Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 1 of 9 JOHN W. HUBER, United States Attorney (#7226) JARED C. BENNETT, Assistant United States Attorney (#9097) 111 South Main Street, #1800 Salt Lake City, Utah 84111 (801) 524-5682 Email: jared.bennett@usdoj.gov Associated Local Counsel M. Patricia Smith, Solicitor of Labor Janet M. Herold, Regional Solicitor Ian H. Eliasoph, ERISA Counsel Andrew Shultz, CA Bar No. 237231 Boris Orlov, CA Bar No. 223532 350 South Figueroa Street, Suite 370 Los Angeles, CA 90071 (213) 894-5410 Email: orlov.boris@dol.gov Attorneys for Plaintiff IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH CENTRAL DIVISION THOMAS E. PEREZ, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR, CIVIL ACTION NO. 2:16CV1159DBP v. PLAINTIFF, BANKERS TRUST COMPANY, BANKERS TRUST COMPANY OF SOUTH DAKOTA, and MONA VIE, INC. EMPLOYEE STOCK OWNERSHIP PLAN, COMPLAINT FOR ERISA VIOLATIONS DEFENDANTS. Plaintiff THOMAS E. PEREZ, Secretary of Labor, United States Department of Labor ( Secretary ) pursuant to his authority under 502(a)(2) and (5) of the Employee Retirement Income Security Act of 1974 ( ERISA ), 29 U.S.C. 1132(a)(2) and (5), alleges: 1
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 2 of 9 JURISDICTION AND VENUE 1. This action arises under Title I of the Employee Retirement Income Security Act of 1974 ( ERISA ), as amended, 29 U.S.C. 1001-1191c, and is brought by the Secretary under ERISA 409 and 502(a)(2) and (5), 29 U.S.C. 1109 and 1132(a)(2) and (5), to enjoin acts and practices that violate the provisions of Title I of ERISA, to obtain appropriate equitable relief for breaches of fiduciary duties under ERISA, and to obtain such further equitable relief as may be appropriate to redress and to enforce the provisions of Title I of ERISA. 2. This Court has subject matter jurisdiction over this action pursuant to ERISA 502(e)(1), 29 U.S.C. 1132(e)(1). 3. Venue of this action lies in the United States District Court of Utah, pursuant to ERISA 502(e)(2), 29 U.S.C. 1132(e)(2), because the Mona Vie, Inc. Employee Stock Ownership Plan (the Plan or ESOP ) was administered in the District of Utah, within this district, and the fiduciary breaches at issue took place within this district. PARTIES 4. Plaintiff, the Secretary of Labor, is vested with authority to enforce the provisions of Title I of ERISA by, among other things, filing and prosecuting claims against fiduciaries and other parties who commit violations of ERISA. ERISA 502(a)(2) and (5), 29 U.S.C. 1132(a)(2) and (5). 5. Defendant Bankers Trust Company is an Iowa corporation headquartered in Iowa. At all relevant times, Bankers Trust Company was and is a named Trustee and fiduciary of the Plan, within the meaning of ERISA 3(21)(A)(i) and (iii), 29 U.S.C. 1002(21)(A)(i) and (iii), and a party in interest to the Plan within the meaning of ERISA 3(14)(A), (E) and (H), 29 2
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 3 of 9 U.S.C. 1002(14)(A), (E) and (H). 6. Defendant Bankers Trust Company of South Dakota (collectively with Bankers Trust Company Bankers Trust or BTC ) is a South Dakota Limited Liability Company. At all relevant times, Bankers Trust Company of South Dakota acted on behalf of Bankers Trust Company as Trustee and fiduciary of the Plan, within the meaning of ERISA 3(21)(A)(i) and (iii), 29 U.S.C. 1002(21)(A)(i) and (iii), and a party in interest to the Plan within the meaning of ERISA 3(14)(A), (E) and (H), 29 U.S.C. 1002(14)(A), (E) and (H). 7. Defendant ESOP is an employee benefit plan within the meaning of ERISA 3(3), 29 U.S.C. 1002(3), and is subject to the provisions of Title I of ERISA pursuant to ERISA 4(a)(1), 29 U.S.C. 1003(a)(1). The ESOP was established by Mona Vie on November 17, 2010 retroactively effective as of January 2, 2010. The ESOP is joined as a party defendant pursuant to Rule 19(a) of the Federal Rules of Civil Procedure solely to assure that complete relief can be granted. INTRODUCTION 8. The Secretary is charged with enforcing the provisions of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. 1001 et seq. One of ERISA's goals is to ensure "the soundness and stability of plans with respect to adequate funds to pay promised benefits." ERISA 2(a), 29 U.S.C. 1001(a). To protect plan investments, ERISA requires that those who manage the investments act solely, exclusively and prudently in the interests of plan participants. ERISA 404(a)(1)(A) & (B), 29 U.S.C. 1104(a)(1)(A) & (B). 9. Title I of ERISA also creates per se prohibitions barring conflict of interest transactions between a plan and a party in interest. ERISA 406-408, 29 U.S.C. 1106-1108. 3
