The Valeant Debacle Claims Another Head

By Markets Fool.com

U.S. stocks are lower in late morning trading, with theS&P 500and theDow Jones Industrial Average (DJINDICES: $INDU)down 0.46% and 0.37%, respectively, at 11:30 a.m. ET. Shares of Valeant Pharmaceuticals International Incdown 4.76%, are underperforming the broad market and the healthcare sector.

Continue Reading Below

Valeant Pharmaceuticals announced on Monday that CEO J. Michael Pearson would step down as soon as his replacement is found. In addition, the board has requested that former chief financial officer Howard Schiller resign his director's seat -- which he has refused to do.

Yesterday, the Valeant debacle -- from its high in August, the company's market value has fallen by roughly $80 billion -- claimed another head: that of Bob Goldfarb, co-manager of the Sequoia Fund and chief executive of the once-venerable money management company Ruane, Cunniff & Goldfarb.

This is the same company Warren Buffett recommended to his investors when he made plans in 1969 to wind up the Buffett Partnership. The company had recently been formed and was then known as Ruane, Cunniff & Stires, with its address at 85 Broad Street in lower Manhattan (Goldman Sachs' global headquarters until 2009).

Last week, influential fund research house Morningstar placed the Sequoia Fund's rating under review (it is currently rated three stars out of a possible five). Justifying this step, Morningstar analyst Kevin McDevitt wrote (my emphasis):

As Valeant's largest shareholder, this fund has been hit hard on a number of fronts. With Valeant's shares down more than 70% since mid-September, the fund's once-exceptional trailing results are in tatters going back 10 years. The damage has been so severe because the Valeant position was 28.7% of assets in June 2015 before the share price started falling last August.

[Fund outflows of nearly $800 million over the six months through February and the possibility of accelerating outflows in March] also raise questions about the fund itself. Goldfarb, Poppe, and their team of analysts have long been known for their in-depth knowledge of their holdings. We don't doubt their efforts to understand Valeant's challenges, but the fund's process should be reevaluated. Specifically, the team does not seem to have taken any steps to mitigate the risks of such a large position.

Continue Reading Below

Ruane, Cunniff's client letter announcing Goldfarb's departure echoes Morningstar's criticism (my emphasis):

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 ...

While our commitment to a value-oriented strategy grounded in extensive primary research remains as strong as ever, the Valeant experience has spurred a period of reflection. Going forward, we have resolved to take a more collaborative approach to constructing the portfolio that will feature a more significant role for our senior analysts ...

Bob Goldfarb joined Ruane, Cunniff in 1971, and his name was added to the door in 2004. What a disastrous way to cap what had been a previously illustrious investing career! Last October, Goldfarb was named by Forbes as one of the men who made a fortune off of America's most controversial stock.

Another one of the men Forbes identified was high-profile hedge fund manager Bill Ackman. Ackman joined Valeant's board this week in an effort to avoid following Goldfarb's as one of the men whose investing reputation was destroyed by America's most controversial stock.

The article The Valeant Debacle Claims Another Head originally appeared on Fool.com.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.