED CLASS ACTION COMPLAINT Defendants, and THARALDSON MOTELS, INC. EMPLOYEE STOCK OWNERSHIP PLAN, Nominal Defendant.

2 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 2 of 63 Plaintiffs, as participants and/or beneficiaries of the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust, individually and on behalf of all those similarly situated, by and through their attorneys, hereby allege as follows: NATURE OF THE ACTION 1. This action arises under the Employee Retirement Income Security Act of 1974 ( ERISA ), 29 U.S.C. 1001, et seq. and is brought on behalf of current and former employees of Tharaldson Motels, Inc. ( TMI or the Company ), who were participants in the Employee Stock Ownership Plan (the Tharaldson ESOP or the Plan ) to restore losses suffered by the Plan and obtain other equitable relief to remedy breaches of fiduciary duty by Defendants in connection with the sale of stock for a total of $500 million in or about January 1999 (the January 1999 Transaction ) and December 1999 (the December 1999 Transaction ) by insiders at Tharaldson to the Plan for more than adequate consideration (collectively the Transactions or the ESOP Transactions ). In connection with these Transactions, Defendants caused the Company and the Plan to enter into various debt obligations, which amounted to more debt than was prudent for the Company to reasonably service and which were not for the primary benefit of the Plan because their size and terms allowed the selling stockholders-lenders to siphon off virtually all of TMI s cash follow for several decades. In addition, by causing or permitting the Plan to engage in the December 1999 Transaction, which required the Plan and the Company to take on additional debt, the Transaction and the resulting additional debt eroded the value of the shares that the ESOP owned prior to the December 1999 Transaction. Finally, the Plan s Trustee, Defendant Gary Tharaldson, the sole Director, President and Chief Executive Officer of TMI and a member of the ESOP Committee at the time of the Transactions and one of the insiders who sold his shares to the ESOP, failed to act prudently and loyally in the interests 2

3 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 3 of 63 of the participants and beneficiaries of the Plan, or if the Trustee was directed to enter into the Transactions, accepted directions which he knew were not proper and were contrary to ERISA. 2. This action seeks relief against Defendant Gary Tharaldson (as the sole member of the Board of Directors and the Trustee) and the ESOP Committee, as fiduciaries of the Plan, to make good to the Plan any losses to the Plan resulting from these breaches, to restore to the Plan any profits of any fiduciary which have been made through the use of assets of the Plan and to obtain such other equitable or remedial relief as the Court may deem appropriate pursuant to ERISA 502(a)(2), 29 U.S.C. 1132(a)(2), and ERISA 409, 29 U.S.C This action also seeks relief against Defendants who sold their shares to the ESOP in the Transactions, as parties-in-interest and/or regardless of their status as fiduciaries of the Plan, including disgorgement or rescission, and other appropriate equitable relief pursuant to ERISA 502(a)(3). JURISDICTION & VENUE 3. This Court has jurisdiction over this action pursuant to 28 U.S.C because this is a civil action arising under the laws of the United States and pursuant to 29 U.S.C. 1132(e)(1), which provides for jurisdiction of actions brought under Title I of ERISA. 4. This Court has personal jurisdiction over each of the Defendants (a) all of the Defendants named in the Second Amended Complaint moved to transfer or consented to the transfer of this action to this Court, (b) upon information and belief, Defendants have or during the times relevant to this Complaint, had extensive contacts with the State of North Dakota as a result of their positions or affiliations with various Tharaldson Lodging entities, (c) a number of Defendants are, or at times relevant to this Complaint were, residents of the State of North Dakota, and (d) because ERISA provides for nationwide service of process. 5. Venue is proper in this district pursuant to 29 U.S.C. 1132(e)(2) because (a) all of the Defendants named in the Second Amended Complaint moved to transfer or consented to 3

4 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 4 of 63 the transfer of this action to this Court, and (b) at least one defendant resides or may be found in this district. Notwithstanding that venue is proper in this District, Plaintiffs, including the Plaintiffs who seek to be added to this Complaint, continue to assert that the District of Nevada was a more appropriate venue for this action because, among other reasons and for the reasons asserted in Plaintiffs Opposition to the Motion for Change of Venue, (a) most of the Defendants have, or during the times relevant to this Complaint, had extensive contacts with the State of Nevada, (b) a number of Defendants are, or at times relevant to this Complaint were, residents of the State of Nevada, (c) Defendant Gary D. Tharaldson, who served as the sole member of the Board of Directors of TMI, the Trustee of the TMI ESOP, and to the best of Plaintiffs knowledge was the sole member of the ESOP Committee as a result of his role as sole member of the Board of Directors, appears to be the sole fiduciary of the TMI ESOP at all times relevant to this Complaint, is, and at all relevant times was, a resident of the State of Nevada, and (d) because ERISA provides for nationwide service of process. As one of the newly added plaintiffs and proposed class representatives, Michael Webster, was a resident of the State of Nevada during his employment and but for the Order Transferring this Action to the District of North Dakota would have filed a separate complaint in the District of Nevada. PARTIES Plaintiffs 6. Plaintiff Raymond Hans is a former employee of TMI and is a vested participant in the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust. Plaintiff Raymond Hans resides in and during the time of his employment at TMI resided in and worked for TMI in Topeka, Kansas. 7. Plaintiff Gayle Herbert is a former employee of TMI who was employed by TMI for at least five years and is a vested participant in the Tharaldson Motels, Inc. Employee Stock 4

