FILED: NEW YORK COUNTY CLERK 02/29/ :03 PM INDEX NO /2016 NYSCEF DOC. NO. 23 RECEIVED NYSCEF: 02/29/2016

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1 FILED NEW YORK COUNTY CLERK 02/29/ PM INDEX NO /2016 NYSCEF DOC. NO. 23 RECEIVED NYSCEF 02/29/2016 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X STANLEY H. EPSTEIN, HARRIET P. EPSTEIN, and SEP IRA A/C PETER CHRISTOPHER GARDNER, Derivatively on Behalf of Nominal Defendant Sequoia Fund, Inc., Plaintiffs, -against- RUANE, CUNNIFF & GOLDFARB INC., ROBERT D. GOLDFARB, DAVID POPPE, ROBERT L. SWIGGETT, and ROGER LOWENSTEIN, and Defendants, SEQUOIA FUND, INC., a Maryland Corporation, Nominal Defendant X Index No /2016 Motion Sequence No. 1 ORAL ARGUMENT REQUESTED MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS RUANE, CUNNIFF & GOLDFARB INC., ROBERT D. GOLDFARB, AND DAVID POPPE S MOTION TO DISMISS THE COMPLAINT Tariq Mundiya Mary Eaton Jeffrey B. Korn WILLKIE FARR & GALLAGHER LLP 787 Seventh Avenue New York, New York (212) Attorneys for Defendants Ruane, Cunniff & Goldfarb Inc., Robert D. Goldfarb, and David Poppe

2 TABLE OF CONTENTS TABLE OF AUTHORITIES... ii PRELIMINARY STATEMENT...1 FACTUAL BACKGROUND...4 A. Sequoia Fund, Inc....4 B. Sequoia s Board of Directors....5 C. Plaintiffs Derivative Allegations...6 ARGUMENT...8 I. PLAINTIFFS DERIVATIVE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS NEVER MADE A DEMAND ON THE BOARD....8 A. Under Maryland Law, Demand Futility Is A Very Limited Exception To The Requirement That Shareholders Make A Pre-Suit Demand On The Board Of Directors....9 B. Plaintiffs Demand Failure Is Not Excused Directors Lazarus, Lowenstein, And Swiggett A Majority Of The Board Are Independent And Disinterested Pursuant To The Maryland Code As A Matter Of Law Plaintiffs Demand Futility Allegations Concerning Lowenstein and Swiggett Have All Been Rejected Under Maryland Law II. PLAINTIFFS HAVE FAILED TO STATE A CLAIM AGAINST THE RCG DEFENDANTS A. Plaintiffs Have Failed To Allege That The RCG Defendants Violated the So-Called Stated Investment Policies The RCG Defendants Did Not Violate the Concentration Policy The RCG Defendants Decision to Hold Valeant Did Not Violate the Sell Strategy B. Plaintiffs Do Not Plead A Viable Claim Based On The Decision To Invest In And Hold Valeant CONCLUSION...25 i

3 TABLE OF AUTHORITIES CASES In re Affiliated Comput. Servs., Inc. S holder Litig., 2009 WL (Del. Ch. Feb. 6, 2009)...14 All. Network, LLC v. Sidley Austin LLP, 43 Misc.3d 848, 852 n.1, 987 N.Y.S.2d 794, 798 (Sup. Ct. N.Y. Cty. 2014)...5 In re Avon Prods. Inc., No /2012, 2013 WL (Sup. Ct. N.Y. Cty. Mar. 5, 2013)...5 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004)...14 Bender v. Schwartz, 917 A.2d 142 (Md. Ct. Spec. App. 2007)...10 Bergeron v. Ridgewood Secs. Corp., 610 F. Supp. 2d 113 (D. Mass. 2009)...23 In re Citigroup, Inc. S holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009)...23 Danielewicz v. Arnold, 769 A.2d 274 (Md. Ct. Sp. App. 2001)...15 In re Davis Selected Mut. Funds Litig., No. 04 Civ MGC, 2005 WL (S.D.N.Y. Oct. 11, 2005)...14 Emerald Partners v. Berlin, Civil Action No. 9700, 1993 WL (Del. Ch. Dec. 23, 1993)...24 In re Evergreen Mut. Funds Litig., 423 F. Supp. 2d 249 (S.D.N.Y. 2006)...13 In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d 451 (D.N.J. 2005)...12, 13, 14 Geller v. Tabas, 462 A.2d 1078 (Del. 1983)...23 Gomes v. Am. Century Cos., 710 F.3d 811 (8th Cir. 2013)...14 Hart v. Gen. Motors Corp., 129 A.D.2d 179, 517 N.Y.S.2d 490 (1st Dep t 1987)...8 ii

4 Hayes v. Crown Cent. Petroleum Corp., 78 F. App x 857 (4th Cir. 2003)...23 Heineman v. Datapoint Corp., 611 A.2d 950 (Del. 1992)...14 JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 693 A.2d 832 (Md. 1997)...22 Kautz v. Sugarman, 456 F. App x 16 (2d Cir. 2011)...11 Leon v. Martinez, 84 N.Y.2d 83, 638 N.E. 2d 511, 614 N.Y.S.2d 972 (1994)...18 In re Merrill Lynch Focus Twenty Fund Inv. Co. Act Litig., 218 F.R.D. 377 (E.D.N.Y. 2003)...16 In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 873 (D. Md. 2005)...12 Oliveira v. Sugarman, No. 1980, 2016 WL (Md. Ct. Sp. App. 2016)...12, 15 Orkin v. Jacobson, 332 A.2d 901 (Md. 1975)...22 Protas v. Cavanagh, Civil Action No VCG, 2012 WL (Del. Ch. May 4, 2012)...24 Raske v. Next Mgmt., LLC, No /2012, 40 Misc.3d 1240(A), 2013 WL (Sup. Ct. N.Y. Cty. Sept. 12, 2013)...8 In re Regions Morgan Keegan Secs., Derivative, and ERISA Litig., 694 F. Supp. 2d 879 (W.D. Tenn. 2010)...13, 16 Robinson v. Robinson, 303 A.D.2d 234, 757 N.Y.S.2d 13 (1st Dep t 2003)...18 Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133 (2d Cir. 2004)...10, 13 Seidl v. Am. Century Cos., Inc., 713 F. Supp. 2d 249 (S.D.N.Y. 2010)...15, 16 iii

