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Disney Ducks 401(k) Class Action on Fund Choice

A federal judge has dismissed a class action that sought to hold plan fiduciaries liable for keeping a mutual fund in the plan in violation of the plan’s diversification requirements.

The plaintiffs in In Re Disney ERISA Litigation (C.D. Cal., No. 2:16-cv-02251, 11/14/16) alleged that the Sequoia Fund violated the fund’s own investment policies, as well as the plan’s diversification requirements, by having too much of the Sequoia fund invested in a single security (Valeant), that they claim was a particularly risky stock, with numerous warning signs that were ignored, and not only that the investment was imprudent, but that it resulted in losses to participants.

Judge Anderson cited Supreme Court precedent (Bell Atlantic Corp. v. Twombly), noting that “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” He also invoked precedent from Fifth Third Bancorp v. Dudenhoeffer, where the Supreme Court held that, “W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” Moreover, that ““[T]he decline in the price of a security does not, by itself, give rise to a plausible inference that the security is no longer a good investment. Rather, the allegation of a decline in price indicates only that the security turns out to have been, in hindsight, a bad investment.”

“As Dudenhoeffer instructs,” Anderson wrote, “the precipitous decline in the value of Valeant’s stock does not alone suggest that Plaintiffs have stated a plausible fiduciary duty claim against the Plan. The Consolidated Complaint contains no allegations of 'special circumstances' that could support even an inference that the Plan had any reason not to rely on the market’s valuation of Valeant up until the collapse in its price.” Lacking any factual allegations suggesting why a “reasonably prudent fiduciary” would have been motivated to remove the Sequoia Fund from the Plan’s investment options prior to the “precipitous drop in Valeant’s stock price, and the resulting loss of value for the Sequoia Fund,” Anderson held that the plaintiffs failed to state a viable claim. “Indeed,” he went on to note in dismissing their claims, “Plaintiffs’ theory of liability, if accepted, would require Plan fiduciaries to monitor the market and publicly available information about every holding maintained by every mutual fund included within the Plan, the concentration of all stocks held by each mutual fund within the Plan, and whether that concentration was the result of an imprudent acquisition of additional shares or the dramatic appreciation in value of any particular mutual fund’s original investment.”

On the other hand, Anderson closed by noting that while the plaintiffs did not specifically request leave to amend, he would give them until Dec. 5, 2016, to file a First Amended Consolidated Complaint. However, if that was not filed by that date, Anderson said that “the Court will issue a Judgment dismissing this action with prejudice.”

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