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Another Sequoia Fund Holding Suit Filed

Yet another suit has been filed by 401(k) plan participants alleging that a plan kept an imprudent and relatively high cost mutual fund in the plan in violation of the plan’s diversification requirements.

In the latest suit, Harmon v. FMC Corp. (E.D. Pa. No. 2:16-cv-06073-BMS, complaint filed 11/18/16), FMC Corp. is accused of permitting more than $40 million in 401(k) assets to be invested in the Sequoia Fund, which was, in turn, heavily invested in the stock of Valeant Pharmaceuticals Inc., and that the plan suffered millions of dollars in losses because substantial assets of the plan were imprudently invested, or allowed to be invested by the defendants, in the Sequoia Fund during the Class Period, in breach of the defendants’ fiduciary duties, and reflected in the diminished account balances of the plan’s participants.

Ironically, the suit came within days of a decision in a federal court in California that dismissed a similar suit involving the 401(k) plan of Walt Disney Co.

‘Significantly Changed Circumstances’

This most recent suit, brought in the U.S. District Court for the Eastern District of Pennsylvania, claims that the plan fiduciaries breached their fiduciary duty of prudence by failing to monitor the plan’s investments, particularly in growth funds, and to remove imprudent ones, “ignoring significantly changed circumstances and allowing the Plan to become overconcentrated in the Sequoia Fund, which was, itself, over-concentrated in Valeant common stock, as well as investing in a fund that had advisory fees well above average.”

The plaintiffs not only claim that the Sequoia Fund was not diversified, but that “if Defendants had acted with a reasonable level of diligence, they would have known that throughout 2015—in violation of the Fund’s investment policies regarding concentration and in spite of the concerns of Fund shareholders—the Fund Managers concentrated the Sequoia Fund’s assets in a single stock: Valeant Pharmaceuticals, Inc.” In fact, according to the complaint, the Sequoia fund was the largest shareholder in Valeant in 2015, owning nearly 10% of Valeant which, in turn, represented more than 30% of the fund’s total assets.

The plaintiffs note that in selecting the plan’s investment options, defendants selected 33 investment funds, many of which they allege were redundant, including 12 target date funds, five funds categorized as a “Stock Long-Term Growth Fund.” Why does that matter? Well, the suit notes that “It is well documented that providing multiple options in a single investment style adds unnecessary complexity to the investment lineup and leads to participant confusion” – and then goes on to state that “it thus appears that Defendants created unnecessary complexity in the Plan’s investment lineup, risking Participant confusion and distraction, and placed an unreasonable burden on unsophisticated Participants who do not have the resources to prescreen investment alternatives.”

Participant Behaviors

The plaintiffs note that defendants, as the plan’s fiduciaries, knew or should have known certain basic facts about the characteristics and behavior of the plan’s participants, “well recognized in the 401(k) literature and the trade press,” including that:


  • employees tend to over-extrapolate from recent returns, expecting high returns to continue or increase going forward;

  • employees tend not to change their investment option allocations in the plans once made; and

  • many participants use a simple strategy of “equal split” to allocate their investments between stocks and bonds in their 401(k), which “naïve form of diversification is sensitive to the framing of the saving plan because investors split equally across investment options rather than across risk categories, making the riskiness of their retirement portfolios a function of plan fiduciaries’ decisions.”


Non-diversified Fund

The suit claims that, despite the plan requiring that all investment options other than the Company Stock Fund “shall be diversified”, the defendants allowed investment in the “non-diversified” Sequoia Fund. Moreover, as such it was not constrained under the Investment Company Act of 1940 to a limit of 5% in a single position.

As a result of the Sequoia Fund being the plan’s third largest overall holding, “Defendants should have been particularly attuned to its prudence,” particularly “on the heels of a poor 2014,” according to the suit. “Instead, they ignored the red flags.” In addition, the Sequoia Fund’s fee of 103 basis points was described as plaintiffs as “outsized compared to prudent long-term growth funds.” The suit notes that the other similarly positioned funds had fees as follows:


  • Clipper Fund, 0.72%

  • Fidelity Magellan Fund Class K8, 0.85%

  • Franklin Mutual Quest Fund Class Z9, 0.82%

  • Royce Special Equity – Institutional Class, 1.15%


On May 31, 2016, the Sequoia Fund disclosed that it had finally sold half of its holdings in Valeant, reducing its ownership to under 5%. But by that point, Valeant’s stock price had dropped by more than 88% in less than a year on unusually large volume. Valeant’s stock price has shed an additional 20% since then, according to the suit.

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