In the contentious Vinoskey ESOP case, one of the defendants, the owner and selling shareholder, Adam Vinoskey, recently appealed the district court’s finding that he was liable for knowingly participating in the trustee defendant’s ERISA violations and was a co-fiduciary for the trustee’s breaches of fiduciary duties. The gist of the litigation was whether the stock sale to the ESOP was for no more than “adequate consideration.”

The court found the trustee caused the ESOP to pay more than fair market value for the company stock. Vinoskey was liable because he knew or should have known the price exceeded FMV.

Backstory: The Department of Labor litigated over a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their successful company to an ESOP. The couple had built the company from scratch. They were committed to rewarding employees for their contributions to its success and, in 1993, set up an employee stock ownership plan. By 2004, the ESOP owned 48% of company stock. Looking toward retirement, they decided to sell their remaining shares. In 2010, the company hired an experienced, independent ESOP trustee, which retained a valuation advisor to determine the range of fair market value for the company’s stock. The agreed-upon price was $406 per share. A 2009 appraisal valued the stock at $285 per share; earlier appraisals valued the stock at less than that.

Reliance on ESOP professionals: In his appeal to the 4th Circuit Court of Appeals, Vinoskey says the district court misstated the legal standard for “knowing participation.” Under the applicable case law, being liable for “knowing participation” means a nonfiduciary, selling shareholder must know more than the bare facts of the transaction. He or she must know the transaction violates ERISA. Here, the district court, relying on a single decision from another jurisdiction, applied a broader test under which it did not matter whether Vinoskey knew that the trustee violated ERISA. It was enough that he knew the price he received was above FMV. Based on this misreading of the test, the district court’s liability finding needs to be reversed.

On a more basic level, the brief argues Vinoskey did not know that the price was higher than FMV. Vinoskey is not a valuation professional, and, in fact, the company hired ESOP professionals to represent the plan’s interests and come up with a valid appraisal, the brief points out. Also, the stock was not obviously worth less than $406 per share. The brief notes that “even credentialed valuation experts disagreed markedly about the value of [the company’s] stock, making it unreasonable to expect a layperson such as Vinoskey to discern the ‘correct’ price.” Specifically, the ESOP appraiser, the DOL’s expert, and the defendants’ expert, using various valuation methods, generated a range of values from $180 per share to $493 per share. The brief shows graphically that the stock’s trajectory aligned with the market as a whole, as represented by the average returns for the S&P 500.

Control issue: Also, the brief challenges the district court’s conclusion that the high valuation was in part due to the erroneous assumption that the ESOP, owning 100% of company stock, would have complete control over the company. The district court decided for various reasons this was not the case. The brief disagrees, noting that, although Vinoskey remained chair of the board of directors after the transaction, no agreements gave him the right to appoint board members. It notes that, under the DOL’s proposed regulations, control can transfer incrementally over time. Here, even if the ESOP had not gained complete control at the closing of the transaction, it did so within a “reasonable time.” In less than two years after the transaction, the Vinoskeys had relinquished their “dominant presence” in the company, the brief notes.

The ESOP valuation did not include a control premium that could have been a red flag to Vinoskey, the brief says. Rather, the financial advisor made “a series of adjustments to [the company’s] past income statements to produce a controlling-interest valuation.” There was no evidence that Vinoskey, as a layperson, understood the significance of these adjustments.

Finally, the brief points out that, as part of the transaction financing, Vinoskey had loaned the company $10.3 million. In 2014, after an industry downturn, he voluntarily forgave $4.6 million of the ESOP’s outstanding debt. The district court declined to factor the debt forgiveness into its damages determination. The brief says this was error. If nothing else, the 4th Circuit should reduce the $6.5 million damage amount by the amount of debt forgiven.

Meanwhile, as far as we know, the defendant trustee has settled its case with the Department of Labor. To date, we have no details on the settlement.

Stay tuned for reporting on further developments in this case.

Article says the size effect didn’t vanish—it never existed

The hits keep coming to the existence of the size effect. A new article in Bloomberg points out that many financial veterans are “concluding that the small-company effect does not, after all, exist.” The Russell indexes show that the factor is “muted at best,” and sophisticated statistical work confirms it. It also points to several recent papers, including one by Cliff Asness (AQR), who studied for his doctorate under Eugene Fama at the University of Chicago. One finding of that paper, “There is No Size Effect,” which we covered here, is that, since the size effect was originally identified in the early 1980s, a “series of cumulative challenges, many of which we have summarized …, all have reduced the historic ‘net of market beta’ return to small vs. large, ultimately leaving nothing.” The article also points to another recent paper, “Settling the Size Matter,” that “nearly resurrects a narrower version of the small-company effect, before finding that it is close to impossible to exploit,” the article says.

Alleged reveal of secret KFC recipe points up valuation question

Ever wonder what those secret 11 herbs and spices are in KFC’s original recipe fried chicken? An article in the Chicago Tribune reports the discovery of what is allegedly the secret recipe that was stuck in a vintage scrapbook belonging to a family member of Colonel Sanders. Is it the real McCoy? Using typical corporate speak, a KFC spokesperson didn’t come right out and deny that it was the secret recipe, so we’ll see what happens.

Valuation query: A trade secret has value because only a limited number of people have access to it. If a trade secret is stolen, litigation can be triggered and the valuation expert enters the picture to calculate economic damages designed to put the parties in the position they would have been in “but for” the alleged wrongful act. But the trade secret can be disclosed during the litigation, so doesn’t the existence of the litigation itself impact the valuation? A number of different precautions are used to prevent the disclosure of the trade secret during litigation. For example, a protective order can limit access to the information to just the attorneys. Also, the information can be submitted to the court “under seal,” and the court, after looking at it, can redact the sensitive information before releasing it to the public.

