- [David] Good afternoon. I'm glad to be here today to talk with you about An Anatomy of a US Department of Labor Investigation and Related Litigation. I actually lived through this whole process with one client. Our engagement started in approximately 2015, 2016, and we're actually still working on the case right now, but the only thing that's happening right now is the Ninth Circuit appeal as it relates to attorney's fees. So I've got intimate familiarity with what's happened. I've been doing this for almost four decades. I'm a senior partner with Hawkins Parnell & Young. I have offices in Napa, California, LA, California, New York, and San Francisco. And I'm happy to be talking to you about this topic, which I find quite interesting and I trust you will, as well. We're gonna cover the following topics today. One is we're gonna talk about the actual ESOP transaction that closed on December 14th, 2012 which ultimately resulted in the litigation and was the topic of the litigation. We're gonna focus on how the investigation opened, facts supporting the actual knowledge of potential ERISA violations that we believe the US Department of Labor and Employee Benefits Security Administration had. We're gonna talk about the content of the complaint that the Secretary of Labor filed in April of 2018 after its more than three-year investigation. The trustee who was the fiduciary, an independent fiduciary and trustee for the transaction, he died suddenly in October of 2018. Very unfortunate. At the time, I believe he had approximately 16 investigations open against him in transactions that he had been involved in dating back to as early as 2012 or 2013. And it's very unfortunate that he passed away, but that really made this a unique case study, quite frankly, because he was not a witness at trial and we were able to exclude any of his declarations or statements because he wasn't available to be cross-examined. Here also we'll talk about ESOP valuations. There were a number of ESOP valuations involved in this case study that again started back in 2011, 2012. And we'll focus on what the, how those presentations of those ESOP valuations at trial had a bearing on the actual result. We'll spend a little bit of time talking about the post-trial findings of facts and conclusions of law. I will tell you that quite frankly, that is where you should put a lot of your effort in defending and/or prosecuting a trial of this nature, because the post-trial findings of facts and conclusions of law are what gets you to the ultimate conclusion whether or not your client or the other side wins or prevails in the case. We'll talk about in depth about discovery orders against the US Department of Labor in this case. We'll spend a few minutes on the recent interpretation on the scope of the DOL subpoena power. We will spend a little bit of time about our post-trial attempts to recover attorney's fees and expenses. And that's been a process that started with a request for the district court to reconsider its rulings. After we failed in that, our clients decided to file a brief before the Ninth Circuit. That's, the matter's been fully briefed and oral argument will occur in February of 2023. And we'll talk a little bit about what's next, potential legislation and rule-making that might have an impact on what happens in these cases going forward. So the December 14th, 2012 transaction involved the Bowers + Kubota Consulting employee stock ownership plan and its plan sponsor, the company itself, the consulting company. At the time, at that time, a transaction occurred in which the selling shareholders, the founding shareholders, sold approximately 1 million shares of common stock to the ESOP trust for $40 million. The selling shareholders didn't get $40 million in terms of cash right up front. The company or the ESOP originally issued promissory notes to the selling shareholders for 40 million, which were "refinanced," quote-unquote, by an internal loan from the company to the ESOP and the ESOP back to the selling shareholders that was used so that the obligations going forward could be paid off by the company as the company generated cash and reduced the interest expense and then slowly paid off over approximately a 25-year period as it relates to the loan between the ESOP and the company, 'cause that resulted in release of shares for allocation to participants' accounts and gave the equity in the company to the plan participants and beneficiaries in a beneficial way. Nicholas Saakvitne served as the independent fiduciary and trustee of the ESOP. He's the one who executed the stock purchase agreement and related trustee resolutions, and he established the fair market value of the company, we'll call it B+KC, the common stock that the selling shareholders sold to the ESOP trust, he established that based upon an independent appraisal by Libra Valuation Advisors, and we'll call them Libra or LVA. The sellers initially met with LVA in October of 2012 pursuant to the advice of counsel, Mr. Gregory M. Hansen of CLP, Case Lombardi & Pettit, out of Honolulu, Hawaii. And Mr. Hansen asked the founding shareholders to meet with LVA or Libra to provide them background, financial background about B+KC and to discuss a potential transaction involving the ESOP, an ESOP and the company B+KC and the founding shareholders. B+KC met with Mr. Saakvitne in November 2012 and formally retained him as the independent appraiser and financial advisor, or, excuse me, the independent trustee and independent fiduciary and trustee on 26th November, 2012. He served in that capacity for a period of years from 2008 or 2012 until 2018 when his untimely death resulted in his not being able to continue. He had been a