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Sequoia Fund Over-Concentrates Investments, Against Its Own Rule Class Action

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When investors put their money into funds, they make choices about the kinds of funds they want to invest in—the riskiness of the investments, the size of the companies invested in, the economic sector, the region or country, and so on. The complaint for this class action claims that Sequoia Fund’s investment in a single company ended up violating its own rules about concentration in a single industry.

The class for this action is all persons or entities who held shares in the Sequoia Fund during the time when more than 25% of the fund’s assets were invested in healthcare industry stocks (“the class period”) and who did not sell any part of their Sequoia shares between the start of the class period and October 20, 2015.

Sequoia Fund has a Concentration Policy of not investing any more than 25% of the value of its net assets in any one industry. The complaint says the purpose of this policy is to limit its losses at any one point in time. It quotes the Securities and Exchange Commission (SEC) as saying that “a fund that concentrates its investments … will be subject to higher risks than funds that do not follow” a policy of concentration.

Policies such as Sequoia Fund’s Concentration Policy can only be changed by a vote of its shareholders.

However, according to the complaint, the fund’s SEC filings for the periods ending March 31, June 30, and September 30, 2015 show that its holdings of healthcare industry stocks constituted more than 25% of its net assets. In fact, on June 30, the fund held 30% of its assets in healthcare industry stocks, with its holdings of a single company, Valeant Pharmaceuticals International, Inc., alone accounting for 28.7%.

According to the complaint, the fund has taken the position that the Concentration Policy only forbids the fund from making purchases that would result in more than 25% concentration of its assets; it says it does not have to sell off stocks if the increase in concentration is caused by changes in stock values.

The complaint claims that investors had no way of knowing about the concentration until the company’s May 26, 2015 N-Q filing with the SEC covering the period ending March 31 of that year. For this reason, the complaint does not specify the beginning date of the class period.

According to the complaint, however, when Valeant stock lost value, the concentration in the stock caused the fund to lose about $600 million in value.

The complaint cites breach of contract as its first and only claim. 

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