Antitrust Suit Could Not Target Investment Banks’ IPO Conduct: U.S. Supreme Court

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

The securities laws impliedly precluded the application of the antitrust laws to an alleged conspiracy among 10 leading investment banks, which acted as underwriters, forming syndicates that helped execute the initial public offerings (IPOs) of several hundred technology-related companies during the tech-stock boom of the late 1990s and 2000, the U.S. Supreme Court ruled on June 18.

The High Court reversed a decision of the U.S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,943) that rejected the implied immunity defense in its entirety and vacated a dismissal on immunity grounds.

As a result, a group of 60 investors cannot proceed with two antitrust class-action lawsuits challenging the IPO conduct of the investment banks between March 1997 and December 2000.

Incompatibility of Securities, Antitrust Laws

The antitrust suit was likely to prove practically incompatible with the Securities and Exchange Commission's administration of the nation’s securities laws, the Court ruled. The securities laws were “clearly incompatible” with the application of the antitrust laws in this context.

Four factors for determining whether a sufficient incompatibility between securities law and antitrust law warranted preclusion were present: (1) the challenged conduct—the underwriters efforts jointly to promote and to sell newly issued securities—fell squarely within the heartland of securities regulations; (2) there was clear and adequate Securities and Exchange Commission (SEC) authority to regulate virtually every aspect of the practices in which underwriters engage; (3) there was active and ongoing agency regulation of underwriter conduct; and (4) there was a serious conflict between the antitrust and regulatory regimes.

The conflict was present, even though the complaint was read as attacking underwriter practices (i.e., laddering, tying, collecting excessive commissions in the form of later sales of the issued shares) that were purportedly disapproved by the SEC.

A serious conflict between the application of the antitrust laws and the proper enforcement of the securities law was indicated by (1) the substantial risk of injury to the efficient functioning of securities markets that could result from an antitrust action in this context and (2) the diminished need for antitrust enforcement to address anticompetitive conduct.

The Court appeared concerned that permitting an antitrust suit in this situation would allow the plaintiffs “to dress what is essentially a securities complaint in antitrust clothing.”

Solicitor General’s Proposed Disposition

The Court rejected the Solicitor General’s suggestion that the case be remanded to the district court to determine whether the challenged conduct could be separated from conduct that was permitted by the SEC regulatory scheme. The Solicitor General’s proposed disposition did not “convincingly address” the Court's concerns with allowing antitrust courts to review syndicate practices important in the marketing of new issues.

Moreover, fears that the Court “might read the law as totally precluding application of the antitrust law to underwriting syndicate behavior, even were underwriters, say, overtly to divide markets” were unwarranted. The Court noted parenthetically that market divisions appeared to fall well outside the heartland of activities related to the underwriting process.

Concurring, Dissenting Opinions

Justice Stephen G. Breyer delivered the opinion of the Court, which was joined by six other Justices. Justice Anthony M. Kennedy took no part in the matter. Justice John Paul Stevens concurred with the judgment in a separate opinion, and Justice Clarence Thomas dissented.

Justice Stevens, in his concurring opinion, said that, rather than finding an implicit grant of immunity, he would have held “that the defendants’ alleged conduct does not violate the antitrust laws.” According to Justice Stevens, in all but the rarest of cases, agreements among underwriters on how best to market IPOs cannot be conspiracies in restraint of trade.

Moreover, as he did in his recent dissenting opinion in Bell Atlantic Corp. v. Trembly (2007-1 Trade Cases ¶75,709), Justice Stevens questioned the majority's decision to allow “the burdens of antitrust litigation” to “play any role in the analysis of the question of law presented.”

Justice Thomas "disagree[d] with that basic premise" that the securities statutes were silent in respect to antitrust and that the Court had to decide whether the securities laws implicitly preclude application of the antitrust laws.

“Both the Securities Act and the Securities Exchange Act contain broad saving clauses that preserve rights and remedies existing outside of the securities laws,” according to Justice Thomas. The majority quickly disposed of this argument saying: “Justice Thomas is wrong to regard §§77p(a) and 78bb(a) as saving clauses so broad as to preserve all antitrust actions.”

The opinion is Credit Suisse Securities (USA) LLC v. Billing, 05-1157, June 18, 2007. It will appear at 2007-1 Trade Cases ¶75,738.