trustee and independent fiduciary for hundreds of ESOPs at that time. A little bit more background information that might be helpful to you to understand this case study. Thomas Nishihara was the CPA and vice president of a local CPA firm in Honolulu, Hawaii. He served as the outside accountant to the plan sponsor from 2008 through 2012 and then thereafter. He prepared B+KC's tax returns and financial statements using income tax basis of accounting, which essentially is a cash basis of accounting as opposed to an accrual basis. Generally reports revenues when they're received and when expenses are paid. In 2012, at the request of B+KC's independent appraiser and financial advisor, Gary Kuba of GMK Consulting, we'll call them GMK, the B+KC ESOP's independent appraiser and financial advisor, LVA or Libra, the CPA began preparing financial statements for valuation purposes at that time on an accrual basis of accounting, which involves reporting revenues when earned and expenses when incurred instead of based upon a cash basis. And it tends to be a little bit more, I think, more accurate way of establishing financial statements for valuation purposes. And both GMK and Libra or LVA advised the company to switch to that method. There was nothing nefarious about it. The DOL and EBSA, the Employee Benefits Security Administration, made a huge deal about that during the course of the pre-trial discovery and trial, but it really was a typical way of handling this that both independent appraisers and financial advisors for the company and for the ESOP recommended. Another thing that the, again, I'll call the US Department of Labor the DOL or the Secretary of Labor and EBSA the Employee Benefits Security Administration, they made a huge issue. I think they made a red herring about a URS Corporation non-binding indication of interest. And I believe the DOL and EBSA make those kinds of red herring arguments virtually all the time in almost every investigation in every piece of litigation. Not saying they don't have some allegations that are, you know, well-founded and should be looked at, but I think their modus operandi is to essentially establish red herrings that they use throughout an investigation and a trial in order to cast dispersions on otherwise honest people who are trying to do honest transactions. And that's what I've seen for almost 40 years in my dealing with that organization, and I have successfully defended hundreds of DOL investigations and EBSA investigations. The sellers, prior to receiving the URS Corporation non-binding indication of interest, they considered selling to management, they considered selling to third parties, and then they thought about maybe selling to an ESOP. In the fall of 2011, B+KC engaged in preliminary discussions with URS about potentially selling their assets or stock to URS. It was, this was not a transaction that was driven by the founding shareholders. It was not a binding relationship. It was not a letter of intent. It was simply a preliminary non-binding indication of interest or an IOI. Prior to the issuance of the IOI, B+KC, and all of this I'm talking about here are facts that were, that came out in the course of discovery and the trial and were in included in the Court's findings of fact after trial. URS received very little or limited financial information in advance of receiving the three-page IOI document from URS Corporation, or B+KC, rather, provided very limited information to URS before URS issued that three-page IOI. URS also admitted through its agents doing "very little," quote-unquote, very little due diligence prior to the date of the IOI, which was in December of 2011. And the proposed purchase price in the IOI was $15 million plus cash, which at the time of the transaction in December of 2012 was 7 or 8 million, and working capital, which was another 7 or 8 million. So even though the DOL and EBSA, I think, falsely stated all along it was a $15 million IOI, there was testimony at trial from the founding shareholders and from the independent appraiser and financial advisor for the ESOP and others that the real IOI was worth 30 million, not 15 million as the DOL tried to argue. And they argued that despite evidence to the contrary. A little bit more background information and then we'll get into the actual case study here. I think it's just, it's good to lay a good foundation. I've already indicated that, you know, both in 2011 the cash and working capital was approximately 14 million. In 2012, B+KC's stock and cash was approximately 15 million. So if you add that to the 15 million proposed cash purchase price plus these items, this was really a 29 or $30 million deal that URS was proposing to B+KC and its shareholders. The DOL continued and the Secretary of Labor continued to argue that it was only a $15 million proposed purchase price right up until the end of the trial in this matter. The district court on this issue again decided it was a red herring, in my opinion. It said that the IOI had, quote-unquote, "little relevance to the actual value of" B+KC. The Court indicated, quote-unquote, that "an individual who makes an offer of $15,000 for a used car with a Blue Book value of $40,000 does not by virtue of making a lowball offer that is never accepted tend to establish that the car is worth 15,000." That's exactly the arguments I made on behalf of my clients, the selling shareholders, and the company at trial. We had separate independent counsel for the ESOP at trial, local attorney in Honolulu, Hawaii. No agreement was ever reached between B+KC, the selling shareholders, and URS Corporation to enter into a deal. The sellers were not willing sellers and the URS corporation was not a willing buyer at