5 Sekuk Glob. Enters. Profit Sharing Plan v. Kevenides, Nos. 24-C , 24-C , 24-C , 2004 WL (Md. Cir. Ct. May 25, 2004)... passim Shenker v. Laureate Educ., Inc., 983 A.2d 408 (Md. App. Ct. 2009)...10, 23 Smith v. Stevens, 957 F. Supp. 2d 466 (S.D.N.Y. 2013)...15 In re Terra Industries, Inc. Shareholder Litigation, No. 24-C , 2010 WL (Md. Cir. Ct. Jul. 14, 2010)...23 Tico, Inc. v. Borrok, 57 A.D.3d 302, 868 N.Y.S.2d 522 (1st Dep t 2008)...8 Weinberg v. Gold, 838 F. Supp. 2d 355 (D. Md. 2012)...15 Werbowsky v. Collomb, 766 A.2d 123 (Md. App. Ct. 2001)... passim In re Zale Corp. Stockholders Litig., Civil Action No VCP, 2015 WL (Del. Ch. Oct. 29, 2015)...22 STATUTES AND RULES CPLR , 8, 17 (a)(3)...1, 8 (a)(7)...1, U.S.C. 80a-2(a)(19)(A)...11 MD. CODE ANN., CORPS. & ASS NS. (West 2015)... passim (b)...2, 5, (a)...23 OTHER AUTHORITIES Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23,064, 63 Fed. Reg. 13,916 (1998)...20 Scott R. Wilson & Todd M. Reinecker, Demand Futility under Maryland Law, MILES & STOCKBRIDGE, MARYLAND CORPORATE LAW BLOG (Oct. 2, 2015), http// iv

6 Defendants Ruane, Cunniff & Goldfarb Inc. ( RCG ), Robert D. Goldfarb, and David Poppe (the RCG Defendants ) respectfully submit this memorandum of law in support of their motion to dismiss the Complaint pursuant to CPLR 3211(a)(3) and (a)(7). 1 PRELIMINARY STATEMENT This is a derivative action brought on behalf of Sequoia Fund, Inc. ( Sequoia ), a mutual fund organized as a Maryland corporation. Plaintiffs seek to second guess a decision by Sequoia, and its investment adviser, to invest in a stock Valeant Pharmaceuticals International, Inc. ( Valeant ), which plaintiffs acknowledge has been very profitable to Sequoia and then not have the clairvoyance to sell it at its peak. The RCG Defendants have strong defenses on the merits (see infra at 17 25), but this Court need not address them because no demand was made on the Sequoia board of directors to investigate the claims prior to the institution of this litigation. That failure requires the dismissal of the Complaint. Under Maryland law, which indisputably applies, any shareholder who wishes to bring a derivative action must either (i) first make a demand on the board of directors or (ii) if no demand is made, demonstrate that demand is excused because it would be futile. Plaintiffs admit they did not make a demand on the five-member Sequoia board, which is composed of a majority of disinterested and independent directors. And they have not come close to showing, as they must, that demand on the Sequoia board would be futile. The Maryland Court of Appeals in the seminal case of Werbowsky v. Collomb, 766 A.2d 123 (Md. App. Ct. 2001), made it crystal clear that the demand futility exception is a very limited exception to the general rule that demand must be made on the board of directors 1 Defendants Robert Swiggett and Roger Lowenstein two independent directors who have been named as defendants and the Sequoia Fund, joined as a nominal defendant, are also filing a motion to dismiss (hereinafter the Individual Defendants Motion ). The RCG Defendants join the Individual Defendants Motion. 1

7 in a derivative action. Werbowsky teaches that to establish demand futility, a plaintiff must clearly demonstrate, in a very particular manner that a majority of the board of directors is conflicted. Id. at 144 (emphasis added). The Maryland courts have adopted this test because they have recognized that a pre-suit demand on the directors is not an onerous requirement, and it gives the directors even interested, non-independent directors an opportunity to consider, or reconsider, the issue in dispute. Id. By contrast, the futility exception essentially eliminates any chance at meaningful pre-litigation alternative dispute resolution, virtually assures extensive and expensive judicial wrangling, and may put the corporation unnecessarily at risk by minority shareholders bent simply on mischief, who file derivative actions not to correct abuse as much to coerce nuisance settlements. Id. Courts outside Maryland including federal courts in New York have applied Werbowsky in rejecting attempts to plead demand futility on facts similar to those alleged here. Plaintiffs do not come close to making the requisite particularized allegations to satisfy the test laid down in Werbowsky. Nor could they. It is undisputed that a majority of the Sequoia board Defendants Roger Lowenstein and Robert L. Swiggett and non-party Edward Lazarus are non-interested directors under the Investment Company Act of 1940 (the Investment Company Act ), which as a matter of Maryland law means that they are deemed to be independent and disinterested when making any determination or taking any action as a director. Md. Code Ann., Corps. & Ass ns (b). Plaintiffs do not make any attempt to address, let alone rebut, this clear statutory directive. Even if the Maryland statute did not doom plaintiffs attempt to circumvent the demand requirement, the Complaint would still fail because plaintiffs cannot show that Messrs. Lowenstein, Swiggett and Lazarus are conflicted. Mr. Lazarus is the General Counsel of 2