5 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 5 of 63 Ownership Plan and Trust. To date, Plaintiff Herbert has not received any distribution of her shares from the ESOP. Plaintiff Herbert resides in Sun Lakes, Arizona and during the time of her employment at TMI resided in and worked for TMI in Waco, Texas, and Chandler, Arizona. 8. Plaintiff Jeremy Jackey is a former employee of TMI who was employed by TMI for at least five years and is a vested participant in the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust. To date, Plaintiff Jackey has not received any distribution of his shares from the ESOP. Plaintiff Jackey currently resides in and during the time of his employment at TMI resided in and worked for TMI in or around Galloway, Ohio. 9. Plaintiff Chuck LeBlanc is a former employee of TMI and is a vested participant in the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust. Plaintiff LeBlanc currently resides in Florida and during the time of his employment at TMI resided in and worked for TMI in or around Canton, Ohio. 10. Plaintiff Larry Richman is a former employee of TMI and is a vested participant in the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust. Plaintiff Richman currently resides in and during the time of his employment at TMI resided in and worked for TMI in or around Peculiar, Missouri. 11. Plaintiff Donna Walker is a former employee of TMI who was employed by TMI for at least five years and is a vested participant in the Tharaldson Motels, Inc. Employee Stock Ownership Plan and Trust who has not received any distribution of her shares from the ESOP. Plaintiff Walker resides in and during the time of her employment at TMI resided in and worked for TMI in Lewisville, Texas. 12. Plaintiff Michael Webster is a former employee of TMI who was employed by TMI for at least five years and is a vested participant in the Tharaldson Motels, Inc. Employee 5

6 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 6 of 63 Stock Ownership Plan and Trust. To date, Plaintiff Webster has not received any distribution of his shares from the ESOP. Plaintiff Webster resides in California and during the time of his employment at TMI resided in and worked for TMI in Las Vegas, Nevada. Defendants 13. Defendant Gary D. Tharaldson, is, and at all relevant times was, the sole Director of TMI, the Trustee of the Tharaldson ESOP and at all times relevant to this complaint was the sole member of the ESOP Committee. At times relevant to this Complaint, Defendant Gary Tharaldson was also the President and Chief Executive Officer of various affiliated companies, including Tharaldson Enterprises, Tharaldson Motels, Inc., Tharaldson Property Management, Inc., Tharaldson Property Development Co., as well as numerous other Tharaldson entities. Defendant Gary Tharaldson is a resident of the State of Nevada. From the creation of the Plan on January 1, 1998, Defendant Gary Tharaldson has been a fiduciary with respect to the Plan within the meaning of ERISA 3 (21), 29 U.S.C (21), based on his appointment as Trustee of the Plan, as a member of the Tharaldson ESOP Committee and as the sole director of TMI, the duties for each of which are described below, and his exercise of authority and control of the Plan s assets in connection with involvement in the decision to cause the Plan to engage in the Transactions and to enter into various debt obligations entered into by the Plan in connection with the Transactions. Defendant Gary Tharaldson directly owned 49% of TMI prior to the Transactions and sold those shares in the January 1999 and/or December 1999 Transactions. Defendant Gary Tharaldson s ownership in TMI was set at 49% prior to the Transactions solely or primarily for personal tax and estate planning purposes and liability concerns because if Defendant Gary Tharaldson owned less than 50% of the TMI in the event of his death, Defendant Connie Tharaldson s estate taxes would be reduced significantly and the amount of time to repay the taxes would be increased. As such, Defendant Gary Tharaldson is, and should 6

7 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 7 of 63 be considered, the indirect owner of the shares owned by Defendant Connie Tharaldson and the owner of 50% or more of TMI pursuant to ERISA 3(14)(E), 29 U.S.C. 1002(14)(E). Accordingly, Defendant Gary Tharaldson is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(A),(E), (H) and/or (I), 29 U.S.C. 1002(14)(A),(H) and/or (I). 14. Defendant Connie Tharaldson is, and at all relevant times was, the wife of Defendant Gary Tharaldson. Defendant Connie Tharaldson is a resident of the State of Nevada and serves as a director, officer, employee and/or registered agent of numerous Nevada corporations. Prior to the Transactions, Defendant Connie Tharaldson owned 2.8% of TMI. Defendant Connie Tharaldson sold her shares in TMI in the January 1999 and/or December 1999 Transactions. Upon information and belief, Defendant Gary Tharaldson s ownership interest in TMI was set at 49% primarily for personal tax and estate planning purposes and liability concerns. As such, Defendant Connie Tharaldson is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), (H) and/or (I), 29 U.S.C. 1002(14)(F),(H) and/or (I). 15. Defendant Roger Tharaldson is the brother of Defendant Gary Tharaldson and is, upon information and belief, a resident of the State of Nevada. At the time of the January 1999 Transaction and/or the December 1999 Transaction, Defendant Roger Tharaldson was an officer, director or employee (or an individual having powers or responsibilities similar to those of officers or directors) of one or more TMI Affiliates that have adopted the TMI ESOP, including Tharaldson Excecutive Management. Prior to the Transactions, Defendant Roger Tharaldson directly owned 0.75% of TMI. Defendant Roger Tharaldson sold his shares in the January 1999 Transaction and/or the December 1999 Transaction. As such, Defendant Roger Tharaldson is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H). 7

