Antitrust lawyers and securities lawyers rarely pay attention to the same litigation. Billing v. Credit Suisse First Boston1 is a notable exception. Now on a petition for certiorari to the U.S. Supreme Court, Billing could have far-reaching consequences for both securities and antitrust law.
The high court recently asked the U.S. Solicitor General for the government's views on whether the process of selling new stocks after their initial offering (i.e., in the "aftermarket") is immune to antitrust challenge.2 The Solicitor General may have to choose sides: In the Court of Appeals, both the Securities and Exchange Commission ("SEC") and the Antitrust Division of the U.S. Department of Justice ("DOJ") participated as amici curiae – on opposite sides.
At stake in Billing is the standard for implied antitrust immunity in underwriting syndication for securities offerings, including IPOs, the process by which underwriters apportion the costs and risks of taking companies public. Underwriting firms (defendants below) assert that the standard should be potential conflict between the securities regulatory scheme and the antitrust laws. In September of last year, the Second Circuit sided with antitrust plaintiffs, a putative class of investors. Although the SEC is authorized to regulate market manipulations in securities markets, and has deemed "stabilizing" manipulations to be permissible, the court refused to recognize implied immunity, holding that such recognition would require proof that Congress specifically intended to immunize specific conduct, and that the SEC has power to compel the practices at issue.
The Dispute
In related consolidated cases, investors accused investment banks and underwriters of violating the Sherman Act, the Robinson-Patman Act, and various state antitrust laws by, among other things:
- Using the syndicate system to impose anticompetitive charges in order to inflate the aftermarket prices of securities.
- Engaging in impermissible aftermarket "laddering of a stock"3 and "tie-in"4 or quid pro quo arrangements on direct purchasers of initial public offering (IPO) shares.
- Giving preference to long-term investors over flippers5 when allocating hot issue IPO shares.
- Agreeing not to flip their shares in exchange for favorable IPO allocations
- Paying or receiving commissions for such allocations.
The SEC informed the district court that applying the antitrust laws in this case would conflict with, and seriously disrupt, its regulation of the securities offering process under the Securities Act of 1933 and Securities Exchange Act of 1934. Defendants moved to dismiss the antitrust claims on several grounds, including implied immunity. The district court granted the motion, but the Second Circuit reversed.
Implied Immunity
Courts are generally reluctant to find that Congress intended to repeal a statute, and particularly the antitrust laws, even for limited purposes. The Supreme Court has held that "repeals by implication are not favored."6 Since the Supreme Court, in the Silver case, first considered implied antitrust immunity for securities-related activity, two interpretive paths have developed.
- First, courts sometimes discern a regulatory scheme so pervasive as to preclude antitrust laws from applying.7
- Second, implied immunity has been found where a statute or regulation either requires or approves of the alleged activities, with a consequent potential for specific conflict between antitrust laws and a regulatory regime.8
According to the Billing district court, under the Supreme Court trilogy of implied immunity cases (i.e., Silver,9 Gordon,10 and NASD11) as interpreted by the Second Circuit in Friedman12 and Stock Exchanges Options,13 defendants’ conduct was impliedly immune from federal antitrust liability primarily due to the SEC’s authority to regulate that conduct, and immune from state antitrust liability because the securities laws preempt those state laws.
The Second Circuit: There is no Evidence That Congress Clearly Intended a Repeal of the Antitrust Laws and Immunization of Anticompetitive Tie-in Arrangements
But the Second Circuit reversed the dismissal in Billing and, without ruling on the merits, held that federal antitrust laws could apply to the securities industry.14 This reportedly marked the first time a court had rejected the SEC’s position advocating implied immunity.
The court determined "that the arguments on both sides proceed[ed] from fundamental, if understandable, misinterpretations of applicable precedents."15 After examining those precedents for itself, the Second Circuit summarily dismissed the defendants’ argument that SEC regulation is so pervasive as to compel immunity. It then applied a multi-factor test to determine whether implied immunity should be granted based on the potential for a specific conflict between antitrust laws and a regulatory regime. The court determined that no legislative history indicates that Congress intended to immunize the conduct at issue. Moreover, the court noted, "this is not a case . . . where the securities regime creates the potential for irreconcilable mandates,"16 and there is no evidence that the SEC has the ability to, or would, compel agreements of the type alleged.17
In addition, the court did not ascertain any provision in securities law that would be "render[ed] nugatory" if antitrust laws were to apply.18 Last, the court found no evidence that the SEC tolerated or authorized the alleged conduct at issue in any other situation. The court concluded that the doctrine of implied immunity does not apply.
