Sequoia Fund Advisers Sued for `Reckless' Valeant Investment

Updated on
  • Investors say fund managers ignored policies, principles
  • Sequoia has lost about $3 billion as Valeant declined

Sequoia Fund’s advisers were sued by a group of investors who claim they recklessly took on a large position in Valeant Pharmaceuticals International Inc. in violation of agreed-upon policies.

Starting in March 2015, managers “recklessly caused the fund to deviate from sound investment principles” by maintaining a heavy concentration in Valeant, despite factors that should have caused Sequoia to be more cautious, the investors said in their complaint filed Friday in Manhattan state court.

At its August peak, the drug company’s stock represented about 32 percent of the fund’s net assets and about 36 percent of its stock holdings, violating policies governing concentration and a “value-oriented investment strategy,” investors said. Around that time, Valeant was trading at close to 100 times its 2014 earnings, they said.

Sequoia’s investment was an even greater concern because Valeant was “constantly immersed in controversy for its extremely aggressive drug pricing, voracious appetite for acquisitions, murky financials and high debt levels,” the investors said.

Robert D. Goldfarb, president of Sequoia Fund and a defendant in the lawsuit, didn’t immediately respond to a phone call seeking comment on the complaint.

Rise, Fall

The fund has risen and fallen largely in step with the stock price of Valeant over the past year. Sequoia has $6.3 billion in assets, according to Morningstar Inc.

Sequoia was the best-performing major U.S. stock fund last year through Aug. 5, according to data compiled by Bloomberg. Valeant surged 83 percent over that stretch to a record high and Sequoia returned 18 percent, top among 563 domestic equity funds with at least $1 billion in assets.

Valeant has since plunged as politicians questioned drug price increases and a short-seller accused the firm of inflating sales. Sequoia has followed its biggest holding down, losing about $3 billion in assets, according to data from Bloomberg and Morningstar.

Valeant’s stock hit a peak of $262.52 on Aug. 5. On Monday it fell 6.2 percent to $85.45.

Renee Soto, an outside spokeswoman for Valeant at Sard Verbinnen & Co., declined to comment on the lawsuit.

The case is Epstein v. Ruane, Cunniff & Goldfarb Inc., 650100/2016, Supreme Court of the State of New York, County of New York (Manhattan).

— With assistance by Charles Stein

(Updates with performance in sixth paragraph.)
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