any other price other than the 29 million, and as a result, that deal didn't happen. And I agree with the Court wholeheartedly that whatever the offer was, not the offer, whatever the IOI was, 'cause it wasn't an offer, didn't have any relevance to the actual fair market value of the business, despite repeated attempts by the DOL and EBSA to make that argument. I did indicate that there was a GMK valuation on behalf of B+KC prior to the transaction closed in December of 2012. On January 25th, 2012, B+KC retained GMK to establish the fair market value of B+KC for evaluating the IOI and other business succession planning purposes. They didn't, as the DOL argued, do that to try to negotiate a better deal with URS. It was true that GMK did express concerns about the reasonableness of B+KC's projections because they represented a significant jump from B+KC's past performance, but that also doesn't take into consideration Mr. Kniesel testimony, the independent appraiser and financial advisor from Libra who said that the projections that he saw from B+KC back in 2012, it turned out that they were some of the best projections that he's ever seen relative to actual performance of the company following the projections. So he found them to be quite credible. And that testimony came out at trial, as well. GMK's preliminary valuation of B+KC was over 38, in excess of $38 million. One of the sellers remarked at the time that the value, that value of 38 million, quote-unquote, "seems very high." That was in an email. There was nothing wrong with that email. He was just remarking that it was a surprise to him because of the very lowball URS indication of interest. And that testimony came out at trial. An early draft valuation by GMK indicated that the range of value for B+KC at the time was 31 million to 54 million, and then after obtaining additional information from the company, GMK reduced the higher end of the range down from 54 million to 46 million and increased the lower end of the range up to 40 million. So that's right within the range of what the actual transaction closed at. I think GMK valuation actually helped prove the case. It didn't hurt the case. It supported Mr. Kniesel's and LVA's valuation and it supported the expert witness valuations that we presented at trial on behalf of our clients. Given the limited scope of GFK's work, however, the Court did accord very little weight when determining the fair market value of B+KC in GMK's valuation. The Government made a huge issue at trial regarding the fact that B+KC shared the GMK valuation with URS, given that GMK prepared its work for internal purposes only. Again, this is just another in a long line of red herrings and red flags that weren't true that the DOL and EBSA identified throughout this entire process. This turned out to be a red herring because B+KC and URS ended their discussions about a potential transaction after B+KC shared the GMK valuation with URS, so I don't know why the DOL and EBSA decided to spend so much effort and so much taxpayer dollars on presenting that evidence in discovery and through trial. Does not make any sense. The, a little bit more background that GMK advised, originally advised B+KC to retain Gregory M. Hansen of Case Lombardi & Petit to advise B+KC in setting up the B+KC and handling related matters in the transaction design and documentation. In other words, effectively Mr. Hansen and Case Lombardi & Petit was the quarterback of the transaction that closed on December 14th, 2012. Another fact that came out during the course of the trial and discovery was that GMK became uncomfortable with accomplishing a valuation for the proposed ESOP transaction. We, our clients presented evidence that that was because the proposed transaction structure involved convertible preferred stock, a structure that GMK was not familiar with and had never really done a valuation on that basis. And GMK was conscious that it had also previously performed a valuation for B+KC, so it decided, hey, GMK decided we weren't gonna do the valuation for the company on one hand and then switch horses and be an independent appraiser and financial advisor for the ESOP after that. So they bowed out professionally. The quarterback for the transaction advised B+KC to meet with Mr. Gregory Kniesel of Libra in October of 2012. This was another fact that the DOL and EBSA tried to turn into a terrible fact for, a bad fact for the trial, but it was quite frankly, I mean, it's probably not the best thing to do, to have the independent appraiser and financial advisor for the ESOP meet with the company in advance of retaining an independent fiduciary trustee of the ESOP. That said, there's nothing in that that violates ERISA and the whole purpose of the meeting was simply to provide information to Mr. Kniesel so he could create an independent preliminary valuation. Mr. Kniesel did issue a preliminary engagement letter to the board of trustees of the proposed ESOP and sent that letter to the sellers. Again, the DOL and EBSA decided to make a huge issue about that and proclaimed that that meant that Mr. Kniesel was not independent, Mr. Kniesel of Libra, and that wasn't proven at trial. That was a fact that was not established. and another fact that was not established was that Mr. Kniesel wasn't working for the selling shareholders and technically speaking wasn't even working for the company prior to the transaction. He was working at all times for the board of trustees of the ESOP or the ESOP itself, the ESOP trust. LVA or Libra did provide a preliminary analysis and valuation on, actually, on 21 November, 2012, and then they agreed to provide a final summary letter no later than 31 December, 2012. The meeting