8 Tribune Media Co., Mr. Lowenstein is a financial writer, and Mr. Swiggett is retired. None of plaintiffs generalized allegations that Messrs. Lowenstein, Swiggett and Lazarus are conflicted because they are paid as board members and sit on the board with interested directors is a valid basis for excusing a demand under Maryland law. In fact, these allegations are true of virtually every corporate board in this country, and are routinely and resoundingly rejected by the Maryland courts (and courts around the nation). As a majority of the board, Messrs. Lowenstein, Swiggett and Lazarus not plaintiffs are vested with the right and duty to control Sequoia s litigation. For this reason, the Complaint should be dismissed without prejudice while plaintiffs follow the appropriate steps required by Maryland law to pursue their claims. Indeed, since Werbowsky, not a single Maryland appellate court has excused a derivative plaintiff s failure to make a demand on the board of a Maryland corporation based on demand futility. There is no reason for this Court to rule differently from every Maryland appeals court in the past 14 years on this issue. Putting aside plaintiffs failure to make a demand, the allegations fail to state a claim. At bottom, this action is a misguided attempt to second-guess Sequoia s decision to invest in Valeant and then not sell it at its August 2015 peak, before it suffered sharp declines late last year. Although plaintiffs were more than happy when the value of this investment skyrocketed between 2010 and 2015, and even though this investment has still yielded a significant return to Sequoia by plaintiffs own admission even with the decline, they now assert a raft of fiduciary duty and other claims in the wake of a sharp price decline suffered in late The courts are not, however, the place to review individual mutual fund investment decisions, nor should mutual fund board members or investment advisers face liability for 3

9 ordinary course investment decisions that were disclosed to investors and are clearly within the purview of the mutual fund s investment authority. Perhaps recognizing that Monday-morning quarterbacking investment decisions is not a recognized theory of liability, plaintiffs claim that Sequoia violated two of its Stated Investment Policies namely a 25% Concentration Policy and a Sell Strategy. Even a cursory glance at the Concentration Policy and the Sell Strategy confirm that neither assertion has any merit. Sequoia did not breach any Concentration Policy because Sequoia never purchased Valeant stock when doing so would have resulted in a portfolio concentration above 25% in any one company or industry, and plaintiffs do not allege otherwise. Nor did Sequoia violate the Sell Strategy because the Sell Strategy is just that a strategy. It is not a rule imposing any specific obligations limiting the discretion of the investment adviser of Sequoia to use its business judgment to decide when to buy and when to sell, let alone did it require Sequoia to sell its profitable position in Valeant when plaintiffs say it should have been sold. Accordingly, the RCG Defendants respectfully submit that this case should be dismissed for failure to make a demand and, in the alternative, for failure to state a claim. FACTUAL BACKGROUND A. Sequoia Fund, Inc. Sequoia is an open-end investment company (i.e., a mutual fund) organized as a corporation under Maryland law. (Compl. 39.) Sequoia is also a registered investment company governed by the Investment Company Act. (Id.) As an open-end mutual fund, Sequoia is engaged in the business of investing and reinvesting capital in securities of the type and in accordance with the limitations specified in its governing documents. (Compl. 39.) RCG is an investment adviser registered under the Investment Advisers Act of 1940, and is the investment adviser to Sequoia. (Id. 28.) As such, 4

10 RCG manages the investment portfolio and the general business affairs of the Fund, pursuant to an Investment Advisory Contract ( IAC ) that has been effective in its current form since March 1, (Id. 29; see also id. 3.) Sequoia fully disclosed to investors its investment strategies, policies, and procedures and the relevant investment risks, along with other detailed information about Sequoia and RCG, to investors in Sequoia s Prospectus and Statement of Additional Information ( SAI ). (Compl. 4.) Copies of Sequoia s IAC with RCG, as well as its Prospectus and Statement of Additional Information, are annexed as Exhibits 2, 3 and 4, respectively, to the Affirmation of Tariq Mundiya, dated February 29, 2016, filed contemporaneously herewith. Those documents are also referred to in the Complaint (Ex. 1). (See, e.g., Compl. 27, 30, 34, 38, 50, 52.) 2 B. Sequoia s Board of Directors. As the Complaint admits, Sequoia is currently managed by a five-member board of directors. (Compl. 20.) Three of the five directors Edward Lazarus, Roger Lowenstein, and Robert L. Swiggett, who together constitute a majority of the board are independent directors. (Id.; see also SAI at 5 (Ex. 3).) 3 This means that those three directors are, by definition under Maryland law, independent of RCG and disinterested. See Md. Code Ann., Corps. & Ass ns (b) (West 2015). As discussed in the SAI, Mr. Lazarus is the Executive Vice President and General Counsel of Tribune Media Co., and is the former Chief of Staff to the Chairman of the Federal 2 On a motion to dismiss, the Court may consider documents referenced in a complaint, even if the pleading fails to attach them. All. Network, LLC v. Sidley Austin LLP, 43 Misc.3d 848, 852 n.1, 987 N.Y.S.2d 794, 798 (Sup. Ct. N.Y. Cty. 2014). A court may also consider news articles and other publicly available documents at the motion to dismiss stage. See In re Avon Prods. Inc., No /2012, 2013 WL , at *1 (Sup. Ct. N.Y. Cty. Mar. 5, 2013). 3 Citations in the form of Ex. _ are to exhibits to the Affirmation of Tariq Mundiya, dated February 29, 2016, filed contemporaneously herewith. 5