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 4 of 9 Congress concluded that certain transactions present such grave opportunities for abuse that, except in narrowly-defined circumstances, they should be prohibited. Thus, subject to certain narrow exceptions, ERISA prohibits a fiduciary from causing a plan to engage in the sale or exchange of property between the plan and a party in interest, ERISA 406(a)(1)(A), 29 U.S.C. 1106(a)(1)(a). While a Plan in narrow circumstances can purchase the security of a Plan sponsor, a party in interest, such a purchase is prohibited if the Plan pays more than adequate consideration. ERISA 408(e), 29 U.S.C. 1108(e). 10. When ERISA's strict fiduciary standards are not met, the Secretary has the authority to seek relief under ERISA 409(a) and 502(a)(2) & (5), 29 U.S.C. 1109(a) and 1132(a)(2) & (5), to restore plan losses, to recover unjust profits and to obtain other remedial and equitable relief as the court may deem appropriate. The Secretary may also seek injunctions to prevent those who have violated their fiduciary duties from managing or providing services to employee benefit plans in the future. GENERAL ALLEGATIONS 11. Mona Vie was founded in 2005 as a privately held multi-level marketing (MLM) company specializing in the sale of acai berry juice products. Mona Vie sold its products through a network of independent distributors who received commissions on their own sales plus commissions for sales by distributors they recruited and their down the line distributors. 12. The ESOP was established on November 17, 2010, retroactively effective as of January 2, 2010, by Mona Vie, the Plan sponsor, to provide retirement benefits to eligible employees. The ESOP was funded exclusively through employer contributions 13. The Plan s governing documents named Mona Vie as the sponsoring employer and Bankers Trust as the Plan Trustee. 4
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 5 of 9 14. Defendants caused the ESOP to purchase newly issued Mona Vie shares for an amount significantly in excess of what those shares were worth. The ESOP overpaid for the company s shares as a result of the Defendants failures to meaningfully review the stock purchase. Instead, BTC relied on the findings of an appraiser who used grossly inflated revenue projections for a rapidly declining company. BTC failed to ensure that the financial information provided to the appraiser and used in valuations was accurate and complete. BTC also failed to question and reject the excessive revenue and other assumptions underlying those valuations. In addition, BTC failed to understand or investigate how to calculate the purchase price of newly issued stock and account for dilution which led to a further overpayment by the ESOP. As a result of these failures, BTC caused the ESOP to overpay for shares in the company. Those shares are now completely worthless because Mona Vie has since gone out of business. SPECIFC ALLEGATIONS RELATED TO ESOP TRANSACTION 15. On November 17, 2010 the Plan purchased 40% of Mona Vie or 12,861,861 shares of newly-issued Mona Vie stock for $186,496.985--$14.50 per share (this transaction shall be referred to as the November 17, 2010 ESOP transaction ). The Plan financed the purchase by borrowing $186,496,985 from the Company, to be repaid in fifteen annual payments at 10% interest per annum. 16. Bankers Trust retained Chartwell Capital Solutions ( Chartwell or Appraiser ), a valuation services firm, to provide a valuation of Mona Vie. The valuation suffered from a number of flaws including unrealistic revenue projections, failure to account for underlying condition of Mona Vie s business and risks posed by the distributorship structure. 17. BTC and Chartwell relied on grossly inflated revenue projections to value Mona Vie. While Mona Vie experienced explosive revenue growth topping at approximately 5
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 6 of 9 $850,000,000 in 2008 the growth was short lived and Mona Vie experienced severe revenue declines of 18.4% in 2009 and 24% in 2010. Despite this decline, Chartwell, at Mona Vie s urging, assumed in its valuation a post 2011 growth rate of 25%. 19. Chartwell attempted to remedy the use of unrealistic growth projections by applying a specious 50% discount rate in its discounted cash flow analysis. It is an improper valuation method to address doubt in the achievability of management projections by merely increasing the company specific risk premium component of the discount rate in a discounted cash flow analysis. Instead of proceeding with the transaction, BTC should have asked Mona Vie management to adjust the projections to account for the perceived deficiencies or request new projections from Mona Vie that were reasonable. 20. The appraisal failed to properly account for the significant risk posed by the MLM structure and the declines in the distributor network. As an MLM company that relied on an acai berry based juice for virtually all its sales, Mona Vie s business model was imperiled by the fact that its distribution network was dramatically shrinking. From August 2009 to August 2010, new distributor enrollments, which Chartwell identified as a key driver of growth, had declined by 23% globally and 63% in the United States, Mona Vie s largest market. Total distributors had declined by 44% in the same time period. In addition, the distribution network was highly concentrated and vulnerable to a few individuals including one distributor accounting for approximately 50% of domestic sales. Those distributors that remained in the network were insisting on better terms from Mona Vie, increasing Mona Vie s costs and threatening to depart for more attractive opportunities. This presented a significant risk to Mona Vie s ability to reach revenue targets. 21. As a result of BTC s failure to identify the Chartwell report s flaws, assumptions 6
