Retirement 'promise' disappears with boss

December 09, 1993|By Gary Cohn | Gary Cohn,Staff Writer

When John C. Kidd Jr. joined Charter Group Inc. in 1984, he made an investment in both his job and his future.

The company had sold workers on the idea of an employee stock ownership plan, based on the promise that if they worked harder and better and helped the firm prosper, so would they.

It was a compact.

"The company had told us, 'You're an employee-owned company. Work hard for this company, because you're an owner of it,' " Mr. Kidd recalled. "The way the employee stock ownership plan was perceived was that this is your retirement program, this is what you're working for, and that's why it's important to make sure the company does well."

But now Mr. Kidd and about 90 other current and former employees of Charter feel betrayed.

Charter's fortunes, which were tottering throughout 1993, came crashing down in September in the wake of the disappearance of Hamilton A. Schmidt, the company's chief executive.

As a result, Charter's employee stock ownership plan (ESOP) -- the only retirement program for its employees -- collapsed as well.

Mr. Kidd's stock in Charter, for instance, was worth $107 a share in September 1992. Today, it is worth nothing. To Mr. Kidd, who now operates an insurance agency in Towson with his wife, that represents a loss of more than $28,000.

"I think it's a travesty that nobody did due diligence to protect the assets," said Patrick Murphy, 48, of Sykesville, who worked at Towson-based Charter for 21 years until he resigned in February. ". . . A lot of innocent people are losing their retirement, which was basically felt to be safe."

Mr. Murphy, who was an executive vice president, said he is out more than $100,000. "I was planning to retire on that money," he said.

It wasn't just the collapse in the value of the stock that Charter employees weren't aware of. They also didn't know:

* The stock ownership plan provided little accountability and few safeguards for workers. Mr. Schmidt, the plan's trustee, had virtually unlimited access to cash in the ESOP. Although the arrangement is legal, financial experts say they would recommend against designing a retirement program that way.

* Between June 1990 and September 1992, Mr. Schmidt withdrew a total of $384,812 in cash from the ESOP in exchange for Charter stock, according to records. What is not clear is what Mr. Schmidt used the cash for or whether the withdrawals were legal.

* Charter was collapsing financially. For months, Mr. Schmidt kept Charter's troubles secret from everyone, including the company's board of directors. Employees believed that their retirement benefits were secure.

Mr. Schmidt vanished in September, two days before a key business meeting with the company's chief creditor, ITT Hartford Insurance Group.

The 39-year-old Mr. Schmidt, who grew up in Baltimore County, had worked at Charter for nearly two decades, rising through the ranks to become the company's chairman and chief executive in 1990. But in a letter mailed to his company on the day he disappeared, Mr. Schmidt revealed that he could no longer take the pressure of life at the top.

"I have lost my desire and drive to lead," he wrote. He said in a second letter mailed that day, to his sister Susan Schmidt, that he was anxious and needed to get away.

An investigation into Mr. Schmidt's mysterious disappearance unmasked the company's perilous financial situation. In October, Charter, once one of the area's largest independent insurance agencies, filed for bankruptcy protection in U.S. Bankruptcy Court in Baltimore. It turned out that the company's retirement program had also collapsed.

Unlike many retirement plans, ESOPs are not backed by the Pension Benefit Guaranty Corp., the quasi-federal agency that makes payments to retired workers if a company cannot meet its pension obligations.

At this point, no one knows how much Charter employees may eventually recover under a bond that was intended to protect the ESOP against theft. The process of determining whether and how much the employees are entitled to recover is expected to take months.

But the likelihood is that employees will see very little -- "perhaps 20 cents on the dollar," said Henry A. Smith III, an expert in employee benefits law who is representing some former Charter employees.

Mr. Smith and other experts say that Charter's ESOP was nTC particularly vulnerable because it gave one person -- in this case Hamilton Schmidt -- control over too many financial decisions, resulting in natural conflicts of interest. Mr. Schmidt was the company's chief executive, its controlling stockholder and the sole trustee of the employee stock ownership plan.

"He was wearing three hats," Mr. Smith said. "At the least, that shows questionable judgment, and it may point out a potentially fatal flaw in the statute that allows the same person to wear all three hats at once.

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