occurred in Chicago. The preliminary valuation that LVA or Libra set for the B+KC was between 37 and 41 and a half million. Then Mr. Saakvitne got in the mix on or about 26 November, 2021, again, based upon the recommendation from the quarterback. And, you know, quite frankly, that was, it was good to have Mr. Saakvitne involved because he was a, quote-unquote, "independent and qualified independent appraiser and financial advisor." So they probably, albeit a little bit late, but still better late than never, 'cause he was involved for a couple, at least two to three weeks before the transaction closed, and that issue became another red herring that I'll talk about a little bit down the road. The quarterback of these, or quarterback of this entire process mentioned a potential 100% transaction for $40 million or a $12 million convertible preferred stock transaction to Mr. Saakvitne. He also mentioned the same to financial advisors who were gonna advise the selling shareholders about deferring their taxes under section 1042 of the Internal Revenue Code. He claimed to have learned about the $40 million transaction amount from the sellers. However, the sellers denied that during their trial testimony. They indicated that they had not planted that seed with the quarterback or with Saakvitne. Saakvitne negotiated on behalf of the B+KC ESOP and one of the sellers negotiated on behalf of the sellers. Saakvitne negotiated the purchase price down by $1 million and negotiated a 3% reduction in the interest rate to be charged to the B+KC ESOP on a 25-year loan from the sellers to the ESOP, which ended up being a loan from the company to the ESOP after it was refinanced that saved the the company and the ESOP millions of dollars. And again, the DOL and EBSA didn't focus on that, and they should have, because that was an example of one aspect of what Mr. Saakvitne did that was quite frankly very beneficial to the B+KC ESOP and demonstrated transaction. The Secretary of Labor alleged in the complaint, and its ERISA fiduciary expert Mark Johnson parroted the allegation, that Saakvitne negotiated against the B+KC ESOP. That allegation was proven to be factually inaccurate at trial, and if you have the time to do so, you can probably see that in the findings in fact and conclusions of law that the judge issued in connection with the actual ruling or judgment. Saakvitne did retain ultimately Libra to act as the independent appraiser and financial advisor for the B+KC ESOP on December 7th, 2012. Again, albeit that should've happened a little bit earlier than that, that was not an issue that was found to have had any real bearing on whether or not the transaction passed muster under ERISA. On December 11th, 2012, Libra provided Saakvitne with a preliminary valuation of B+KC. Again, the range was 37.5 million to more than 41 million. Saakvitne had this preliminary valuation prior to negotiating the terms of the subtransaction with the selling shareholders and he had a number of schedules that the independent appraiser and financial advisor at Libra had accomplished, and as a result, this was done in such a way that the preliminary valuation with LVA was discussed at length and there was a number of schedules that were discussed between Saakvitne and Mr. Kniesel about the valuation before the deal closed on December 14th, 2012. At the time of the closing, Libra sent Saakvitne a summary of its valuation and concluded that because the fair market value of B+KC was circa 41.5 million and the purchase price was 40 million, the B+KC ESOP CEP, it doesn't say that in my PowerPoint that you'll receive, but I'll clean that up. Was not going to pay more than fair market value for B+KC. Libra also advised Saakvitne in its fair market value and fairness opinion letter that he issued, that LVA issued on December 14th, 2012 that the terms of the loans by the sellers to the B+KC ESOP were, quote, "at least as favorable from a financial standpoint as they would be the terms of a comparable loan resulting from arm's length negotiation between independent parties." That's required under ERISA to get an exemption from the prohibited transaction rules. So Kniesel concluded, Saakvitne concluded that those were fair terms and reasonable terms, commercially reasonable. LVA's actual valuation of B+KC was attached to his summary and fair market value and fairness opinion letter. The Government's "ERISA fiduciary prudence expert," quote-unquote, Mark Johnson, loosely opined that Saakvitne clearly rushed the transaction. He argued that Saakvitne only billed 30.1 hours, although there was no evidence to that because Saakvitne didn't testify at trial and he only kept so many records of his as an attorney of the time spent on the matter. And Mark Johnson also concluded that this minimal work and improperly relying on LVA was, didn't pass muster under ERISA, and he argued that, he went so far as to argue that Mr. Kniesel, the independent appraiser and financial advisor with 20 years experience, didn't qualify as an independent appraiser given his prior work for B+KC. The Court, and on the other hand, Gregory K. Brown, a defense expert with 45 years of legal practice involving ERISA, differed, testifying that Saakvitne's due diligence was sufficient and consistent with those and other ERISA fiduciaries. The Court focused on who had the burden of proof on this issue. The Court concluded that the Government had the responsibility and failed to satisfy the burden, focusing on the deficiencies of the Government's expert witness, Mr. Mark Johnson, who did not detail what kind of review another trustee would've conducted and stated that Saakvitne only spent 28 hours on the transaction without indicating how that