Supreme Court Rejects IPO Laddering Antitrust Case

The Supreme Court still has not yet issued its much-anticipated decision in the Tellabs case (about which refer here), but it did issue a 7-1 decision today (refer here) in the Credit Suisse Securities v. Billing case, holding that the securities laws preclude application of the antitrust laws in a case filed against ten investment banks and asserting IPO laddering allegations.

The plaintiffs alleged that between March 1997 and December 2000, the defendant investment banks "abused the practice of combining into underwriting syndicates" by allegedly agreeing among themselves to impose conditions on investors who wanted access to shares in sought-after IPOs. The alleged conditions included "laddering" (requiring investors to buy additional shares in the aftermarket); "tying arrangements" (requiring investors to purchase other, less-attractive securities), and excess commissions. The plaintiffs alleged that these supposed practices violated the Sherman Act, the Clayton Act, and state antitrust laws.

The case was before the Supreme Court on the question whether or not the securities laws "implicitly preclude the application of the antitrust laws to the conduct at issue in this case." The regulation of underwriting syndicates’ behavior in connection with securities offerings is within the purview of the SEC, because it is "central to the proper functioning of well-regulated capital markets," and the law grants the SEC the legal authority to supervise the activities in dispute – a legal authority the SEC has "continuously exercised."

The court concluded that "to permit antitrust actions such as the present one threatens serious securities-related harm," particularly given the fine line that exists between permitted underwriting syndicate-building collaborative activity and prohibited collusive activity. The SEC, according to the Court, is responsible for drawing a "complex, sinuous line separating securities-permitted from securities-prohibited conduct." The Court asked "who but the SEC" could make these determinations with confidence? Without this sophisticated oversight, there is an "unusually high risk that different court will evaluate different factual circumstances differently," which would in turn "suggest that antitrust courts are likely to make unusually serious mistakes."

Under these circumstances, offering underwriters would not only steer clear of conduct the securities law forbids, "but also a wide range of joint conduct that the securities law permits and encourages (but which they fear could lead to an antitrust lawsuit and the risk of treble damages)."

The Court concluded that the need for antitrust-related enforcement is very small, since the SEC actively enforces its own existing rules prohibiting the contested conduct, and in any event, investors harmed by the disputed practices "may bring lawsuits and obtain damages under the securities laws."

This last point about the availability of remedies under the securities laws may be the most telling. Many of us who can remember the inundation of IPO laddering cases that flooded the courts in 2001 will remember the antitrust cases that also appeared as stray artifacts from a period of lawsuit-filing madness. The mad rush for a piece of the IPO laddering action led to the filing of securities cases against over 310 companies (subsequently consolidated into the IPO Laddering action, about which refer here). This antitrust case looked at the time like nothing more than an attempt to purchase by other means a piece of the litigation territory that prior plaintiffs had claimed in securities lawsuits. The Supreme Court may well have sensed this "end-run" attribute of the antitrust action, noting that "to permit an antitrust lawsuit risks circumventing [the statutory requirements of the PSLRA] by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing."

There are several aspects of this decision that are interesting, beyond the holding itself. The first is that Justice Breyer, usually perceived as a member of the court’s liberal wing, wrote the opinion for a 7-1 majority (Justice Kennedy not participating) that cut broadly across the court’s usual political fault line. Justice Breyer has shown an interest in the past for business cases (he wrote the majority opinion in the punitive damages case earlier in the term). While this does not necessarily tell us anything one way or the other helpful to prognosticating the outcome of the Tellabs case, it does suggest that we can hope for an outcome that is at least clear-cut and that provides guidance on the pleading issues presented in the Tellabs case. (I wonder, without any basis whatsoever for so speculating, whether Justice Breyer will write the majority opinion in the Tellabs case?)

The second interesting aspect of this decision is that the Court seemed to have little trouble rejecting the compromise position advocated by the solicitor general, who advocated remanding the case to the lower court for further proceedings. This absence of deference to the government’s official position suggests that the court might not be overly swayed by the SEC’s amicus brief in the Tellabs case (refer here), which urged a narrow view of the PSLRA pleading standard. On the other hand, the majority opinion in the Credit Suisse case seems to reflect an awfully high opinion of the SEC’s expertise on securities law issues.

Good brief descriptions of the Credit Suisse decision can be found on the SCOTUS blog (here) and on the Legal Pad blog (here).