Disney Plan Fiduciaries Defeat Investment Option Challenge

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…

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