compared to what another ERISA fiduciary would've done in a similar situation. And we juxtapose that against Mr. Brown's testimony and we get to the point that the Court didn't give any real weight to Mr. Mark Johnson's testimony. He was the alleged expert witness on behalf of the Government. So that's where the defense made a lot of progress in the case. Steven, when we focus on valuation issues, Steven J. Sherman, he's a managing director at Loop Capital Financial Consulting. He was the Government's alleged expert ESOP valuation witness. The Court, the defense pointed out to in the Court, identified to the Court, the Court identified many flaws that the defense had shared with the Court in Mr. Sherman's valuation work. Mr. Sherman testified that on December 14th, 2012, the fair market value of B+KC was 26.9 million. Please recall that, juxtapose that conclusion where Mr. Sherman testified that on December 14th, 2012, the fair market value of B+KC was only 26.9 million, compare that to Mr., to GMK's conclusion where it was about 38 million of a valuation. Well, actually, 40, between 40 and 46 million, and Mr. Kniesel's range of between 37 and 41, and they just, this didn't make any sense to the Court, didn't make any sense to the defense or to the Court. In reaching the conclusion of 26.9 million, Mr. Sherman incorrectly deducted almost 3 million in light of what he claimed was limited control by the B+KC ESOP of B+KC. The Court found that Sherman, quote-unquote, "significantly and unreasonably undervalued," end quote, B+KC. The Court also held specifically that, quote, "not only does this render Mr. Sherman's ultimate valuation unreliable," comma, "it also undermines the usefulness of his critique of LVA's valuation." The Court found that Mr. Sherman's valuation appears to have ignored the uniform standards of professional appraisal practice, or USPAP, in a number of respects. Kenneth J. Pia was one of the defendant's expert ESOP valuation witnesses. He opined that the application of USPAP in establishing valuations for ESOP transactions is mandatory, yet Mr. Sherman considered information that was not available at the time of the transaction and the valuation by Libra, and he based his valuation on that information that was not available on the date of the actual transaction, and that simply violated USPAP, as Mr. Pia testified at trial. Mr. Pia also testified that Mr. Sherman's failure to follow USPAP, quote-unquote, "introduced substantial errors," end quote, in Mr. Sherman's valuation analysis. Mr. Pia testified that Mr. Sherman should've interviewed B+KC's management and that the failure to do so violated USPAP's scope of work and competency rules, which require research and analysis to be sufficient to produce credible results and to be conducted in a manner that's not careless or negligent. Here the issue was that Mr. Sherman could've asked for an opportunity to meet with the selling shareholders in B+KC's management to develop real facts that he could rely upon. He chose not to. The DOL tried to argue that they would've said no at trial, but that isn't true and was not proven. In fact, I'm sure based upon the evidence at trial that the selling shareholders in the company would've gladly talked with Sherman prior to him completing his valuation for trial purposes, and Sherman chose not to take that information into consideration. Mr. Pia also testified that Mr. Sherman erred in how he treated sub-consultant fees and expenses and that that error could've been avoided by questioning B+KC's management. The, in fact, B+KC passed sub-consulting fees charged by sub-consultants to it along to its clients without any markup, yet Sherman treated those pass-through sub-consultant fees as actual B+KC expenses for which they didn't receive reimbursement and then incorrectly deducted them in determining the fair market value of B+KC. Sherman admitted during trial that he treated in excess of 10.5 million as sub-consultant expenses, which he deducted in determining the fair market value of B+KC as of December 14th, 2012, and he didn't include any corresponding revenue with those expenses. So that was a substantial reduction in value of the business that Mr. Sherman created simply out of whole cloth without any basis in reality. That's what violated USPAP. Sherman again applied a limited control discount. He testified that this discount related to Sherman's conclusion that after the sale, the sellers continued to exercise meaningful control of B+KC. Well, you know, in fact, they didn't exercise control of B+KC. They simply were involved along with other managers in trying to make B+KC profitable, and indeed it was profitable. The company has increased in value by twofold since December 14th, 2012. It's probably worth more than 80 or $100 million at this point when it was only worth 40 million back in 2012. Mr. Sherman based his conclusion about control on the substantial bonuses that B+KC paid to the sellers without documented approval by Saakvitne, according to him. That was never proven at trial. Pia faulted Sherman, Pia is the defense, one of the defense experts, faulted Sherman in this respect, and again referenced USPAP Advisory Opinion number 34, which indicates that only with market evidence that data subsequent to the effective date was consistent with market expectations as of the valuation date is it appropriate to use that subsequent data, and Sherman didn't have that basis on which to rely. In the absence of such evidence, according to USPAP Advisory Opinion number 34, the effective date should be used as the cutoff date for data considered by the appraiser. Sherman violated that rule under USPAP in many respects. The Court concluded that Sherman's