Process Protects Fiduciaries in Sequia Fund Performance Lawsuit

The ERISA fiduciary duty requires fiduciaries to act with prudence, not prescience, a court said.

A new pro-defense decision has been entered by the U.S. District Court for the District of Nebraska in the matter of Muriv v. National Indemnity Company.

The lead plaintiff sued his former employer, National Indemnity Company, for allegedly breaching the fiduciary duties owed to him, and all others similarly situated, under the Employee Retirement Income Security Act (ERISA). National Indemnity moved for summary judgment on Muri’s claims, which the court has now granted.

In both its claims and now its outcome, the Muriv lawsuit resembles other examples of litigation filed against retirement plan fiduciaries that made investments in the Sequoia Fund. Earlier this year, in fact, the 9th U.S. Circuit Court of Appeals ruled that, as a general matter, allegations based solely on publicly available information that a stock is or was excessively risky in light of its price do not alone plausibly state a claim for breach of the ERISA duty of prudence.

Background information in case documents shows the lead plaintiff was employed by National Indemnity, an insurance provider located in Omaha, Nebraska. During his employment, the plaintiff participated in National Indemnity Company’s Employee Retirement Savings Plan, which is a defined contribution plan.

According to case documents, the lead plaintiff elected to invest in the Sequoia Fund, described as “a non-diversified, long-term growth, mutual fund managed by Ruane, Cunniff & Goldfarb, Inc.” The Sequoia Fund invests in “common stocks it believes are undervalued at the time of purchase and have the potential for growth.” And it sells common stocks “when the company shows deteriorating fundamentals … or its value appears excessive relative to its expected future earnings.”

Despite having made and maintained the selection of the Sequoia Fund, the plaintiff alleged that the Sequoia Fund was, as of January 2015, no longer a prudent investment option. Additionally, the plaintiff contended the Sequoia Fund violated its own “value policy” by over-concentrating its investments in one, high risk stock, namely Valeant Pharmaceuticals. The plaintiff argued that Valeant’s stated acquisition strategy, along with its accounting practices, began raising red flags.

In October 2015, Valeant’s stock price fell dramatically, and by November 2015, Valeant had lost more than $65 billion in market value. This, in turn, caused the Sequoia Fund to lose approximately 25% of its value, diminishing the retirement account of the lead plaintiff and other plan participants who invested in the fund.

Formally, the lawsuit alleged National Indemnity violated the fiduciary duties it owed to plan participants by failing to prudently manage the plan by offering “shortsighted” investment options, such as the Sequoia Fund; and failing to avoid conflicts of interest in choosing its investment options, specifically those with close relationships to National Indemnity’s parent company, Berkshire Hathaway.” National Indemnity, for its part, motioned for summary judgment on both the duty of prudence and duty of loyalty claims.

The new ruling sides firmly with National Indemnity on these two issues.

First considering the duty of prudence claims, the court emphasizes that this duty “requires fiduciaries to act with prudence, not prescience, and thus, the relevant inquiry focuses on the information available to the fiduciary at the time of the relevant investment decision.”

“Relatedly, a plan fiduciary also has a continuing duty to monitor and evaluate the fund options in the plan and to remove imprudent ones,” the decision states, citing Tibble v. Edison. “That means the fiduciaries must ‘systematically consider all the investments of the plan at regular intervals to ensure that they are appropriate.’ But even if a fiduciary did not adequately engage in a review process before making a decision, that fiduciary is insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway.”

The decision states that, even viewing the facts of the case in the light most favorable to plaintiffs, no reasonable fact finder could determine that National Indemnity failed to meet its duty of prudence.

“Indeed, nothing in [the expert testimony] suggests that National Indemnity’s Plan committee was not thinking about, or consistently reviewing, the prudence of the Sequoia Fund,” the decision says. “Nor has plaintiff pointed the court to any authority suggesting that the failure to have an investment policy in place, standing alone, proves imprudence. … The record evidence demonstrates that the committee did not ignore the increased risk of maintaining the Sequoia Fund. Instead, as National Indemnity correctly points out, the committee monitored Sequoia and the plan’s other investments by meeting quarterly, reviewing performance evaluation reports from Wells Fargo, and relying on information in the financial press surrounding Valeant and the Sequoia Fund.”

The court goes on to explain that, while the plan committee allowed the Sequoia Fund to remain on the menu during the Valeant fiasco in 2015 and 2016, the committee repeatedly sent out advisories to plan participants that owned shares of the troubled fund. Such advisories noted that the committee had discussed various options with regard to Sequoia, one of which was whether to remove Sequoia as an investment option in the plan. The committee emphasized that there were alternative investment options in the plan available to participants that do not want to invest in Sequoia or who want to liquidate their investment in Sequoia. The committee further communicated that it did not want to force participants into liquidating, which would happen if the plan removed Sequoia as an investment option—and that it was up to participants to make their own choices in this matter.

Turning to the duty of loyalty claims, the court again sides firmly with the defense.

“The plaintiff contends that National Indemnity fell victim to conflicts of interest in choosing its investment options, especially those with close relationships to its parent company, Berkshire Hathaway—specifically, because the Sequoia Fund owned Berkshire Hathaway stock,” the decision states. “So, to support that claim, plaintiff must point to evidence from which a reasonable fact finder could infer that the subjective motivation behind the committee’s conduct placed Berkshire Hathaway’s interests over those of the plan participants. But here, there is no evidence in the record to support the conclusory allegation that the primary reason for National Indemnity’s retention of the Sequoia Fund in the plan is that the Sequoia Fund represented a vehicle for plan participants to invest in the stock of [National Indemnity’s] corporate parent, Berkshire Hathaway.”

Instead, the decision explains, the only evidence before the court is that the committee was skeptical of removing the Sequoia Fund from the plan because they did not want to “force participants into liquidating their investments” and wanted “to allow participants to decide based on their individual investment goals whether to continue their investment in the Sequoia Fund or to liquidate.”

“And to that end, plaintiff’s own expert found that committee members seem to have believed that the fund’s popularity among the participants was an important reason to defer any removal decision,” the decision concludes. “But it is not disloyal for an investment committee to consider what the Plan participants they represent might want. In fact, it simply bolsters the conclusion that the committee members were acting with the participants’ interests in mind.”

The full text of the summary dismissal decision is available here.