Struggle Between the DOJ and the SEC
The SEC and the DOJ are on opposite sides of this case. "In a spat over turf as much as principle, the agencies are split over the primary legal issue in the case: whether heavily regulated industries, such as those policed by the SEC, have an implied immunity from antitrust enforcement."19
SEC lawyers argue that underwriters have implied immunity, even though the SEC does not contend that the alleged conduct is lawful under the securities laws. According to the SEC’s response to the Second Circuit’s invitation to file letter briefs, the SEC has expansive authority over the registered securities offering process based on Section 9(a) and other provisions of the Securities Exchange Act. In addition to being comprehensive, the SEC’s authority is also actively exercised. For example, the SEC is taking specific steps to investigate the alleged misconduct and to remedy any violations, if found. In addition, the NYSE/NASD IPO Advisory Committee, formed in October 2002, has proposed amendments to various regulations, which are intended to "prohibit certain activities by underwriters and other distribution participants that can undermine the integrity and fairness of the offering process."20 The SEC stresses that antitrust immunity is appropriate to protect the efficacy of the regulatory scheme, as established by Congress. Another concern of the SEC is that participants in the securities markets will be forced to focus on avoiding antitrust liability, as opposed to a more constructive focus on complying with securities laws; this "in terrorem effect of [antitrust] liability could distort market participant behavior in ways that are harmful to the overall securities market."21
The DOJ, recognized as having an institutional opposition to antitrust immunity, maintains implied immunity is unavailable in this case because the SEC does not expressly regulate the alleged behavior. In addition, the DOJ maintains that the SEC has never authorized tying and laddering; as a result, "there is no demonstrated "potential for regulatory permission of the conduct at issue"" and "no proper basis for finding a conflict."22 The DOJ does not view enforcement of antitrust laws in the context of laddering and tying allegations to have the potential to interfere with the SEC’s capacity to regulate or exempt from regulation.
The district court sided with the SEC, and indicated that the SEC should have absolute authority when it comes to conduct directly affecting the securities market. However, the Second Circuit favored the DOJ. It remains to be seen how the agencies will fare with the Supreme Court – if the Court takes the case. In June, the Supreme Court granted cert. in two other antitrust cases.23
Implications if the Supreme Court Does Not Grant Certiorari
Many believe it is likely that the Supreme Court will grant certiorari, because this is the first time the SEC's position on immunity has been rejected by a circuit court, the case "is at least facially inconsistent" with earlier Supreme Court decisions, and there is the imminent prospect of multibillion-dollar litigation.24 However, if the Supreme Court does not grant certiorari and lets the Second Circuit’s decision stand, there are several implications for securities firms.
One of the biggest risks is that many allegations of securities fraud could include antitrust counts, and plaintiffs may be able to escape early dismissal in litigation if they demonstrate that the alleged fraud is of a type Congress intended to ban when it passed the securities laws. Litigation risks for defendants would consequentially be heightened in two regards.
- First, the heightened pleading requirements of the Private Securities Litigation Reform Act25 do not apply to antitrust counts.
- Second, prevailing plaintiffs in antitrust cases are awarded treble damages and attorneys fees.26
So, if the Second Circuit’s decision stands, there is a concern that massive litigation costs and settlements induced solely because of these massive risks will plague securities defendants. Moreover, this decision sets the standard fairly high for antitrust immunity. Another concern is that the Second Circuit opinion creates confusion regarding the standard for implied immunity, which will lead to "a flood of new antitrust class action litigation," and drain the judicial resources of the federal courts.27
The Securities Industry Association and the Bond Market Association are also alarmed by the potential implications of the Second Circuit’s holding. In their amicus brief to the Supreme Court, the associations characterized the ruling as "an indiscriminate attack on long-standing techniques for raising capital," and referred to the lawsuit as "a frontal assault on one of the linchpins of the private economy."28
SEC Commissioner Paul Atkins, whose recent writings on the case have been formally submitted as a supplemental brief to the court, maintains that a detailed regulatory framework for the securities industry already exists, which should preclude the application of federal antitrust laws. Atkins cites to a recent Supreme Court decision, Verizon v. Trinko29, for this proposition. Atkins asserts that he and the SEC "already act as vigilant watchdogs and protect against collusive practices without the undue costs of imposing federal antitrust law." Atkins warns that the plaintiffs’ bar could use the antitrust laws "to strike a blow to the American capital markets, which already are suffering under the weight of new regulatory burdens."30
On the other hand, respondents argue that "wise prosecution of [antitrust] law has historically aided and promoted capital formation," whereas the "defendants’ pernicious conspiracies destroy capital formation and are not necessarily policed by the SEC."31
Pending a final decision in this case, it would be wise for firms "to continue and enhance their antitrust compliance programs in areas where conduct involving two or more firms is involved." It is also important for firms to sensitize their personnel regularly in contact with competitors about "antitrust pitfalls" and ways to avoid them.32
Live Links
Docket No. 05-1157, Credit Suisse First Boston Ltd., et al., Petitioners v. Glen Billing, et al., Supreme Court of the United States
The Free Dictionary
Top court may rule on IPO groups, The Deal.com
SEC Commish Begs Supremes: Protect Us From Pesky Antitrust Laws, The Wall Street Journal Online
Is Securities Fraud Actionable Under the Antitrust Laws?, Real Corporate Lawyer
Endnotes
1. 426 F.3d 130 (2d Cir. 2005).