reliance on matters occurring after the sale to the ESOP to apply the limited control discount appears to have contravened the appraisal standards limiting the facts to be considered as required by USPAP, and as a result of that, you know, well, I'll get to that in a minute. First, one other thing that Sherman did. If two strikes was not enough, he decided to swing the bat a third time and strike out entirely. Sherman criticized Libra's analysis as relying in part on an allegedly inflated EBITDA of 9.2 million for B+KC. Sherman claimed that this amount exceeded historical amounts. Sherman decided that even though there was factual evidence to support the 9.235 million with very careful charts and projections prepared by the selling shareholders and the founding shareholders and the company, he concluded that 4.8 million was a more appropriate EBITDA to use. Again, some fact that was not known on December 14th, alleged fact that was not known on December 14th, 2012. Sherman criticized B+KC's very detailed financial projections. The defense expert, Ian Rusk, another defense expert. There were two of 'em. One was Pia and the other was Ian C. Rusk. He noted that Sherman's dismissal of B+KC's financial projections simply wasn't supported by historical results and was in error because the company's earnings were trending upward in 2012 because of a huge backlog of contracts, two plus years worth, and Mr. Rusk concluded that the projections were not inaccurate, and so did Mr. Kniesel, who was the independent appraiser and financial advisor for the ESOP. He even testified that they were spot on over a period of five years after the transaction closed. The Court found that Sherman's hypothetical or corrected EBITDA for 2012 from 9.2 million down to less than 5 million should've taken into account those relevant circumstances identified by Rusk and the failure to do so rendered Sherman's EBITDA conclusion unreliable. Furthermore, the Court concluded that Sherman should have known that his corrected EBITDA was too low because the actual EBITDA as of December 31st, 2012 was 7 million, which was 2 million more than Sherman's hypothetical amount of 4.9 million. Sherman had all this information available and yet he still concluded that it wasn't four point, or it wasn't 7 million or 9.2 million. The EBITDA he used was only 4.9 million, which is what got got him in trouble with the Court. I've indicated earlier that the sellers did send and the founding shareholders in the company sent Libra revenue growth projections for 2014 through 2017. Actually, for a five-year period of time. I think it was '13 through '17. They used a 5% growth rate during those years. The actual growth rate for B+KC in terms of sales ranged between 10 and 14%, meaning that the sellers actually understated the growth rate in November of 2012 to Libra. Libra testified that no company provided more detailed financial projections for ESOP valuation purposes than B+KC in its history of doing these valuations. Another thing that came up in trial which was really unfortunate, it was another red herring that was created by Marcus Piquet, CPA, who was the third-party record keeper for B+KC and their ESOP. He decided of his own volition in April of 2018 to prepare an inaccurate analysis of LVA's December 14th, 2012 valuation and he disclosed that to the DOL in discovery. The DOL used this wholly inaccurate and inappropriate analysis of Libra's December 14th, 2012 valuation to distract the Court during trial, and it just, it simply wasn't true. It wasn't factually accurate. Libra testified it wasn't accurate. So did the other defense experts. And so Mr. Piquet's efforts to protect himself from potential liability, which is what he testified, and create an inaccurate analysis resulted in a red herring of that inaccurate analysis throughout the history of the case. In terms of specific findings of fact and conclusions of law in the case, the Government asserted that the sellers breached their fiduciary duty to the B+KC ESOP by sending inflated revenue projections for 2012. That turned out to be not supported at trial. The Court concluded that the Government did not satisfy their burden and made no findings of imprudent conduct in this respect. The Government alleged that the sellers breached their limited fiduciary duty to monitor Saakvitne after B+KC appointed him as the independent fiduciary and trustee. The Court again concluded that the Government did not prove this assertion or allegation by preponderance of the evidence. Preponderance of the evidence is just more likely than not. The Government asserted that the sellers breached their fiduciary duty to the B+KC ESOP by relying on LVA's preliminary valuation and fairness opinion dated 21 November, 2012. Court concluded that the record did not establish that alleged breach, no material errors or misstatements. The Government also alleged that the sellers breached their fiduciary duty to the B+KC ESOP by causing the ESOP to purchase company stock for more than fair market value. Again, the Court concluded that the Government didn't satisfy that burden. Basically in all material respects, the Court concluded that government failed to establish the burden. There's a, in my opinion, there was a complete failure of proof by the DOL and EBSA at trial. The Government alleged that the transaction was rushed and did not allow a prudent process to occur to protect the ESOP participants. The Court concluded that, on the other end, that Saakvitne may have decided that the tax benefits to the B+KC ESOP outweighed the burden of finalizing the sale by the end of 2012, so he may have decided to accelerate getting the transaction done. While the Government argued that