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From Securities Regulation Daily, July 13, 2018

‘what the SEC giveth, the SEC taketh away’

By Amy Leisinger, J.D.

A Ninth Circuit panel affirmed a California district court’s dismissal of a lawsuit against Yahoo! and certain of its directors and officers alleging that the company was illegally operating as an unregistered investment company. The panel agreed with the district court that the Investment Company Act does not establish a private right of action for challenging the continued validity of an ICA exemption. "[W]hat the SEC giveth, the SEC taketh away," the panel stated (UFCW Local 1500 Pension Fund v. Mayer, July 12, 2018, Owens, J.).

Yahoo! exemption. In 2000, approximately 57 percent of Yahoo’s income came from its operating business, while approximately 44 percent came from investments, and the company applied for and obtained an SEC order exempting it from registering as an investment company. The Commission noted that Yahoo was "primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading securities." In the years since then, Yahoo!’s business has changed to reflect substantially more investment, particularly with regard to Chinese e-commerce company Alibaba.

A pension fund filed suit in January 2016 alleging that Yahoo! had violated the conditions of its registration exemption by investing in Alibaba, which should render the exemption void. According to the complaint, Yahoo! had been operating as an unregistered investment company in violation of the Investment Company Act since at least 2013. The fund sought to rescind certain Yahoo! officials’ employment contracts and enjoin the company from further performing contracts signed in violation of the Act. The court rejected this argument, finding that a federal court is not empowered to find that a company has lost the protection of an Investment Company Act exemption. It is the province of the SEC to determine when a company is no longer entitled to an exemption and not of the court, the court stated.

No private right of action. Investment Company Act Section 3(b)(2) authorizes the SEC to exempt a company from the Act’s requirements if it finds the company "to be primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities" and to revoke the exemption when it finds that the circumstances giving rise to the exemption no longer exist. The Investment Company Act does not establish a private right of action to challenge the validity of an exemption, the panel found. To create a private right of action, a statute must use rights-creating language, and the Act’s registration exemptions do not contain such language, the panel explained.

The panel also rejected the argument that Section 47(b) of the Act establishes a private right of action for challenging the continued validity of an exemption because this statute also provides no private right of action. The provision "merely establishes what it says: that contracts formed in violation of the ICA are usually unenforceable," the panel stated.

Further, permitting a legal challenge to an SEC exemption order could force the courts and the Commission into "a tellingly odd game of chicken," the panel opined.

Finding the all of the claims depend on the ability to challenge the continued validity of Yahoo!’s exemption, the court affirmed the dismissal of the complaint.

The case is No. 17-15435.

Attorneys: Peter S. Linden (Kirby Mclnerney LLP) and Adrian Sawyer (Kerr & Wagstaffe LLP) for UFCW Local 1500 Pension Fund. Mark Ryan Scott Foster (Morrison & Foerster LLP) for Marissa Mayer.

Companies: UFCW Local 1500 Pension Fund; Yahoo, Inc.

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