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 7 of 9 and inaccuracies, the value it set for Mona Vie stock were far higher than the stocks actual fair market value. Therefore, the ESOP paid more than adequate consideration for Mona Vie stock. 23. Further, BTC failed to understand, investigate or document how to calculate the purchase price of the newly issued shares. The Chartwell valuation provided a pre- transaction Fair Market Value range of $273,620,000 to $363,745,000 for 19,292,791 outstanding shares or $13.99 to $18.66 per share. Forty percent of this range equals $109,448,000 to $145,498,000. Instead, Defendants paid $186,496,985 for 12,861,861 shares (or $14.50 per share), 40% of posttransaction shares of Mona Vie. The failure to properly calculate the price of newly issued stock and account for dilution caused a further overpayment. 23. In addition, BTC failed insure complete independence from Mona Vie during the negotiations because it was negotiating the ESOP purchase price with Mona Vie at the same time the two were negotiating BTC s engagement and fee for ongoing trustee work contingent on the successful close of the ESOP transaction. Ongoing trustee fees were significantly higher than the relatively modest transaction fee BTC was receiving and provided financial incentive for BTC to reach a deal and agree to Mona Vie s inflated sales price. ERISA VIOLATIONS 24. Based on the facts set forth in paragraphs 1-23 above, Defendants violated ERISA 404(a)(1)(A) and (B), 406(a)(1)(A) and (D) and (2), 29 U.S.C. 1054(g), 1103(c)(1), 1104(a)(1)(A) and (B), 1106(a)(1)(A) and (D) as follows: a. Both prior to and at the time of the November 17, 2010 ESOP transaction, Defendants failed to act solely in the interest of the participants and beneficiaries of the Plan and for the exclusive purpose of providing benefits to the participants and their beneficiaries with respect to that 7
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 8 of 9 transaction, in violation of ERISA 404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A); b. Both prior to and at the time of the November 17, 2010 ESOP transaction, Defendants failed to act with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims with respect to that transaction, in violation of ERISA 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B); c. Defendants caused the Plan to engage in transactions that they knew or should have known constituted a direct or indirect sale or exchange of any property between the Plan and a party in interest, in violation of ERISA 406(a)(1)(A), 29 U.S.C. 1106(a)(1)(A); d. Defendants caused the Plan to engage in transactions that they knew or should have known constituted a direct or indirect transfer of Plan assets to, or use by or for the benefit of a party in interest, in violation of ERISA 406(a)(1)(D), 29 U.S.C. 1106(a)(1)(D); 30. As a direct and proximate result of the breaches of fiduciary duties committed by Defendants the Plan has suffered losses, including lost-opportunity income, for which Defendants are jointly and severally liable, pursuant to ERISA 409, 29 U.S.C. 1109. PRAYER FOR RELIEF WHEREFORE, the Secretary prays for judgment: A. Ordering Defendants to reverse the 2010 prohibited transaction, and restore to the 8
Case 2:16-cv-01159-BSJ Document 2 Filed 11/14/16 Page 9 of 9 Plan any losses, including lost opportunity costs, resulting from fiduciary breaches committed by them or for which they are liable; B. Permanently enjoining Defendants from violating the provisions of Title I of ERISA; C. Permanently enjoining Defendants from serving as a fiduciary of, or service provider to, any ERISA-covered employee stock ownership plan; D. Appointing an independent fiduciary to distribute the Plan s assets to the participants and beneficiaries, if necessary terminate the Plan, and conclude any Plan-related matters connected with the proper termination or liquidation of the Plan; E. Requiring Defendants to pay for all costs and fees associated with the appointment and retention of the independent fiduciary; F. Requiring the Defendants to cooperate with the independent fiduciary. G. Awarding the Secretary the costs of this action; and H. Ordering such further relief as is appropriate and just. Respectfully submitted, M. Patricia Smith, Solicitor of Labor Janet M. Herold, Regional Solicitor Ian H. Eliasoph, ERISA Counsel Andrew Schultz, Senior Trial Attorney Boris Orlov, Senior Trial Attorney /s/ Jared Bennett Civil Division Chief JOHN W. HUBER United States Attorney District of Utah Associated Local Counsel for Plaintiff 9