2. See
http://www.supremecourtus.gov/docket/05-1157.htm.3. "The promotion of inflated pre-IPO prices for the sake of obtaining a greater allotment of the offering." (available at http://financialdictionary. thefreedictionary.com)
4. Agreements whereby the underwriters demand extra payment or other commitments, in excess of the actual stock price, from investors who seek allocations in hot initial offerings. (Hamblett, Mark, 2nd Circuit Reinstates Lawsuit in "Epic" Stock Conspiracy, NY Law Journal, Sept. 29, 2005).
5. "A short-term investor or day trader who buys pre IPO shares, swiftly spinning them out into public markets for a quick profit." (available at
http://financial-dictionary.thefreedictionary.com)6. Silver v. New York Stock Exch., 373 U.S. 341, 357 (1963).
7. Gordon v. New York Stock Exch., 422 U.S. 659 (1975).
8. United States v. National Ass’n of Sec. Dealers, 422 U.S. 694 (1975) (NASD).
9. Silver v. New York Stock Exch., 373 U.S. 341 (1963).
10. Gordon v. New York Stock Exch., 422 U.S. 659 (1975).
11. United States v. National Ass’n of Sec. Dealers, 422 U.S. 694 (1975) (NASD).
12. Friedman v. Salomon/Smith Barney, Inc., 313 F.3d 796 (2d Cir. 2002).
13. In re Stock Exch. Options Trading Antitrust Litig., 317 F.3d 134 (2d Cir. 2003).
14. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130 (2d Cir. 2005).
15. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130, 168 (2d Cir. 2005)
16. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130, 169 (2d Cir. 2005).
17. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130, 168 (2d Cir. 2005).
18. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130, 169 (2d Cir. 2005).
19. Cecile Kohrs Lindell, Top court may rule on IPO groups, June 15, 2006 (available at
http://www.thedeal.com/servlet/ContentServer?cid=1150079879747&pagename=hpa&c=TDDArticle&p=M4YD5AR1).20. Giovanni P. Prezioso, General Counsel, Response to Court’s invitation to file letter brief, Billing v. Credit Suisse First Boston, Nos. 03-9284 and 03-9288 (2d Cir. March 2, 2005).
21. Giovanni P. Prezioso, General Counsel, Response to Court’s invitation to file letter brief, Billing v. Credit Suisse First Boston, Nos. 03-9284 and 03-9288 (2d Cir. March 2, 2005).
22. R. Hewitt Pate, Assistant Attorney General, Response of the United States to the Court’s Request for Views on the Issue of Implied Antitrust Immunity, Billing v. Credit Suisse First Boston, Nos. 03-9284 and 03-9288 (2d Cir. May 5, 2005).
23. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (05-381), dealing with "predatory buying,"and Bell Atlantic Corp. v. Twombly, (05-1126) , alleging that telecommunications companies had conspired to allocate markets.
24. Cecile Kohrs Lindell, Top court may rule on IPO groups, June 15, 2006 (available at
http://www.thedeal.com/servlet/ContentServer?cid=1150079879747&pagename=hpa&c=TDDArticle&p=M4YD5AR1).25. See 15 U.S.C.A. § 78u-4(b) (1995).
26. See 15 U.S.C.A. § 15.
27. Petition for a Writ of Certiorari at 25, Credit Suisse First Boston Ltd. v. Billing (No. 05-1157).
28. Motion for Leave to File Brief as Amici Curiae and Brief of the Securities Industry Association, et al. as Amici Curiae in Support of Petitioners, Credit Suisse First Boston Ltd. v. Billing (No. 05-1157).
29. Verizon v. Trinko, LLP. 540 US 398 (2004).
30. Lattman, Peter, SEC Commish Begs Supremes: Protect us from Pesky Antitrust Laws, June 13, 2006 (available at http://blogs.wsj.com/law/2006/06/13/sec-commish-atkins-begs-supremes-protect-us-from-pesky-antitrust-laws/ .
31. Reply Brief for the Plaintiffs-Appellants, Billing v. Credit Suisse First Boston, 2004 WL 3589536, at *2-4 (2d Cir. 2004).
32. Jonathan M. Rich and Alan Gongora, Is Securities Fraud Actionable Under the Antitrust Laws? (available at http://www.realcorporatelawyer.com/wsl/wsl1205.html
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