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B&L loses case with ex-execs

Rochester Business Journal
March 21, 2014

Five years, two owners and three judges later, former Bausch & Lomb Inc. chairman and CEO Daniel Gill and two other retired executives of the eye-care company have won a court battle to reclaim generous, tax-free pensions.

The company had canceled the pensions after it was taken over by Warburg Pincus LLC.

In a decision handed down this month, U.S. District Judge Michael Telesca said Bausch & Lomb—now a New Jersey-based division of Valeant Pharmaceuticals International Inc., which is based in Quebec—was wrong when it canceled pension plans for Gill;

Thomas McDermott, ex-Bausch & Lomb president and chief operating officer; and Jay Holmes, former chief administrative officer.

For Valeant, the ruling ordering the eye-care company to pay the retirees retroactively with interest means that its purchase of Bausch & Lomb last year for roughly $9 billion also brought a multimillion-dollar obligation to the three former executives.

A judgment in favor of the three executives, entered in court records March 5, leaves the amounts the men are owed blank.

Neither a Valeant corporate spokeswoman nor an attorney representing Bausch & Lomb in the dispute responded this week to requests for comment.

The dispute turned on the exact meaning of terms and conditions of Supplemental Retirement Income Plan I, a pension plan the company created in the mid-1980s to cushion the exit of its most highly paid officers. Called SERP I, the plan called for lifetime tax-free pension payments.

McDermott, who left the firm in 1993, and Gill and Holmes, who retired in 1995 and 1996, were the only executives Bausch & Lomb enrolled in SERP I.

Later SERP II and SERP III had similar terms but differed in a key respect, the retirees’ attorney, Harold Kurland of Ward, Heller, Greenberg & Reidy LLP, argued in court papers. The later SERP plans could be canceled if the company was sold; SERP I could not.

Under Gill, who had joined the company in 1978 and led it from 1981 until his retirement, Bausch & Lomb first topped $1 billion in revenues and grew to global status. In the early 1990s, when the Rochester-born firm was at its acme, Gill was the prime mover behind construction of the lavish Bausch & Lomb world headquarters in downtown Rochester.

A 1994 Securities and Exchange Commission investigation presaged the beginning of the fall from the peak to which Gill had brought the company. Other inquiries and earnings restatements followed under Gill’s successors. Bausch & Lomb’s name was further tarnished when one of its contact lens solutions was linked to a fungal eye infection that caused some users to go blind. By the mid-2000s, the firm was seen as a ripe acquisition target.

After it was acquired in the $3.8 billion Warburg Pincus private-equity takeover, Bausch & Lomb told Gill, McDermott and Holmes it was scrapping SERP I. On Oct. 1, 2007, it sent them onetime payments that it maintained ended its further obligations under the plan.

The cancellation violated the federal Employee Retirement Income Security Act, the retirees maintained in internally lodged protests in 2007 and 2008.

And even if it did not, Kurland argued, the $6.4 million, $2.1 million and $1.5 million closeout checks received by Gill, McDermott and Holmes fell short of what they should have gotten to fairly close out the secular trust Bausch & Lomb had set up to fund their SERP I payments.

Bausch & Lomb held its ground, refusing to reinstate SERP I.

In 2009, the three men sued the company, filing an action in U.S. District Court in Rochester that essentially repeated the claims they had pressed unsuccessfully for the previous two years.

Over the next half decade, the federal case piled up reams of paper as lawyers jousted to set terms under which the dispute could be settled while the case passed back and forth between two judges with no resolution.

Last month it finally landed before Telesca, a long-retired judge still on active service. His March 3 ruling addressed both sides’ summary judgment motions, conceding every point to the three retirees.

Among Telesca’s findings in the 44-page decision:

 In canceling SERP I, the company ignored the plans’ terms by allowing unauthorized company functionaries to carry out the cancellation and organized a body authorized to make such a decision only as an afterthought.

 Virtually every move the company made to cancel the pension plan violated ERISA.

 As members of a Bausch & Lomb board compensation committee that belatedly voted to end SERP I, three Warburg Pincus partners in line to benefit financially from the cancellation ignored a clear conflict of interest.

Telesca was unconvinced by the compensation committee trio’s sworn statements attesting to their impartiality.

More telling, the judge wrote, was the advice that compensation committee member and Warburg partner Scott Mackesy offered to an eye-care company lawyer in an email: “We should just deny (their) claim and get on with it.”

Telesca’s ruling allows the eye-care company to take the approximately $10 million it paid out to Gill, McDermott and Holmes in 2007 as an offset against other damages owed to the men but otherwise orders the company to honor SERP I terms laid out in the plan’s original 1985 draft.

The exact size of that obligation—now owed to Gill, McDermott and Holmes by Valeant—is not clear.

Before it was acquired by Warburg, the eye-care company partially detailed SERP I obligations to Gill and Holmes in 1994 and 1995 Securities and Exchange Commission filings. It did not mention McDermott. Similar filings in subsequent years describe SERP II and SERP III obligations but do not mention SERP I.

The estimated annual after-tax benefits payable at normal retirement age for Gill and Holmes under SERP I would be $728,786 and $334,079, the company stated in a 1994 proxy statement. In a 1995 proxy, the company said it had upped Gill’s pension payout and put the former CEO’s SERP benefits at $1.9 million. After-tax costs racked up to meet the ex-CEO’s SERP I obligations then totaled some $4 million, the filing states.

In addition to the continuing annual pension obligations, the SERP I dispute turned on how much the company could claim of $7.3 million left in the SERP I trust after the 2007 final payments to Gill, McDermott and Holmes.

SERP I terms state that in the event of the plan’s demise, leftover amounts should go to the company. But Kurland claimed in court papers that the approximately $10 million in final payments Bausch & Lomb made to Gill, McDermott and Holmes fell $2 million or more below what the men should have been paid.

3/21/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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