8 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 8 of Defendant Linda Tharaldson is the former wife of Defendant Gary Tharaldson and is a resident of the State of Minnesota. Defendant Linda Tharaldson is named as a defendant individually and as the Trustee of the Michael Tharaldson Trust is a party-in-interest for the following reasons: (a) Upon information and belief, Linda Tharaldson is, and at the time of the Transactions was, an officer, director or employee (or an individual having powers or responsibilities similar to those of officers or directors) of one or more TMI Affiliates that have adopted the TMI ESOP, including Tharaldson Excecutive Management and/or Tharaldson Property Management. Prior to the Transactions, Defendant Linda Tharaldson directly owned 3.25% of TMI. Defendant Linda Tharaldson sold her shares in the January 1999 Transaction and/or the December 1999 Transaction. As such, Defendant Linda Tharaldson is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14) (H). (b) Defendant Linda Tharaldson as the Trustee for the Michael Tharaldson Trust (the Michael Tharaldson Trust ) is the trustee for a trust set up for the benefit of Michael Tharaldson, who is the son of Defendant Gary Tharaldson and is, and/or at the time of one or more of the Transactions was, a resident of the State of Nevada. Prior to the Transactions, the Michael Tharaldson Trust owned 7.75% of TMI. The Michael Tharaldson Trust sold its shares in the January 1999 Transaction and/or the December 1999 Transaction. Michael Tharaldson, the beneficiary of the Michael Tharaldson Trust, was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15) and an employee of TMI and/or an Affiliate at the time of the Transactions. As such, at the time of both Transactions, the Michael Tharaldson Trust 8

9 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 9 of 63 was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F) & (H), 29 U.S.C. 1002(14)(F) & (H). (c) By virtue of her position at a TMI ESOP Affiliate and her control over her individual ownership of 3.25% and her control of another 7.75% of TMI stock through the Michael Tharaldson Trust at the time of the Transactions, Linda Tharaldson was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H) and/or (I), 29 U.S.C. 1002(14)(H) and/or (I). 17. Defendants Raymond Braun and James Lochow are defendants in this action as the Trustees for the Michelle Tharaldson Trust (the Michelle Tharaldson Trust ), and as the Trustees for the Matthew Tharaldson Trust (the Matthew Tharaldson Trust ) (collectively the Michelle and Matthew Tharaldson Trusts ). Defendants the Michelle and Matthew Tharaldson Trusts are parties-in-interest for the following reasons: (a) The Michelle Tharaldson Trust is a trust set up for the benefit of Michelle Tharaldson, who is the daughter of Defendant Gary Tharaldson and is a resident of the State of Nevada. As of the January 1999 Transaction, the Michelle Tharaldson Trust owned 1,700,000 shares or more than 17% of the shares of -- TMI stock. In March 1999, the Michelle Tharaldson Trust sold, bequeathed and/or transferred 160,530 shares -- or a little more than 1.6% ownership of TMI -- to the Michelle Tharaldson Dynasty Trust so that as of the time of the December 1999 Transaction, the Michelle Tharaldson Trust was still a more than 10% shareholder of TMI. As such, at all relevant times (including at the time of both Transactions), the Michelle Tharaldson Trust was a more than 10% shareholder of TMI and as such was a party-in-interest with respect to the Plan within the meaning of ERISA 3(14)(H) and/or (I), 29 U.S.C. 1002(14)(H) and/or 9

10 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 10 of 63 (I). Additionally and alternatively, Michelle Tharaldson, the beneficiary of the Michelle Tharaldson Trust, was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15) and was an employee of TMI or an Affiliate as of the time of the Transactions. As such, at the time of both Transactions, the Michelle Tharaldson Trust was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F) (H) and/or (I), 29 U.S.C. 1002(14)(F), (H) and/or (I). (b) The Matthew Tharaldson Trust is a trust set up for the benefit of Matthew Tharaldson, who is the son of Defendant Gary Tharaldson and is, and/or at the time of one or more of the Transactions was, a resident of the State of Nevada. As of the January 1999 Transaction, the Matthew Tharaldson Trust owned 1,700,000 shares or more than 17% of the shares of -- TMI stock. In March 1999, the Matthew Tharaldson Trust sold, bequeathed and/or transferred 160,530 shares -- or a little more than 1.6% ownership of TMI -- to the Matthew Tharaldson Dynasty Trust so that as of the time of the December 1999 Transaction, the Michelle Tharaldson Trust was a more than 10% shareholder of TMI. As such, at all relevant times (including at the time of both Transactions), the Matthew Tharaldson Trust was a more than 10% shareholder of TMI and as such was a party-in-interest with respect to the Plan within the meaning of ERISA 3(14)(H) and/or (I), 29 U.S.C. 1002(14)(H) and/or (I). Additionally and alternatively, Matthew Tharaldson, the beneficiary of the Matthew Tharaldson Trust, was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15). As such, at the time of both Transactions the Matthew Tharaldson Trust was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), (H) and/or (I), 29 U.S.C. 1002(14)(F), (H) and/or (I). 10

