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Walt Disney Co.'s 401(k) plan fiduciaries don’t have to defend a proposed class action challenging their decision to allow plan participants to invest their retirement assets in a mutual fund that invested heavily in Valeant Pharmaceuticals International Inc.'s stock ( In re Disney ERISA Litig. , 2017 BL 132189, C.D. Cal., No. 2:16-cv-02251, 4/21/17 ).
Judge Percy Anderson on April 21 dismissed the participants’ second amended lawsuit against the plan’s investment committee and its members. The participants failed to allege “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, or to discontinue offering the Sequoia Fund—which as of 2015 had invested 25 percent of its assets in Valeant stock—as an investment option, Anderson said.
This is the second time Anderson has dismissed the participants’ allegations against the plan’s investment committee. In the new decision, Anderson declined to allow the participants leave to amend their allegations.
The decision could be good news for other companies facing Employee Retirement Income Security Act lawsuits over Valeant stock held in their employees’ retirement assets. Information technology giant DST Systems Inc. has been sued twice in the past year for allegedly mismanaging its 401(k) plan by retaining investment adviser Ruane Cunniff & Goldfarb Inc.—the investment firm that manages the Sequoia Fund. In June, a participant in DST’s plan voluntarily dismissed his lawsuit against the software company, though he is moving forward with his allegations against adviser Ruane. The second lawsuit against DST is pending in a federal court in Missouri. Chemical company FMC Corp. is also facing similar accusations.
The Disney 401(k) participants’ allegations are over Valeant stock, which declined to less than $70 per share in November 2015 from $262 per share in August 2015, following a growth-by-acquisition strategy where the pharmaceutical spent over $23 billion to acquire seven companies between 2009 and 2015. The participants had invested 12 percent of their plan assets—more than $500 million—in the Sequoia Fund.
In their second attempt to plead a claim against the investment committee for its decision to offer the Sequoia Fund as an investment option, the participants changed their theory of liability. They took issue with the fund’s investment classification between a growth fund—a fund that seeks to invest in companies that are expected to increase their revenue quickly—and a value fund—a fund that seeks to purchase bargain stocks which have a low stock value.
They alleged that a reasonably prudent fiduciary would have removed the Sequoia Fund because it invested in a “growth” stock, despite holding itself out as a “value” investor. Anderson rejected this theory, noting that investors use these terms to describe their investments, not their overall investment strategy.
Stirs & Maher LLP, Zamansky LLC and Cofiroute USA LLC represent the participants. O’Melveny & Myers LLP represents the Disney fiduciaries.
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