https://www.nytimes.com/2015/11/13/business/huge-valeant-stake-exposes-rift-at-sequoia-fund.

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COMMON SENSE

Huge Valeant Stake Exposes Rift at Sequoia Fund

By James B. Stewart
Nov. 12, 2015

For more than four decades, the Sequoia Fund has been the envy of Wall Street, one of the rare funds to consistently beat the market.
Known for its close ties to Warren E. Buffett, the fund at its peak managed more than $9 billion. It was in such demand that it closed to
new investors in 2013, a move that enhanced its mystique.

That mystique has been shattered. Late last month, two of Sequoia’s five independent directors, Vinod Ahooja and Sharon Osberg,
abruptly resigned, a rare and public sign of dissent within a mutual fund’s board.

Sequoia gave no reason for the departures, but they came just days after a contentious board meeting in which the fund’s managers
revealed they had bought more shares in the embattled drug maker Valeant Pharmaceuticals International, despite objections by the
independent directors. All the directors had repeatedly expressed concern over the size of an already large stake in Valeant. The
managers disclosed the purchase of an additional 1.5 million shares, increasing Sequoia’s stake in Valeant to more than 10 percent and
making it the company’s largest shareholder.

At its peak this summer, Valeant represented 32 percent of the fund’s portfolio, according to Sequoia, a hugely concentrated bet even for
a fund like Sequoia, which invests in a smaller number of stocks than most funds.

David Poppe, president of Ruane, Cunniff & Goldfarb, the New York investment firm that manages the Sequoia Fund, confirmed that the
two directors had resigned over the Valeant position.

“There was an ongoing debate over a considerable period of time, and they pushed us pretty hard on the level of concentration and why
we were comfortable with that,” he told me this week. “And I think recent events frustrated them,” he said, referring to Valeant’s stock
plunge. Still, the resignations came as a surprise. “They resigned within five minutes of each other on a Sunday,” he said.

From its inception in 1970 through the end of last year, Sequoia has been a top-performing fund, generating an annualized return of 14.5
percent a year, compared with 11 percent for the Standard & Poor’s 500-stock index.

Then came Sequoia’s infatuation with Valeant. The fund began buying the pharmaceutical company’s shares in 2010 and watched its
share price rise inexorably as it bought existing drugs and raised their prices significantly, rather than trying to develop new drugs.

But this summer, Valeant came under siege for its aggressive drug-pricing policies, its voracious appetite for acquisitions, its high debt
level and its ties to a dubious pharmacy partner. Valeant’s shares have plunged to about $75 this week from over $260 in August.

Valeant, in turn, has dragged down Sequoia. Over the last three months, shares of Sequoia, which trade publicly as an open-end mutual
fund, have dropped 22 percent, while the S.&P. 500 has been flat. During October, investors withdrew nearly $100 million from the fund.

The Sequoia directors’ resignations also revealed a growing estrangement between Sequoia and Mr. Buffett, who over the years has
often praised the fund’s management, performance and adherence to his value-oriented investment approach.

After Mr. Buffett closed his investment partnership in 1969, Sequoia, founded by his close friend William J. Ruane, was the one fund he
recommended to his clients. (Mr. Ruane died in 2005.) Mr. Buffett’s company, Berkshire Hathaway, has been a core position for Sequoia:
During the late 1990s, it reached 35 percent of the fund’s assets, the only stock that has exceeded the size of its current position in
Valeant. Berkshire is now its second-largest holding after Valeant, with the company’s two classes of shares representing nearly 13
percent of the portfolio.

When Sequoia was seeking new independent directors 12 years ago, Mr. Buffett recommended Ms. Osberg. In a 2006 interview with The
San Francisco Chronicle, she described Mr. Buffett as her best friend, and she has often spent Thanksgiving with him in Omaha. A
former Wells Fargo executive, Ms. Osberg is perhaps best known as a world-class bridge player. She has won two world championships,
and she and Mr. Buffett play bridge electronically four times a week.

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Ms. Osberg had been expressing her worries about Valeant at board meetings for over a year, and she grew so concerned that she
insisted the discussions be reflected in the minutes. In recent weeks, Mr. Buffett advised Ms. Osberg on her predicament and agreed
with her decision to resign after concluding she had done all she could as a board member. Ms. Osberg sold her stake in Sequoia shortly
after resigning.

The headquarters of Valeant Pharmaceuticals International, in Laval, Quebec. Christinne

Muschi/Reuters

Mr. Ahooja, a former Goldman Sachs partner, is also a friend and supporter of Ms. Osberg (though not a bridge partner) and she
persuaded him to rejoin the board last year after he had resigned because of health issues.