11 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 11 of 63 (c) Defendants Raymond Braun and James Lochow as Trustees for both of these trusts as of the date of both Transactions, upon information and belief, have the power to transact business on behalf of each of the trusts and hold legal title to the assets of the trusts. By virtue of the authority held by Defendants Braun and Lochow as Trustees of the Michelle and Matthew Tharaldson Trusts, Defendants Braun and Lochow, at all relevant times (including at the time of both Transactions) were more than 10% shareholders of TMI and as such were a party-in-interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H). As such, Defendant the Michelle Tharaldson Trust and the Matthew Tharaldson Trust, each individually and/or collectively was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), (H) and/or (I), 29 U.S.C. 1002(14)(F) (H) and/or (I). 18. Defendant South Dakota Trust Company, LLC is a defendant in this action as the Trustee for the Michelle Lyn Tharaldson LeMaster Dynasty Trust ( Michelle Tharaldson Dynasty Trust ), as the Trustee for the Matthew Tharaldson LeMaster Dynasty Trust (the Matthew Tharaldson Dynasty Trust ), and as Trustee for the Michael Tharaldson LeMaster Dynasty Trust (the Michael Tharaldson Dynasty Trust ) (collectively the Dynasty Trusts ). Defendants the Dynasty Trusts are parties-in-interest for the following reasons: (a) The Michelle Tharaldson Dynasty Trust is a trust set up for the benefit of the unborn children of Michelle Tharaldson, a/k/a the unborn grandchildren of Defendant Gary Tharaldson, and the Grantor of such Trust is Michelle Tharaldson, the daughter of Gary Tharaldson. In addition, Matthew Tharaldson, the son of Mathew Tharaldson who also had a direct or indirect interest in the more than 10% of the shares of TMI, had a contingent interest in the Michelle Tharaldson Dynasty Trust. Likewise the heirs of 11

12 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 12 of 63 Matthew Tharaldson, the grandchildren of Defendant Gary Tharaldson, each have a contingent interest in the Michelle Tharaldson Dynasty Trust. The Michelle Tharaldson Dynasty Trust sold its shares in the December 1999 Transaction. At the time of the Transactions, each of the direct and contingent beneficiaries of the Michelle Tharaldson Dynasty Trust was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15). As such, at the time of the Transactions the Michelle Tharaldson Dynasty Trust was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), 29 U.S.C. 1002(14)(F). (b) The Matthew Tharaldson Dynasty Trust is a trust set up for the benefit of the unborn children of Matthew Tharaldson, a/k/a the grandchildren of Defendant Gary Tharaldson, and the grantor of the Trust is Matthew Tharaldson, the son of Defendant Gary Tharaldson. In addition, Michelle Tharaldson (the daughter of Defendant Gary Tharaldson) who had had a direct and/or indirect interest in more than 10% of the shares of TMI, had a contingent interest in the Matthew Tharaldson Dynasty Trust has a contingent interest in the Matthew Tharaldson Dynasty Trust. Likewise, the heirs of Michelle Tharaldson, the grandchildren of Defendant Gary Tharaldson, each have a contingent interest in the Matthew Tharaldson Dynasty Trust. The Matthew Tharaldson Dynasty Trust sold its shares in the December 1999 Transaction. At the time of the Transactions, each of the direct and contingent beneficiaries of the Michelle Tharaldson Dynasty Trust was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15). As such, at the time of the Transactions the Michelle Tharaldson Dynasty Trust was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), (H) & (I), 29 U.S.C. 1002(14)(F), (H) & (I). 12

13 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 13 of 63 (c) The Michael Tharaldson Dynasty Trust is a trust set up for the benefit of the children of Michael Tharaldson, a/k/a the grandchildren of Defendant Gary Tharaldson and the Grantor is Michael Tharaldson, the son of Defendant Gary Tharaldson. In addition, Matthew Tharaldson (and his heirs) and Michelle Tharaldson (and her heirs), each of whom were more than 10% shareholders in TMI prior to the Transactions, each have a contingent interest in the Michael Tharaldson Trust. At the time of the Transactions, each of the direct and contingent beneficiaries of the Michelle Tharaldson Dynasty Trust was a relative of Defendant Gary Tharaldson within the meaning of ERISA 3(15), 29 U.S.C. 1002(15). As such, at the time of the Transactions the Matthew Tharaldson Dynasty Trust was a party in interest with respect to the Plan within the meaning of ERISA 3(14)(F), (H) & (I), 29 U.S.C. 1002(14)(F), (H) & (I). (d) Additionally and alternatively, each of the Dynasty Trusts is controlled by the same Investment Committee, which has the sole authority and discretion with respect to investments including the sale of trust property. For each Dynasty Trust at the time of the December 1999 Transaction, the members of the Investment Committee constituted Mark Knutson, an employee of TMI as of the December 1999 Transaction and Colleen Haugen, an employee of an Affiliate of TMI as of the December 1999 Transaction. As such, both Mr. Knutson and Ms. Haugen were parties-in-interest within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H). By virtue of the authority held by Mark Knutson and Colleen Haugen with respect to the Dynasty Trusts at the time of the December 1999 Transaction, the Dynasty Trusts constituted an parties-in-interest within the meaning of ERISA 3(14)(H). 13

