Litigators Secure Dismissal of Shareholder Lawsuit against Sequoia Fund

On September 9, a Ropes & Gray litigation team secured the dismissal of a shareholder lawsuit against the Sequoia Fund, addressing the issue of industry concentration in mutual funds under SEC guidance. In a decision ratifying the mutual fund industry’s long-standing treatment of portfolio concentration, the U.S. Court of Appeals for the Second Circuit affirmed the trial court’s earlier rejection of a putative class action against the Fund.

In Edwards v. Sequoia Fund, Inc., the shareholder-plaintiffs alleged that the Fund violated its industry concentration policy when healthcare stocks grew to comprise more than 25% of the Fund’s assets in 2015, due to strong growth in the value of its holdings in Valeant Pharmaceuticals, Inc. The Fund’s healthcare position grew to more than 25% due solely to increases in Valeant’s share price, not because of any additional share purchases. Applying SEC guidance from 1983, the Second Circuit affirmed the trial court’s holding that such “passive” increases in concentration cannot constitute a policy violation, rejecting the plaintiffs’ claim that the SEC guidance had been rescinded.

The Ropes & Gray litigation team representing the Sequoia Fund is led by Boston-based litigation and enforcement partners Robert A. Skinner and Amy D. Roy, and New York-based litigation and enforcement counsel Lee Gayer. “We are gratified by the Second Circuit’s decision, including its recognition of industry concentration standards long followed by the fund industry,” Skinner said. The Second Circuit’s decision is the latest in a string of court victories for the Sequoia Fund and its directors and adviser regarding the Valeant investment, including earlier dismissals of actions in New York and Maryland state courts. Roy noted, “Multiple courts have consistently rejected the claims of the plaintiff’s bar regarding Sequoia’s investments in Valeant. Hopefully they will see that it’s time to move on.”