Lifetouch Inc. workers have lost “hundreds of millions of dollars” through their employee stock ownership plan, a loss that should have been avoided, a federal lawsuit contends. At the same time, executives were “unjustly enriched.”
The value of the stock plan at the Eden Prairie-based company has plunged more than $840 million since June 30, 2015, according to the suit filed against the company’s chief executive and board of directors. That represents an average loss of more than $52,000 in retirement savings for the plan’s 16,000 participants.
A spokeswoman for Lifetouch said in an e-mail that the company does not address active litigation. Officials at Shutterfly, the firm acquiring Lifetouch, did not respond to a request for comment.
Founded in 1936 and best known for school portraits, Lifetouch has fought to remain relevant in recent years. In late January, Lifetouch announced it was being sold to online photo retailer Shutterfly for $825 million in cash.
Lifetouch, one of the nation’s five largest employee-owned companies, reported an operating loss of $3.9 million on revenue of $964 million last year.
The lawsuit was filed March 1 by Lifetouch employee Deborah Vigeant, and seeks class-action status. The suit is somewhat unusual in that it involves a private company, and all of the shares are owned by current or former employees who rely on the plan to fund their retirements.
Other recent claims of a breach of fiduciary duty related to stock declines have involved publicly traded firms — including Target Corp., Wells Fargo and Lehman Brothers — and have not been successful.
Also named in the suit is Newport Trust Co., based in New Hampshire, which administers the plan and hires an independent appraiser to value the company.
“Here you had fiduciaries who controlled every aspect of how the retirement savings were invested,” said Sam Bonderoff, an attorney handling the case for New York-based Zamansky LLC, which specializes in Employee Retirement Income Security Act claims.
“They decided whether and how much stock to purchase on behalf of the employees. They decided what the stock price should be,” he said. “That set of circumstances is unusual, and, we think, more egregious, where you essentially have fiduciaries controlling every aspect of the production line, so to speak.”
The lawsuit contends that the company’s board and Newport knew that Lifetouch was struggling and failed to take action to protect employees’ investments. It also failed to act before the sale to Shutterfly, when it had reason to believe that the stock might erode even further, the suit says.
Had the board divested the retirement plan of Lifetouch stock in June 2016, it would have avoided losses that cost each participant an average of nearly $50,000 in retirement savings, the suit says.
“It is not incumbent on Lifetouch employees, who are generally unsophisticated about investments, to take it upon themselves to determine whether Lifetouch stock is a prudent investment,” the suit said. “That is what expert fiduciaries like the trustee are hired — and paid — to do.”
The lawsuit also contends that current CEO Michael Meek and the six other board members created and “actively condoned” the overvaluation of Lifetouch stock for the benefit of retiring senior executives.
Employees who work at least 700 hours a year are eligible for the employee stock ownership plan, commonly known as an ESOP. They become fully vested after six years. They are not able to cash out or roll over the plan until they reach a certain age.
The suit contends that former Chairman and CEO Paul Harmel was among those who improperly profited.
Harmel retired after 40 years with the company in July 2016, shortly after the annual stock valuation process. Harmel cashed out at $88 per share, according to the complaint. Eleven months later, the stock hit $56. Harmel was the last of the senior executives to retire.
“While senior executives were retiring, liquidating their plan accounts and benefiting from the artificially inflated Lifetouch stock prices of 2015 and 2016, defendants were welcoming company contributions into the plan and purchasing shares at overvalued prices,” the suit says, adding that defendants, especially the board, knew the plan was overpaying for each share.
The deal with Shutterfly is expected to close in the second quarter. Employees will then be able to convert their ownership shares to other retirement plans, such as IRAs or 401(k)s.