14 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 14 of Pursuant to the Declaration of Gary D. Tharaldson dated August 5, 2005 ( Tharaldson Declaration ), during all times relevant to the Complaint, Defendant Gary Tharaldson was the sole member of the Board of Directors of Tharaldson Motels, Inc. (and/or participating affiliates). As such, Defendant Gary D. Tharaldson is alternatively referred to as the Director Defendant. As also explained by the Tharaldson Declaration, as the sole member of the Board of Directors, Defendant Gary Tharaldson had the authority to appoint the members of the Tharaldson ESOP Committee. As such, the Director Defendant, as the sole member of the Board of Directors acting on behalf of the Company, was a fiduciary with respect to the Plan within the meaning of ERISA 3(21), 29 U.S.C. 1002(21) by virtue of (a) the discretionary authority, power and/or control which he exercised over the appointment, monitoring and/or removal of the Committee and/or the Plan s Trustee, (b) the discretionary authority, power and/or control which he could or did exercise as acting as the Committee, and/or (c) the discretionary authority, power and/or control which he could exercise or did exercise in providing direction to the Plan s Trustee, as described more fully below. 20. Upon information and belief based on the Tharaldson Declaration and other information, including communications by high-level management at TMI (including current fiduciaries of the ESOP) to ESOP Participants (including some of the Named Plaintiffs), the Director Defendant had not appointed anyone to serve on the ESOP Committee referred to in Section 8.2 of the Governing Plan Documents at the time of the Transactions. As explained in the Tharaldson Declaration, in the absence of such appointment, the Board of Directors of TMI, which at all times relevant to the Complaint consisted solely of Defendant Gary Tharaldson, served as the ESOP Committee. According to a November 14, from Tharaldson Lodging Vice-President of Operations Charles Krumwiede to Dean Manternach, Regional Vice- 14

15 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 15 of 63 President of Tharaldson Lodging on which ESOP Communications Committee member and TMI Vice President of Operation for the Extended Services Division Aimee Fyke, TMI Secretary and current member of the Board of Directors (and therefore also a current TMI ESOP Committee member) Doug Dobmeier were copied (the November 14, ), the Board of Directors constitutes the TMI ESOP Committee. To the extent that during the course of discovery Plaintiffs discover that persons other than Gary Tharaldson were members of the ESOP Committee (including, but not limited to, the members of the ESOP Communications Committee) at the time of the Transactions, Plaintiffs will seek to name those persons individually. As such, the Board of Directors and/or Gary Tharaldson and/or any other member of the ESOP Committee, individually and collectively, is referred to as the ESOP Committee Defendant(s). During all relevant times, the ESOP Committee Defendant(s) was a fiduciary with respect to the Plan within the meaning of ERISA 3 (21), 29 U.S.C (21) because, among other things, the ESOP Committee Defendant(s) (a) had the authority to give, purported to give, or actually gave direction to the Trustee of the ESOP in connection with the purchase and acquisition of investments on behalf of the Plan (including the Transactions and associated debt obligations entered into by the Plan in connection therewith), (b) served as Plan Administrator and named fiduciary and the Governing Plan Documents gave them discretionary authority and control over the management and administration of the Plan and authority and control over Plan assets, as more fully described below, and/or (c) held themselves out, individually as members of or collectively to constitute, the ESOP Committee with the authority and discretion described in (a) and (b). 21. Defendants Gary Tharaldson, Connie Tharaldson, Linda Tharaldson Roger Tharaldson, the Michelle Tharaldson Trust, the Michelle Tharaldson Dynasty Trust, the Matthew 15

16 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 16 of 63 Tharaldson Trust, the Matthew Tharaldson Dynasty Trust, the Michael Tharaldson Trust, Michael Tharaldson Dynasty Trust, are former shareholders of Tharaldson Motels, Inc who sold their shares of Tharaldson stock to the Plan in the January 1999 Transaction and/or the December 1999 Transaction and are collectively referred to as the Selling Defendants. The January 1999 and/or December 1999 Transactions between the ESOP and the Selling Defendants constituted prohibited transactions directly or indirectly with parties- in-interest with respect to the Plan within the meaning of ERISA 3(14)(A), (E), (F), (H) and/or (I), 29 U.S.C. 1002(14)(A), (E), (F), (H) and/or (I) and ERISA 406, 29 U.S.C Defendant Gary D. Tharaldson was the sole Director of TMI at the time of the January 1999 Transaction and/or the December 1999 Transaction and is alternatively referred to as the Selling Director Defendant. Nominal Defendant 23. Nominal Defendant Tharaldson Employee Stock Ownership Plan ( ESOP or the Plan ) is a defined contribution plan within the meaning of ERISA 3(35), 29 U.S.C. 1002(35). The ESOP is named as a defendant in this action pursuant to Federal Rules of Civil Procedure Rule 19, solely to assure that complete relief can be granted. Relevant Non-Defendants 24. The Selling Non-Defendants. The following persons owned shares in TMI prior to the Transactions and sold their shares of TMI in the Transactions, but are not named as defendants in this action because, based upon the available information and the Answer of Gary Tharaldson to the Second Amended Complaint, they do not constitute parties in interest with respect to the Plan within the meaning of ERISA 3(14), 29 U.S.C. 1002(14) and/or : (a) Colleen Haugen is Defendant Gary Tharaldson s sister and is a resident of the State of North Dakota. Colleen Haugen is and, upon information and belief at the 16