11 Communications Commission. (See SAI at 5 (Ex. 4).) Although the Complaint alleges that Mr. Lazarus did not join the board until November 11, 2015, that is plain wrong he has been a member of Sequoia s board since November 11, 2014, as documents referenced in plaintiffs own complaint readily acknowledge. (Compare Compl. 20 n.8 with SAI at 5 (Ex. 4) (referred to at Compl. 50, 55).) Mr. Lazarus has not been named as a defendant in this lawsuit. Mr. Lowenstein is a writer for major financial and news publications. (SAI at 5 (Ex. 4).) He has published five books, three of them New York Times bestsellers, and has written for many publications, including the Wall Street Journal, New York Times, Smart Money and others. (Ex. 5 (Wikipedia page for Roger Lowenstein).) Mr. Swiggett is retired and was formerly the Chairman of the Board of Directors of the Kollmorgen Corporation. (SAI at 5 (Ex. 4).) Plaintiffs have not alleged that Messrs. Swiggett, Lazarus, or Lowenstein have any business relationship or affiliation with any of the RCG Defendants. In addition to Sequoia s three independent directors, Sequoia has two directors Robert D. Goldfarb and David M. Poppe who are classified as interested directors for purposes of the Investment Company Act because they are affiliated with Sequoia s investment advisor, RCG. (SAI at 5 (Ex. 4).) C. Plaintiffs Derivative Allegations. Plaintiffs allege that RCG and Sequoia s board of directors breached their fiduciary and other duties to Sequoia by investing more than 25% of Sequoia s assets in Valeant a publicly traded, Canadian-based pharmaceutical company and not selling when the stock hit its peak price in August (Compl ) According to the Complaint, Sequoia first started investing in Valeant over five years ago, in the first half of 2010, when it purchased 3,230,000 shares for $168,986,700. 6

12 (Compl. 59.) 4 At the time, this accounted for 5.7% of Sequoia s total net assets. (Id.) Later that year, Sequoia increased the size of its Valeant investment to 11,320,000 shares totaling $320,242,800, comprising 9.2% of Sequoia s total net assets at the time. (Id. 60.) None of those purchases in 2010 violated Sequoia s stated Concentration Policy, as reflected in Sequoia s SAI, that [t]he Fund may not... [i]nvest more than 25% of the value of its net assets (at the time of purchase and after giving effect thereto) in the securities of any one issuer. (SAI at 4 (Ex. 4).) (emphasis added).) Consistent with Sequoia s long-term value investment strategy, Sequoia held this investment and did not purchase any additional shares of Valeant stock for the next five years. (Compl. 61 (acknowledging that, as of December 2014, Sequoia owned 11,281,224 shares of Valeant).) During that period, the value of Valeant s stock skyrocketed. By June 2015, the value of Sequoia s investment in Valeant had increased from approximately $320 million to over $2.5 billion. (Compl. 65.) That was a seven-fold increase in value over four years, which resulted from dramatic increases in the stock price, not from new or additional purchases by Sequoia. To be sure, as a result of that significant increase in value, the Valeant position, at times, represented more than 25% of the Sequoia Fund. But, as detailed below, the Valeant position did not violate the Concentration Policy because the 25% threshold is measured as the plain, unambiguous language of the Concentration Policy itself states at the time of purchase, not some later arbitrary time when the position had increased in value. Plaintiffs nonetheless allege that maintaining this investment was reckless and violated Sequoia s stated investment policies based on what happened to the price of the stock during a three-month period at the end of Following the publication of negative reports 4 While not relevant to this motion, this allegation is factually inaccurate. On June 30, 2010, Valeant s stock was at $19.24 per share, not $52.29 per share as this allegation implies. 7

13 about Valeant s business practices starting in September 2015, Valeant s stock plummeted by over 75% from its all-time high of $ (on August 5, 2015) to under $70 (on November 17, 2015). (Compl ) When Plaintiffs filed the Complaint, Valeant was trading at $91.06 per share, which still reflects a substantial overall profit for Sequoia. Despite this fact, plaintiffs allege, with the benefit of hindsight, that the Defendants breached their fiduciary and other duties to Sequoia by investing in Valeant and not selling sooner. All claims asserted in this action are derivative claims belonging to Sequoia. Plaintiffs admit that they have never made a pre-suit demand on Sequoia s board of directors to bring this litigation on the company s behalf. (Compl. 103.) ARGUMENT I. PLAINTIFFS DERIVATIVE COMPLAINT SHOULD BE DISMISSED BECAUSE PLAINTIFFS NEVER MADE A DEMAND ON THE BOARD. This is a derivative action brought by plaintiffs on behalf of Nominal Defendant Sequoia. (Compl. 1.) As a derivative action, plaintiffs must either make a formal demand on the board of directors prior to filing suit or demonstrate that such a demand would have been futile. See Tico, Inc. v. Borrok, 57 A.D.3d 302, 302, 868 N.Y.S.2d 522, 522 (1st Dep t 2008) (noting that plaintiffs lacked standing on the basis that they did not make a formal demand... and failed to demonstrate that such a demand would have been futile ). Where demand has not been made, and is not excused, the case should be dismissed pursuant to CPLR 3211(a)(3) because plaintiffs lack standing. Id.; Raske v. Next Mgmt., LLC, No /2012, 40 Misc.3d 1240(A), 2013 WL , at *5 (Sup. Ct. N.Y. Cty. Sept. 12, 2013). Because Sequoia is a Maryland corporation, Maryland law applies to this threshold issue. See, e.g., Hart v. Gen. Motors Corp., 129 A.D.2d 179, 182, 517 N.Y.S.2d 490, 8

14 492 (1st Dep t 1987) ( One of the abiding principles of the law of corporations is that the issue of corporate governance, including the threshold demand issue, is governed by the law of the State in which the corporation is chartered. ). Under well-settled principles of Maryland law articulated in Werbowsky v. Collomb, 766 A.2d 123, 144 (Md. App. Ct. 2001), the Maryland Court of Appeals seminal decision on demand futility this case should be dismissed because plaintiffs have utterly failed to clearly demonstrate, in a very particular manner that demand should be excused. Id. at 144. A. Under Maryland Law, Demand Futility Is A Very Limited Exception To The Requirement That Shareholders Make A Pre-Suit Demand On The Board Of Directors. As a general rule, the business and affairs of a corporation are managed under the direction of its board of directors. Werbowsky, 766 A.2d at 133. This includes the decision to exercise the corporate power to institute litigation and the control of any litigation. Id. The derivative action which permits shareholders to invoke the board s authority and sue on behalf of the corporation was fashioned by the courts as a justifiable, but limited, intrusion upon the general authority of the directors to manage the business affairs of the corporation. Id. at 135. The demand requirement is designed to balance these competing interests. As the Maryland Court of Appeals explained in Werbowsky The demand requirement is important. Directors are presumed to act properly and in the best interest of the corporation. They enjoy the benefit and protection of the business judgment rule, and their control of corporate affairs should not be impinged based on non-specific or speculative allegations of wrongdoing. Nor should they, or the corporation, be put unnecessarily at risk by minority shareholders bent simply on mischief, who file derivative actions not to correct abuse as much to coerce nuisance settlements. Id. at 144 (emphasis in original). 9

