Last week, UFCW Local 1500 Pension Fund filed a class action and derivative lawsuit against Yahoo! Inc., its board of directors and some of its current and former officers. (N.D. Cal. Case No. 3:16-cv-00478-RS). According to the complaint,
Yahoo describes itself as a global Internet new media company that offers a branded network of media, commerce, and communication services. However, as more fully described herein, Yahoo is primarily engaged in investing in publicly traded securities, with its combined ownership stake in two other companies, Yahoo! Japan Corporation (“Yahoo Japan”) and Alibaba Group Holding Limited (“Alibaba”), representing approximately 90% of Yahoo’s total assets.
As a company whose assets are and have been primarily invested in publicly traded securities, Yahoo is an investment company under the ICA. Yahoo has, however, failed to register as an investment company as required by the ICA, and is otherwise failing to comply with the structural limitations and the investor protection mandates of the ICA.
It is premature to make any observations about the merits (or lack thereof) of the complaint. The case, however, is a reminder that as companies shed operations, they may inadvertently fall within the definition of an "investment company" under the Investment Company Act of 1940.
One famous example of the transformation of an operating company into an investment company is SEC v. Fifth Avenue Coach Lines, Inc., 435 F.2d 510 (2d Cir. 1970). Fifth Avenue Coach Lines was once one of the largest transit systems in the United States. Then, the City of New York acquired all of Fifth Avenue's operating assets by condemnation. The company used the net condemnation proceeds to acquire interests in other companies but failed to register under the Investment Company Act. The SEC sued and obtained both a permanent injunction and the appointment of a receiver.
"We didn't start the fire . . ."
I've been intrigued by a different aspect of the Fifth Avenue case. One of the defendants was the late New York attorney Roy M. Cohn. His name may not be familiar to many today, but he once played a very prominent and controversial role in American public life. In 1951, Mr. Cohn was a prosecutor in the famous espionage trial of Julius and Ethel Rosenberg. His direct examination of Ethel's brother, David Greenglass, proved to be highly damaging to the couple, who were ultimately convicted and executed. Two years later, Senator Joseph McCarthy appointed Mr. Cohn to the Senate investigations subcommittee. Many years later, the State of New York disbarred Mr. Cohn and he died shortly thereafter.
