The fallout from Valeant Pharmaceuticals’ (VRX) mounting woes persisted on Wednesday as Robert Goldfarb resigned as head of the Sequoia Fund, a mutual fund closely linked with Warren Buffett, after its outsize stake in the embattled drug giant continued to drag down returns.
Sequoia sent Fortune a copy of its letter to shareholders announcing Goldfarb’s retirement. While it lavished praise on the veteran investor’s record and business acumen, it also contained an implicit criticism of his position on Valeant:
We owe [our] achievements to immense talents like Bill Ruane, Rick Cunniff and Bob Goldfarb, but we believe that we owe our success first and foremost to a simple but powerful strategy: The careful selection of a focused portfolio comprised of intensively researched investments, purchased with a margin of safety. While we have beaten the market over the past decade, through the end of 2015, our investment in Valeant has diminished a record that we have built over two generations and in which we take great pride. We are a loyal, dedicated and intensely driven group, and to the extent that we have lost any of our investors’ confidence, we are determined to win it back.
Valeant’s been on a roller coaster of misery over the past six months. Controversies over its distribution model and pricing strategies have wrought federal investigations and Congressional inquiries.
The troubles came to a head last week as the drugmaker slashed its 2016 earnings outlook after discovering accounting problems, leading to a staggering 50% single-day decline in share value. The company’s stock has dropped 85% over the past six months, forcing a management shakeup which includes the ouster of CEO Michael Pearson and the addition of Valeant-allied activist investor Bill Ackman to its board. The company’s massive debt level threatens its recovery plans.
For Sequoia, Valeant’s troubles have become its own thanks to the fund’s unusually large stake in the pharma firm. Goldfarb championed Sequoia’s Valeant position, according to the fund’s executive vice president (and Goldfarb’s successor) David Poppe, which at one point reached 30% of the net portfolio.
“[W]e calculate that Valeant contributed -6.3% to Sequoia’s return of -7.3% for [2015],” the fund admitted in a statement earlier this month.
Those financials have galvanized a shareholder revolt against Ruane, Cunniff & Goldfarb, the investing entity which runs Sequoia, including a lawsuit alleging “gross negligence” by the fund’s managers.
“Just as it should come as no surprise to the gambler when the horse pulls up lame, the same holds equally true for the defendants,” the shareholders wrote in their complaint.
This post has been updated.
