Contractors Register – the Blue Book of Building and Construction – was sold to an employee benefits plan in 2012, the federal government says, for vastly more than it was worth.
The U.S. Department of Labor sued Blue Book’s consultant, Professional Fiduciary Services LLC, Aug. 22 in federal court, White Plains, alleging that it used blatantly unrealistic revenue projections to establish the $26.7 million price.
PFS’s failure to thoroughly analyze the transaction, the complaint states, caused the employee plan to “overpay by tens of millions of dollars above fair market value.”
Contractors Register, based in the Jefferson Valley section of Yorktown, is also known as the Blue Book for the name of the regional publications and databases it distributes to the construction industry.
In 2012, James O’Malley, the owner, CEO and chairman, decided to sell the company to an Employee Stock Ownership Plan. With an ESOP — like a pension fund or profit-sharing plan — employees receive shares in the plan; when they leave, the company must buy back their shares at fair market value.
The ESOP had 473 participants at the end of 2017, according to a Department of Labor report, including employees, retirees and survivors of deceased beneficiaries.
O’Malley hired PFS of Milwaukee, Wisconsin to act as the ESOP’s trustee and independent fiduciary and to put together the deal. The consultant’s job was to complete the transaction, if it found that the purchase of company stock was prudent and in the best interests of the ESOP participants.
PFS, which was paid $27,500 to set up the deal and then $16,000 a year for ongoing services, hired Prairie Capital Advisors to establish the Blue Book’s fair market value.
But Prairie, according to the Department of Labor, indicated it would accept Blue Book’s financial information “as being accurate without independent verification.” Prairie allegedly received a feasibility report from another consultant hired by O’Malley that pegged the value of the company at $26,765,000.
Prairie then allegedly used Blue Book numbers that greatly inflated the valuation. It cited a 4-year compound annual growth rate of 0.4%, but the growth rate for the previous two years had fallen to a negative 10.5%.
The decline was not simply a cyclical phenomenon, according to the complaint. The Blue Book’s print advertising revenue was being disrupted by internet competitors that charged less for online advertising.
Prairie also accepted Blue Book’s projections of compound annual sales growth rate of 2.2% for five years, and then 6.3% for the next five years, without explaining how the company would obtain such growth.
Prairie used low capital expenditure projections that assumed that Blue Book would grow while not replacing depleting assets, and a low working capital number with “no explanation as to how this change would be possible.”
Prairie added a 10% “control premium,” the extra amount that a buyer pays to control a company. But Prairie’s valuation model had already factored in a control premium, the complaint states. And the ESOP would not actually control the company, because O’Malley had preserved the right to nominate the majority of board directors.
PFS President Mickey Maier did not respond to an email request for comment.
Neither Prairie nor O’Malley are named as defendants in the lawsuit. The issue, according to the Department of Labor, is that PFS accepted Prairie’s valuation without questioning blatant valuation errors.
PFS’s duty was to act prudently and solely in the interest of the ESOP and its beneficiaries, according to the complaint, but PFS failed to negotiate material aspects of the transaction, including price.
PFS caused the ESOP to buy 100% of O’Malley’s company stock for $26.7 million, “the price that had been contemplated by the parties from the beginning.”
The Blue Book had also agreed to indemnify PFS for liability and attorney fees that could require the ESOP to cover the costs of legal proceedings over PFS’s performance, even where the company has violated its fiduciary duties.
The Department of Labor accuses PFS of violating its fiduciary duties and engaging in a prohibited transaction. The government is asking the court to require PFS to restore all losses it caused to the ESOP and to void the indemnification agreement.