Compliance

Disney Plan Fiduciaries Defeat Investment Option Challenge

Plaintiffs unsuccessfully alleged plan fiduciaries should have known that an investment option had the “clear indicia of a growth stock,” and did not meet purported investing criteria of seeking out value stocks.

By Alison Cooke Mintzer editors@assetinternational.com | April 26, 2017
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The U.S. District Court for the Central District of California has again ruled in an Employee Retirement Income Security Act (ERISA) lawsuit targeting the Walt Disney Company—concluding a motion to dismiss from the company should be granted.

In this instance the court, pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, moved on the matter without oral argument, ruling that plan fiduciaries cannot be held liable for losses suffered by participants who had exposure to Valeant Pharmaceuticals stock at the time of that company’s dramatic fall from grace.

Background information included in the text of the district court’s decision states that the Walt Disney Company offers a number of retirement benefits to its employees, including a wide choice of retirement savings and investment vehicles. Among these is the plan including the investment option at question here, “which is a participant-directed individual account plan, meaning that individuals investing in the plan have an individual account which pays benefits based solely on the amount contributed by the participant.”

Important to note, “plan participants are themselves required to select the specific funds into which their individual contributions are invested … Plan participants are offered a choice of 26 different funds.” As a result, case documents suggest, plan participants can allocate their individual plan accounts among a number of investment options, reflecting a broad range of investments styles and risk profiles.

One of the investment options included in the plan is the Sequoia Fund, a mutual fund managed by Ruane, Cunniff & Goldfarb. As the new decision lays out, “Plaintiffs allege that the Sequoia Fund purports to be a value fund … Plan participants have invested more than $500 million in the Sequoia Fund, causing investments in the fund to account for approximately 12% of all plan assets not invested in Disney itself.”

Plaintiffs suggested that the Sequoia Fund eventually moved up to 25% of its net assets into investments in Valeant, leading to an unfortunate chain of events when Valeant’s accounting practices and investment strategies were called into question by state and federal regulators. In August 2015, Valeant stock closed at $262 per share, representing a trade value that was 98-times higher than its earnings. By November 17, 2015, Valeant stock precipitously declined to less than $70 a share, representing a loss of more than $65 billion in market value.

Because their initial arguments failed (that the plan fiduciaries should have known that a problem was brewing at Valeant and should therefore have moved to drop the stock), plaintiffs in their second amended complaint instead allege that plan fiduciaries should have known that Valeant had the “clear indicia of a growth stock,” and did not meet the Sequoia Fund’s purported investing criteria of seeking out value stocks. Thus they argue that plan fiduciaries should have moved, even before the Valeant accounting fiasco and subsequent losses, to vacate the plan’s investment in the fund, according to their various duties of prudence and loyalty under ERISA.

NEXT: Failed claims of fiduciary wrongdoing

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