A complaint brought by closed end fund Gabelli Global Multimedia Trust, Inc. alleging violations of the anti-pyramiding provisions of the Investment Company Act was dismissed for a lack of standing. The defendants were Arthur Lipson and a group of investment companies he controlled. The Gabelli Global Multimedia Trust, Inc. v. Western Investment LLC., Civil No. RBD 10-0557 (D. Md.).

The complaint claimed that Mr. Lipson, through his controlled funds, pursued an arbitrage strategy of acquiring up to 3% of shares of closed-end funds such as plaintiff which sell at a discount to NAV. By having each entity acquire up to 3%, the defendants violated the Section 12(d)(1)(A) of the Investment Company Act, according to plaintiff.

Section 12(d)(1)(A) of the Act makes it unlawful for any registered investment company to own in the aggregate “any security issued by any other investment company . . . if the acquiring company and any company or companies controlled by it immediately after such purchase . . . own in the aggregate . . . more than 3% of the total outstanding voting stock of the acquired company.” The section does not contain an express cause of action.

The test for determining if a cause of action can be implied under a statutory section was defined by the Supreme Court in Alexander v. Sandoval, 532 U.S. 275 (2001). That case revamped the standards for implying a cause of action. There, the court held that the question is whether the statute illustrates an intent to create a private right of action and remedy. The statute must have specific “rights-creating” language. If that language is present, the court must determine whether the overall-statutory scheme demonstrates that primary responsibility for enforcement rests with the government or private parties.

Using the Sandoval approach the Second Circuit held in Olmsted v. Pruco Life Ins. Co. , 283 F.3d 429 (2nd Cir. 2002) that the section on which this case is based does not evidence an intent which would permit a court to imply a cause of action. The section does not contain the necessary rights-creating language. In addition, the fact that Congress created other specific private rights of actions in certain sections of the Act, but not the once the anti-pyramiding section, compels the result that a private right of action should not be implied here. Accordingly the complaint was dismissed.