15 Accordingly, under Maryland law, before instituting suit, the derivative plaintiff either must make a demand on the corporation s board of directors to pursue the claim against the offending parties or demonstrate to the court that such demand would be futile due to the conflicting interests of the members of the board. Shenker v. Laureate Educ., Inc., 983 A.2d 408, 423 (Md. App. Ct. 2009); see also Bender v. Schwartz, 917 A.2d 142, 152 (Md. Ct. Spec. App. 2007). In most cases, as the Court observed in Werbowsky, a pre-suit demand on the directors is not an onerous requirement, and it gives the directors even interested, nonindependent directors an opportunity to consider, or reconsider, the issue in dispute. Werbowsky, 766 A.2d at 144. By contrast, the futility exception essentially eliminates any chance at meaningful pre-litigation alternative dispute resolution and virtually assures extensive and expensive judicial wrangling. Id. The Maryland Court of Appeals therefore crafted a very limited exception to the demand requirement. Id. To establish demand futility, a plaintiff must clearly demonstrate, in a very particular manner that (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. Id. (emphasis added); see also Sekuk Glob. Enters. Profit Sharing Plan v. Kevenides, Nos. 24-C , 24-C , 24-C , 2004 WL , at *3 (Md. Cir. Ct. May 25, 2004); Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 139 (2d Cir. 2004) (Maryland law). In light of this exacting standard, one Maryland corporate law commentator noted, as of October 2015, it is not surprising that, in the fourteen years since Werbowsky, no Maryland appellate court has recognized demand to have been futile. Scott R. Wilson & Todd M. Reinecker, Demand Futility under Maryland Law, MILES & STOCKBRIDGE, MARYLAND 10

16 CORPORATE LAW BLOG (Oct. 2, 2015), http// (emphasis added). Indeed, this track record prompted the Second Circuit to reject a demand futility argument under Maryland law with the following observation demand is rarely, if ever, properly excused under Maryland law. Kautz v. Sugarman, 456 F. App x 16, 19 (2d Cir. 2011). B. Plaintiffs Demand Failure Is Not Excused. Plaintiffs do not assert that making a demand would cause irreparable harm to the corporation. Werbowsky, 766 A.2d at Consequently, demand would be excused if, and only if, a majority of Sequoia s directors i.e., three out of five are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. Id. None of plaintiffs speculative and conclusory allegations comes close to making this showing. Demand is not excused. 1. Directors Lazarus, Lowenstein, And Swiggett A Majority Of The Board Are Independent And Disinterested Pursuant To The Maryland Code As A Matter Of Law. Defendants Lazarus, Lowenstein, and Swiggett are each independent directors. (SAI at 5 (Ex. 3).) None of them is employed by, or otherwise affiliated with RCG, Sequoia s investment adviser. Lazarus is the Executive Vice President and General Counsel at Tribune Media Co., Lowenstein is a widely published writer, and Swiggett is retired. (Id.) In short, under the Investment Company Act, none of them is an interested person (i.e., affiliated with RCG). See 15 U.S.C. 80a-2(a)(19)(A) (defining interested person based on relationship to investment adviser). Plaintiffs do not assert otherwise, and instead effectively concede that Lazarus, Lowenstein, and Swiggett are independent directors. (Compl. 119 (alleging that the Sequoia board includes three independent directors ).) 11

17 This ends the inquiry. Under Section (b) of the Maryland Code, [a] director of a corporation who with respect to the corporation is not an interested person, as defined by the Investment Company Act of 1940, shall be deemed to be independent and disinterested when making any determination or taking any action as a director. Md. Code Ann., Corps. & Ass ns (b) (emphasis added); see also In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d 451, 470 (D.N.J. 2005) (noting that, under the Maryland statute, [a]n outside director is presumed to be disinterested for purposes of demand futility); In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 873, 879 (D. Md. 2005) ( [T]here can be no question that [Section (b) of the Maryland Code] appl[ies] in the demand futility context. ). Because a majority of the Sequoia board is independent and disinterested under the Maryland Code, demand is not excused. Werbowsky, 766 A.2d at Plaintiffs Demand Futility Allegations Concerning Lowenstein and Swiggett Have All Been Rejected Under Maryland Law. In Werbowsky, the Maryland Court of Appeals made clear that demand is not excused simply because a majority of the directors approved or participated in some way in the challenged transaction or decision, or on the basis of generalized or speculative allegations that they are conflicted or are controlled by other conflicted persons, or because they are paid well for their services as directors, were chosen as directors at the behest of controlling stockholders or would be hostile to the action. Id. at Nothing more is alleged here against Lowenstein and Swiggett. 5 5 Plaintiffs do not allege that Lazarus is conflicted. (Compl ) In fact, plaintiffs did not even name Lazarus as a defendant in this case. (Id. 20 n.8.) Therefore, there is no dispute that Lazarus is an independent director who plaintiffs concede would be able to respond to a presuit demand. See Oliveira v. Sugarman, No. 1980, 2016 WL , at *8 (Md. Ct. Sp. App. Jan. 28, 2016) (holding that single director s evaluation of demand was entitled to business judgment deference). 12

