Employees of SS&C Technologies, which acquired DST Systems this year, and several former employees of DST Systems have sued the firms and other defendants, claiming violations of the Employee Retirement Plan Security Act (ERISA) in relation to an investment in the DST Systems Profit Sharing Plan, a segment of the firm’s 401(k) plan.
As in a previous lawsuit, the complaint states that a portion of the plan’s assets are invested in the DST Systems Inc. Master Trust. The investment manager of the Master Trust was and/or is defendant Ruane, Cunniff & Goldfarb & Co. Inc. Ruane is, and/or at pertinent times was, also the distributor and adviser to the Sequoia Fund Inc., which, in turn, was a client of DST. Participants could not exercise control of their investments in the profit sharing plan.
According to the complaint, DST recently disclosed that, in contravention of the fiduciary obligations owed by those with discretion and control over the profit sharing plan, it was not properly diversified. In fact, rather than minimize the risk of large losses to the plan, the complaint said, the plan’s fiduciaries caused and/or allowed plan assets to be invested imprudently in the stock of Valeant Pharmaceuticals International Inc., such that, as the value of Valeant stock dropped from a high of approximately $258 per share on or about July 31, 2015, to $15.41 per share on or about January 10, 2016, the plan, and all participants, suffered enormous losses. “The failure to diversify was the result of a defective and inappropriate process abusive of the lawful discretion afforded defendants,” the complaint states.
At the end of 2014, approximately 30% of the profit sharing plan consisted of Valeant stock. This amounted to approximately 15% of the combined 401(k) and profit sharing plan’s assets and constituted a clear breach of the defendants’ duty to diversify plan assets in an appropriate and prudent manner, the plaintiffs allege.
The complaint lays out how Valeant pursued a particularly risky and potentially dubious growth strategy, which clearly did not meet the plan’s purported investing criteria or the criteria of an objectively prudent fiduciary. In addition, the complaint says, prudent fiduciaries would have known that Valeant was a volatile and risky stock. Valeant made public its aggressive strategy and was the subject of intense industry scrutiny and speculation about whether its aggressive growth strategy, accounting, and business were legitimate.
In addition, the plaintiff alleges, while a plan fiduciary acting with the care, skill, prudence, and diligence of a prudent person would have elected not to retain and/or continue to retain defendant Ruane as an investment manager, in light of its demonstrable imprudence in failing to adequately diversify the profit sharing plan and in buying the stock of a volatile, risky and unsustainable business, the defendants, acting with objective imprudence, continued to retain Ruane even as the Valeant stock plummeted and the plan experienced enormous losses.
The complaint also says that not only did the DST Defendants retain Ruane, they continued to follow the advice of Ruane, knowing that such advice was flawed and unsuitable. In addition, Ruane is the distributor and adviser to the Sequoia Fund Inc.—under which the plan invests in Valeant—which, in turn, is a client of DST (DST serves as the registrar and shareholder servicing agent for the Sequoia Fund Inc.). Thus, DST receives, and has received, compensation from a fund for which Ruane is the adviser. The complaint alleges a plan fiduciary acting with the care, skill, prudence, and diligence of a prudent person would have avoided this conflict of interest.The Walt Disney Company and FMC Corporation have also been sued over the Sequoia Fund’s investment in Valeant Pharmaceuticals.