“Multiply the cases of Messrs. Childs and Pilger by a few thousand and you have the runaway administrative state. Sad to say, the government has no trouble finding Americans happy to do this work-happy to treat everyone in the private economy as a criminal…

…No wonder many business people, having seen the last of the Obama administration, now pray a new president will mean a new era of hope and change.”, Holman W. Jenkins, Jr., “Meet the Victims of the Administrative State”, The Wall Street Journal, January 30, 2017


Meet the Victims of the Administrative State

Multiply these two cases thousands of times over and you can understand America’s doldrums.

By Holman W. Jenkins, Jr.

Usually in the run-up to a presidential election, or soon thereafter, a column appears in this space pointing out that an important part of every president’s job is protecting America from Washington. Barack Obama did not embrace this presidential duty. Maybe Donald Trump will.

John W. Childs runs a highly reputed Boston private-equity firm that Dodd-Frank placed under the jurisdiction of the Securities and Exchange Commission, which demanded a list of campaign donations.



Lo, in 2013, one partner gave $250 to a Boston mayoral candidate who didn’t get past the Democratic primary. Ten years earlier, the city of Boston had invested in the firm’s fund.

“I’m not in favor of bribery,” says Mr. Childs, though he wonders how a donation today can influence an investment decision made by somebody else a decade earlier.

Never mind. He agreed to a settlement and a fine of $35,000 under “pay to play” rules, but then the SEC demanded he also accept “censure” of his firm. “Censure,” to him, sounded like “evildoing capitalists” admitting to “something egregiously wrong,” so the normally publicity-shy Mr. Childs drew a line.

In a wholly uneconomic decision, his firm has decided to fight. “I’m fortunate that I can afford to do this,” he says. Stay tuned, because his battle potentially has First Amendment implications.

Which brings us to case No. 2.

David Pilger and his late brother, William, for 40 years operated a Miami-based dry-cleaning supply and export business, which itself has been around for 82 years. Looking for a way to retire while taking care of their employees, the brothers decided to transfer ownership to an ESOP—an employee stock ownership plan.

Through the ESOP Association, they found an adviser to fill out the Labor Department paperwork. They hired RSM McGladrey, a global accountancy, to render an opinion on what the firm was worth. The result—a bit more than $9 million, after being reduced for a “lack of marketability”—left them unthrilled. But this was the trough of the great recession and they went ahead.

At first they lined up a bank but then chose to finance the deal themselves with a 4% (later reduced to 1.4%) promissory note. This is important: If you’re dumping a business on an ESOP at an inflated price, you want a bank to take the risk while you make off with the loot.

Commodity Control Corp., their company, appears to have exceptionally good relations with its 45 employees, many of whom have been around for decades. Every year, the company sponsors a three-day cruise to hand out employee awards and hold training sessions on hazmat, driver safety, sexual harassment, etc.

The firm had reliably generated profits of $700,000 a year on sales of $14 million—and lately closer to $1 million, adds the affable Mr. Pilger, since the “grossly overpaid” brothers replaced themselves with professional managers.

The company has no bank debt. Virtually every year the firm makes the maximum allowable contribution, 25% of payroll, to the ESOP trust.

Enrique Padron, who now runs the company and came aboard after the deal, says he and his employees have seen no reason to complain about the ESOP terms. “It’s been a great opportunity for them to get ownership in the company and save for retirement,” he says.

Alas, the government does not launch investigations except for the purpose of finding something. Eight years after the fact, the Labor Department now says the ESOP was overvalued, demanding the return of all funds received by the Pilgers, plus a potential 20% penalty.

How did they become a target? Not because of any complaint. The agency chose as a matter of policy to investigate leveraged ESOPs, and Mr. Pilger’s was the only one available to be investigated by the department’s Atlanta regional office. At first, he didn’t hire a lawyer and voluntarily signed a tolling agreement to extend the statute of limitations. “I thought they’d investigate and hand me a commendation for making owners out of my employees,” he tells me.

Now let it be said that ESOPs are created by government, promoted by government, showered with government tax benefits, and ripe for abuse. But this does not appear to be one of those cases—unlike, say, the disastrous ESOP of the Chicago Tribune company around the same time, whose egregiousness anybody could see from five miles off.

Rather, we have here a question of dueling valuations, with the Labor Department’s figure influenced by the subsequent Obama era’s miserableness for small business. Recall that the Pilgers themselves are financing the transaction. In essence, they are buying the company from themselves with the company’s now-tax-privileged cash flow and, at the same time, gifting shares to the employees. What matters is that they aren’t taking out cash at an unsustainable rate.

Multiply the cases of Messrs. Childs and Pilger by a few thousand and you have the runaway administrative state. Sad to say, the government has no trouble finding Americans happy to do this work—happy to treat everyone in the private economy as a criminal. No wonder many business people, having seen the last of the Obama administration, now pray a new president will mean a new era of hope and change.

Posted on February 1, 2017, in Postings. Bookmark the permalink. Leave a comment.

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