Sequoia Firm's Valeant Stake Brings Pain in Retiree Lawsuit

  • Retiree accuses Ruane Cunniff, DST Systems of self-dealing
  • Fund manager accused of stacking 401(k) with Valeant shares

When Valeant Pharmaceuticals International Inc.’s stock tumbled 51 percent on Tuesday, nobody lost more than fund manager Ruane Cunniff & Goldfarb Inc., which saw $1.26 billion in value wiped out in a day. But the week’s Valeant-related troubles don’t end there for the parent company of the Sequoia Fund

On Monday, a retiree whose money was managed by Ruane Cunniff filed a lawsuit accusing the firm of conflict of interest, self-dealing and breach of trust. Those sins, the retiree alleged in a proposed group suit, fueled an environment that gave short shrift to participants of a retirement plan for employees of a company called DST Systems Inc.

Which is where Valeant comes in. In an unusual arrangement for a 401(k), the participants didn’t have control over a large chunk of the money invested on their behalf. A nontransparent fund managed by Ruane Cunniff was packed with shares of Valeant -- as much as 30 percent of its holdings, according to the complaint filed in Manhattan federal court.

“As participants of the plan recently and belatedly learned, Ruane Cunniff shockingly invested an enormous and imprudent amount” of the plan in Valeant shares, the DST retiree, Clive V. Cooper, claimed in the suit. That was an “abject breach of fiduciary duty,” he said.

Ruane Cunniff spokesman Jonathan Gross didn’t immediately return a call for comment on the lawsuit.

Latest Blow

The suit is the latest blow for Ruane Cunniff, a storied investment house started more than four decades ago by friends of billionaire investor Warren Buffett. Ruane Cunniff, whose Sequoia fund had one of the fund industry’s best long-term records, manages about $14 billion of assets in publicly listed securities, according to Bloomberg data. 

The firm has also been one of Valeant’s biggest supporters in recent months -- buying up shares in the embattled pharmaceuticals company late last year as others fled. Ruane Cunniff now owns more than 10 percent of Valeant, whose shares are down more than 86 percent since August. 

About one-third of Ruane Cunniff’s stake is held through the Sequoia fund. The firm holds other shares of the drugmaker in separate accounts that it runs for high-net-worth individuals and retirement plans. Among them is a pension fund originally set up for employees of the Washington Post Co., which changed its name to the Graham Holdings Co. Retirement Plan after the Graham family sold its flagship newspaper in 2013. The paper’s buyer, Inc. founder Jeff Bezos, assumed pension obligations of current employees while Graham is responsible for those of retired workers.

As of the end of 2014, the latest figures available from Labor Department filings, Ruane Cunniff managed more than $2.2 billion for the Graham pension, which included more than 3 million Valeant shares. Donald Graham, chairman of Graham Holdings, declined to comment on the retirement plan investments, according to an e-mail from his assistant Pinkie Mayfield.

Software Contractor

Ruane Cunniff also runs money in retirement plan for employees of DST, a Kansas City, Missouri,-based software contractor for financial services and health-care companies. DST provides back-office services for Ruane Cunniff, according to the complaint filed Monday.

DST retiree Cooper sued Ruane Cunniff as well as his former employer, alleging among other things that the longstanding financial relationship between the two companies raises concerns of self-dealing. 

DST generates significant business from Ruane Cunniff handling record-keeping and shareholder communications for Sequoia, according to the complaint. Ruane Cunniff charged 1 percent annually in fees for running the company-directed portion of the retirement fund -- a “grossly excessive” fee, the plaintiff alleged, that isn’t in line with discounts that a $750 million fund would normally receive.

DST’s press office didn’t immediately respond to a call or e-mail seeking comment.

Cooper didn’t respond to a request for comment. His lawyer, Laurie Rubinow, declined to comment on the lawsuit.

Holdings Stacked

With more than $1.4 billion in assets and more than 9,400 participants as of Dec. 31, 2014, the DST 401(k) retirement plan allowed employees to manage only a portion of the investments. More than half the assets, or about $750 million, was overseen by a DST-appointed trustee and managed by Ruane Cunniff, according to the complaint. 

The employer-managed portion didn’t guarantee employees a specific return or retirement benefit. The set-up was “extremely unusual” and “participants literally have no means to monitor the current investments” in the plan, Cooper said.

The Employee Retirement Income Security Act requires retirement-plan administrators to put plan participants’ interests first. DST and Ruane Cunniff didn’t follow that guideline and may have been swayed by their own interests, according to the complaint.

‘Imprudent’ Strategy

Ruane Cunniff “pursued an exceptionally imprudent investment strategy with respect to a significant portion of the plan’s assets,” resulting in more than $100 million in losses, according to the complaint, which was filed before Valeant’s 51 percent one-day decline. They ran the retirement fund as a virtual clone of the Sequoia fund, the plaintiffs allege, adding that the managers “selected and retained high-cost and poor-performing investments.”

The size of Ruane Cunniff’s holdings in Valeant would make it difficult for it to sell without suppressing market prices, according to the complaint.

Lawyers have filed a flurry of cases in recent years involving fees charged to 401(k) accounts and the proper management of them by employers. Some have settled for millions while others have gone all the way to the Supreme Court.

A separate group of investors sued Ruane Cunniff in January, claiming the firm recklessly took a large position in Valeant in the Sequoia Fund that violated the fund’s rules.

The case is Cooper v. DST Systems Inc., 1:16-cv-01900, U.S. District Court for the Southern District of New York (Manhattan).

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