Issues
The Securities and Exchange Commission (SEC) heavily regulates public offerings of securities. Does the SEC’s jurisdiction automatically displace the application of antitrust law to these offerings, or does antitrust immunity for an offering of securities only occur when Congress has specifically expressed the intent to exempt a particular practice from antitrust liability?
Glen Billing and other investors filed a class action lawsuit against Credit Suisse First Boston Ltd. and other Wall Street investment firms, alleging that the firms violated the Sherman Antitrust Act, by artificially inflating the prices of securities in initial public offerings. The Court of Appeals for the Second Circuit, splitting with other courts, held that since Congress had not specifically immunized this conduct from antitrust liability, the Sherman Act should apply despite the Securities and Exchange Commission’s regulation of this area. The Supreme Court’s decision in this case will help resolve whether conduct already heavily regulated by the SEC should be automatically immune from antitrust liability, or whether antitrust immunity should only be granted where Congress has expressed a specific intent to immunize the conduct at issue.
Questions as Framed for the Court by the Parties
Whether, in a private damages action under the antitrust laws challenging conduct that occurs in a highly regulated securities offering, the standard for implying antitrust immunity is the potential for conflict with the securities laws or, as the Second Circuit held, a specific expression of Congressional intent to immunize such conduct and a showing that the SEC has power to compel the specific practices at issue..
Facts
Glen Billing and other investors filed a class action lawsuit against Credit Suisse First Boston Ltd. (“Credit Suisse”) and other Wall Street investment firms. In re Initial Public Offering Antitrust Litigation, 287 F.Supp.2d 497 (S.D.N.Y. 2003) (“In re IPO”). Billing alleged that the firms had violated the Sherman Antitrust Act, 15 U.S.C. § 1 et seq., and various state antitrust laws by conspiring to drive up the cost of securities in initial public offerings (“IPO”) during the stock market boom of the 1990s. In re IPO, 287 F.Supp.2d at 499. The firms allegedly entered into illegal contracts with purchasers of securities distributed in IPOs. Id. at 499–500. Through the contracts and other illegal means, the firms allegedly executed a series of anticompetitive manipulations that grossly inflated the price of the securities. Id.
Billing contended that the firms capitalized on the artificial inflation and profited at the expense of the investing public. Id. Credit Suisse argued that the suit should be dismissed because the firms had implied antitrust immunity. Id. at 501–02. The Securities and Exchange Commission (SEC), as amicus curiae, suggested that application of the antitrust laws here 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 (“Exchange Act”). See id. at 505; see also Memorandum Amicus Curiae of the Securities and Exchange Commission at 1. The United States District Court for the Southern District of New York agreed with the SEC and dismissed the investors’ complaints. In re IPO, 287 F.Supp.2d at 524–25.
On appeal, the United States Court of Appeals for the Second Circuit reversed the lower court and reinstated the suit. See Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130 (2d Cir. 2005). While conceding that “the securities markets in toto might be better entrusted to an expert agency than the federal courts,” the Second Circuit ultimately ruled that immunity was unavailable because there was no evidence that Congress had intended securities laws like the Securities Act of 1933 to foreclose antitrust suits challenging practices like those engaged in by Credit Suisse. Id. at 172. The Second Circuit cited two cases—United States v. Philadelphia National Bank, 374 U.S. 321 (1963) and Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)—involving agency review of private behavior that turned, at least in part, on the Court’s stated inability to conclude that Congress had intended to immunize the reviewed acts. Billing, 426 F.3d at 150.
The United States Supreme Court granted certiorari on December 7, 2006.
Analysis
Firms’ Argument
Credit Suisse and the other firms named in Billing’s complaint contend that the Supreme Court’s implied immunity precedents require dismissal of the investors’ antitrust suits because they are repugnant to the scheme of securities regulation. Brief for Petitioners at 19, 23. The firms argue that the Court properly defined the scope of implied immunity in the securities context in Silver v. New York Stock Exch., 373 U.S. 341 (1963), Gordon v. New York Stock Exch., 422 U.S. 659 (1975), and United States v. National Ass’n of Securities Dealers, 422 U.S. 694 (1975) (“NASD”), and that the investors’ suits “squarely fit the criteria set forth in those decisions.” Brief for Petitioners at 23. Furthermore, the firms contend that Verizon Communications v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004) confirms that immunity is necessary here. Id. at 24.
