Feds reach settlement in lawsuit against Bellows Falls auto parts manufacturer

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BELLOWS FALLS — A preliminary settlement has been reached in the U.S. Department of Labor's lawsuit against a Bellows Falls auto parts manufacturer, new court documents show.

Federal investigators have alleged that Sonnax Industries, two executives and a financial adviser caused an employee stock plan to suffer "sizable financial losses" when the company became employee-owned in 2011. But a federal judge on Monday approved a 120-day suspension of the federal government's case in order to allow for finalization of a settlement agreement.

While details of the settlement are not yet clear, a motion signed by attorneys for the Labor Department, Sonnax and First Bankers Trust Services says the deal resulted from their meeting with a neutral evaluator earlier this month.

"As a result of that mediation, a settlement contingent upon certain events occurring among all the parties was reached that would resolve the case," the attorneys wrote.

Sonnax, founded in 1978, says it specializes in "cutting-edge design, manufacture and distribution of the highest quality products to the automotive aftermarket, commercial vehicle industries and industrial sectors utilizing drivetrain technology."

The company's website touts its growth and says it "exports to more than 70 countries and supports emerging markets worldwide."

Sonnax became an employee-owned company in early 2011.

But in a complaint filed late last year in Vermont's U.S. District Court, the Labor Department alleged that the sale of Sonnax to its staffers violated the Employee Retirement Income Security Act.

First Bankers, which acted as a trustee for the employee stock plan, relied on inflated estimates of Sonnax's value and future growth, the Labor Department alleged. Additionally, First Bankers didn't properly account for future financial rights retained by some members of management, the complaint said.

Federal officials also alleged that Tommy Harmon, Sonnax's president and chief executive officer, and Frederick Fritz, a Sonnax board member, "knew or should have known First Bankers was relying on aggressive and overly optimistic projections which they had provided and even their own advisers acknowledged were unrealistic."

Harmon and Fritz had been the company's sole owners before employees purchased Sonnax.

The end result, officials said, was that the employee stock plan overpaid by millions of dollars for "highly leveraged Sonnax stock."

The exact amount of the alleged overpayment was not specified. But documents say Sonnax bought the owners' stock for $48.8 million, then sold all of the newly issued shares to employees for $10 million.

Attorneys for Sonnax, Harmon, Fritz and First Bankers denied the allegations. Sonnax said there had been "no actual economic losses or damages," while First Bankers said it "acted in good faith and solely for the benefit of the (employee stock) plan and its participants."

Earlier this year, the federal government and the defendants agreed to submit the case to early neutral evaluation, a court program that's aimed at preventing extended, costly litigation by boosting the chances for a settlement.

In court documents, the parties noted that the case "involves complex issues relating to the establishment, valuation and funding of an employee stock ownership plan for the acquisition and ownership of Sonnax Industries."

The Employee Retirement Income Security Act is "a highly specialized area of the law, with each defendant retaining specialized counsel to represent it," court filings said.

The neutral evaluation session - conducted in Boston before an attorney "with substantial knowledge and experience" in matters related to the security act - apparently went well.

But the disposition of the case is not yet a sure thing.

"The settlement is conditioned upon a contingent event which is highly likely to occur, but which is not certain to occur," court documents say. "This contingent event will occur, if it occurs, within the next 90 to 120 days."

No further details about the settlement were available on Monday.

If the deal falls through, "the parties anticipate continuing to litigate the case, as the settlement terms will not be agreeable to all parties under those circumstances," court documents say.

Mike Faher reports for the Brattleboro Reformer, VTDigger, and The Commons. He can be contacted at mfaher@vtdigger.org.

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