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Disney Fiduciaries Fend Off Sequoia Fund Suit

ERISA

Plan fiduciaries have prevailed again for a decision to continue to keep a mutual fund investment in the plan, even after plaintiffs alleged “…it became apparent that the Fund was no longer a suitable investment for participants’ retirement savings.”

Case History

The plaintiffs here are participants in the Disney Savings and Investment Plan who held shares of the Sequoia Fund, one of the options in the plan. In 2010, the Fund invested over $250 million in Valeant Pharmaceuticals International, Inc.; at that time, Sequoia's investment in Valeant represented 7.96% of the fund's net assets. By July 2015, due to appreciation of the initial investment and purchases of additional shares, Sequoia's investment in Valeant represented 28.7% of the fund's net assets. From August 2015 to November 2015, the price of Valeant stock dropped from $263 a share to $70 a share, causing Sequoia to lose more than 20% of its value.

The plaintiffs 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.

Appellate Ruling

However, in a remarkably short (and unpublished) decision, the U.S. Court of Appeals for the Ninth Circuit affirmed a 2017 district court decision. “The plaintiffs cited ‘only publicly available information’ in alleging that Sequoia’s investment in Valeant marked a material shift in its investment strategy from investing in conservative ‘value’ stocks to investing in risky ‘growth’ stocks … They allege that this shift was inconsistent with Plan documents and that the Defendants failed to discover or inform Plaintiffs about the shift,” the court noted, but concluded (citing Fifth Third Bancorp v. Dudenhoeffer) that “…as a general matter, allegations based solely on publicly available information that a stock is excessively risky in light of its price do not state a claim for breach of the ERISA duty of prudence.”

The court also concluded that Sequoia’s investment and concentration in Valeant was facially consistent with the plan documents. “Indeed, both the Plan's Summary Plan Description and Sequoia’s 2015 Prospectus note that Sequoia is ‘non-diversified’ and there are risks associated with Sequoia's investment strategy,” according to the opinion. The Ninth Circuit went on to explain that, “to the extent that the Plan documents even distinguish between ‘value’ and ‘growth,’ we agree with the district court that these words were used simply to ‘describe [Sequoia's] investments; not to also convey [its] overall investment strategy.’” The court concluded that “to find otherwise—that the documents’ use of these terms imposed material limitations on Sequoia's investment strategy—would require drawing ‘unreasonable inferences.’” 

Ultimately, the Ninth Circuit held that the district court did not err in denying Plaintiffs a second opportunity to amend their complaint, and that “based on the foregoing, it is clear that such efforts would be futile because Plaintiffs’ complaint cannot ‘be saved by any amendment.’” 

The case is Wilson v. Fid. Mgmt. Tr. Co., 2019 BL 69493, 9th Cir., No. 17-55726, unpublished 3/1/19.

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