-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2cwou8vCEHVPDd0QREo6MBH6fggnKoZer4g6grFHtf31wNSKsl2Y5OS4lHaZ26J YD7lCYQJJrl1rNG5IEGWuw== 0000089043-05-000003.txt : 20050225 0000089043-05-000003.hdr.sgml : 20050225 20050225081517 ACCESSION NUMBER: 0000089043-05-000003 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050225 DATE AS OF CHANGE: 20050225 EFFECTIVENESS DATE: 20050225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUOIA FUND INC CENTRAL INDEX KEY: 0000089043 IRS NUMBER: 132663968 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-01976 FILM NUMBER: 05638876 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: SUITE 4701 CITY: NEW YORK STATE: NY ZIP: 10153-4798 BUSINESS PHONE: 2128325280 MAIL ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: SUITE 4701 CITY: NEW YORK STATE: NY ZIP: 10153-4798 FORMER COMPANY: FORMER CONFORMED NAME: CIMARRON FUND INC DATE OF NAME CHANGE: 19700625 N-CSR 1 ncsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-01976 Sequoia Fund, Inc. (Exact name of registrant as specified in charter) 767 Fifth Avenue, Suite 4701, New York, NY 10153-4798 (Address of principal executive offices) (Zip code) Robert D. Goldfarb Ruane, Cunniff & Goldfarb Inc. 767 Fifth Avenue Suite 4701 New York, New York 10153-4798 (Name and address of agent for service) Registrant's telephone number, including area code: (212) 832-5280 Date of fiscal year end: December 31 Date of reporting period: December 31, 2004 ITEM 1. REPORTS TO STOCKHOLDERS. [SEQUOIA FUND, INC. LOGO] SEQUOIA FUND, INC. ANNUAL REPORT DECEMBER 31, 2004 SEQUOIA FUND, INC. ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH INCOME DIVIDENDS REINVESTED AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN SHARES The table below covers the period from July 15, 1970 (the date Fund shares were first offered to the public) to December 31, 2004. This period was one of widely fluctuating common stock prices. The results shown should not be considered as a representation of the dividend income or capital gain or loss which may be realized from an investment made in the Fund today.
VALUE OF VALUE OF VALUE OF INITIAL CUMULATIVE CUMULATIVE TOTAL $10,000 CAPITAL GAINS REINVESTED VALUE OF PERIOD ENDED: INVESTMENT DISTRIBUTIONS DIVIDENDS SHARES - ------------- ---------- ------------- ---------- -------- July 15, 1970 $ 10,000 $ -- $ -- $ 10,000 May 31, 1971 11,750 -- 184 11,934 May 31, 1972 12,350 706 451 13,507 May 31, 1973 9,540 1,118 584 11,242 May 31, 1974 7,530 1,696 787 10,013 May 31, 1975 9,490 2,137 1,698 13,325 May 31, 1976 12,030 2,709 2,654 17,393 May 31, 1977 15,400 3,468 3,958 22,826 Dec. 31, 1977 18,420 4,617 5,020 28,057 Dec. 31, 1978 22,270 5,872 6,629 34,771 Dec. 31, 1979 24,300 6,481 8,180 38,961 Dec. 31, 1980 25,040 8,848 10,006 43,894 Dec. 31, 1981 27,170 13,140 13,019 53,329 Dec. 31, 1982 31,960 18,450 19,510 69,920 Dec. 31, 1983 37,110 24,919 26,986 89,015 Dec. 31, 1984 39,260 33,627 32,594 105,481 Dec. 31, 1985 44,010 49,611 41,354 134,975 Dec. 31, 1986 39,290 71,954 41,783 153,027 Dec. 31, 1987 38,430 76,911 49,020 164,361 Dec. 31, 1988 38,810 87,760 55,946 182,516 Dec. 31, 1989 46,860 112,979 73,614 233,453 Dec. 31, 1990 41,940 110,013 72,633 224,586 Dec. 31, 1991 53,310 160,835 100,281 314,426 Dec. 31, 1992 56,660 174,775 112,428 343,863 Dec. 31, 1993 54,840 213,397 112,682 380,919 Dec. 31, 1994 55,590 220,943 117,100 393,633 Dec. 31, 1995 78,130 311,266 167,129 556,525 Dec. 31, 1996 88,440 397,099 191,967 677,506 Dec. 31, 1997 125,630 570,917 273,653 970,200 Dec. 31, 1998 160,700 798,314 353,183 1,312,197 Dec. 31, 1999 127,270 680,866 286,989 1,095,125 Dec. 31, 2000 122,090 903,255 289,505 1,314,850 Dec. 31, 2001 130,240 1,002,955 319,980 1,453,175 Dec. 31, 2002 126,630 976,920 311,226 1,414,776 Dec. 31, 2003 147,610 1,146,523 362,790 1,656,923 Dec. 31, 2004 154,270 1,200,687 379,159 1,734,116
The total amount of capital gains distributions accepted in shares was $622,656, the total amount of dividends reinvested was $116,740. No adjustment has been made for any taxes payable by shareholders on capital gain distributions, dividends reinvested in shares or sale of fund shares. [CHART] COMPARISON OF A CHANGE IN VALUE OF A $10,000 INVESTMENT IN SEQUOIA FUND AND THE S&P 500 INDEX*
SEQUOIA FUND S&P 500* 1/1/1995 $ 10,000 $ 10,000 12/31/1995 $ 14,138 $ 13,753 12/30/1996 $ 17,212 $ 16,915 12/31/1997 $ 24,647 $ 22,554 12/31/1998 $ 33,335 $ 28,998 12/31/1999 $ 27,821 $ 35,099 12/31/2000 $ 33,402 $ 31,905 12/31/2001 $ 36,916 $ 28,112 12/31/2002 $ 35,942 $ 21,899 12/31/2003 $ 42,095 $ 28,180 12/31/2004 $ 44,057 $ 31,245
(From 1/1/95 to 12/31/04) * The S&P 500 Index is an unmanaged, capitalization-weighted index of the common stocks of 500 major US corporations. The information presented for the Fund assumes reinvestment of dividends and capital gains distributions and does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Past performance is not indicative of future results. TO THE SHAREHOLDERS OF SEQUOIA FUND, INC. Dear Shareholder: Sequoia Fund's results for the quarter and year ended December 31, 2004 appear below along with comparable results for the major market indexes: TO DECEMBER 31, 2004
SEQUOIA DOW JONES STANDARD & FUND INDUSTRIALS POOR'S 500 ------- ----------- ---------- Fourth Quarter 3.83% 7.55% 9.22% 1 Year 4.66% 5.34% 10.92% 5 Years (Annualized) 9.65% 0.67% -2.33% 10 Years (Annualized) 16.02% 13.13% 12.07%
The S&P 500 Index is an unmanaged, capitalization-weighted index of the common stocks of 500 major US corporations. The Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 actively traded blue chip stocks. The performance data quoted represents past performance and assumes reinvestment of dividends. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. We do not normally provide you with an early estimate of Sequoia's year-end capital gains distributions. However, due to the magnitude of this distribution in 2005, we felt we should alert our tax-paying shareholders that it is likely to be approximately $10 per share. We recommend that you keep this in mind for your tax planning. We will provide updated information in our March report. Sincerely, /s/ Richard T. Cunniff /s/ David M. Poppe /s/ William J. Ruane /s/ Robert D. Goldfarb Richard T. Cunniff David M. Poppe William J. Ruane Robert D. Goldfarb Vice Chairman Executive Vice President Chairman President February 18, 2005
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE The Fund's total return for the year 2004 was 4.7%, including reinvestment of dividends. This compares to the 10.9% return of the S&P 500. Our investment philosophy is to make concentrated investments in a limited number of companies that have superior long-term economic prospects and that sell at what we believe are attractive prices. We do not own a broad basket of stocks, and as a result the performance of the Fund will often vary significantly from that of the overall market in any given year. The table below shows the stock price performance of the Fund's major positions for 2004:
% OF ASSETS PRICE % OF ASSETS POSITION 12/31/03 CHANGE 12/31/04 - -------- -------- ------ ----------- Berkshire Hathaway 34.7% 4.3% 35.2% Progressive Corp. 12.8% 1.5% 12.6% Mohawk Industries 6.6% 29.4% 8.4% TJX 7.2% 14.0% 8.0% Fifth Third Bancorp 10.8% -20.0% 5.6% Fastenal 2.9% 23.7% 3.6% ------ ----- Top six positions 75.0% 73.4% ====== =====
