A federal appellate court has affirmed a lower court decision in a lawsuit against Fidelity Management Trust Company as a fiduciary to the Disney Savings and Investment Plan that retirement plan participants failed to prove that continuing to offer the Sequoia Fund as an investment option in the plan was a breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).
In their second amended complaint, the plaintiffs argued that the Sequoia Fund purported to be a value fund, but increased investments in Valeant Pharmaceuticals—which saw a decline in stock value after its accounting practices and investment strategies were called into question—created a “clear indicia of a growth stock,” and did not meet the Sequoia Fund’s purported investing criteria of seeking out value stocks. They argued that plan fiduciaries should have moved, even before the Valeant accounting issues and subsequent losses, to vacate the plan’s investment in the fund, according to their duties of prudence and loyalty under ERISA.
In its opinion, the 9th U.S. Circuit Court of Appeals said as a general matter, allegations based solely on publicly available information that a stock is excessively risky in light of its price do not state a claim for breach of the ERISA duty of prudence.
In addition, the appellate court found that Sequoia’s investment and concentration in Valeant was facially consistent with the retirement plan documents, noting that both the plan’s summary plan description and Sequoia’s 2015 Prospectus note that Sequoia is “non-diversified” and there are risks associated with Sequoia’s investment strategy. To the extent that the plan documents even distinguish between “value” and “growth,” the 9th Circuit agreed with the District Court that these words were used simply to “describe [Sequoia’s] investments; not to also convey [its] overall investment strategy.”
To find otherwise—that the documents’ use of these terms imposed material limitations on Sequoia’s investment strategy—would require drawing “unreasonable inferences,” the appellate court said.Finally, the 9th Circuit also agreed with the District Court that allowing plaintiffs to file another amended complaint would be futile.
« IRI Advocates for Provisions of RESA in Federal Retirement Security Blueprint