Saakvitne was forced by the time constraint to hire Libra, the Court concluded that the record demonstrates that he had unfettered discretion to hire anyone, any independent appraiser and financial advisor he wanted, and that he was not required to hire Libra and he still chose to do so. The Court also concluded that the record doesn't support the Government's suggestion that the sellers and Saakvitne conspired to arrange a $40 million deal. Quote, "Knowing what a seller wants does not make a buyer complicit in wrongdoing." So even though I think that was a red herring, the fact that because the sellers didn't agree with this testimony, even if the sellers did ask Hansen, the quarterback, to share that $40 million offer or amount to Saakvitne, which they claimed they did not at trial, the Court was saying it didn't matter. That doesn't prove complicit behavior or wrongdoing as it relates to a potential $40 million deal. The Court concluded that government, quote-unquote, "simply did not prove that the sellers should've better monitored Saakvitne to ensure that he was acting in the best interest of the B+KC ESOP and to prevent the ESOP from being damaged," quote-unquote, because the Court concluded that the ESOP was not damaged. The DOL didn't appeal any of the trial court's findings of facts and conclusions of law. B+KC, the ESOP plan sponsor, did seek to recover costs of litigation and attorney's fees under the Equal Access to Justice Act. The trial court approved the recovery of specified costs. I mean, I think the defendants asked for about 70-some thousand and the Court concluded that about 45 or 50,000 was appropriate under the Equal Access to Justice Act. These are costs, actually. And the Court concluded at trial or after trial that DOL was substantially justified in bringing its complaint in the first place. Arguments have been made at the Ninth Circuit to the contrary. B+KC appealed the trial court rulings in this respect as it relates to the costs of litigation and attorney's fees under the Equal Access to Justice Act. It appealed those alleging that the DOL was not substantially justified in aserting its complaint. In fact, the defense had presented evidence throughout trial and during discovery that this case should never have been brought in the first place. The appeal is currently pending in the Ninth Circuit Court of Appeals. The appeal urges the Ninth Circuit to consider differences between the Government's broad investigatory powers under ERISA and the decision to file and maintain the litigation without substantial justification following an extensive three-year investigation conducted by the DOL. That's what's at stake in the appeal. It will be argued before the Ninth Circuit in February of 2023, and I'm sure we'll hear a ruling from the Ninth Circuit at some point in 2023. The ESOP Association, a national nonprofit organization that supports the creation and maintenance of employee stock ownership plans, did file an amicus curiae or friend of the court brief in favor of the appeal by B+KC and the selling shareholders. The ESOP Association brief argues that the DOL has erred over many years in its interpretation of ERISA's adequate consideration standard that permits sales to an ESOP from a related party that are conducted in good faith and at prices not exceeding fair market value. The brief by the ESOP Association asserts that the DOL was not substantially justified in suing under its incorrect standards for establishing adequate consideration. Now, before we wrap up, and I've got probably another 10 or 15 minutes. Well, actually, about 12 minutes. I might maybe go 15 minutes. I wanna cover some discovery matters that were addressed during the course of this case that I think are pretty significant. Discovery in private plaintiff ERISA cases and those brought by the US Department of Labor or the DOL are similar. Plaintiff does not typically have personal knowledge of the alleged ERISA violations. This was true here, too. DOL and EBSA didn't have any actual knowledge, or, excuse me, I don't wanna use the term actual knowledge, 'cause that's another issue. But they weren't present at the time of the actual transaction, so they would've had to get others to testify as to what happened in connection with the transaction. DOL ERISA actions, they rise out of investigations by EBSA, the DOL's Employee Benefits Security Administration. EBSA gathers considerable factual information such as plan-related documents, transactional documents, emails, and conducts numerous interviews of investigation targets that are discoverable in litigation. In fact, it costs employers sometimes hundreds of thousands of dollars to respond to these subpoenas from EBSA. While certain of the DOL's investigatory materials are privileged under a number of governmental privileges such as investigatory files, deliberative process, and informant privileges, the underlying facts should be discoverable no matter what. That's just the, that's the discovery rules. Governmental privileges must be supported by detailed declaration from senior agency staff explaining how the withheld material fits into the decision making or investigative process. That's from the northern District of California 2008. Here one of the acting senior members at EBSA or at DOL in Washington, DC had to file four different declarations and still didn't get it correct after all those years of filing those declarations. And as a result, the DOL is obligated to produce facts relevant to the claims and defenses in a lawsuit, and the government privilege doesn't protect those facts in evidence from disclosure. Another point that the Court noted in addressing this issue of these privileges was that if factual