17 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 17 of 63 time of the Transactions, was an employee (or an individual having powers or responsibilities similar to those of officers or directors) of one or more TMI Affiliates that have adopted the TMI ESOP, including Tharaldson Excecutive Management and/or Tharaldson Enterprises. Prior to the Transactions, Colleen Haugen directly owned 1.1 % of TMI. Colleen Haugen sold her shares in the January 1999 Transaction and/or the December 1999 Transaction. As such, Colleen Haugen is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H). (b) Delphine Nauer, the sister of Gary Tharaldson, owned 0.45% of TMI prior to the Transactions and sold her shares in the Transactions. Ms. Nauer may have been employed at an Affiliate of TMI from at least January 1, 1998 to August 18, As such Delphine Nauer may have been a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H) at the time of the January 1999 Transaction if that transaction occurred prior to August 18, 1999; however, after August 18, 1999, Ms. Nauer was not (1) a fiduciary, counsel or employee of the TMI ESOP at the time of any of the Transactions; (2) was not a person providing services to the TMI ESOP at the time of any of the Transactions; (3) was not an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors) or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G) of ERISA 3(14), 29 U.S.C. 1002(14), or of the TMI ESOP. (c) Cleone Nitti, the sister of Gary Tharaldson, owned 0.45% of TMI prior to the Transactions and sold her shares in the Transactions, but was not (1) a fiduciary, counsel or employee of the TMI ESOP at the time of any of the Transactions; (2) was 17

18 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 18 of 63 not a person providing services to the TMI ESOP at the time of any of the Transactions; (3) was not an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors) or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G) of ERISA 3(14), 29 U.S.C. 1002(14), or of the TMI ESOP. (d) Rodney Tharaldson is the brother of Defendant Gary Tharaldson and is a resident of the State of North Dakota. At the time of the January 1999 Transaction and/or the December 1999 Transaction, Rodney Tharaldson was an officer, director or employee (or an individual having powers or responsibilities similar to those of officers or directors) of one or more TMI Affiliates that have adopted the TMI ESOP, including Tharaldson Excecutive Management. Prior to the Transactions, Rodney Tharaldson directly owned 0.75% of TMI. Defendant Rodney Tharaldson sold his shares in the January 1999 Transaction and/or the December 1999 Transaction. As such, Rodney Tharaldson is a party in interest with respect to the Plan within the meaning of ERISA 3(14)(H), 29 U.S.C. 1002(14)(H). (e) The Fargo Moorhead Area Foundation owned 2 % of TMI prior to the December Transaction and sold its shares in the December Transaction but was not (1) a fiduciary, counsel or employee of the TMI ESOP at the time of any of the Transactions; (2) was not a person providing services to the TMI ESOP at the time of any of the Transactions; (3) was not an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors) or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G) of ERISA 3(14), 29 U.S.C. 1002(14), or of the TMI ESOP. 18

19 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 19 of 63 Colleen Haugen, Delphine Nauer, Cleone Nitti, Rodney Tharaldson and the Fargo Moorhead Area Foundation are collectively referred to as the Selling Non-Defendants. 25. The ESOP Communication Committee. The following persons, who were originally named as Defendants in this lawsuit as members of the ESOP Committee, have been dismissed without prejudice from this lawsuit pursuant to a Stipulation between Plaintiffs and those then-defendants and an Order of the United States District Court for the District of Nevada: (a) Darwin Braunagel was, at all relevant times, a member of the Tharaldson ESOP Communications Committee. Braunagel is, and all relevant times was, a resident of North Dakota. At times relevant to this Complaint, Braunagel was also Director of Sales and/or Marketing at Tharaldson Property Management, Inc. and/or TMI. (b) Annette Croves was, at all relevant times, a member of the Tharaldson ESOP Communications Committee. At all times relevant to this Complaint, Ms. Croves was also the Chief Financial Officer and Controller of Tharaldson Enterprises and the Chief Financial Officer of Tharaldson Development Company. (c) Aimee Fyke was, at all relevant times, a member of the Tharaldson ESOP Communications Committee. At times relevant to this Complaint, Ms. Fyke was also the Vice President of Operations for the Extended Services Division of Tharaldson Enterprises, Inc. (d) Mark Knutson was, at all relevant times, a member of the Tharaldson ESOP Communications Committee. At all relevant times, Mr. Knutson was a also Finance Manager for Tharaldson Enterprises. At times relevant to this Complaint, 19

20 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 20 of 63 Knutson also served as the Secretary for Lady Wellness of Nevada, a Nevada Corporation, and Tharaldson Development Corporation, a Nevada Corporation. (e) Anne McElroy was, at all relevant times, a member of the Tharaldson ESOP Communications Committee. At times relevant to this Complaint, Ms. McElroy was also a Marketing Director for Tharaldson Enterprises. (f) Tom Schneider was at all relevant times a member of the Tharaldson ESOP Communications Committee. From 1997 through August 2001, Mr. Schneider was also a Regional Vice President of Tharaldson Property Management. Darwin Braunagel, Annette Croves, Aimee Fyke, Mark Knutson, Anne McElroy and Tom Schneider are collectively referred to as the ESOP Communications Committee. Based on the Answer of Defendant Gary Tharaldson, the Tharaldson Declaration, the Answers of each of the members of the ESOP Communications Committee (and their declarations), the ESOP Communications Committee was not the same as the ESOP Committee and did not have the authority or responsibility of the ESOP Committee, nor was the ESOP Communications Committee, collectively or individually, appointed by the Board of Directors pursuant to the Governing Plan Documents as member(s) of, nor did they ever act as the ESOP Committee. Based on the Tharaldson Declaration, the purpose of the ESOP Communications Committee was only to communicate, celebrate and market the ESOP to their fellow employees and at no time did the ESOP Communications Committee, individually or collectively, exercise any discretionary authority or discretionary control respecting the management of the TMI ESOP or exercise any authority or control respecting management or disposition of its assets or have any discretionary authority or discretionary responsibility in the administration of the TMI ESOP. 20