18 First, plaintiffs allege that Lowenstein and Swiggett are conflicted because they have received significant compensation from Sequoia. (Compl ) But the courts that have addressed this allegation under Maryland law have consistently ruled that demand is not futile simply because directors receive substantial compensation as board members or are well paid for their services as directors. Werbowsky, 766 A.2d at ; see also Scalisi, 380 F.3d at 136, 140; In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d at 470; see also In re Evergreen Mut. Funds Litig., 423 F. Supp. 2d 249, 263 (S.D.N.Y. 2006) (noting that [m]ere allegations of substantial compensation are insufficient to establish futility under Delaware law). Lowenstein and Swiggett are not conflicted merely because, like virtually every other corporate board member in this country, they do not provide their services to Sequoia for free. See, e.g., In re Regions Morgan Keegan Sec., Derivative, and ERISA Litig., 694 F. Supp. 2d 879, 887 (W.D. Tenn. 2010) ( Werbowsky flatly rejected the notion that a plaintiff may excuse demand based on an allegation that directors are well paid for their services. ). Second, plaintiffs allege that Lowenstein and Swiggett are conflicted because they have served for many years on the same board with Goldfarb and Poppe, that they have longstanding business and personal entanglements with them, and that Goldfarb and Poppe dominate the board. (Compl. 115, ) The Maryland courts have squarely rejected this as insufficient to plead demand futility. These are exactly the kind of non-specific or speculative allegations that failed to excuse demand in Werbowsky and every other Maryland case since Werbowsky. See Werbowsky, 766 A.2d at 143 (rejecting allegations about routine business as inadequate to demonstrate that directors could not properly consider demand); 13

19 Sekuk, 2004 WL , at *4 (finding that evidence of personal and/or business relationships is not enough to plead demand futility). 6 Third, plaintiffs assert that Lowenstein and Swiggett are conflicted because they approved the Valeant investment. (Compl ) However, in Werbowsky, the Court of Appeals held that it was not willing to excuse the failure to make demand simply because a majority of the directors approved or participated in some way in the challenged transaction or decision. Werbowsky, 766 A.2d at 143; see also Gomes v. Am. Century Cos., 710 F.3d 811, 817 (8th Cir. 2013) (explaining that [n]o Maryland court has held after Werbowsky that demand was excused because the directors participated in the transaction giving rise to the claim ); In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d at 470 (noting, under Maryland law, that the [m]ere approval of the challenged transactions... is not enough to excuse the failure to make a demand ); In re Davis Selected Mut. Funds Litig., No. 04 Civ MGC, 2005 WL , at *4 (S.D.N.Y. Oct. 11, 2005) ( [P]laintiffs allegations that the director defendants were appointed by the investment adviser, had approved the challenged 6 Maryland is not alone on this point. Courts around the country have repeatedly rejected these generalized and vague assertions of personal and business entanglements as being insufficient to excuse demand. See, e.g., Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) ( Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director s independence. ). Likewise, general allegations that the board was dominated by certain directors also do not suffice to establish demand futility. See In re Affiliated Comput. Servs., Inc. S holder Litig., 2009 WL , at *9 (Del. Ch. Feb. 6, 2009) ( [T]he mere allegation that a director is dominated and controlled does not raise a reasonable doubt as to his or her independence. ). Rather, the party pleading demand futility must advance particularized factual allegations from which the [court] can infer that the board members who approved the transaction are acting at the direction of the allegedly dominating individual or entity. Heineman v. Datapoint Corp., 611 A.2d 950, 955 (Del. 1992). No such allegations are made, or could be made, here. 14

20 conduct, or had a financial interest in sitting on the board... are insufficient to excused demand under Maryland law. ). 7 Fourth, plaintiffs allege that Lowenstein and Swiggett are unable to exercise their business judgment to consider a demand because any lawsuit would require them to sue themselves and would thereby expose their own gross negligence and other misconduct. (Compl. 121(a) (e).) A director does not lack independence merely because he is a named defendant in [the] lawsuit. Oliveira, 2016 WL , at *8 ( The Shareholders further contend that Ridings lacks independence because he is a named defendant in this lawsuit. This assertion is contrary to established law. ); see also Smith v. Stevens, 957 F. Supp. 2d 466, 472 (S.D.N.Y. 2013) ( allegation that a suit may render a director personally liable does not excuse demand). Even where the director approved or participated in the challenged action and is subject to potential liability, this is not a disqualifying conflict under Maryland law. See Werbowsky, 766 A.2d at 143; Sekuk Glob. Enters., 2004 WL , at *9; see also Weinberg v. Gold, 838 F. Supp. 2d 355, (D. Md. 2012); Seidl v. American Century Cos., 713 F. Supp. 2d 249, (S.D.N.Y. 2010); Danielewicz v. Arnold, 769 A.2d 274, 292 (Md. Ct. Sp. App. 2001). As the Maryland Court of Appeals explained in Werbowsky, the fact that a director would be hostile to the action does not mean that he or she is conflicted. See Werbowsky, 766 A.2d at Indeed, if that were the case, the demand requirement would be rendered completely meaningless. Finally, plaintiffs assert that the board of directors is effectively disabled from complying with any demand because it may result in the loss of their insurance coverage. 7 In any event, as the Complaint concedes, the board delegated investment decisions to RCG pursuant to the IAC, which was approved by shareholders. Lowenstein and Swiggett were not responsible for these decisions. 15

21 (Compl. 121(f).) This argument also has been rejected under Maryland law. See Sekuk Glob. Enters., 2004 WL , at *9 ( Based on the rationale in Werbowsky, this Court concludes that when it does directly address the issue, the Court of Appeals will most likely follow the lead of other courts which have held that an insured-versus-insured provision does not excuse a presuit demand. ); Regions, 694 F. Supp. 2d at 887 ( The allegation that [d]irectors may have to sue themselves or their fellow board members and thereby void their liability insurance coverage is not enough to waive demand under Maryland law. ). Notably, on a similar set of facts, the court in In re Merrill Lynch Focus Twenty Fund Inv. Co. Act Litig., 218 F.R.D. 377 (E.D.N.Y. 2003), dismissed a derivative complaint asserted on behalf of another Maryland mutual fund for failure to make a demand. There, as here, plaintiffs alleged breach of fiduciary duty and negligence claims against an investment adviser for its decision to invest heavily in a single stock in that case, Enron. Id. at 378. And there, as here, plaintiffs failed to make a demand and argued demand futility on the grounds that the directors were appointed by the adviser, served on many boards together, and were paid for their service. Id. at 380. The court held that these allegations were not enough to demonstrate the futility of a demand under the very limited exception articulated in Werbowsky. Id. at 381. Instead, as the Merrill Lynch court explained, plaintiffs were required to make a demand and any refusal of demand can subsequently be reviewed under the business judgment rule. Id.; see also Seidl, 713 F. Supp. at 260 (S.D.N.Y. 2010) (dismissing derivative action alleging that mutual fund, its adviser, and its directors were reckless in investing in gambling company because plaintiff failed to allege any facts to show that any of the directors were self-interested and thus unable to consider a demand in good faith ); Regions, 694 F. Supp. 2d at 887 (dismissing derivative action alleging that fund violated internal investment principles where 16