We're less concerned with the annual movement in share prices than we are with the earnings progress exhibited by our holdings. If earnings grow, the stock price eventually follows. We expect Berkshire Hathaway will turn in satisfactory results for 2004 that were somewhat obscured by several one-time events. In the third quarter, the Florida hurricanes produced $816 million after-tax in losses in the insurance businesses. Berkshire also booked a one-time non-cash charge of $255 million, its share of a write-down taken by MidAmerican in connection with the termination of a mineral extraction project. And a number of high-yield and investment grade securities matured in 2004, with the proceeds going into low-yielding cash. Berkshire's reported earnings took a short-term hit, but its earning power didn't change. It's worth noting that Berkshire also earned significant foreign currency trading profits in 2004, as it did on fixed-income arbitrage in 2003. Accounting conventions do not allow including these gains in operating earnings. Despite the downward pressures on reported profits this year, we believe that Berkshire is continuing to make steady progress in increasing its earning power over the long run. One measure of that growth is the burgeoning investment portfolio at Berkshire's insurance subsidiaries: At September 30, it was $97.0 billion, up nearly 30% over the last two years. Additionally if there were ever a significant stress in the financial system, Berkshire, with its ample liquidity, has the potential to step its current earnings power up even higher than the current trend line. Progressive's operating results were strong in 2004. Net premiums earned rose 16% for the year and the company's underwriting margin was an impressive 14.9%. Earnings per share rose 34% to $7.63. To be sure, growth in premiums decelerated during the year and the underwriting margin is not likely to remain so robust in 2005. The auto insurance industry is cyclical. Rates inevitably tend to soften in response to improving underwriting margins. Still, we believe Progressive's margins will remain healthy and written premiums will keep growing, albeit at a slower pace. The company recently bought back 8% of its shares outstanding, which will also boost earnings per share this year. Progressive has just 7% of the U.S. car insurance market, and over time we believe consumers will find Progressive a great value and drive its market share higher. The third-largest position in the Fund is now Mohawk Industries, the country's largest flooring business. Mohawk and its rival, Shaw Industries, which is owned by Berkshire Hathaway, have spent many years consolidating a highly fragmented and inefficient industry down to two strong players. Simultaneously, Mohawk has benefited from the U.S. housing boom, which has kept demand for flooring products quite high. As a result, Mohawk's results over the past few years have been terrific. It earned $3.00 per share in 2000. In 2005, we believe earnings per share could exceed $6. That 15% growth rate has come despite big increases in the price of oil, the main source of raw material for carpet. Mohawk's management has wisely deployed its growing earnings back into the business, buying up other flooring companies and some suppliers. We believe Mohawk has a bright future. TJX continues to perform as we expected when we bought the stock in 2000. Since then, its earnings per share have grown at a 10% annual rate. The stock has appreciated faster than earnings, but still trades at a discount to the S&P 500. The retail apparel business is difficult. Over the past four years, the number of units sold in the U.S. has barely risen, while pricing has declined slightly. The result is a stagnant industry. Indeed, several U.S. department stores earned less in 2004 than they did four years earlier. That makes TJX's steady growth look even better. That said, TJX is at something of a crossroads. Its core Marmaxx business, which consists of TJ Maxx and Marshalls stores, continues to perform well but is clearly maturing. The same is true of the Canadian division, Winners. In coming years, investors will need to see better performance at the company's younger divisions, which include TK Maxx in the UK and Ireland, HomeGoods and AJ Wright. All three younger concepts stumbled in 2004, which is worrisome. We expect to see significant progress in 2005. Fifth Third Bancorp represented a major drag on results at the Fund in both 2003 and 2004, coming after years of stalwart performance. What went wrong? As interest rates reached generational lows, Fifth Third could not reduce its already low cost of deposits. Yet to stay competitive with other lenders it had to reduce the interest rates it charged borrowers. Inevitably, its net interest margin tightened. This is an obvious problem. In an attempt to preserve its net interest income, it entered into a series of off-balance sheet interest rate swaps to protect it against the possibility that the Federal Reserve would lower interest rates still further. When the Fed began raising short-term rates during the year, the bank paid a dear price to terminate the swaps. The bank's unsuccessful effort to acquire National Commerce Financial as well as its successful effort to acquire First National Bankshares of Florida highlighted the challenge of continuing to grow rapidly in the mature markets of the Midwest. We sold a substantial portion of the Fund's position, but we regret that we didn't act sooner. Nevertheless, over our 11-year holding period, Fifth Third provided us with a compound annual total return of 17.8%. We want to thank George Schaefer, Neal Arnold and their hard-working team for enriching our shareholders. Fastenal continues to impress us with its culture of enterprise and hard work. Sales rose by 24.5% and earnings per share by 55.0% for the year. The stock currently trades for nearly 30 times this year's estimated earnings. At times, it can be tempting to sell shares at such lofty levels. But we continue to believe that Fastenal has very significant long-term growth opportunities. We also have great respect for management's capabilities and integrity. These factors give us the confidence to maintain our holdings. We could make similar remarks about Expeditors International and Walgreen. Both stocks trade at high price-to-earnings ratios. But both companies have uniquely competitive cultures and strong market positions. Expeditors has an exceptionally strong presence in the surging trade lane between China and the U.S. Walgreen fills more daily prescriptions per store than any other major retailer, giving it significant economies of scale. For the year, Expeditors rose 48.4% and Walgreen 5.5%. One of our most disappointing stocks in 2004 was Tiffany & Co. It lost 29.3% of its value during the year, and it continues to struggle to reverse declining earnings in its highly profitable Japanese business. During the year, the Fund reduced its holdings in Fifth Third Bancorp from 10.8% of assets to 5.6%. The Fund added to three positions: Gtech Holdings, Walgreen and Idexx Laboratories. The Fund initiated three small positions, Wal-Mart Stores, Petsmart and O'Reilly Automotive. The Fund also bought and sold two small positions during the year, AutoZone and Jacobs Engineering. The Fund suffered losses on both stocks. At the end of the year, Sequoia was 90.8% invested in stocks, compared to 85.6% a year earlier. In both years, the remainder of Sequoia's assets was held in cash and cash equivalents. SHAREHOLDER EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and will not help you determine the relative total costs of owning different funds.