21 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 21 of 63 THE PLAN 26. The Tharaldson Employee Stock Ownership Plan is an employee benefit Plan within the meaning of ERISA Sections 3(3) and 3(2)(A), 29 U.S.C. 1002(3) and 1002(2)(A), established by Tharaldson purportedly for the exclusive benefit of its participants to provide retirement benefits for employees of Tharaldson Motels, Inc. in which the assets of the Plan are to be invested primarily in Company stock. 27. The Plan is designed to be an employee stock ownership plan ( ESOP ) that meets the requirements of Section 4975(e)(7) of the Internal Revenue Code (the Code ) and Section of the Regulations promulgated by the Secretary of the Treasury that pertain to the Code. 28. At the times relevant to this Complaint, the terms of the Plan were governed by the governing Plan documents, effective January 1, 1998, or upon information and belief, substantially similar terms (hereinafter the Governing Plan Documents ). Participation in The Plan 29. Pursuant to Section 2.1 of the Governing Plan Documents, an employee of TMI or an Affiliate (defined as a member of a controlled group of corporations within the meaning of Section 414(b) of the Code) became eligible to participate in the Plan upon the attainment of age 21 and the completion of one year of service with TMI or an Affiliate prior to January 1, As of January 1, 2002, the Plan was amended to require only six months of service with TMI. All such employees are eligible to participate in the Plan, except for those employees who were (1) employees covered by a collective bargaining agreement, (2) nonresident aliens who received no earned income from TMI or an Affiliate from sources within the United States, (3) leased employees, or (4) employees of a non-adopting Affiliate (such eligible employees are hereinafter referred to as Tharaldson employees ). 21

22 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 22 of Pursuant to Defendant Gary Tharaldson s Answers to Plaintiffs First Set of Interrogatories, the following Tharaldson Lodging entities (in addition to TMI) are Affiliates of and have adopted the TMI ESOP: (a) Tharaldson Employee Management, Inc.; (b) Tharaldson Lodging I, Inc.; (c) Tharaldson Lodging I-A, Inc; (d) Tharaldson Lodging II, Inc; (e) Tharaldson Property Management, Inc.; (f) Tharaldson Development, Co.; (g) Midwest Heritage Inn of Souix Falls, Inc.; (h) Tharaldson Executive Management, Inc.; and (i) Tharaldson Communications, Inc. Accordingly, the eligible employees of all such Tharaldson Lodging entities are participants in the TMI ESOP. 31. Pursuant to Section 2.2 of the Governing Plan Documents, Tharaldson employees were entitled to begin participation in the Plan on the earlier of the first day of the Plan Year (which operated on a calendar year) or the first day of the seventh month of the Plan Year following the commencement of their employment. Pursuant to Section 4.11 of the Governing Plan Documents, absent retirement, death or disability, the Plan provided for 100% cliff vesting for a Tharaldson employee who had five years of participation in the Plan. Fiduciaries of the Plan 32. Pursuant to Section 8.1 of the Governing Plan Documents, TMI was required to appoint a Committee (the Committee or the ESOP Committee ) which had the overall responsibility for administering and operating the Plan. Pursuant to Section 8.2(a) of the Governing Plan documents, the Committee was a named fiduciary pursuant to ERISA 402(a)(2), the Administrator pursuant to ERISA 3(16) and the agent for service of process of the Plan. 33. Pursuant to Section 8.2 of the Governing Plan Documents, the Board of Directors of TMI was responsible for appointing the members of the Committee and had the power to remove the members of the Committee with or without cause. Moreover, in the absence of the 22

23 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 23 of 63 appointment of members of the Committee, the Board of Directors of the Company served as the Committee. Pursuant to Section 9.9 of the Governing Plan Documents, the Board of Directors had the power to appoint an investment manager to manage, acquire or dispose of all or part of the Trust assets in accordance with the provisions of the Plan and Trust agreement and who, if authorized by the ESOP Committee, could give written instructions to the Trustee with respect to acquiring, managing and disposing of assets managed by the investment manager. Pursuant to Section 9.12 of the Governing Plan Document, the Board of Directors also had the power to appoint the Trustee and to remove the Trustee any time... upon five days written notice to the Trustee, with or without cause. Accordingly, the members of the Board of Directors were fiduciaries within the meaning of ERISA 3(21)(A), 29 U.S.C. 1002(21)(A), with respect to the Plan in exercising their authority and power to appoint, monitor, supervise and remove the members of the Committee, the investment manager, and the Trustee and/or by virtue of serving as the default Committee. 34. Pursuant to Section 8.4 of the Governing Plan Documents, the Committee was required to enforce the Plan and Trust in accordance with [its] terms and had all the powers necessary to carry out such provisions. The Committee also had the power to authorize all disbursements from the Trust by the Trustee in accordance with the Plan s terms. Pursuant to Section 8.5 of the Governing Plan Documents, the Committee had the authority to control and manage the operation and administration of the Plan. Pursuant to Article IX of the Governing Plan Documents, the Committee had the power to direct the Trustee as to the portion of the Trust Fund that shall be invested in Company Stock and had the power to direct the Trustee to invest the Trust Fund in property other than Company Stock. Accordingly, the members of the 23