In Silver, brokers alleged that the New York Stock Exchange violated antitrust laws by denying them wire connections with exchange member firms. 373 U.S. 341. That claim required the Court to square the antitrust laws’ condemnation of group boycotts with the Exchange Act, which “contemplat[es] that securities exchanges will engage in self-regulation which may well have anticompetitive effects.” Id. at 349. The Court observed that although the Exchange Act obligates an exchange to formulate rules governing the conduct of its members, it did not— at that time—“give the [SEC] jurisdiction to review particular instances of enforcement of exchange rules.” Id. at 357. Given the lack of “conflict or coextensiveness of coverage [between] the agency’s regulatory power” and the antitrust laws, the Court held that the brokers’ suit could proceed. Id. at 358. The Court emphasized that “a different case” would be presented if “review of exchange self-regulation [was] provided through a vehicle other than the antitrust laws.” Id. at 360. That different case arose in Gordon, a private damages class action challenging the practice of fixing commission rates. 422 U.S. 659. The Court determined that the challenged conduct was impliedly immune from antitrust scrutiny. Id. The Court rejected the contention that immunity could only be implied where there is a “pervasive regulatory scheme,” and held that immunity applies whenever the SEC has been given specific regulatory authority over the activity at issue and has exercised that authority. Id. at 688–89. The same day it decided Gordon, the Court held in NASD “that antitrust immunity must be implied not only where the SEC actively exercises specific regulatory power over the challenged conduct, but also where the regulatory scheme the SEC has established is so pervasive that there is a real potential for conflict with the antitrust laws.” Brief for Petitioners at 25. In NASD, the Department of Justice alleged a vertical conspiracy among underwriters and broker-dealers to restrict the sale and fix the price of mutual fund shares in the secondary market, as well as a horizontal conspiracy among NASD members to prevent the growth of that market. 422 U.S. at 701–02.
Investors’ Argument
The investors contend that the Court should affirm the Second Circuit’s rejection of implied immunity in this case because there is no “convincing showing of clear repugnancy between antitrust laws and the [SEC’s] regulatory system” which would warrant an implied repeal of antitrust laws. National Gerimedical Hospital and Gerontology Ctr. v. Blue Cross of Kansas City, 452 U.S. 378, 388 (1981). To the contrary, the investors contend that the conduct challenged as anticompetitive in this case has been consistently prohibited by both the antitrust laws and the SEC’s regulatory scheme. Brief for the State of New York as Amicus Curiae Supporting Respondents at 4 [hereinafter Brief Supporting Respondents]. Even in cases where clear repugnancy is found, the investors argue that repeal “is to be regarded as implied … only to the minimum extent necessary.” Silver, 373 U.S. at 357. Hence, “the proper approach” is one that, where possible, “reconciles the operation of both statutory schemes with one another rather than holding one completely ousted.” Id. Mere overlap between the antitrust laws and a regulatory scheme is insufficient to imply antitrust repeal. NASD, 422 U.S. at 734. Although the Court has considered “the question of the pervasiveness of the regulatory scheme as a factor in determining whether there is an implied repeal of the antitrust laws,” Gordon, 422 U.S. at 688, it has never relied solely on that ground to create blanket antitrust immunity for regulated industries. Silver, 373 U.S. at 360–61.
The investors argue that the “clear repugnancy” required for immunity can result only from an “actual” or “potential” conflict between the two bodies of law. Brief Supporting Respondents at 5. Where both the antitrust laws and the regulatory scheme consistently prohibit the challenged conduct, antitrust immunity is inappropriate. Id. at 6. Consequently, there can be no “clear repugnancy” in this case because there is no conflict between antitrust enforcement and securities regulation. Id. The investors’ Complaint, liberally construed, charges either upward price-fixing or, at least, horizontal and vertical collusion involving securities industry competitors that had the purpose and effect of raising open-market prices. Id. The investors contend that the securities statutes themselves prohibit the blatant upward price manipulation alleged here. See Section 17 of the Securities Act, 15 U.S.C. § 77q (“Fraudulent Interstate Transactions”); Sections 9(a)(1)–(5) of the Exchange Act, 15 U.S.C. § 78i(a)(1)–(5) ( “Manipulation of Security Prices”); Section 15(c)(1) of the Exchange Act, 15 U.S.C. § 78o(c)(1) (“Use of Manipulative or Deceptive Devices; Contravention of Rules and Regulations”). Although Section 9(a)(6) of the Exchange Act, 15 U.S.C. § 78i(a)(6), gives the SEC rulemaking power to permit conduct designed to stabilize the price of a security, and although this power permits aftermarket price stabilization “for the purpose of preventing or retarding a decline in the market price,” the rulemaking power does not extend to conduct designed to increase prices. Brief Supporting Respondents at 8–9 (quoting In re IPO, 287 F. Supp. 2d at 515). Because the SEC statutes prohibit the alleged anticompetitive practices in this case, the investors argue that applying the antitrust laws in this case would not be “clearly repugnant” to the SEC’s regulatory scheme. National Gerimedical Hospital, 452 U.S. at 388. Implied antitrust immunity is therefore inappropriate.
