Disney Fiduciaries Beat Lawsuit Over Valeant Stock in 401(k) Plan

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By Carmen Castro-Pagan

Nov. 18 — Fiduciaries of Walt Disney Co.'s 401(k) plan convinced a federal judge in California to toss out a proposed class action challenging their decision to allow participants to invest their plan assets in the Sequoia Fund and Valeant Pharmaceuticals International Inc.'s stock ( In Re Disney ERISA Litigation , C.D. Cal., No. 2:16-cv-02251, 11/14/16 ).

Judge Percy Anderson of the U.S. District Court for the Central District of California dismissed Nov. 14 the participants’ lawsuit against the plan’s investment committee and its members. The participants alleged no facts suggesting that the fiduciaries had any reason to investigate the prudence of continuing to include the Sequoia Fund—a mutual fund that had steep losses in 2015 due to its high investments in Valeant’s stock—as one of the plan’s investment options, Anderson said.

The participants will address the concerns articulated by Anderson in an amended consolidated complaint, Peter K. Stris attorney for the proposed class told Bloomberg BNA Nov. 18 via e-mail. “The individuals responsible for Disney’s retirement plan caused staggering losses through imprudent management,” Stris said, adding that he and his colleagues “are quite confident that this case presents a textbook case” of fiduciary breach under the Employee Retirement Income Security Act.

Insufficient Allegations

The Walt Disney plan participants alleged that “serious questions” about Valeant’s business model and accounting methods long before its stock declined should have alerted the fiduciaries that the Sequoia Fund’s substantial investment in Valeant made it an imprudent investment for participants.

In dismissing the lawsuit, Anderson said that “the precipitous decline in the value of Valeant’s stock” didn’t alone suggest that the participants had stated a plausible fiduciary duty claim.

The participants didn’t allege “special circumstances” that could support even an inference that the fiduciaries had any reason not to rely on the market’s valuation of Valeant up until the collapse in its price, Anderson said. The participants didn’t include allegations suggesting a situation that would have caused a fiduciary to remove the fund from the plan’s investment options prior to the drop of Valeant’s stock price.

If the court were to accept the participant’s theory of liability, fiduciaries would be subject to obligations that may not be “reasonable or appropriate,” Anderson wrote. These obligations would include the duty “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,” Anderson said.

Attorneys for the plan’s committee declined to comment.

Other Challenges

The decision is the latest installment in a number of lawsuits filed this year related to the inclusion of the Sequoia Fund as an investment option in retirement plans. The fund, which describes itself as “non-diversified,” lost 7.31 percent in 2015, compared to a 1.38 percent gain by the Standard & Poor’s 500 Index’s rate of return. Its losses continued throughout the year and in its annual report, the fund blamed the poor performance on its investment in Valeant.

In March, participants in DST Systems Inc.'s retirement plan sued the software company and Ruane Cunniff & Goldfarb Inc.—the longtime manager of the Sequoia Fund—under ERISA for selecting and retaining Valeant stock as an investment option in their plans.

Three months later the participants voluntarily dismissed their claims against DST. However, the participants continued the lawsuit against Ruane Cunniff, whose actions allegedly caused more than $300 million in losses to participants in DST’s retirement plan.

Zamansky LLC, Corbett Steelman & Specter APLC, Kirby & Kirby LLP, Stris & Maher LLP, Izard Kindal & Raabe LLP and Bailey Glasser LLP represented the Walt Disney plan participants. O’Melveny & Myers LLP represents the plan’s investment committee and its members.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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