EXPENSES ENDING PAID DURING BEGINNING ACCOUNT PERIOD* ACCOUNT VALUE JULY 1, 2004 VALUE DECEMBER 31, TO DECEMBER 31, JULY 1, 2004 2004 2004 ------------ ------------ --------------- Actual $ 1,000 $ 1,014.13 $ 5.06 Hypothetical (5% return per year before expenses) $ 1,000 $ 1,020.11 $ 5.08
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.00%, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). SEQUOIA FUND, INC. SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 COMMON STOCKS (90.79%)
VALUE SHARES (NOTE 1) ------ ----------------- AUTO & HOME SUPPLY STORES (1.07%) 896,915 O'Reilly Automotive Inc.* $ 40,406,021 ----------------- BANK HOLDING COMPANIES (5.62%) 4,455,511 Fifth Third Bancorp 210,656,560 9,921 Mercantile Bankshares Corporation 517,876 ----------------- 211,174,436 ----------------- BUILDING MATERIALS (3.56%) 2,175,067 Fastenal Company 133,897,125 ----------------- COMPUTER PROGRAMMING SERVICES (1.52%) 2,203,879 GTECH Holdings Corporation 57,190,660 ----------------- CHEMICAL DIAGNOSTIC SUBSTANCES (2.31%) 1,589,551 IDEXX Laboratories Inc* 86,773,589 ----------------- DIVERSIFIED COMPANIES (35.31%) 15,104 Berkshire Hathaway Inc. Class A* 1,327,641,600 126 Berkshire Hathaway Inc. Class B* 369,936 ----------------- 1,328,011,536 ----------------- FREIGHT TRANSPORTATION (2.83%) 1,905,533 Expeditors International of Washington, Inc. 106,481,184 ----------------- HOME FURNISHINGS (1.97%) 1,855,059 Ethan Allen Interiors, Inc.+ 74,239,461 ----------------- INSURANCE AGENTS & BROKERS (1.76%) 1,524,207 Brown & Brown Inc. 66,379,215 ----------------- INSURANCE (12.64%) 5,603,253 Progressive Corporation -- Ohio 475,379,985 ----------------- MANUFACTURING (0.51%) 314,531 Harley Davidson, Inc. 19,107,758 ----------------- MEDICAL & HOSPITAL EQUIPMENT (0.15%) 126,726 Patterson Companies Inc.* 5,498,641 ----------------- TEXTILE -- CARPETS (8.38%) 3,455,247 Mohawk Industries Inc.+* 315,291,289 -----------------
VALUE SHARES (NOTE 1) ------ ----------------- PROCESS CONTROL INSTRUMENTS (0.62%) 405,360 Danaher Corporation $ 23,271,718 ----------------- RETAILING (12.54%) 42,001 Costco Wholesale Corporation 2,033,268 97,260 Petsmart Inc. 3,455,648 1,229,591 Tiffany & Company 39,310,024 12,042,702 TJX Companies, Inc. 302,633,101 724,603 Wal-Mart Stores Inc. 38,273,530 2,237,113 Walgreen Company 85,838,026 ----------------- 471,543,597 ----------------- TOTAL COMMON STOCKS (COST $1,068,684,011) $ 3,414,646,215 ----------------- PRINCIPAL AMOUNT --------- U.S. GOVERNMENT OBLIGATIONS (9.21%) $ 347,000,000 U.S. Treasury Bills due 01/13/05 through 02/10/05 346,596,120 ----------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $346,596,120) 346,596,120 ----------------- TOTAL INVESTMENTS (100%)++ (Cost $1,415,280,131) $ 3,761,242,335 =================
- ---------- ++ The cost for federal income tax purposes is identical. * Non-income producing. + Refer to Note 7. The accompanying notes form an integral part of these Financial Statements. SEQUOIA FUND, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 ASSETS: Investments in securities, at value (cost $1,415,280,131) (Note 1) $ 3,761,242,335 Cash on deposit with custodian 6,254,519 Receivable for capital stock sold 590,714 Dividends receivable 1,764,016 Receivable for investments securities sold unsettled 11,338,360 Other assets 40,605 ----------------- Total assets 3,781,230,549 ----------------- LIABILITIES: Payable for capital stock repurchased 485,896 Payable for investments securities purchased unsettled 4,990,319 Accrued investment advisory fee 3,214,319 Accrued other expenses 157,114 ----------------- Total liabilities 8,847,648 ----------------- Net assets applicable to 24,452,419 shares of capital stock outstanding (Note 4) $ 3,772,382,901 ================= Net asset value, offering price and redemption price per share $ 154.27 =================
The accompanying notes form an integral part of these Financial Statements. SEQUOIA FUND, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 INVESTMENT INCOME: Income: Dividends: Unaffiliated companies $ 14,651,546 Affiliated companies (Note 7) 6,828,323 Interest 4,010,882 Other income 7,309 ---------------- Total income 25,498,060 ---------------- Expenses: Investment advisory fee (Note 2) 39,539,826 Legal and auditing fees 168,623 Stockholder servicing agent fees 441,850 Custodian fees 80,000 Directors fees and expenses (Note 6) 194,565 Other 195,936 ---------------- Total expenses 40,620,800 Less expenses reimbursed by Investment Adviser (Note 2) 931,000 ---------------- Net expenses 39,689,800 ---------------- Net investment (loss) (14,191,740) ---------------- REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: Realized gain on investments: Unaffiliated companies 283,983,148 Affiliated companies (Note 7) 12,785,984 ---------------- Net realized gain on investments $ 296,769,132 Net (decrease) in unrealized appreciation on investments (106,708,915) Net realized and unrealized gain on investments 190,060,217 ---------------- Increase in net assets from operations $ 175,868,477 ================
The accompanying notes form an integral part of these Financial Statements. SEQUOIA FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: From operations: Net investment (loss) $ (14,191,740) $ (16,725,720) Net realized gains 296,769,132 308,007,558 Net (decrease)/increase in unrealized appreciation (106,708,915) 292,183,274 ----------------- ----------------- Net increase/(decrease) in net assets from operations 175,868,477 583,465,112 Distributions to shareholders from: Net investment income 0 0 Net realized gains (5,637,360) (16,944,455) Capital share transactions (Note 4) (371,435,383) (498,069,470) ----------------- ----------------- Total (decrease)/increase (201,204,266) 68,451,187 NET ASSETS: Beginning of year 3,973,587,167 3,905,135,980 ----------------- ----------------- End of year $ 3,772,382,901 $ 3,973,587,167 ================= ================= NET ASSETS CONSIST OF: Capital (par value and paid in surplus) $ 1,347,326,752 $ 1,515,277,416 Undistributed net realized gains (Note 5) 79,093,945 5,638,632 Unrealized appreciation 2,345,962,204 2,452,671,119 ----------------- ----------------- Total Net Assets $ 3,772,382,901 $ 3,973,587,167 ================= =================
The accompanying notes form an integral part of these Financial Statements. SEQUOIA FUND, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: Sequoia Fund, Inc. is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. The investment objective of the Fund is growth of capital from investments primarily in common stocks and securities convertible into or exchangeable for common stock. The following is a summary of significant accounting policies, consistently followed by the Fund in the preparation of its financial statements. A. VALUATION OF INVESTMENTS: Investments are carried at market value or at fair value as determined by the Board of Directors. Securities traded on a national securities exchange are valued at the last reported sales price on the principal exchange on which the security is listed on the last business day of the period; securities traded in the over-the-counter market are valued in accordance with NASDAQ Official Closing Price on the last business day of the period; listed securities and securities traded in the over-the-counter market for which no sale was reported on that date are valued at the mean between the last reported bid and asked prices; U.S. Treasury Bills with remaining maturities of 60 days or less are valued at their amortized cost. U.S. Treasury Bills that when purchased have a remaining maturity in excess of sixty days are stated at their discounted value based upon the mean between the bid and asked discount rates until the sixtieth day prior to maturity, at which point they are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS: Investment transactions are accounted for on the trade date and dividend income is recorded on the ex-dividend date. Interest income is accrued as earned. Premiums and discounts on fixed income securities are amortized over the life of the respective security. The net realized gain or loss on security transactions is determined for accounting and tax purposes on the specific identification basis. C. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its stockholders. Therefore, no federal income tax provision is required. D. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. E. GENERAL: Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. NOTE 2--INVESTMENT ADVISORY CONTRACTS AND PAYMENTS TO INTERESTED PERSONS: The Fund retains Ruane, Cunniff & Goldfarb Inc., (formerly Ruane, Cunniff & Co., Inc.), as its investment adviser. Ruane, Cunniff & Goldfarb Inc. (Investment Adviser) provides the Fund with investment advice, administrative services and facilities. Under the terms of the Advisory Agreement, the Investment Adviser receives a management fee equal to 1% per annum of the Fund's average daily net asset values. This percentage will not increase or decrease in relation to increases or decreases in the net asset value of the Fund. Under the Advisory Agreement, the Investment Adviser is obligated to reimburse the Fund for the amount, if any, by which the operating expenses of the Fund (including the investment advisory fee) in any year exceed the sum of 1-1/2% of the average daily net asset values of the Fund during such year up to a maximum of $30,000,000, plus 1% of the average daily net asset values in excess of $30,000,000. The expenses incurred by the Fund exceeded the percentage limitation during the year ended December 31, 2004 and the Investment Adviser reimbursed the Fund $931,000. Such reimbursement is not subject to recoupment by the Investment Adviser. For the year ended December 31, 2004, there were no amounts accrued or paid to interested persons, including officers and directors, other than advisory fees of $39,539,826 to Ruane, Cunniff & Goldfarb Inc. and brokerage commissions of $336,123 to Ruane, Cunniff & Goldfarb LLC. Certain officers of the Fund are also officers of the Investment Adviser and the Fund's distributor. Ruane, Cunniff & Goldfarb LLC, the Fund's distributor, received no compensation from the Fund on the sale of the Fund's capital shares during the year ended December 31, 2004. NOTE 3--PORTFOLIO TRANSACTIONS: The aggregate cost of purchases and the proceeds from the sales of securities, excluding U.S. government obligations, for the year ended December 31, 2004 were $361,180,596 and $537,871,098, respectively. Included in proceeds of sales is $307,677,376 representing the value of securities distributed as in-kind payment of redemptions, resulting in realized gains of $217,676,459. At December 31, 2004 the aggregate gross unrealized appreciation of securities was $2,345,962,204. NOTE 4--CAPITAL STOCK: At December 31, 2004 there were 100,000,000 shares of $.10 par value capital stock authorized. Transactions in capital stock were as follows:
