Government accuses executives of overvaluing Hawaii architectural and design firm

The U.S. Department of Labor is suing the top two executives of a local architectural and design firm after they allegedly sold it to their employees for $40 million, about $13-$25 million more than what it was worth.

Brian J. Bowers and Dexter C. Kubota, president and vice president of Bowers + Kubota, worked with a third-party trustee, Nicholas L. Saakvitne, to create an Employee Stock Ownership Plan and to overvalue their company before selling to their employees, according to allegations, valuations and a previous purchase offer for the company detailed in more than three years of federal court filings.

The Labor Department alleges Bowers and Kubota violated the Employee Retirement Income Security Act of 1974, including the section that “prohibits a fiduciary from dealing with the assets of a plan in his own interest or for his own account.” Four days before the ESOP sale, Bowers and Kubota allegedly changed the company’s bylaws and articles of incorporation to convert 100 shares of stock into 1 million issued shares, and executed the ESOP four days later for significantly more than those shares were worth on Dec. 14, 2012, creating trust accounts to receive payments, according to court filings.

The defense mounted by attorneys for Bowers and Kubota said the pair did nothing wrong, they followed industry standards, and their financial strategy is generating exceptional returns for their employees. The case is in the post-trial filing phase with an Aug. 9 deadline for submissions.

David R. Johanson, a Napa, Calif.-based attorney representing Bowers and Kubota, told the Honolulu Star-Advertiser the federal government presented no evidence of wrongdoing against Saakvitne (who died in 2018), Bowers or Kubota and the company’s stock price is up 1,200% in eight years and employees have hundreds of thousands of dollars in their accounts.

The Secretary of Labor and his successor pursued false allegations against the defendants dating back to the opening of his investigation in the summer of 2014, Johanson said.

In December 2012, the two executives completed the sale of the company to the employees in the ESOP deal. Bowers received a promissory note worth $20.4 million and Kubota received a promissory note valued at $19.6 million when the sale closed. As of December 2019, the pair claim the company had more than $27 million in outstanding debt related to the ESOP, according to court documents.

“The ESOP paid significantly over fair market value for the company’s shares based on a grossly inaccurate appraisal that Bowers and Kubota obtained. … The appraisal relied on unrealistic projections which Bowers and Kubota supplied, some of which were verifiably inaccurate at the time of the transaction,” according to the initial complaint, filed by attorneys for the Labor Department in U.S. District Court.

The government’s case involves the sale of shares by Bowers and Kubota to the ESOP Ownership Plan for significantly more than they were worth. For purposes of this stock purchase, Saakvitne acted as trustee and the company acted as plan administrator through Bowers and Kubota.

According to court filings, “Rather than prudently investigate the merits of the transaction and the true value of the stock on the ESOP’s behalf, as ERISA (Employee Retirement Income Security Act of 1974) requires, Saakvitne, improperly relied on a flawed, inflated valuation of the stock…In addition, the valuation relied on overly optimistic and aggressive revenue projections that were demonstrably inaccurate at the time of the transaction and which diverged significantly from the company’s prior performance… As a result of Saakvitne, Bowers, and Kubota’s breach of their fiduciary responsibilities in accepting a valuation resulting from the appraiser’s flawed process and based on unrealistic assumptions, the price the ESOP paid for the company far exceeded its fair market value.”

In a statement, Johanson told the Star-Advertiser: “This is a clear case of government overreach against a small veteran-owned company and the trustee who the company retained to represent the ESOP’s efforts in the December 2012 B+KC ESOP transaction. The evidence at trial (both lay and expert witnesses) showed that the B+KC ESOP did not pay more than fair market value for the company stock that it purchased. The B+KC ESOP trustee died soon after the Secretary of Labor filed the lawsuit against him. In spite of this, the Secretary of Labor continued the lawsuit against his widow. This is not Mr. Bowers’ and Mr. Kubota’s ESOP. It is the ESOP for eligible B+KC employees.”

Bowers and Kubota did not reply to phone calls or emails seeking comment. Scott I. Batterman, who represents the ESOP, declined to answer questions emailed to him at his request. Elisabeth P. Nolte, Ruben R. Chapa and Christine Z. Heri, attorneys handling the case for the U.S. Department of Labor, did not comment or reply to phone messages or questions sent to them about the case.

In comments not specific to the Bowers + Kubota case, Jose Carnevali, a spokesman for the U.S. Department of Labor, told the Star-Advertiser, “Companies and individuals acting as fiduciaries on behalf of participants in retirement plans, such as ESOPs, must always act in good faith and in the best interest of their employees. When they breach that obligation, they jeopardize their employees’ financial security and may face legal action. The Department of Labor’s Employee Benefits Security Administration is charged with protecting the retirement income of ESOP participants, and it is important to hold fiduciaries accountable when they act against their employees’ best interest,”

Bowers and Kubota filed declarations in U.S. District Court on Thursday claiming the Employee Stock Ownership Plan they created was perfectly legal, despite Kubota’s testimony that revealed they entertained a $15 million cash offer from a private company.

After proposing a counter offer to the $15 million from URS Corporation on Dec. 5, 2011, URS (an engineering, design, and construction consortium previously headquartered in San Francisco) ended negotiations. Bowers and Kubota then decided to create an ESOP and sell their shares to it.

Bowers said Libra Valuation Advisors Inc. concluded that as of Dec. 14, 2012, the fair market value of the company was $40.15 million, according to court documents. An accountant who filed a declaration in the case placed the value of the company at $26.9 million.

Gary Kuba, a certified public accountant and principal of GMK Consulting LLC, was hired by Bowers + Kubota in early 2012 to create an “internal-use valuation analysis for negotiation with a publicly held company that was interested in acquiring them. The publicly held company was URS Corporation,” Kuba testified.

On Feb. 26, 2012, Kubota sent Kuba an email with an attachment of the company’s financial projections for 2012 that appeared optimistic given recent history. Bowers and Kubota projected a net income of $9.284 million in 2012 compared to net incomes of $6.452 million in 2011; $6.367 million in 2010; $4.412 million in 2009; and $4.332 million in 2008, according to court documents.

Kuba testified that “In reviewing the projected net income for 2012, I had some concerns from a reasonableness standpoint regarding the pretty significant jump in the projections for 2012 compared to historical performance, but because the scope of my assignment was an internal-use analysis for negotiation purposes, I took their assumption and incorporated it into the analysis without digging into the underlying assumptions and doing due diligence.”

Another accountant also filed a declaration June 21 claiming a due diligence review of B+K’s records revealed the company used cash valuations and was not worth close to what its owners said it was. The appraisal relied on “unrealistic projections, which Bowers and Kubota supplied, some of which were verifiably inaccurate at the time of the transaction,” according to court documents.

Steven J. Sherman, who worked for accounting firm KPMG for 30 years, said Bowers and Kubota’s conclusion about the value of their company “was significantly overstated since it was based on inflated results and projections provided by management.”