22 plaintiffs demand futility allegations were speculative and would make the demand requirement a chimera. ). Here, plaintiffs make the same type of generalized, speculative allegations about Lowenstein and Swiggett and the result should be the same. Nowhere do plaintiffs allege with the required particularity any specific facts or evidence suggesting that these independent directors service on the board of Sequoia would somehow compromise their ability properly and independently to assess a demand within the ambit of the business judgment rule. Quite to the contrary. Plaintiffs allege that those directors previously and repeatedly expressed concern over the size of the Valeant investment. (Compl. 118.) Because Lowenstein and Swiggett with Lazarus who plaintiffs do not even assert is conflicted constitute a majority of the Sequoia board, this case does not fit within the very limited exception to the demand requirement set forth in Werbowsky. See Werbowsky, 766 A.2d at 146; Sekuk, 2004 WL , at * Accordingly, this derivative action should be dismissed without prejudice so that plaintiffs, if they choose, may make a demand on the Sequoia board, and the Sequoia board can exercise its business judgment to evaluate that demand. This is a business decision for the majority of the Sequoia board, is not an onerous requirement and it gives the directors even interested, non-independent directors an opportunity to consider, or reconsider, the issue in dispute, as the Maryland Court of Appeals discussed in Werbowsky, 766 A.2d at 144. II. PLAINTIFFS HAVE FAILED TO STATE A CLAIM AGAINST THE RCG DEFENDANTS. On a CPLR 3211(a)(7) motion, the Court must accept the facts as alleged in the Complaint as true, accord plaintiffs the benefit of every favorable inference, and determine only 8 The Court need not reach the issue of whether Messrs. Goldfarb and Poppe in fact are conflicted because it is beyond dispute that Lazarus, Lowenstein, and Swiggett a majority of Sequoia s board are not. 17

23 whether the facts as alleged fit into any cognizable legal theory. Leon v. Martinez, 84 N.Y.2d 83, 87 88, 638 N.E. 2d 511, 614 N.Y.S.2d 972, 974 (1994). In doing so, however, the court is not required to accept factual allegations that are plainly contradicted by the documentary evidence or legal conclusions that are unsupportable based on the undisputed facts. Robinson v. Robinson, 303 A.D.2d 234, 235, 757 N.Y.S.2d 13, 15 (1st Dep t 2003). Even putting aside plaintiffs demand failure, their claims fail as a matter of law. Although styled as six separate claims against five defendants, all of plaintiffs claims boil down to three issues (1) the allegation that the RCG Defendants violated the Concentration Policy by allowing Valeant stock to comprise more than 25% of Sequoia s portfolio (see, e.g., id ); (2) the claim that the RCG Defendants violated the Sell Strategy by not selling Sequoia s Valeant stock in response to market rumors (see, e.g., id ); and (3) the general notion that the RCG Defendants failed to manage Sequoia prudently by investing in Valeant (see, e.g., Compl ). No matter what theory of liability plaintiffs assert, however, plaintiffs have not alleged any actionable wrongdoing. A. Plaintiffs Have Failed To Allege That The RCG Defendants Violated the So- Called Stated Investment Policies. Plaintiffs allege that the Valeant investment was contrary to two specific aspects of the Prospectus and Statement of Additional Information, which plaintiffs refer to as the Stated Investment Policies. Neither claim has any merit. 1. The RCG Defendants Did Not Violate the Concentration Policy. Plaintiffs claim Sequoia s investment in Valeant violated the Concentration Policy because, at certain points in 2015, Valeant represented more than 25% of Sequoia s net assets. (Compl ) According to plaintiffs, Sequoia s investment in Valeant ran afoul of the Concentration Policy because (1) Sequoia concentrated more than 25% of Sequoia s net 18

24 assets in a single issuer and (2) Sequoia concentrated more than 25% of Sequoia s net assets in a single industry. (Id. 7 9, ) Plaintiffs are wrong on both counts. First, Sequoia s SAI provides that [t]he Fund may not... [i]nvest more than 25% of the value of its net assets (at the time of purchase and after giving effect thereto) in the securities of any one issuer. (SAI at 4 (Ex. 4) (emphasis added).) Thus, Sequoia may not purchase securities in an issuer if that purchase will cause Sequoia to have more than 25% of its net assets in that issuer. The Complaint itself makes clear that none of Sequoia s three separate purchases of Valeant ran afoul of this provision. Specifically, the Complaint states that Sequoia s initial investment in Valeant, which was disclosed in June 2010, accounted for 5.7% of [Sequoia s] total net assets. (Compl. 59.) Sequoia subsequently purchased additional shares of Valeant in late 2010, which brought the Valeant holding to 9.2% of [Sequoia s] total net assets. (Id. 60.) Finally, Sequoia purchased an additional 1.5 million shares of Valeant in October 2015, which plaintiffs do not allege put Sequoia over the 25% threshold. (Id. 68.) Plaintiffs thus have not alleged any violation of the issuer-level concentration limits because they have not pled that any of Sequoia s purchases caused Sequoia to hold more than 25% of its assets in Valeant. Second, the SAI contains a separate investment policy, providing that [t]he Fund may not... [c]oncentrate investments in an industry[.] (SAI at 4 (Ex. 4) (emphasis added).) 9 9 In the Complaint, plaintiffs define this specific policy concerning industry concentration as the Concentration Policy, without including the policy concerning issuer concentration (described above) in the definition. (Compl. 7 8). However, plaintiffs also make allegations concerning the extent to which Sequoia s portfolio was concentrated in Valeant, without making reference to the industry in which Valeant operates. (See, e.g., Compl. 13 ( It is remarkable that the defendants would take on the risk of maintaining more than 25% of the Fund s net assets in any single issuer. ); see also id ) Because plaintiffs are not clear as to which policy was allegedly violated through the Valeant investment, the RCG Defendants will address both the industry policy and the issuer policy together as the Concentration Policy. 19