2004 2003 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- Shares sold 937,018 $ 142,174,969 1,275,248 $ 166,839,514 Shares issued to stockholders on reinvestment of: Net investment income -- -- -- -- Net realized gain on investments 31,351 4,737,104 111,262 14,470,754 ---------- -------------- ---------- -------------- 968,369 146,912,073 1,386,510 181,310,268 Shares repurchased 3,435,889 518,347,456 5,304,441 679,379,738 ---------- -------------- ---------- -------------- Net (decrease) (2,467,520) $ (371,435,383) (3,917,931) $ (498,069,470) ========== ============== ========== ==============
NOTE 5--DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are determined in accordance with federal tax regulations and may differ from those determined for financial statement purposes. To the extent these differences are permanent such amounts are reclassified within the capital accounts based on federal tax regulations. During the year ended December 31, 2004 permanent differences due to a net investment loss not deductible for tax purposes and realized gains on redemptions in kind not recognized for tax purposes resulted in a net decrease in net accumulated investment loss of $14,191,740 and undistributed net realized gains of $217,676,459 with a corresponding increase in paid in surplus of $203,484,719. These reclassifications had no effect on net assets. The tax character of distributions paid during 2003 and 2004 was as follows:
2004 2003 ------------ -------------- Distributions paid from: Ordinary income $ -- $ -- Long-term capital gains 5,637,360 16,944,455 ------------ -------------- Total distributions $ 5,637,360 $ 16,944,455 ============ ==============
As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: Undistributed long-term gain $ 79,093,945 Unrealized appreciation 2,345,962,204 ---------------- $ 2,425,056,149 ================
NOTE 6--DIRECTORS FEES AND EXPENSES: Directors who are not deemed "interested persons" receive fees of $6,000 per quarter and $2,500 for each meeting attended, and are reimbursed for travel and other out-of-pocket disbursements incurred in connection with attending directors meetings. The total of such fees and expenses paid by the Fund to these directors for the year ended December 31, 2004 was $194,565. NOTE 7--AFFILIATED COMPANIES: Portfolio companies 5% or more of whose outstanding voting securities are held by the Fund are defined in the Investment Company Act of 1940 as "affiliated companies." The total value and cost of investments in affiliates at December 31, 2004 aggregated $389,530,750 and $206,205,899, respectively. The summary of transactions for each affiliate during the period of their affiliation for the year ended December 31, 2004 is provided below:
PURCHASES SALES ------------------- ----------------------- REALIZED DIVIDEND AFFILIATE SHARES COST SHARES COST GAIN INCOME - --------- ------ ---------- ------- ------------- ------------- ------------ Ethan Allen Interiors, Inc. 22,500 $ 838,700 175,181 $ 4,377,572 $ 2,178,762 $ 6,828,323 Mohawk Industries Inc. -- -- 284,386 $ 12,780,080 10,607,222 -- ------------- ------------ $ 12,785,984 $ 6,828,323 ============= ============
NOTE 8--FINANCIAL HIGHLIGHTS:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per Share Operating Performance (for a share outstanding throughout each year) Net asset value, beginning of year $ 147.61 $ 126.63 $ 130.24 $ 122.09 $ 127.27 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment (loss)/income (0.58) (0.62) (0.41) 0.97 1.66 Net realized and unrealized gains (losses) on investments 7.45 22.21 (3.03) 11.52 23.33 ---------- ---------- ---------- ---------- ---------- Total from investment operations 6.87 21.59 (3.44) 12.49 24.99 ---------- ---------- ---------- ---------- ---------- Less distributions: Dividends from net investment income (0.00) (0.00) (0.01) (0.97) (1.66) Distributions from net realized gains (0.21) (0.61) (0.16) (3.37) (28.51) ---------- ---------- ---------- ---------- ---------- Total distributions (0.21) (0.61) (0.17) (4.34) (30.17) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 154.27 $ 147.61 $ 126.63 $ 130.24 $ 122.09 ========== ========== ========== ========== ========== Total Return 4.7% 17.1% -2.6% 10.5% 20.1% Ratios/Supplemental data Net assets, end of year (in millions) $ 3,772.4 $ 3,973.6 $ 3,905.1 $ 4,230.1 $ 3,943.9 Ratio to average net assets: Expenses 1.0% 1.0% 1.0% 1.0% 1.0% Net investment income (loss) -0.4% -0.5% -0.3% 0.8% 1.2% Portfolio turnover rate 6% 3% 8% 7% 36%
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Sequoia Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Sequoia Fund, Inc. (the "Fund") at December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 22, 2005 INFORMATION ABOUT SEQUOIA FUND OFFICERS AND DIRECTORS: The SAI includes additional information about Fund directors and is available, without charge, upon request. You may call toll-free 1-800-686-6884 to request the SAI.
OTHER TERM OF OFFICE AND PRINCIPAL DIRECTORSHIPS POSITION HELD LENGTH OF TIME OCCUPATION DURING HELD BY NAME, AGE, AND ADDRESS WITH FUND SERVED PAST 5 YEARS DIRECTOR - ---------------------- ------------- ------------------ ----------------- ------------- William J. Ruane, 79 Chairman of the Term -- 1 Year & Chairman of the None 767 Fifth Avenue Board & Director Length of Time Board & Director of New York, NY 10153 served -- 34 Years Ruane, Cunniff & Goldfarb Inc. Richard T. Cunniff, 81 Vice Chairman & Term -- 1 Year & Vice Chairman & Sturm, 767 Fifth Avenue Director Length of Time Director of Ruane, Ruger & New York, NY 10153 served -- 34 Years Cunniff & Goldfarb Company, Inc. Inc. Robert D. Goldfarb, 60 President & Director Term -- 1 Year & President & Director None 767 Fifth Avenue Length of Time of Ruane, Cunniff & New York, NY 10153 served -- 26 Years Goldfarb Inc. David M. Poppe, 40 Executive Vice Term -- 1 Year & Research Analyst of None 767 Fifth Avenue President & Director Length of Time Ruane, Cunniff & New York, NY 10153 served -- 2 Years Goldfarb Inc.; Business reporter Miami Herald Joseph Quinones, Jr., 59 Vice President, Term -- 1 Year & Vice President, None 767 Fifth Avenue Secretary, Length of Time Secretary, New York, NY 10153 Treasurer & Chief served -- 9 Years Treasurer & Chief Compliance Officer Compliance Officer of Ruane, Cunniff & Goldfarb Inc. Francis P. Matthews, 82 Director Term -- 1 Year & Retired None 767 Fifth Avenue Length of Time New York, NY 10153 served -- 32 Years C. William Neuhauser, 78 Director Term -- 1 Year & Retired None 767 Fifth Avenue Length of Time New York, NY 10153 served -- 30 Years Robert L. Swiggett, 82 Director Term -- 1 Year & Retired None 767 Fifth Avenue Length of Time New York, NY 10153 served -- 34 Years Sharon Osberg, 55 Director Term -- 1 Year & Consultant Internet None 767 Fifth Avenue Length of Time Mobile Technology New York, NY 10153 served -- 0 Years
OTHER TERM OF OFFICE AND PRINCIPAL DIRECTORSHIPS POSITION HELD LENGTH OF TIME OCCUPATION DURING HELD BY NAME, AGE, AND ADDRESS WITH FUND SERVED PAST 5 YEARS DIRECTOR - ---------------------- ------------- ------------------ ----------------- ------------- Roger Lowenstein, 50 Director Term -- 1 Year & Writer major None 767 Fifth Avenue Length of Time Financial and News New York, NY 10153 served -- 6 Years Publications Vinod Ahooja, 53 Director Term -- 1 Year & Retired None 767 Fifth Avenue Length of Time New York, NY 10153 served -- 4 Years
OTHER INFORMATION The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC's web site at http://www.sec.gov. The Fund's Form N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. For information regarding the operation of the SEC's Public Reference Room, call 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly, semiannual or annual report on Sequoia Fund's web site at http://www.sequoiafund.com/fund_reports.htm. You may obtain a description of the Fund's proxy voting policies and procedures, and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge. Visit Sequoia Fund's web site at www.sequoiafund.com and use the "Shareholder Information" link to obtain all proxy information. This information may also be obtained from the Securities and Exchange Commission's web site at www.sec.gov. This page was intentionally left blank. SEQUOIA FUND, INC. 767 FIFTH AVENUE, SUITE 4701 NEW YORK, NEW YORK 10153-4798 WEBSITE: www.sequoiafund.com DIRECTORS William J. Ruane Richard T. Cunniff Robert D. Goldfarb David M. Poppe Vinod Ahooja Roger Lowenstein Francis P. Matthews C. William Neuhauser Sharon Osberg Robert L. Swiggett OFFICERS William J. Ruane -- CHAIRMAN OF THE BOARD Richard T. Cunniff -- VICE CHAIRMAN Robert D. Goldfarb -- PRESIDENT David M. Poppe -- EXECUTIVE VICE PRESIDENT Joseph Quinones, Jr. -- VICE PRESIDENT, SECRETARY, TREASURER & CHIEF COMPLIANCE OFFICER INVESTMENT ADVISER Ruane, Cunniff & Goldfarb Inc. 767 Fifth Avenue, Suite 4701 New York, New York 10153-4798 DISTRIBUTOR Ruane, Cunniff & Goldfarb LLC 767 Fifth Avenue, Suite 4701 New York, New York 10153-4798 CUSTODIAN The Bank of New York MF Custody Administration Department One Wall Street, 25th Floor New York, New York 10286 REGISTRAR AND SHAREHOLDER SERVICING AGENT DST Systems, Inc. P.O. Box 219477 Kansas City, Missouri 64121 LEGAL COUNSEL Seward & Kissel One Battery Park Plaza New York, New York 10004 This report has been prepared for the information of shareholders of Sequoia Fund, Inc. ITEM 2. CODE OF ETHICS. As of the end of the period covered by this report, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. During the period covered by this report, no substantive amendments were approved or waivers were granted to the code of ethics. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The registrant's Board of Directors has determined that the registrant does not have an audit committee financial expert serving on its audit committee. The registrant's Board of Directors has determined that, based on the background and extensive experience of each of the members of the audit committee in the financial services industry, a designated audit committee financial expert is unnecessary. The members of the audit committee are well-known and respected members of the investment management industry and the registrant is satisfied that their collective knowledge and experience is sufficient for them to perform their duties as audit committee members. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) - (d) Aggregate fees billed to the registrant for the last two fiscal year for professional services rendered by the registrant's independent auditor were as follows: December 31, 2004 December 31, 2003 ----------------- ----------------- Audit Fees $39,000 $36,000 Audit-Related Fees n/a n/a Tax Fees $4,000 $3,150 Other Fees n/a n/a Audit fees include amounts related to the audit of the registrant's annual financial statements and services normally provided by the auditor in connection with statutory and regulatory filings. Tax fees include amounts related to tax compliance and tax advice. (e)(1) The registrant's audit committee has the responsibility to pre-approve all audit and non-audit services provided to the registrant by its independent auditor in advance at regularly scheduled audit committee meetings. The registrant's audit committee also has the responsibility to pre-approve all non-audit services provided by the registrant's independent auditor to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant, in advance at regularly scheduled audit committee meetings. (e)(2) No services included in (b)-(d) were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) Not applicable. (g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant's independent auditor for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $75,000 and $54,120, respectively. (h) The registrant's audit committee has considered the provision of non-audit services that were rendered to its investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant and that were not pre-approved and determined that those services are compatible with maintaining the independent auditor's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 10. CONTROLS AND PROCEDURES. (a)(i) The registrant's principal executive officer and principal financial officer have concluded that as of a date within 90 days of the filing of this report there were no significant deficiencies in the design or operation of the disclosure controls and procedures of the registrant which would have adversely affected the ability of the registrant to record, process, summarize and report the subject matter contained in this report. (a)(ii) There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 11. EXHIBITS. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is attached. (a)(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act, is attached. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEQUOIA FUND, INC. By: /s/ Robert D. Goldfarb ------------------------------ Robert D. Goldfarb President and Principal Executive Officer Date: February 24, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert D. Goldfarb ------------------------------ Robert D. Goldfarb President and Principal Executive Officer Date: February 24, 2005 By: /s/ Joseph Quinones, Jr. --------------------------- Joseph Quinones, Jr. Vice President, Secretary, Treasurer Date: February 24, 2005 EX-99.CERT 2 ex99cert.txt Exhibit 12(a)(2) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Robert D. Goldfarb, President and President and Principal Executive Officer of Sequoia Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Sequoia Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal controls over financial reporting (as defined in Rule 30a-3(d) of the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2005 /s/ Robert D. Goldfarb ---------------------- Robert D. Goldfarb President and Principal Executive Officer Exhibit 12(a)(2) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Joseph Quinones, Jr., Vice President, Secretary & Treasurer of Sequoia Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Sequoia Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2005 /s/ Joseph Quinones ------------------- Vice President, Secretary & Treasurer EX-99.906 CERT 3 ex99906.txt Exhibit 12(b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Pursuant to 18 U.S.C. 1350, each of the undersigned, being the Principal Executive Officer and Principal Financial Officer of Sequoia Fund, Inc. (the "Registrant"), hereby certifies that, to the best of such officer's knowledge, the Registrant's report on Form N CSR for the period ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of, and for, the periods presented in the Report. Date: February 25, 2005 By: /s/ Robert D. Goldfarb - ----------------------------------------- President and Principal Executive Officer By: /s/ Joseph Quinones, Jr. - ----------------------------------------- Vice President, Secretary and Treasurer This certification is furnished as an exhibit solely pursuant to Item 12(b) of Form N-CSR and is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates this certification by reference. EX-99.CODE ETH 4 coe.txt Ruane, Cunniff & Goldfarb Inc., Ruane, Cunniff & Goldfarb LLC and Sequoia Fund, Inc. Code of Ethics -------------- (Amended and Restated as of December 13, 2004) 1. Introduction Ruane, Cunniff & Goldfarb Inc. ("Ruane Cunniff"), the Sequoia Fund, Inc. (the "Fund") and Ruane, Cunniff & Goldfarb LLC, the Fund's distributor, (the "Distributor") believe that adherence to the highest ethical standards is essential to maintaining the continuing confidence of its clients. Therefore, Ruane Cunniff, the Fund and the Distributor adopt the following Code of Ethics (the "Code") and Policies for Preventing Insider Trading (the "Insider Trading Policy") to establish procedures designed to address potential conflicts of interest resulting from the personal securities trading of employees, officers and directors of Ruane Cunniff, the Fund and the Distributor (collectively, "Covered Persons"). 2. Definitions The following definitions of underlined terms apply for purposes of the Code and the Insider Trading Policy in addition to the definitions contained elsewhere herein. (a) "Advisers Act" means the Investment Advisers Act of 1940, as amended. (b) "Beneficial Ownership" means ownership by any person who has or shares a direct or indirect financial interest in a Covered Security. (c) "Client" means any person or entity for which Ruane Cunniff provides advisory services and for which Ruane Cunniff receives an advisory fee. Independent Directors of the Fund who have Personal Accounts managed by Ruane Cunniff shall not be treated as "Clients" under the Code and the Insider Trading Policy. (d) "Company Act" means the Investment Company Act of 1940, as amended. (e) "Covered Security" means the instruments commonly known as securities (as set forth in Section 2(a)(36) of the Company Act) and includes any derivative of a security, commodities, options or forward contracts, but does not include shares of open-end investment companies registered under the Company Act (other than those for whom Ruane Cunniff acts as an investment adviser or the Distributor acts as principal underwriter), direct obligations of the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper, and high quality short term debt instruments, including repurchase agreements. (f) "Designated Supervisory Person" refers to Joe Quinones. (g) "Head of Trading" refers to Jim Berkery. (h) "Initial Public Offering" or "IPO" means an offering of securities registered under the Securities Act of 1933 (the "1933 Act"), the issuer of which, immediately before the registration, was not subject to the reporting requirements of the Securities Exchange Act of 1934. (i) "Insider Trading Policy" means the "Policies for Preventing and Detecting Insider Trading" adopted by Ruane Cunniff. (j) "Limited Offering" means an offering that is exempt from registration under the 1933 Act. (k) "Personal Account" means an account in which a Covered Person has any Beneficial Ownership. The Covered Person's Personal Accounts include accounts of: (i) the Covered Person's spouse (other than a legally separated or divorced spouse) or minor children, (ii) any person who resides with the Covered Person, and (iii) any other account (except a Client account) managed by the Covered Person. Notwithstanding the above, for purposes of this Code, Acacia Partners, L.P., Acacia Partners II, L.P and Acacia Institutional Partners, L.P. will not be treated as "Personal Accounts". (l) "Purchase" or "sale" of a Covered Security includes, among other things, the writing of an option to purchase or sell a Covered Security. (m) A Covered Security is "Under Active Consideration" for purchase or sale when it is subject to active analytical review in anticipation of developing or refining an investment opinion or it may be a candidate to be purchased or sold at or about at the current market price on behalf of a Client as determined by the Head of Trading. 3. Objectives of the Code (a) The Code is designed to ensure that the personal securities transactions of Covered Persons are conducted in accordance with the following standards: (i) A duty at all times to place first the interests of Clients; (ii) The requirement that all personal securities transactions be conducted consistent with the Code and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's responsibility and position of trust; and (iii) The fundamental standard that Covered Persons not take inappropriate advantage of their positions. (iv) The fundamental standard that all Covered Persons must comply with the federal securities laws (b) Prohibited Conduct. Even if a transaction is otherwise permitted by the Code, all Covered Persons are prohibited from: (i) acting in any manner to defraud any Client; (ii) making to any Client, to the Head of Trading or to a Designated Supervisory Person any untrue statement of a material fact or omitting to state to such person a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (iii) engaging in any act, practice or course of business which does or could defraud or deceive any Client; (iv) engaging in any manipulative practice with respect to any Client; or (v) revealing to any other person (except in the normal course of his or her duties on behalf of a Client) any information regarding securities transactions by any Client or the consideration by any Client or Ruane Cunniff of any such securities transactions. 