By Jonathan Stempel
NEW YORK, Jan 11 (Reuters) - The investment firm that runs
the Sequoia Fund, long known for its ties to Warren Buffett, was
sued by shareholders who claim it recklessly took a huge stake
in embattled drug company Valeant Pharmaceuticals (N:VRX) International
Inc VRX.TO , causing more than $2 billion in losses.
Investment firm Ruane, Cunniff & Goldfarb; portfolio
managers Robert Goldfarb and David Poppe; and two directors were
accused of gross negligence for letting Sequoia amass a Valeant
stake that peaked at 32 percent of its portfolio in August.
According to the complaint filed on Friday in a New York
state court in Manhattan, this violated Sequoia's policy of not
investing more than 25 percent of assets in one industry.
The complaint also called it the "antithesis" of Sequoia's
strategy of seeking investments such as Buffett's Berkshire
Hathaway Inc BRKa.N , its second-largest holding, that
represent "value-oriented" investing.
Valeant shares have lost about two-thirds of their value
since early August amid concerns about its drug pricing, merger
appetite and since-severed ties to a mail-order pharmacy.
Sequoia's investment "is akin to a gambler at the race track
betting more than one quarter of his net worth on a fast horse
with a history of maladies and with improbably high odds," the
complaint said.
"Just as it should come as no surprise to the gambler when
the horse pulls up lame, the same holds equally true for the
defendants," it added.
Other defendants include the author Roger Lowenstein, who
chairs Sequoia's board, and director Robert Swiggett. The
lawsuit seeks to recoup damages and management fees for the
fund.
Ruane, Cunniff and lawyers for the defendants did not
immediately respond to requests for comment.
Two other independent directors, including Buffett bridge
partner Sharon Osberg, quit Sequoia's board last October.
The lawsuit cites news reports that those directors objected
to the Valeant stake, and recounts criticism of Valeant by
Charles Munger, Berkshire's vice chairman.
Ruane, Cunniff's late founder, William Ruane, was a friend
of Buffett, who, like Sequoia, is known for concentrated bets.
The $6.3 billion Sequoia fund has returned an average 7.23
percent annually over 15 years, in the top percentile among
peers, according to mutual fund information provider Morningstar
Inc.
But in 2015, the Valeant stake led to an overall 7.29
percent loss, trailing 97 percent of peers.
In an Oct. 28 shareholder letter, Goldfarb and Poppe
defended Valeant, saying the company "is an aggressively-managed
business that may push boundaries, but operates within the law."
The case is Epstein et al v. Ruane, Cunniff & Goldfarb Inc
et al, New York State Supreme Court, New York County, No.
650100/2016.