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Harmon v. FMC Corp.

United States District Court, E.D. Pennsylvania

March 16, 2018

MATTHEW B. HARMON and SUSAN H. CLARKE, on behalf of the FMC Corporation Savings and Investment Plan, themselves, and a class consisting of similarly situated participants of the Plan, Plaintiffs,
v.
FMC CORPORATION, et al., Defendants.

          MEMORANDUM

          Schiller, J.

         Matthew Harmon and Susan Clarke sued FMC Corporation and several associated entities and individuals on behalf of themselves and other FMC employees. They claim Defendants breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering imprudent and undiversified investment options as part of an employer-sponsored retirement plan. Defendants filed a motion to dismiss. Because the Complaint fails to state a claim, the Court grants the motion.

         I. BACKGROUND

         FMC offers its employees access to a 401(k) defined contribution retirement plan (the “Plan”).[1] (Am. Compl. ¶¶ 4, 38.) Participants in the Plan set up an individual account, make contributions, and allocate their assets as they see fit, selecting from a range of investment options. (Mem. of Law in Supp. of Defs.' Mot. to Dismiss [Defs.' Mem.] at 4.) The Plan offers over thirty investment options for participants to choose from, selected by FMC Plan administrators. (See Compl. ¶ 64.) The options include FMC stock as well as a number of mutual funds with a range of risk and diversification profiles. (See Id. ¶ 40.) The primary Plan offering at issue in this case is the Sequoia Fund, which both Plaintiffs claim to have held during the relevant period. (See Id. ¶¶ 15-16.)

         The Sequoia Fund was included in the Plan as one of five “long-term growth funds.” (Id. ¶ 64.) It is a self-described “non-diversified” mutual fund. (Id. ¶ 67.) Throughout the time period at issue, the Sequoia Fund invested heavily in Valeant Pharmaceuticals stock. For a time, the Valeant investment generated substantial growth for the Sequoia Fund and, accordingly, the Plaintiffs. Valeant's stock price rose by more than 80 percent through the first half of 2015. (Pls.' Mem. in Opp. to Defs.' Mot. to Dismiss [Pls.' Resp.] at 4.) As a result of this growth, coupled with additional stock purchases by the Sequoia Fund in October 2015, Valeant's position in the Sequoia Fund's portfolio grew from 14 percent in 2012 to 32 percent in 2015. (Id.; Am. Compl. ¶ 89.)

         As it turned out, however, Valeant's apparent success was not long-lived. Questions about Valeant's accounting practices and drug pricing caused the company's share prices to plummet in late 2015. (Am. Compl. ¶¶ 73, 112.) In early 2016, Valeant announced that it was under investigation by the Securities and Exchange Commission (“SEC”). (Id. ¶ 93.)

         Valeant's poor performance eventually led the Sequoia Fund to sell its shares in Valeant. In May 2016, when Valeant's stock price had dropped by nearly 90 percent in less than a year, the Sequoia Fund announced that it had sold half of its holdings in the company. (Id. ¶ 95.) By mid-June, the Sequoia Fund completely divested of its Valeant shares. (Id. ¶ 99.) By this time, according to Plaintiffs, the Sequoia Fund's high concentration in Valeant stock had caused the Sequoia Fund to underperform the S&P 500 Index “by 6.14 percent in 2014, 8.68 percent in 2015, and 15.17 percent during the period from January 1 to June 15, 2016.” (Id. ¶ 98.) As a result, Plaintiffs allege that the Plan and, therefore, the participants with holdings in the Sequoia Fund, lost millions of dollars. (Id. ¶ 154.)

         According to Plaintiffs, these losses were preventable. They claim that Defendants should have removed the Sequoia Fund from the Plan before it became heavily concentrated in Valeant and Valeant's decline caused losses for the Sequoia Fund. (See Id. ¶ 127.) By failing to do so, Plaintiffs argue, Defendants breached their fiduciary duty to monitor Plan investments and remove risky investment options. (Id.)

         Plaintiffs claim that there were a number of red flags about Valeant's business practices and the Sequoia Fund's concentration in Valeant stock, beginning as far back as 2014, which should have prompted Defendants to rethink the inclusion of the Sequoia Fund in the Plan. (Pls.' Resp. at 4-8.) All of the warning signs Plaintiffs point to were in the public record. For instance, the Sequoia Fund disclosed its high concentration in Valeant and noted shareholders' concerns about the company in SEC filings and its annual report in 2015. (Am. Compl. ¶¶ 85, 94.) And in late 2015, a news article reported that two Sequoia Fund directors left as, according to Plaintiffs, “the Fund's Valeant position mushroomed and losses mounted.” (Id. ¶ 91.)

         Plaintiffs also point to criticisms of Valeant lodged by a handful of well-known investors and commentators between 2014 and 2016. (See Id. ¶¶ 101-07.) Some of these investors took issue with Valeant's accounting methods and suggested that it was a “house of cards” and a “trust me story.” (Id. ¶¶ 103, 105) In addition, Plaintiffs note multiple news articles from late 2015 and 2016 questioning Valeant's business and accounting practices. (Id. ¶¶ 113-15, 118.)

         Plaintiffs claim that Defendants “ignored or did not notice” these warning signs about Valeant and the Sequoia Fund. (Id. ¶ 127.) They therefore allege that Defendants breached their duty under ERISA to monitor Plan investments and remove imprudent ones. (Id.)

         Plaintiffs also point to a number of procedural steps Defendants had in place to monitor the Plan's investments, and argue that these procedures should have alerted them to the risks of the Sequoia Fund. For instance, in June 2015, members of FMC's Pension Investment Subcommittee met with representatives of Ruane, Cunniff & Goldfarb, Inc., the investment firm that managed the Sequoia Fund, to discuss the Sequoia Fund. (Id. ¶¶ 69-70.) Defendants also sought advice regarding the Plan's investments from Aon Hewitt, a consulting firm. (Id. ¶ 108.) In November 2015, that firm issued a review of the Plan in which it observed that the Sequoia Fund was “[e]xtremely concentrated, ” with “strong” long-term performance but “vulnerab[ility] to bouts of volatility due to lack of diversification.” (Id. ¶¶ 108-09.) FMC Plan administrators did not remove the Sequoia Fund at this time.

         The Pension Investment Subcommittee met again with Ruane Cunniff in March 2016 to discuss the Sequoia Fund's performance. (Id. ¶ 116.) The Committee determined not to take immediate action but to “continue to closely monitor the situation.” (Id.)

         Finally, after Aon Hewitt “proposed replacing the Sequoia Fund” with a different investment option in June 2016, the Committee decided to remove the Sequoia Fund. (Id. ΒΆΒΆ 119-122.) The Committee planned to make the switch ...


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