Plan Fiduciaries Sued for Failing to Remove Fund

By Nevin Adams • July 13, 2016 • 0 Comments
While one plaintiff’s law firm had been looking for “potential violations” of ERISA in failing to remove a specific mutual fund from the plan menu — another one has apparently found them. Or at least a participant willing to raise the issue.

Earlier this year the New York-based law firm Zamansky LLC launched what it described as an investigation, looking for “potential violations” of ERISA, specifically whether the plan fiduciaries violated their duties to prudently manage and invest plan assets “by the continued offering of the Sequoia Fund as an investment option” in the plan, specifically soliciting participants in the Disney 401(k) plan.

But it was the law firms of Stris & Maher, LLP and Izard Kindall & Raabe who found a participant in the Disney Savings and Investment Plan to challenge that plan’s continued holding of the Sequoia Fund “when it became apparent that the Fund was no longer a suitable investment for participants’ retirement savings.”

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.

Concentration Issues

Disney’s plan document required all investment options other than the Company Stock Fund to be diversified, meaning that no more than 5% of its assets were invested in the securities of one company, a stance that the lawsuit says prohibited the Sequoia Fund from investing 25% or more of the fund’s total assets in any single industry. Here the Sequoia Fund held 11,281,224 shares of Valeant stock worth $2,240,676,711, accounting for more than 26% of the Sequoia Fund’s total net assets, and that as of June 30, 2015, 28.7% of the Sequoia Fund’s assets were invested in Valeant stock and 30% of the Fund’s assets were invested in stocks in the health care industry.

The complaint alleges that the Sequoia Fund’s 25% limit on concentration in any one position was violated by its approximately 35% investment in Valeant, and further that the Sequoia Fund’s managers violated its “sell strategy” by failing to sell Valeant when its valuation became “excessive in relation to its expected earnings,” and that Valeant’s $236 per share price was 100 times its 2014 earnings.

Fund Troubles

Published reports indicate that the Sequoia fund, in its 2015 annual report, stated to investors that its “credibility as investors” had been bruised by the controversy around Valeant, and that the fund had experienced “higher-than-normal redemptions,” two shareholder lawsuits and the resignation of two out of five independent directors.

The current suit alleges that the Sequoia Fund was “more expensive, dramatically more concentrated in Valeant, and underperformed all 10 of the most common alternative funds” in each of the three periods examined. Moreover, plaintiff notes that, from its peak in August 2015 until Nov. 17, 2015, Valeant stock declined from $263 a share to less than $70 a share. During the same time, the Sequoia Fund lost approximately 25% of its value. During 2015, the Sequoia Fund lost 7.31% of its value. Nearly all of this decline, 6.3% of the 7.31%, was due to the Fund’s holdings in Valeant.

Aside from a declaration on the existence of the class, that the defendants violated their fiduciary duties under ERISA, and an order to appoint one or more independent fiduciaries to participate in the management of the plan’s investments, the plaintiff is also seeking an order compelling the defendants to make good to the plan all losses “resulting from Defendants’ breaches of their fiduciary duties, including loss of vested benefits to the Plans resulting from imprudent investment of the Plans’ assets; to restore to the Plans all profits Defendants made through use of the Plans’ assets; and to restore to the Plans all profits which the Plans and participants would have made if Defendants had fulfilled their fiduciary obligations.”