4. Personal Trading Restrictions and Procedures (a) Transactions in Covered Securities must be effected in accordance with the following provisions: (i) Preclearance. Generally, all personal transactions in Covered Securities must be precleared. The Head of Trading (assuming that he has no personal interest in the subject transaction, if so, then a Designated Supervisory Person [or any qualified and properly registered assistant trader]) may approve the transaction if he concludes that the transaction is not likely to have any adverse economic impact on a Client. A preclearance request is made by completing the "Preclearance Request," a copy of which is attached. (ii) Black Out Period. - Preclearance requests will not be granted if there is a pending buy or sell order in that same Covered Security for any Client or if the Covered Security is Under Active Consideration for purchase or sale on behalf of a Client. (iii) Two-Day Waiting Period. Once a Covered Security is no longer Under Active Consideration for purchase or sale by a Client, Covered Persons may be permitted to buy or sell that Covered Security after a waiting period of two business days. The two day waiting period may be waived, in the sole discretion of the Head of Trading or a Designated Supervisory Person, under the following circumstances: (a) if an order by a Covered Person to purchase or sell a Covered Security would represent less than 5% of the average daily market trading volume for that Covered Security for the preceding three months (as determined and documented by the Head of Trading) and (b) if the Covered Person's order is a sell order, all Client orders within the prior two business days have been sell orders and no Client currently owns such Covered Security. In the event a decision is made to waive the waiting period, the basis of the decision must be reflected in writing on the approval form. (iv) Commingling of Covered Person Trades with Client Trades. Orders for Clients and Covered Persons for Covered Securities may not be commingled unless the Head of Trading has determined that commingling would not disadvantage any Client. (v) Board Service. Covered Persons who serve on the board of a publicly traded company or who have a material business relationship involving a Covered Security Under Active Consideration must disclose such board service or business relationship to the Head of Trading before recommending the purchase or sale of an affected Covered Security. (b) Personal transactions involving shares of the Fund are subject to the preclearance requirements in Section 4(a) of the Code. 5. Exempted Transactions (a) The requirements of Section 4(a)(i) through (iv) of the Code do not apply to: (i) purchases or sales of Covered Securities that are non-volitional on the part of either a Covered Person or a Client or are pursuant to an automatic reinvestment plan, such as a dividend reinvestment plan; and (ii) purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer's securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. (b) Shareholders of Ruane Cunniff and Members of the Distributor. A shareholder of Ruane Cunniff or a member of the Distributor who is not an employee, officer or director of Ruane Cunniff or a member, officer or manager of the Distributor, shall not be subject to the provisions of this Code unless the shareholder owns 25% or more of the outstanding voting securities of Ruane Cunniff or the Distributor, as appropriate. 6. Reporting (a) Personal Accounts to be maintained at Neuberger Berman. Personal Accounts should be maintained at Neuberger Berman, LLC ("Neuberger Berman"). Neuberger Berman will provide monthly reports to Ruane Cunniff regarding Covered Person trading. Each Covered Person who maintains a Personal Account at a broker other than Neuberger Berman must receive written approval for such account from the Designated Supervisory Person and must direct the broker to submit to the Designated Supervisory Person a duplicate copy of the confirmation of each personal transaction in Covered Securities in such Personal Account and a copy of the Covered Person's monthly or quarterly statements for the account. All such statements must be received by Ruane Cunniff, the Distributor or the Fund, as applicable, within 30 days after the close of the month or quarter covered by such statement. (b) Statement of Security Ownership. Covered Persons must, within ten (10) days of commencement of employment with Ruane Cunniff, the Distributor or the Fund, and annually thereafter, submit a statement to the Designated Supervisory Person listing all of the (i) the title and type, the exchange ticker symbol or CUSIP number (if applicable), number of shares and principal amount of Covered Securities in which the Covered Person has any Beneficial Ownership, (ii) business activities in which the Covered Person has a significant role (including any service as a director of a publicly traded company) and (iii) the names of the brokerage firms or banks where the Covered Person maintains a securities account and the date the account was established. The statement must be current as of a date no more than 30 days before the statement is submitted. Statements under this Section shall carry the date when submitted to the Designated Supervisory Person. (c) Annual Certification of Code. Each person subject to the Code and the Insider Trading Policy must certify annually that he or she has read and understands them, recognizes that he or she is subject thereto and has complied with their provisions and disclosed or reported all personal securities transactions required to be disclosed or reported thereunder. Such certificates and reports are to be given to the Designated Supervisory Person. (d) Confidentiality of Reports. All reports furnished pursuant to this Section will be kept confidential, subject to the rights of inspection by a Designated Supervisory Person, the Securities and Exchange Commission or other regulatory bodies and by other third parties pursuant to applicable law. (e) Acknowledgement of Receipt. The Designated Supervisory Person is responsible for providing each Covered Person with a copy of this Code and any amendments thereto. Each Covered Person is responsible for providing the Designated Supervisory Person with a written acknowledgement receipt of the Code and any amendments thereto. The Designated Supervisory Person is responsible for ensuring that all such written acknowledgements are received. 7. Prohibited Purchases and Sales and Reporting Requirements For Non-Employee Directors of Ruane Cunniff and the Fund and Managers of the Distributor (a) The requirements in Section 4(a)(i) - (iv) apply to an independent director of the Fund or an independent manager of the Distributor only if the director or manager had actual knowledge that during the 15-day period preceding or following a purchase or sale of a Covered Security in the director's or manager's Personal Account such Covered Security was Under Active Consideration for purchase or sale by a Client (for independent directors of Ruane Cunniff or independent managers of the Distributor) or the Fund (for independent directors of the Fund). Nevertheless, the requirements of Section 4(a)(ii)-(iv) above shall apply to transactions by or for any Personal Accounts of an independent director that are managed by Ruane Cunniff. (b) Independent directors of the Fund need not submit the confirmations and account statements described in Section 6(a) above unless the director knew or, in the ordinary course of fulfilling his or her official duties as a Fund director, should have known that during the 15-day period immediately before or after the director's transaction in a Covered Security, the Fund purchased or sold the Covered Security, or the Fund (or Ruane Cunniff on behalf of the Fund) considered purchasing or selling the Covered Security. (c) The statement described in Section 6(b) above shall not apply to independent directors of the Fund. 8. Sanctions Upon learning of a violation of the Code, Ruane Cunniff, may impose such sanctions as it deems appropriate, including, among other things, disgorgement of profits, censure, suspension or termination of service. Further, such violation may also be a violation of the federal securities laws or other federal and state laws. Any such person who is suspected of violating the Code should be reported immediately to a Designated Supervisory Person. 9. Recordkeeping (a) The Designated Supervisory Person will keep the following records: (i) a copy of each Code that is in effect, or at any time within the past five years was in effect, maintained in an easily accessible place; (ii) a record of any violation of the Code and of any action taken as a result of the violation, maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs; (iii) a copy of each report made by Covered Persons maintained for at least five years after the end of the fiscal year in which the report is made, the first two years in an easily accessible place; (iv) a record of all persons currently or within the past five years, who are or were required to make reports or who are or were responsible for reviewing these reports, maintained in an easily accessible place; and (v) a copy of all preclearance request approvals. A copy of every report required by this Section of the Code must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. 