material is, quote-unquote, "so interwoven with the deliberative material that it's not severable," end quote, it may be encompassed within the privilege, but that's gotta be proven by the Department of Labor, Secretary of Labor, and EBSA. Even if properly asserted, qualified privileges can be overcome if the defendant's need for the materials and the interest in accurate fact-finding outweighs the government's interest in non-disclosure. Again, that's a California case, Ninth Circuit 1984, and then Northern District of California 2003. The upshot of this was originally the magistrate judge awarded $141,000 of attorney's fees and costs to, $141,000 of attorney's fees and about $2,000 of costs against Secretary of Labor in favor of two defendants following the 14-month discovery dispute over the Secretary of Labor's failure to produce documents and provide sufficient privilege logs and declarations, four of whom were attempted, supporting the assertion of government privileges. Despite the Secretary of Labor's continued failings in discovery and being compelled to produce thousands of pages of documents previously withheld, the Court failed to find a waiver of governmental privileges and held that an award of attorney's fees and costs was appropriate and proper. Again, Magistrate judge decided it was 141,000. The actual Article III judge decided it was only 63,000, but that's still one of the highest awards of sanctions I've ever seen against the US Department of Labor and EBSA. With respect to the Secretary of Labor's continued assertions of privilege and certain redactions, the Court determined the defendant's need for the materials and the interest in accurate fact-finding did not outweigh the government's interest in non-disclosure. So defense got a bunch of fees and expenses. They got thousands of pages of documents. They didn't get everything they needed which they thought would've helped them prove that the government had actual knowledge of the potential allegations more than three years before they filed the lawsuit and that it should've been barred by the statute of limitations, the knowledge statute of limitations under ERISA. A recent case, and I'm only gonna go about another 10 minutes here, the recent case is worth looking at is called Walsh v. Alight Solutions LLC. It's in the Seventh Circuit, August 12th, 2022. There, Alight Solutions LLC is a company that provides administrative services for employers who sponsor healthcare and retirement plans. They appealed the District Court's grant of the DOL's petition to enforce a subpoena related to the DOL's investigation of alleged cybersecurity breaches at Alight. The Seventh Circuit ruled in favor of the DOL. The Seventh Circuit rejected the argument that the DOL subpoena power extended only to ERISA fiduciaries like trustees or independent fiduciaries. Significantly, the Court found that Alight's estimate that complying with the subpoena, quote-unquote, "would require thousands of hours of work," end quote, didn't demonstrate undue burden according to the Government. The message of ERISA plan sponsors is to ensure that, well, I think the message to ERISA plan sponsors here is to ensure that insurance coverage is maintained for the cost of this type of investigation, 'cause a company like Alight will simply have an agreement with the company to pay it for responding to these subpoenas and the actual plan sponsor needs to maintain insurance. Typically, those insurance policies only provide for about $250,000 worth of coverage, but it's better, it's certainly better than nothing, and that's the message I'd share with you is that these, you're gonna see these subpoenas enforced, 'cause this subpoena power is very broad and not unchecked here by this Alight case. The DOL has not filed new ESOP case allegations challenges since October 2021 and has settled several other cases that were pending for trial. Hopefully what we showed the DOL in the B+KC case is that they ought to tread a lot more lightly on making unfounded allegations, as it turned out they did in the the B+KC case. Congress has been alerted to the problems of the DOL practice of rulemaking by litigation or legislation by litigation through, from the ESOP Association and others for many years. I've even told Congress that myself personally in communications. On June 14th, 2022, bipartisan legislation, which is funny that it hardly ever happens anymore in Congress, requiring the DOL to promulgate regulations on the determination of fair market value for purposes of an ESOP stock purchase was approved by the Senate Committee on Health, Education, Wealth, Labor, and Pension. The regulatory process mandated in the proposed legislation would require the opportunity for public comments and hearings prior to the issuance of final adequate consideration regulations. Hopefully after, I mean, originally the DOL issued the proposed regulations in May of 1988. That is 34 years ago. Hopefully now we'll finally get some and this will pin the government down in how they proceed to investigate and prosecute these cases. I am going to end there. I have been doing this for almost four decades, and I really appreciate the opportunity to speak with you today. And if anybody's got any questions or et cetera, they can certainly reach me at [email protected]. I'm a senior partner there and I'm proud of the work I've accomplished on behalf of ESOPs over the last almost 40 years, having delivered through the plans that I've helped employers establish, probably delivered well over a billion dollars worth of retirement benefits to employees through those plans. I really appreciate the opportunity to talk with you today, and thank you very much. Have a nice day.