Many of Ms. Osberg’s problems with Valeant echoed those expressed by executives at Berkshire Hathaway. Charlie Munger, Berkshire
Hathaway’s vice chairman and a close business partner of Mr. Buffett, has been one of the most vocal critics of Valeant, whose
aggressive pricing tactics he observed firsthand as chairman of Good Samaritan Hospital in Los Angeles. He has publicly called the
company’s practices “deeply immoral” and its business strategy unsustainable. If anything, Mr. Buffett takes an even dimmer view of
Valeant, though he has not been as outspoken.

“Any time Charlie or Warren says something, you listen,” Mr. Poppe told me. “But rightly or wrongly, we felt we knew Valeant very well.
As we said in our recent letter to shareholders, we thought Valeant was aggressive but stayed within the lines. To say they’re immoral is
pretty strong.”

In the recent Sequoia directors’ meeting, conducted by telephone, Mr. Poppe and Ruane Cunniff’s chairman, Bob Goldfarb, defended the
fund’s large position in Valeant by comparing it with the fund’s longtime investment in Berkshire Hathaway. Some independent
directors were especially taken aback when Mr. Goldfarb defended the recent additional purchase of Valeant shares by repeating one of
Mr. Buffett’s favorite sayings: “Be greedy when others are fearful.”

In his conversation with me, Mr. Poppe also used Berkshire to defend his Valeant investment. He said that during the late 1990s,
Berkshire Hathaway was 35 percent of the fund and had a period when it lost half its value, but it recovered and became one of the
fund’s best investments.

But the comparison between Mr. Buffett, who has often said that he won’t tolerate practices that are borderline unethical, and Valeant’s
chief executive, J. Michael Pearson, was the last straw for Ms. Osberg. She and other people “said Buffett is nothing like Pearson,” Mr.
Poppe acknowledged. He agreed that “Buffett is a different kind of investor and manager than Pearson, but there were still risks when
we had such a big stake in Berkshire Hathaway. We had a third of our portfolio invested with a 69- or 70-year-old chief executive.” (Mr.
Buffett is now 85 and still chief executive at Berkshire Hathaway.)

Mr. Poppe stressed that it’s not up to fund directors like Ms. Osberg to make investment decisions. “We believed Valeant was one of our
very best ideas,” he said. “Bob and I make those decisions. It’s not a team or management by committee. We listened to their input, but
we felt strongly that we need to manage the fund as we see fit.”
Alan Palmiter, a law professor at Wake Forest University and an expert in mutual fund governance, said the board revolt at Sequoia was
highly unusual. “I’ve never heard of mutual fund directors ever quitting in protest of fund management. I’m sure it’s happened, but the
world of mutual fund directors is one of ‘go along to get along.’”

Mr. Poppe said shareholders understood that the fund’s policy was to take concentrated positions in stocks the managers believed in,
and then hold them long-term. Still, the fund has typically pruned positions as their valuations soared, and the concentration in Valeant
seems an anomaly. The next biggest position after Berkshire Hathaway is just 5 percent of the portfolio, and most are less than 2
percent.

Larry E. Swedroe, director of research at Buckingham Family of Financial Services and the author of several finance books, including
one on Mr. Buffett, praised Sequoia’s track record but said its outsize Valeant position was an accident waiting to happen.

“There’s no way Valeant could be considered a value stock,” he said. “Not at 100 times forward earnings. If they were a systematic value
manager that followed certain statistical criteria, they would never have owned Valeant at that multiple, let alone let it get to nearly one-
third of the portfolio.” He added that successful investors often start to think they are smarter than everyone else. “Then they start
ignoring their own discipline,” he said. “Hubris may have gotten to them.”

Mr. Poppe conceded that he and his colleagues had not realized the level of risk that was in the stock at $260. “We’re still surprised that
the accusations, which certainly don’t warrant the death of the company, would have led to a loss of two-thirds of its market value,” he
said. “The stock is trading on panic, not fundamentals. Hindsight will tell if we were smart or not so smart.”

Hindsight, of course, already suggests that Sequoia’s managers should have heeded Ms. Osberg’s and other directors’ warnings and
sold or at least pruned the Valeant position in late summer, when the stock was over $200 and Sequoia was sitting on a huge gain.
(Sequoia said it still has a net gain on its Valeant position because its early purchases were at such low prices.)

At the insistence of the remaining three independent directors, Sequoia’s managers have agreed not to buy any more Valeant shares,
even at current depressed levels. On Tuesday, its shares traded as low as $73.70, nearing its intraday low of $73.32 reached last week, the
stock’s lowest price in more than two years.

The last month has been “painful,” Mr. Poppe said, but has also taught him a valuable lesson about owning companies with questionable
business practices, even though those practices may be within the boundaries of the law. As he wrote in the fund’s recent letter to
shareholders, “One lesson of recent events is that sometimes doing everything legally permissible to maximize earnings does not create
shareholder value.”