25 Plaintiffs also fail to allege that Sequoia breached the Concentration Policy by investing more than 25% of its net assets in a single industry for the same reason. (See Compl. 7 9, ) The Securities and Exchange Commission ( SEC ) has stated that, where an investment company does not intend to concentrate, no further investment may be made in any given industry if, upon making the proposed investment, 25 percent or more of the value of the [company s] assets would be invested in such industry. Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23,064, 63 Fed. Reg. 13,916, Guide 19 (May 13, 1998) (emphasis added). Thus, the industry concentration requirement functions in the same manner as the issuer concentration limit. In fact, the SEC has explicitly held that investment companies need not sell investments in an industry if concentration in that industry exceeds 25% as a result of changes in the value of securities. See id. ( [W]hen securities of a given industry come to constitute more than 25% of the value of [the company s] assets by reason of changes in value in either the concentrated securities or the other securities, the excess need not be sold. ). That is precisely what happened here the increased concentration in the Healthcare industry (as alleged by plaintiffs) was due to the increased stock price of Valeant. Because the Complaint lacks any allegation that Sequoia s purchases of Valeant themselves caused its industry concentration to exceed 25%, plaintiffs have failed to allege facts to adequately plead that the RCG Defendants violated the industry concentration limits. This result comports entirely with common sense and good policy. If managers were arbitrarily and automatically forced to sell down a position just because the market value of a position increased or the value of other positions decreased, that could have serious consequences for investors. It could increase transactional costs, trigger unfavorable tax 20

26 consequences, and could interfere with the discretion and business judgment of managers who might believe holding the investment was otherwise in the best interests of investors. It is not surprising that there is no authority supporting plaintiffs assertion that concentration policies whether by issuer or industry compel the automatic sale of a position if the concentration limit is crossed after the time of initial purchase. 2. The RCG Defendants Decision to Hold Valeant Did Not Violate the Sell Strategy. Plaintiffs allege that the RCG Defendants violated Sequoia s Sell Strategy by failing to prune [Sequoia s] concentrated Valeant position around the time of Valeant s August 2015 peak. (Compl. 6.) That is nothing more than plaintiffs trying to substitute their judgment, using hindsight, for the business judgment of Sequoia s investment manager. It would turn the investment community on its head, and wreak havoc in the financial markets, if investment advisers could be subjected to liability for failing to sell every investment at what, with the benefit of hindsight, might be the peak stock price. In any event, plaintiffs are just wrong that the so-called Sell Strategy imposed an enforceable obligation on the RCG Defendants. While the Prospectus states that Sequoia typically sells the equity security of a company when the company shows deteriorating fundamentals, its earnings progress falls short of the investment advisor s expectations or its valuation appears excessive relative to its expected future earnings, it is not required to do so. (Prospectus at 2 (Ex. 3) (emphasis added).) There is simply no requirement that Sequoia must sell a security because of a company s allegedly deteriorating fundamentals, purportedly disappointing earnings progress, or an apparently excessive valuation relative to future earnings. The Sell Strategy does not mean that a position always will be sold, as plaintiffs would have it, and it certainly does not impose a definitive requirement that each security in Sequoia s portfolio 21

27 must be sold when it meets one of the three conditions set forth in the Sell Strategy much less that the RCG Defendants should be exposed to liability in the event that they fail to do so. 10 B. Plaintiffs Do Not Plead A Viable Claim Based On The Decision To Invest In And Hold Valeant. Putting aside the specific allegations about violations of Sequoia s policies, plaintiffs also complain that the RCG Defendants somehow violated their duties to Sequoia by investing in Valeant in the first place. (Compl ) That is wrong. Valeant has seen an extraordinary stock price increase since Sequoia first invested in Valeant. (See supra at 6 7.) No basis exists to subject RCG (or anyone) to liability for making a profitable investment. Under the IAC, RCG is not liable to Sequoia for any mistake of judgment, except if it fails to act in good faith or if is engages in misfeasance, bad faith or gross negligence. (Compl. 167.) Nowhere do plaintiffs even allege that RCG acted in bad faith or engaged in any type of wrongdoing that would rise to the level of misfeasance. Nor can the RCG Defendants decision to purchase and hold Valeant stock be deemed grossly negligent. To support a claim of gross negligence, the decision has to be so grossly off-themark as to amount to reckless indifference or a gross abuse of discretion. In re Zale Corp. Stockholders Litig., Civil Action No VCP, 2015 WL , at *4 (Del. Ch. Oct. 29, 2015). Plaintiffs have not alleged any facts that would support any reasonable inference that the RCG Defendants acted in any such manner. Plaintiffs allegations that RCG, and Messrs. Goldfarb and Poppe breached fiduciary duties to Sequoia fare no better. Under Maryland law, [i]t is well established that 10 Plaintiffs interpretation would essentially read the word typically out of the Sell Strategy, which is impermissible under general principles of interpretation. See, e.g., JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 693 A.2d 832, 834 (Md. App. Ct. 1997) (a court must give, if we can, some distinct meaning to every word employed in a contract); Orkin v. Jacobson, 332 A.2d 901, 904 (Md. App. Ct. 1975) (noting that a statute is to be read so that no word, clause, sentence or phrase shall be rendered surplusage, superfluous, meaningless, or nugatory. ). 22