10. Administration of the Code (a) The Head of Trading or the Designated Supervisory Person will be responsible for approving Preclearance Requests. (b) The Designated Supervisory Person will be responsible for reviewing reports of securities holdings, brokerage confirmations and periodic statements to determine whether all Covered Persons are complying with the Code. (c) The Designated Supervisory Person will inform Covered Persons of their reporting and other obligations under the Code. (d) The Designated Supervisory Person will maintain a current list of all Covered Persons subject to the Code. (e) The Designated Supervisory Person will periodically report to the President of Ruane Cunniff regarding the administration of the Code. (f) The Designated Supervisory Person will submit a written report annually to the Board of Directors of the Fund (i) describing any issues arising under the Code since the last such report, including, but not limited to, information about material violations of the Code and sanctions imposed in response to the material violations; and (ii) certifying that Ruane Cunniff and the Distributor have each adopted procedures reasonably necessary to prevent relevant Covered Persons from violating the Code. Approved by action of Adviser's Board of Directors, Sequoia Fund, Inc's Board of Directors and the Board of Managers of the Distributor on December 13, 2004. By: /s/ Joseph Quinones, Jr. ------------------------- Joseph Quinones, Jr. Ruane, Cunniff & Goldfarb Inc. By: /s/ Joseph Quinones, Jr. -------------------- Joseph Quinones, Jr. Ruane Cunniff & Goldfarb LLC By: /s/ Joseph Quinones, Jr. ------------------------- Joseph Quinones, Jr. Sequoia Fund, Inc. EXHIBIT A RUANE, CUNNIFF & GOLDFARB INC. RUANE CUNNIFF & GOLDFARB LLC SEQUOIA FUND, INC. Request Date: Ruane, Cunniff & Goldfarb Inc. 767 Fifth Avenue, Suite 4701 New York, New York 10153-4798 PRECLEARANCE REQUEST -------------------- I hereby request preclearance for the following trade(s) for the account of : ------------------------------------------------- (Please print name* ) (Note Purchase or Sale) Security Number of Shares Broker Please signify your approval by signing below. Approved: - ---------------------------- ---------------------------------- Trading Desk Covered Person Signature - ---------- * Self, spouse or other family members (including minor children and adults living in the same household). This trading intention applies to current strategy for near-term execution (within 5 business days), allowing for market conditions and in accordance with the guidelines in the Code of Ethics of Ruane, Cunniff & Goldfarb Inc., Ruane Cunniff & Goldfarb LLC and Sequoia Fund, Inc. Note: Waive (2) day waiting period due to daily trading volume (see attached): (_) Waive (2) day waiting period; all customers' holdings in securities sold. (_) EXHIBIT B RUANE, CUNNIFF & Goldfarb INC. RUANE CUNNIFF & Goldfarb LLC POLICIES FOR PREVENTING AND DETECTING INSIDER TRADING SECTION I. INSIDER TRADING POLICY A. Introduction Ruane, Cunniff & Goldfarb Inc. (the "Adviser") and Ruane Cunniff & Goldfarb LLC (the "Distributor") (each, a "Firm" and together, the "Firms") seek to foster a reputation for integrity and professionalism. To further that goal, this Insider Trading Policy implements procedures to deter the misuse of material, nonpublic information in securities transactions. Trading securities while in possession of material, nonpublic information or improperly communicating that information to others may expose you to stringent penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years imprisonment. Finally, you may be sued by investors seeking to recover damages for insider trading violations. The Firms view seriously any violation of this Insider Trading Policy. Violations may constitute grounds for disciplinary sanctions, including dismissal. B. Scope of the Insider Trading Policy This Insider Trading Policy will be applied and interpreted broadly. This Insider Trading Statement applies to securities trading and information handling by directors, managers, officers and employees of the Firms including family members, and extends to activities within and outside their duties at the Firms. The law of insider trading is unsettled; an individual legitimately may be uncertain about the application of the Insider Trading Policy in a particular circumstance. Often, asking a single question can forestall disciplinary action or complex legal problems. You should direct any questions relating to the Insider Trading Policy to the Designated Supervisory Person. You also must notify the Designated Supervisory Person immediately if you have any reason to believe that a violation of the Insider Trading Policy has occurred or is about to occur. C. Insider Trading Policy The Firms forbid any officer, director, manager or employee from trading, either personally or on behalf of others, including accounts managed by the Adviser, on material nonpublic information or communicating material nonpublic information to others in violation of the law. This conduct is frequently referred to as "insider trading." Every officer, director, manager and employee must read and retain this Insider Trading Policy. Any questions regarding the Firms' policy and procedures should be referred to the Designated Supervisory Person. The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material nonpublic information to trade in securities (whether or not one is an "insider") or to communications of material nonpublic information to others. While the law concerning insider trading is not static, it is generally understood that the law prohibits: a. trading by an insider, while in possession of material nonpublic information, or b. trading by a non-insider, while in possession of material nonpublic information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated, or c. communicating material nonpublic information to others. The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this Policy Statement, you have any questions you should consult the Designated Supervisory Person. D. Who is an Insider? The concept of "insider" is broad. It includes officers, directors, managers and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, the Adviser or the Distributor may become a temporary insider of a company it advises or for which it performs other services. According to the Supreme Court, the company must expect the outsider to keep the disclosed nonpublic information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider. E. What is Material Information? Trading on insider information is not a basis for liability unless the information is material. Information is "material" when there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or if it is reasonably certain to have a substantial effect on the price of a company's securities. Information that officers, directors, managers and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. Material information does not have to relate to a company's business, but may also relate to the market for a company's securities. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Journal and whether those reports would be favorable or not. No simple "bright line" test exists to determine when information is material; assessments of materiality involve a highly fact-specific inquiry. For this reason, you should direct any questions about whether information is material to the Designated Supervisory Person. F. Contacts with Public Companies. For the Firms, contacts with public companies represent an important part of our research efforts and other services. For example, the Adviser may make investment decisions on the basis of the Adviser's conclusions formed through such contacts and analysis of publicly-available information. Difficult legal issues arise, however, when, in the course of these contacts, a Firm's employee or other person subject to this Insider Trading Policy becomes aware of material, nonpublic information. This could happen, for example, if a Firm employee serves as a director on the board of a publicly traded company, if a company's Chief Financial Officer prematurely discloses quarterly results to an analyst or if an investor relations representative makes a selective disclosure of adverse news to a handful of investors. In such situations, that Firm must make a judgment as to its further conduct. To protect yourself, our clients and the Firms, you should contact the Designated Supervisory Person immediately and before trading in the securities of a company on whose board you serve, if you believe that you may have received material, nonpublic information. G. Tender Offers. Tender offers represent a particular concern in the law of insider trading for two reasons. First, tender offer activity often produces extraordinary gyrations in the price of the target company's securities. Trading during this time period is more likely to attract regulatory attention (and produces a disproportionate percentage of insider trading cases). Second, the SEC has adopted a rule which expressly forbids trading and "tipping" while in possession of material, nonpublic information regarding a tender offer received from the tender offeror, the target company or anyone acting on behalf of either. The employees of the Firms and others subject to this Insider Trading Policy should exercise particular caution any time they become aware of nonpublic information relating to a tender offer. H. What is Nonpublic Information? Information is nonpublic until it has been effectively communicated to the market place. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public. I. Bases for Liability i. Fiduciary Duty Theory In 1980, the Supreme Court found that there is no general duty to disclose before trading on material nonpublic information, but that such a duty arises only where there is a fiduciary relationship. That is, there must be a relationship between the parties to the transaction such that one party has a right to expect that the other party will disclose any material nonpublic information or refrain from trading. Chiarella v. U.S., 445 U.S. 22 (1980). In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders: they can enter into a confidential relationship with the company through which they gain information (e.g., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders. However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be pecuniary, but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo. ii. Misappropriation Theory Another basis for insider trading liability is the "misappropriation" theory, where liability is established when trading occurs on material nonpublic information that was stolen or misappropriated from any other person. In U.S. v. Carpenter, supra, the Court found, in 1987, a columnist defrauded The Wall Street Journal when he stole information from the Journal and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory. J. Penalties for Insider Trading Penalties for trading on or communicating material nonpublic information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include: - civil injunctions - treble damages - disorgement of profits - jail sentences - fines for the person who committed the violation o up to three time the profit gains or loss avoided, whether or not the person actually benefited, and - fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gains or loss avoided. In addition, any violation of this Insider Trading Policy can be expected to result in serious sanctions by the Firms, including dismissal of the persons involved. SECTION II. PROCEDURES TO IMPLEMENT THE POLICY OF THE FIRMS The following procedures have been established to aid the officers, directors, managers and employees of the Firms in avoiding insider trading, and to aid the Firms in preventing, detecting and imposing sanctions against insider trading. Every officer, director, manager and employee of the Firms must follow these procedures or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties. If you have any questions about these procedures you should consult the Designated Supervisory Person. A. Identifying Insider Information Before trading for yourself or others, including accounts managed by the Adviser or for whom either of the Firms performs services, in the securities of a company about which you may have potential inside information, ask yourself the following questions: i. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially affect the market price of the securities if generally disclosed? ii. Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace by being published in Reuters, The Wall Street Journal or other publications of general circulation? If, after consideration of the above, you believe that the information is material and nonpublic, or if you have questions as to whether the information is material and nonpublic, you should take the following steps: i. Report the matter immediately to the Designated Supervisory Person. ii. Do not purchase or sell the securities on behalf of yourself or others, including accounts managed by the Adviser or for whom either of the Firms perform services. iii. Do not communicate the information inside or outside your Firm, other than to the Designated Supervisory Person. iv. After the Designated Supervisory Person has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information. B. Personal Securities Trading. The Firms have adopted a Code of Ethics (the "Code"), which, among other things, restricts personal securities trading and requires preclearance of personal securities transactions. Transactions permitted under the Code may nevertheless be prohibited under this Insider Trading Policy. All officers, directors, managers and employees of the Firms shall submit to the Designated Supervisory Person a report of every securities transaction in which they, their families (including the spouse, minor children and adults living in the same household as the officer, director, manager or employee), have a beneficial interest. C. High-Risk Trading Activities. Certain high-risk trading activities, if used in the management of the Firms' officers', directors', managers' or employees' personal trading portfolios are risky not only because of the nature of the securities transactions themselves, but also because of the potential that action necessary to close out the transaction may become prohibited during the pendency of the transactions. Examples of such activities include short sales of common stock and trading in derivative instruments such as option contracts to purchase ("call") or sell ("put") securities at certain predetermined prices. Officers, directors, managers and employees of either of the Firms should understand that short sales and trading in derivative instruments involve special risks--derivative instruments, for example, ordinarily have greater price volatility than the underlying security. The fulfillment of the obligations owned by each officer, director, manager and employee to the Firms may heighten those risks. For example, if a Firm becomes aware of material, nonpublic information about the issuer of the underlying securities, that Firm's personnel may find themselves "frozen" in a position in a derivative security. A Firm will not bear any losses resulting in personal accounts through the implementation of this Insider Trading Policy. D. Restricting Access to Material Nonpublic Information Information in your possession that you identify as material and nonpublic may not be communicated to anyone, including persons within either of the Firms, except as provided in paragraph 1 above. In addition, care should be taken so that such information is secure. For example, files containing material nonpublic information should be sealed; access to computer files containing material nonpublic information should be restricted, and conversations containing such information, if appropriate at all, should be conducted in private (for example not by cellular telephone), to avoid potential interception. E. Resolving Issues Concerning Insider Trading If, after consideration of the items set forth in paragraph 1, doubt remains as to whether information is material or nonpublic, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures, or as to the propriety of any action, it must be discussed with the Designated Supervisory Person before trading or communicating the information to anyone. F. Acknowledgment I have read and understand the foregoing procedures and will comply in all respects with such procedures. I understand that any violation of the Insider Trading Policy may lead to sanctions, including dismissal. - ------------------------------- ----------------------------------- NAME DATE SECTION III. SUPERVISORY PROCEDURES The roles of the Head of Trading and the Designated Supervisory Person are critical to the implementation and maintenance of the Firms' policy and procedures against insider trading. Supervisory Procedures can be divided into two classifications--prevention of insider trading and detection of insider trading. A. Prevention of Insider Trading To prevent insider trading, the Firms should: i. distribute and review the Firms' policy and procedures with new employees and periodically review them with existing directors, managers, officers and employees ii. answer questions regarding the Firms' policy and procedures iii. resolve issues of whether information received by an officer, director, manager or employee of a Firm is material and nonpublic iv. review on a regular basis and update as necessary the Firms' policy and procedures v. when it has been determined that an officer, director, manager or employee of a Firm has material nonpublic information a. implement measures to prevent dissemination of such information, and b. if necessary, restrict officer, directors, managers and employees from trading the securities. vi. promptly review and either approve or disapprove, in writing, each request of an officer, director, manager or employee for clearance to trade in specified securities. B. Detection of Insider Trading To detect insider trading, the Designated Supervisory Person should: i. Monitor trading activities of the relevant Firm's own account, if any, on a daily basis in addition to review of trade confirmations and monthly customer statements provided by any NASD Member broker-dealer with whom that Firm may establish an account (transactions in that Firm's account. ii. Monitor trading activities of a Firm's employees through review of duplicates of confirmations and customer statements provided by any NASD Member broker-dealer with whom the employee has an account (the Firms recommend that all employees maintain their Personal Accounts, as defined in Section 2 of the Firms' Code, at Neuberger Berman but if, with the written permission of the Designated Supervisory Person, a Personal Account is maintained at a brokerage firm other than Neuberger Berman, a duplicate of all brokerage confirmations should be sent to the Designated Supervisory Person. iii. Coordinate the review of such reports with other appropriate officers, directors, managers or employees of the appropriate Firm. iv. Promptly investigate all reports of any possible violations of the Firms' Policy and Statement. C. Special Reports Promptly, upon learning of a potential violation of the Firms' Insider Trading Policy, the Designated Supervisory Person should prepare a written report providing full details and recommendations for further action which may include any or all of the following: i. the name of particular securities involved, if any, ii. the date(s) the Designated Supervisory Person learned of the potential violation and began investigating, iii. the accounts and individuals involved, iv. actions taken as a result of the investigation, if any, and v. recommendations for further action. D. General Reports to Management and/or the Board of Directors or Managers On an as-needed or periodic basis, it may be useful for the Designated Supervisory Person to prepare a written report to the management and/or the Board of Directors of the Adviser or the Board of Managers of the Distributor setting forth some or all of the following: i. a summary of existing procedures to detect and prevent insider trading, ii. a summary of changes in procedures made in the last year, iii. full details of any investigation since the last report (either internal or by a regulatory agency) of any suspected insider trading, the results of the investigation and a description of any changes in procedures prompted by any such investigation, iv. an evaluation of the current procedures and a description of anticipated changes in procedures, and v. a description of each Firm's continuing educational program regarding insider trading, including the dates of such programs since the last report to management. E. Annual Reports On an annual basis, the Adviser's Board of Directors and the Board of Managers of the Distributor will re-evaluate the current policies and procedures in place. Approved by action of Adviser's Board of Directors and the Board of Managers of the Distributor on December 13, 2004. By: /s/ Joseph Quinones, Jr. ------------------------- Joseph Quinones, Jr. Ruane, Cunniff & Goldfarb Inc. By: /s/ Joseph Quinones, Jr. ------------------------ Joseph Quinones, Jr. Ruane Cunniff & Goldfarb LLC 69900.0020 #530303 -----END PRIVACY-ENHANCED MESSAGE-----