938 F.3d 8
2d Cir.2019Background
- Sequoia Fund, a Maryland mutual fund, included a "Concentration Policy" in its SAI and prospectus prohibiting concentration as defined by the Investment Company Act and related SEC guidance.
- The SEC's 1983 Guide 19 treated a fund as "concentrating" if it invested more than 25% of assets in one industry but allowed "passive increases" (market-driven rises above 25%) without mandatory divestment.
- The 1998 amendments to Form N‑1A incorporated a 25% percentage test; plaintiffs argued the 1998 Guidance rescinded Guide 19's passive‑increase exception.
- Plaintiffs (shareholders) alleged Sequoia breached the Concentration Policy in 2015 when healthcare holdings (including Valeant) exceeded 25% due to market value increases, causing losses.
- The district court dismissed under Rule 12(b)(6) for failure to state a claim, finding (1) no enforceable contract and (2) alternatively no breach because passive increases are permitted; the Second Circuit affirmed on the alternative ground.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did publication of the SAI/prospectus create an enforceable contract obligating Sequoia to comply with the Concentration Policy? | Prospectus/SAI was an offer; purchase and holding of shares constituted acceptance, creating a binding contract. | No enforceable contract: printed statements lacked offer/intent/meeting of minds to form contract. | Court assumed for analysis (did not decide); resolved case on breach issue instead. |
| Did Sequoia breach the Concentration Policy when healthcare holdings exceeded 25% due to market appreciation? | 1998 Guidance rescinded 1983 Guide 19; the policy forbids >25% at any time, so passive increases breached the policy. | 1998 Guidance retained Guide 19's 25% test and its allowance for passive increases; no obligation to divest when market movements push holdings above 25%. | Court held 1998 Guidance did not eliminate the passive‑increase exception; complaint fails to allege a breach. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard requires plausible factual allegations)
- Krumme v. WestPoint Stevens Inc., 238 F.3d 133 (2d Cir. 2000) (contract ambiguous if capable of more than one meaning objectively)
- Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458 (2d Cir. 2010) (clear contract language is interpreted as a matter of law)
- Orlander v. Staples, Inc., 802 F.3d 289 (2d Cir. 2015) (elements required to plead breach of contract)
- Orchard Hill Master Fund Ltd. v. SBA Commc'ns Corp., 830 F.3d 152 (2d Cir. 2016) (contract‑interpretation dismissal appropriate only when terms unambiguous)
- Crane Co. v. Coltec Indus., Inc., 171 F.3d 733 (2d Cir. 1999) (when parties' intent is unambiguously conveyed, interpretation is a matter of law)