US Labor Department sues Bellows Falls company

An auto parts manufacturer and a financial services company are denying allegations contained in a federal lawsuit that they failed to protect an employee stock ownership plan by engaging in a 2011 transaction that overvalued company shares.

The complaint alleges the transaction, which involved selling company stock to the employee stock ownership plan, relied on “flawed valuation.” The lawsuit was filed by then-U.S. Secretary of Labor Tom Perez and the U.S. Department of Labor against Sonnax Industries and First Bankers Trust Services Inc. on Dec. 28 in U.S. District Court in Rutland, Vt.

Tommy Harmon, Sonnax’s president and CEO, and Frederick Fritz, one of the company’s board members, are also listed as defendants in the lawsuit. The two jointly owned 100 percent of the company at the time of the 2011 transaction, according to court documents. The lawsuit says that in 2009 or early 2010, Harmon and Fritz wanted to “explore” selling their 100-percent ownership of Sonnax and at first, tried to sell the company to strategic buyers or private equity firms, but received little interest.

In January 2011, after negotiations with First Bankers Trust Services Inc., which was the trustee and named fiduciary of the employee stock ownership plan, Sonnax bought Harmon and Fritz’s stock for $15 million in cash and $33.8 million in promissory notes. It then sold 100 percent of the company in newly issued shares to the employee stock ownership plan for a $10 million promissory note, according to court documents.