By Joe Kelly
(CN) – The retirement fund and stock ownership fund of an Appleton paper company is suing the company’s former managers, as well as other parties, for securities manipulations that cost employees millions of dollars of their retirement savings.
The complaint, filed Nov. 26 in federal court in Green Bay, claims that Appvion’s senior management participated in a system of “fraud and concealment” in the handling of the company’s Employee Stock Ownership Plan, or ESOP, up until Appvion filed for bankruptcy in October 2017.
Grant Lyon, who was appointed as the sole member of the ESOP committee in August 2017, filed the complaint on the committee’s behalf, charging breach of fiduciary duty, negligent misrepresentation and securities fraud.
Among the defendants in the case are Appvion’s former executives, as well as plan trustees and other advising firms that oversaw the plan.
The complaint seeks to recover damages suffered by the plan and its employee participants, the amounts paid to the management insiders and plan fiduciaries, as well as other related fees.
The fraudulent misrepresentations of Appvion’s management and advisers, the complaint states, induced Appvion’s employees to take money saved in their retirement plans and use it to provide the $106 million down payment that was needed to fund the plan’s purchase of 100 percent of parent company Paperweight Development Corporation’s (PDC) stock in November 2001.
The complaint charges that “by inflating the appraised value of the PDC stock in each semi-annual appraisal” the defendants were able to prevent Appvion employees from learning of the various breaches of fiduciary duties.
“In early 2001,” the complaint says, “Appvion management, spearheaded by CEO Douglas Buth and general counsel Paul Karch, proposed an employee buyout of the company using money from Appvion employees’ individual 401(k) retirement funds.”
The complaint goes on to say that an August 2001 video features Appvion management “making repeated misrepresentations to Appvion’s employees in order to convince them that they should seize upon this ‘unique one-time opportunity’ to transfer money out of their 401(k) plans to buy PDC stock. They explained that if the employees came up with at least $100 million, the company could borrow the rest (almost $700 million) to buy 100 percent of PDC’s stock.”
Appvion employees were eventually convinced and they raised the money needed to buy the stock, “investing their life savings, earned paycheck by paycheck, in a very risky transaction in which every dollar the employees invested was encumbered with approximately $6.60 in debt,” according to the complaint.
The lawsuit states that the video presentation “downplayed the risks and appropriateness of transferring funds from an existing employment retirement plan to a new, highly-leveraged, undiversified ESOP.”
At the time, Appvion was in financial straits and could not find a buyer.
Over the years, employees were convinced to buy more and more stock, during which the complaint alleges that the misrepresentations about the stock’s health and projected value continued.
From 2001 to 2006, the value of the stock went from $10 a share to $33.62 a share.
It was at this point, when the fraudulent stock was at its highest value, that virtually all of Appvion’s top management, going off of inside information, left the company and began cashing out of their personal investment in PDC stock, as well as phantom stock and deferred compensation rights.
“For example,” the complaint says, “Buth left on 1 July 2005, retiring at the age of 49. He was able to capture a gain of more than $852,000 for his stock.”
Then, from December 2007 until June 2010, PDC’s stock value declined from $33.41 to $12.03. By June 2017, the stock price had fallen to $6.85. The October 2017 bankruptcy rendered the stock worthless.
Before that bankruptcy filing, in August 2017, Grant Lyon was appointed to replace the entire Appvion ESOP Committee.
“Having a forensic accounting background and training,” the complaint says, “he began an analysis of Appvion’s financial statements and PDC’s stock valuations.”
“He learned,” the complaint continues, “for the first time, that the appraisals fraudulently overvalued PDC’s stock value and concealed Appvion’s true financial condition.”
The complaint states that Lyon reported his findings to Appvion’s board of directors on Sept. 1, 2017.
The representing attorney for the plaintiffs is Frederick Perillo with Previant Law Firm in Milwaukee, in conjunction with Sara Geenen at Previant, as well as representatives from the Beus Gilbert firm based out of Phoenix.