The former owners of Sonnax Industries, Inc., a Bellows Falls auto-parts manufacturer, have reached a $2 million settlement with the U.S. Department of Labor over allegations they sold stock to an employee benefits plan at an inflated price.

The impending settlement allowed Marmon Holdings, Inc., a subsidiary of Berkshire Hathaway, to buy Sonnax for more than $65 million without inheriting the legal battle. The sale went through March 30, according to a Tuesday news release from Sonnax. A judge signed off on the settlement April 30.

The former owners, Tommy A. Harmon and Frederick Fritz, did not admit wrongdoing as part of the settlement. They continue to deny the government’s allegations.

Harmon, then president and CEO, and Fritz, then a member of the board of directors, effectively sold Sonnax to its employees in January 2011, according to court documents.

The company paid Harmon and Fritz a combined $48.8 million in cash and promissory notes to buy back their shares, then issued new shares, which a newly established employee stock ownership plan bought for $10 million.

An employee stock ownership plan, or ESOP, is a benefits plan that invests in the employer’s stock, essentially turning employees into shareholders. Sonnax has almost 250 employees, according to its website.

The Department of Labor lawsuit, filed in December 2016, alleged that a faulty valuation of the company caused the benefits plan to overpay for the stock by “millions of dollars.”

The lawsuit named as defendants Harmon, Fritz, Sonnax and First Bankers Trust Services, an Illinois-based financial company that served as the employee ownership plan’s trustee and had commissioned the valuation.

The government alleged that First Bankers, Sonnax, Harmon and Fritz — as parties responsible for overseeing the pension plan — “knew or should have known” that the valuation report overstated Sonnax’s worth.

Sonnax, in its news release, says the Marmon acquisition vindicates the terms of the 2011 transaction.

“Sonnax employees will now share in more than $35 million in proceeds from the sale,” the release stated. “This is a significant financial reward for Sonnax employees and counters the (government’s) argument that the ESOP was overcharged and suffered significant financial losses as a result of the 2011 transaction.”

A Department of Labor spokesman said Wednesday that the agency stands by its original allegations.

The settlement calls for Harmon and Fritz to pay a combined $2 million to the employee ownership plan, along with a $200,000 fine to the Department of Labor. First Bankers is to pay the benefits plan $225,000, plus a $25,000 penalty.

Brian Ippensen, president of First Bankers Trust Services, declined to comment beyond a written statement summarizing the terms of the settlement.

Sonnax had been gearing up to fight the government’s allegations at trial, until it received the unexpected acquisition offer from Marmon Holdings last year, Tristram J. Coffin, an attorney for the company, said Tuesday.

Marmon would only buy the company if the lawsuit was resolved, which prompted settlement talks, he said.

The Department of Labor and the defendants agreed to a settlement that would take effect if Marmon bought Sonnax for more than $65 million, according to court documents.

Coffin would not disclose the sale price, saying only that it was “well in excess” of $65 million.

Sonnax employees overwhelmingly approved the Marmon acquisition earlier this year, Coffin said. As a result of the sale, employee-held shares are worth triple what they were in September 2016, according to the settlement. Coffin said employees can keep the proceeds tax-free in retirement accounts or withdraw them, subject to taxes and fees.

Harmon said in the Sonnax news release that he and Fritz settled so employee-shareholders could benefit from the Marmon acquisition.

“Without the settlement, this opportunity for the employee-shareholders to cash out through the acquisition would have been missed, which would have been wrong,” he said.

The Department of Labor, in its 2016 complaint, sought to portray Harmon and Fritz as using their positions of responsibility at the company — both served on the three-member board — to reap an illegitimate windfall.

In 2009 or 2010, the government alleged, the two men started looking to sell the company.

The Department of Labor claimed Harmon and Fritz first tried to sell to other companies. After receiving minimal interest, and only at prices below what they thought was fair, they turned to the idea of selling to an employee ownership plan, the department alleged.

Harmon and Fritz thought Sonnax was worth $48 million to $60 million, but a financial advisory firm they hired, SES Capital Advisors, Inc., “expressed misgivings about this range” and put the estimate at $40 million to $44 million, according to the lawsuit.

The government claimed SES said Harmon and Fritz could likely sell Sonnax between $40 million and $42 million and might be able to fetch up to $48 million.

In October 2010, SES contacted First Bankers Trust Services about acting as a trustee for the employee ownership plan, according to the lawsuit. First Bankers determined the $48.8 million price, relying on an outside valuation company, the department claimed.

On Jan. 3, 2011, Sonnax paid Harmon and Fritz $15 million in cash — financed with a bank loan — and $33.8 million in promissory notes, according to the complaint.

The Department of Labor alleged the outside valuation used improbable growth projections and contained other analytical flaws. The agency accused First Bankers of “woefully deficient investigation.” It claimed Harmon and Fritz at best failed to fulfill their oversight duties.

Coffin called the government’s version of events “outrageous.”

He said a “very cursory approach with investment banks” yielded some “interesting offers.” Harmon and Fritz instead opted for an employee stock ownership plan — not out of greed, but generosity, Coffin said.

“They sold it to their employees instead of selling it to an investment bank because they wanted the employees to do well,” he said.

Coffin argued the company’s subsequent performance refuted the government’s claim that the stock was overvalued.

“It increased its earnings, post recession,” Coffin said of Sonnax. “How many companies in southern Vermont did that?”

The Sonnax case is not First Bankers’ only run-in with the Department of Labor over stock sales to employee ownership plans.

In March 2017, after a trial in federal court, a judge ruled First Bankers had been careless in relying on a flawed valuation report that caused a benefits plan at a New Jersey construction company to overpay for stock by $9.4 million.

In a lengthy opinion, Judge Michael A. Shipp castigated First Bankers’ “failure to conduct an independent inquiry into the myriad of red flags, glaring errors, and other significant issues affecting the valuation ... led to a passive and blind adoption of the seller’s optimistic valuation.”

First Bankers agreed to pay $15.75 million to resolve that case and settle two similar Department of Labor lawsuits, according to a November news release.

According to Coffin, First Bankers remains a trustee of the employee ownership plan. The firm, he said, is overseeing payments into employee accounts from the Marmon acquisition — and from settlement funds.

Paul Cuno-Booth can be reached at 352-1234, extension 1409, or Follow him on Twitter @PCunoBoothKS