Looking to get up to speed on trade secret valuation? A quick search of BVResearch Pro produced 226 results, such as:

• A recent court case on a trade secrets dispute;

• A webinar on new guidance for calculating damages related to intellectual property;

• An article on available remedies for trade secret damages; and

• The leading book on economic damages, which includes a discussion of trade secrets.

All of these resources are included in a subscription to BVResearch Pro.

ASA announces winners of conference drawing

An appraiser in the business valuation discipline has been awarded the grand prize of a full registration to the American Society of Appraisers 2020 International Conference plus a stay at Planet Hollywood: Susan Boin, who is with Bank of America. In addition, there were winners in each discipline for a full registration to the conference. They are:

• Appraisal Review and Management: Guillermo Miranda (Mynarski International Valuation);

• Business Valuation: Donald Erickson (Mercer Capital);

• Machinery and Technical Specialties: Jason Kmiecik (HeliValue$ Inc.);

• Personal Property: Richard-Raymond Alasko (The Alasko Co.); and

• Real Property: Mike Pratt (Palm Beach County Property Appraiser).

But wait—you may still be a winner! When you register for the 2020 ASA International Conference being held on October 12-13, you will earn points for each of the various activities ASA has to offer during the event, including attending a session, visiting a booth, chatting, and more. The top-five point leaders will win a prize, such as a full 2021 conference registration, an Amazon Echo Show, $50 Visa Gift Card, or other award. During the conference, you’ll be able to track where you stand in the points race!

NACVA adds 75 newly credentialed members

In the third quarter of 2020, 75 members of the National Association of Certified Valuators and Analysts (NACVA) earned their credentials, according to an announcement. Most of those (70) earned the Certified Valuation Analyst (CVA) credential, and five members earned the Master Analyst in Financial Forensics (MAFF) credential. These members completed the training, exam, and credentialing processes for the two credentials.

IVSC launches survey on valuation
user perspectives

The Europe Board of the International Valuation Standards Council (IVSC) is looking for input from users of business valuations on the role of internationally recognized valuation standards.

BV movers . . .

People: The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the third quarter of 2020: William Ditty, CPA, CFF, CVA, MAFF, president and owner of Ditty Financial Forensics LLC and Ditty Financial Advisors LLC, and Tonisha “Dr. Toni” Pinckney, Ph.D., MSCJ, MAFF, CFE, CBE, CSCD, CCII, an outspoken author, advocate, and activist on racial, socioeconomic, and gender disparities … Several individuals have joined Valuation Research Corp. (VRC): Pablo Alfaro, CFA, joined the firm’s New York City office as a senior vice president specializing in complex securities (he was formerly with BDO USA, Deloitte, and Finnerty); Leon Li, CFA, joined VRC’s San Francisco office as a senior vice president specializing in complex securities (formerly a vice president at Duff & Phelps); Matthew Colligan, CFA, joined VRC’s Princeton, N.J., office as an associate in the portfolio valuation group (former senior analyst at Analysis Group); Nathan Fineman, ASA, joined VRC’s Chicago office as an associate where he specializes in the valuation of business enterprises and intangible assets for purchase price allocations and goodwill impairment studies as well as fairness and solvency opinions (formerly with Newmark Knight Frank and Duff & Phelps); Alex Caligiuri (CFA candidate), joined VRC’s Princeton, N.J., office as an analyst in the portfolio valuation group (formerly interned with Lincoln Financial Group and GoldOller Real Estate Investments); Brandon Chew joined VRC’s San Francisco office as an analyst where he specializes in business enterprise valuations and intangible-asset valuations (formerly a transfer pricing analyst at Duff & Phelps); and Tyler Peltz joined VRC’s Princeton, N.J., office as an analyst in the portfolio valuation group (formerly an analyst at HealthCare Appraisers Inc.)

Firms: New York-based Grassi & Co. has acquired Levine Caufield Martin & Goldberg (LCMG) of Needham, Mass.; the deal expands Grassi’s geographic footprint to the Boston area and increases its service capabilities in sectors such as healthcare, real estate, manufacturing and distribution, professional services, and nonprofit … Florham Park, N.J.-based Wiss & Co. LLP has launched a new business analytics and intelligence practice, targeting middle-market companies that are looking to better utilize their internal data … New York-based EisnerAmper LLP rolled out the EisnerAmper RTO Platform, a new mobile application designed to help companies keep their employees safe as they re-enter their physical offices; the platform will be offered at no cost to EisnerAmper clients … Lexington, Ky.-based Dean Dorton launched a new COVID-19 Health Check Solution to help businesses comply with federal and state reporting requirements as employees return to work.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Valuation of Inventory: Taking Stock of the Guidance, October 8, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Anthony J. Pumphrey (Valuation Research Corp.). Part of BVR’s Special Series on Fair Value.

  Given divergences in both practice and guidance, inventory valuation can seem challenging. This webinar illustrates simple, straightforward modifications to the valuation of inventory that you can incorporate into your valuation process.

• Valuing Micro and Small Businesses in the Shadows of COVID-19, October 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Gregory R. Caruso (Harvest Business).

This webinar is a deep dive into problematic areas of actual small-business valuation cases, with multiple case studies, audience questions, and succinct opinions welcomed.