DST, Ruane Cunniff Must Defend Suit from Feds Over Sequoia Fund

The Labor Department advanced a lawsuit accusing investment adviser Ruane Cunniff & Goldfarb Inc. of mismanaging DST Systems Inc.'s retirement plan by over-investing in individual stocks, when a Manhattan federal judge declined to dismiss the lawsuit as filed too late.

The defendants argued that the 2019 lawsuit was untimely under the Employee Retirement Income Security Act’s six-year statute of repose, because it challenged DST’s decision to hire Ruane as its profit sharing plan investment manager in the 1970s. Judge Andrew L. Carter Jr. of the U.S. District Court for the Southern District of New York disagreed Monday, saying the lawsuit challenged ongoing, recent conduct, including Ruane’s decision to continue applying a “non-diversification” strategy and its alleged failure to adjust the plan’s investments as they became over-concentrated in individual stocks.

The defendants also argued the lawsuit was blocked by ERISA’s three-year deadline to sue, which is triggered when a plaintiff acquires “actual knowledge” of the legal breach. According to the defendants, the DOL had knowledge of the plan’s investment strategy from the plan’s annual Form 5500 filings.

Carter again disagreed, citing the U.S. Supreme Court’s 2020 decision in Intel Corp. v. Sulyma, which held that a plaintiff doesn’t have “actual knowledge” of an aspect of their retirement plan if they merely receive information in the mail that they don’t necessarily read. The defendants argued that Sulyma‘s reasoning doesn’t apply when the plaintiff is the Labor Department, but they provided “no binding caselaw for this distinction,” Carter said.

“At the least, discovery is needed to ascertain whether the Secretary obtained ‘actual knowledge’ from the Form 5500 filings,” he said.

The department accuses Ruane of pursuing a “deliberate strategy of non-diversification” that left the DST plan’s profit-sharing component invested solely in “two to three dozen individual stocks.” Ruane refused to rebalance this portfolio and allowed a single investment—the stock of troubled drugmaker Valeant Pharmaceuticals Inc.—to grow to more than 45% of the total portfolio before taking action, the DOL alleges.

The plan lost hundreds of millions of dollars when Valeant’s stock price fell, according to the DOL.

Ruane and DST have faced a flurry of litigation and arbitration actions over Ruane’s Sequoia Fund, a non-diversified mutual fund that invested heavily in Valeant stock. Last year, the U.S. Court of Appeals for the Second Circuit ruled that Ruane couldn’t use an arbitration agreement in DST’s employee handbook to block a proposed class action by plan participants.

The department represents itself. Ruane is represented by Schulte Roth & Zabel LLP, O’Melveny & Myers LLP, Cohen & Gresser LLP, and Scale LLP. DST is represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The case is Walsh v. Ruane, Cunniff & Goldfarb, Inc., 2022 BL 105175, S.D.N.Y., No. 1:19-cv-09302, 3/28/22.