Discussion
This case addresses the SEC's jurisdiction over antitrust issues. The general rule has been that SEC regulation immunizes certain conduct from liability under the Sherman Antitrust Act, because application of antitrust laws such as the Sherman Act to conduct that is already closely overseen by securities regulators—who have drawn fine lines between permissible and unlawful activities—would conflict with the SEC’s authority. See United States v. National Ass’n of Securities Dealers, 422 U.S. 694 (1975); see also Gordon v. New York Stock Exch., 422 U.S. 659 (1975). However, when reversing the district court’s decision in this case, the Court of Appeals for the Second Circuit held that unless Congress specifically expresses intent to grant immunity to the particular conduct at issue, antitrust law should apply. See Billing, 426 F.3d at 172. This decision will resolve the question of whether antitrust law can or cannot apply to an area already regulated by the SEC.
The conduct involved in this case is the practice of making “tie-in agreements,” which the SEC has long considered illegal. See James Harrington, Second Circuit Decision Paves the Way for IPO Antitrust Litigation (Oct. 31, 2005). Billing alleged that Credit Suisse and the other firms involved in the litigation “required customers to agree, in order to obtain IPO shares of Class Securities, to make ‘tie-in purchases’ of such Class Securities in the aftermarket at levels above the respective IPO prices, a process known as ‘laddering,’ in order to artificially inflate the aftermarket prices of the IPOs.” In re IPO, 287 F.Supp.2d. at 500 (internal quotations omitted). These “tie-in agreements,” essentially, were pre-arranged sales at set prices, guaranteeing the stock price would rise in the aftermarket. See Harrington. This price escalation induced prospective buyers to buy on momentum. However, once the conspirators “dumped the stock,” the price often plummeted, causing large losses for the buyers. See id.
If the Court decides in favor of Credit Suisse, the SEC will continue to regulate this type of conduct without fear of interference from antitrust laws. However, because the SEC’s existing regulations do not always take antitrust considerations into account, a ruling in favor of Credit Suisse could enable securities dealers to continue manipulative practices that drive up the price of shares and have the potential to create large losses for investors. See Business Law Prof Blog, Atkins on the Billing Case (June 10, 2006). If the Court upholds the Second Circuit and decides for Billing, it will open the door for plaintiffs to bring expensive and time-consuming class action suits under the antitrust laws against investment banks and other securities dealers. Paul Atkins, the Commissioner of the SEC, has publicly asked the Supreme Court to reverse the Second Circuit’s decision for this reason. See Paul Atkins, A Serious Threat to Our Capital Markets, Wall Street J. at A12 (June 10, 2006); see also Atkins on the Billing Case. In addition to the time and financial costs of such suits, the SEC is concerned that potential plaintiffs, by bringing antitrust suits for securities violations, will undermine and eventually destroy the securities laws that Congress intended to govern such suits. See Memorandum Amicus Curiae of the Securities and Exchange Commission at I(A).
The outcome of this case has implications for a wide range of parties. Obviously, if the Court upholds the Second Circuit, the SEC may need to restructure its existing regulatory scheme to comply fully with antitrust laws, and investment banks and other securities dealers may have to rework their business practices. See Brief of Amicus Curiae Security Industries Association, et al., in support of Petitioners at 16. However, investors in securities will also be affected if the Supreme Court upholds the Second Circuit’s decision; the way in which investors buy shares and the price they pay may change. In the same vein, publicly traded companies and those that have the potential to become publicly traded will be affected, since any changes to the SEC regulations will likely affect the price they can get for their shares and the method by which they make their initial public offering. Finally, the United States itself, and especially Congress, has an interest in making sure both the antitrust laws and SEC regulations work together without either being displaced. See Brief of Amicus Curiae United States in support of Vacatur at 8.
Conclusion
The Court’s decision in this case will determine whether plaintiffs can bring suits under the Sherman Antitrust Act in areas already governed by SEC regulations. If the Court upholds the decision from the Court of Appeals for the Second Circuit and permits the application of antitrust law to SEC-regulated issues, the SEC may need to rework its regulatory scheme to ensure full compliance with the Sherman Act, and securities dealers may need to restructure some of their business practices. If the Court reverses the Second Circuit, business practices that are technically violations of antitrust law may continue to slip through the cracks of the SEC’s regulatory scheme.
Written by:
Emily Green
Kiernan Joliat