24 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 24 of 63 ESOP Committee, individually and/or collectively, were fiduciaries within the meaning of ERISA 3(21)(A), 29 U.S.C. 1002(21)(A). 35. Pursuant to Section 9.7 of the Governing Plan Documents, the Trustee had the authority to manage and control the assets of the Plan pursuant to the terms of the Plan and the Trust including, [t]o the extent the Committee has not directed the Trustee as to the investment of the Trust Fund, the Trustee was required to diversify such investments so as to minimize the risk of large losses, unless, under the circumstances, it is clearly prudent not to do so. Pursuant to Section 9.8, the Trustee had the following powers, among others: (a) To sell any property at any time held by the fund, for such consideration and upon such terms as the Trustee deemed advisable; (b) At the direction of the Committee, to borrow from time to time money from persons or others (but not from a party in interest) for the purposes of the Trust... on such terms and conditions as the Trustee may deem advisable. (c) At the direction of the Committee, to borrow money [and] to assume indebtedness... provided, however, if any loan transaction is with a Disqualified Person... or a Disqualified Person guarantees a loan to the Plan or Trust only if certain conditions are met. (d) To invest and reinvest... in such manner and to such extent as is prudent under the circumstances. (e) To do all acts, whether or not expressly authorized... which [the Trustee] may deem necessary and proper for the protection of the property [of the Plan] and to carry out the purposes of the Plan. 24

25 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 25 of 63 Pursuant to Section 9.10 of the Governing Plan Documents, in exchange for providing services to the Plan, the Trustee was entitled to reasonable compensation for its services. Accordingly, the Trustee was a fiduciary with respect to the Plan within the meaning of ERISA 3 (21), 29 U.S.C (21), based on his authority as Trustee with respect to the investment of Plan assets. 36. Pursuant to Section 9.9 of the Governing Plan Documents, the Board of Directors could, but was not required to appoint an investment manager to manage, acquire or dispose of all or part of the Trust assets in accordance with the provisions of the Plan and Trust agreement. If such an investment manager was appointed by the Board of Directors, the ESOP Committee could, but was not required to, give written instructions to the Trustee with respect to acquiring, managing and disposing of assets managed by the investment manager. Only if such an investment manager was appointed and such written instructions were given to the Trustee, was the Trustee required to follow such instructions and was under no duty to make an independent determination whether such instruction was proper. Upon information and belief, at least at the time of the January 1999 Transaction and the December 1999 Transaction, no such investment manager was properly appointed and/or no such written instructions were properly given to the Trustee. Contributions to and Investments of the Plan 37. Pursuant to Section 3.1 of the Governing Plan Documents, each Plan year, TMI (and any Affiliate) was required to make cash contributions to the Plan in such amounts as necessary to pay any currently maturing obligations under an Acquisition Loan, notwithstanding that any other employer contribution was entirely discretionary. Pursuant to the various Audited Financial Statements and Schedules for the Tharaldson ESOP prepared by Ernst & Young, as 25

26 Case 3:05-cv RRE-KKK Document 745 Filed 05/08/12 Page 26 of 63 described more fully below, the ESOP loan agreements provide for interest-only payments until maturity, which vary from 2019 through Pursuant to Section 3.7 of the Governing Plan Documents, only participants who had attained age 55 and who had completed at least 10 years of Participation in the Plan were entitled to direct up to 50% of their portion of the Participant s Account in investments other than Company Stock. Upon information and belief, at least at the time of the January 1999 Transaction and the December 1999 Transaction, no participants in the ESOP were entitled to diversify their portion of their account in the Plan and/or none of the accounts of any of the participants were diversified. 39. Pursuant to Section 3.8 of the Governing Plan Documents, the Committee was authorized, but not required, to direct the Trustee to incur an Acquisition Loan to finance the acquisition of Company Stock for the Trust or to repay a prior acquisition Loan. 40. Pursuant to Section 9.3 of the Governing Plan Documents, the purpose of the Plan was to invest primarily and hold Company Stock for the benefit of the Participants and the Beneficiaries of Participants. As such, the Committee was required to direct the Trustee as to the portion of the Trust Fund which was to be invested in Company Stock at a particular time in addition, as directed by the Committee, the Trustee was permitted to also invest the Trust Fund in property other than Company Stock. Allocation of Stock to Participant Accounts 41. Pursuant to Section 4.1 of the Governing Plan Documents, employer contributions for the Plan Year (based on a calendar year), are allocated to the Account of each Participant (if employed on the last day of the Plan Year and if they performed at least 1,000 hours of service during the Plan Year) as of the Valuation Date (generally, the last day of the Plan Year). 26