On Monday June 18, the Supreme Court staved off “serious harm to the efficient functioning of the securities markets” by immunizing Wall Street’s IPO syndication practices from antitrust lawsuits. With the much anticipated decision in Credit Suisse Securities v. Billing, the Court ruled in favor of Wall Street defendants and foreclosed antitrust claims to challenge conduct already regulated by the SEC, even where the SEC has deemed that conduct illegal. Any challenge to such conduct must be limited to claims under the securities laws. In so doing, the Court dealt a serious blow to the plaintiffs bar, which has increasingly attempted to expand the use of antitrust law, and its potential for treble damages. Further, the Court announced a broader standard for implied antitrust immunity that could resonate beyond the securities regulation context.
Plaintiffs in this case were purchasers of technology securities distributed in IPOs and their aftermarket stocks during the dot com bubble of the late nineties. They claimed that the defendants, 17 of Wall Street’s biggest IPO underwriters and institutional investors, conspired to manipulate the price of both the IPO and the aftermarket for the stocks in violation of antitrust laws.
The case arrived at the Supreme Court after the lower courts disagreed about the standard for applying immunity from antitrust claims. The District Court for the Southern District of New York agreed with the Wall Street banks and dismissed the stock purchasers’ case on the grounds that wherever there is an actual or potential conflict between securities and antitrust laws, antitrust must give way to the comprehensive regulatory and enforcement authority of the SEC. The Second Circuit narrowed this standard and held that in the absence of a specific congressional directive to regulate the challenged behavior, no “potential specific conflict” existed between SEC regulations of IPO practices and antitrust laws, thereby allowing the purchasers’ antitrust class action to proceed. Accordingly, the question before the Supreme Court was whether the enforcement of securities laws by the SEC impliedly precluded the application of antitrust laws in this area.
Before the Supreme Court, the stock purchasers focused on the fact that the complained-of behavior, namely requiring purchasers to (1) buy additional shares later at higher prices (referred to as “laddering”); (2) pay excessively high commission on later trades; or (3) buy less desirable securities later (referred to as “tie-ins” or “tying”) in order for them to get a piece of the “hot” IPO, was also prohibited by the SEC. Therefore, the stock purchasers argued, no conflict existed between antitrust mandates and securities regulations and without a conflict there was no need for securities law to impliedly preclude application of the antitrust laws. The stock purchasers characterized the role of the SEC as “transactional”-based and thus unable or unwilling to take on multi-transactional or systemic problems. As a result, the purchasers argued that the antitrust hammer was needed to suppress such behavior.
The Wall Street underwriters, on the other hand, argued that any of the complained-of behavior could be and is governed by the SEC, and that the stock purchasers’ class action lawsuit was simply an ill-disguised attempt to evade the lawsuit hurdles Congress put in place to protect securities issuers from strike suits. These underwriters warned that opening up the securities industry to antitrust claims would harmfully interfere with the SEC’s ability to regulate the market and generate capital formation.
In the end, six of the eight justices1 agreed with the Wall Street underwriters that application of the antitrust laws in the IPO arena is “clearly incompatible” with federal securities laws, and therefore antitrust claims are precluded. Relying heavily on precedent in this area, the Court articulated the standard for determining whether antitrust laws are impliedly precluded by the laws and regulations of oversight bodies such as the SEC. According to the Court, application of antitrust laws are precluded where: (1) the questioned conduct is “squarely within the heartland” of the regulatory body’s oversight; (2) a regulatory body has authority to supervise the challenged conduct; (3) the regulatory body has actively exercised that authority; and (4) the absence of antitrust immunity could subject the actor to conflicting standards or regulations pertaining to the questioned conduct.
After announcing this standard, the Court spent little literary capital explaining that the SEC’s regulation of IPO practices easily satisfies the first three prongs. Instead, the Court focused its analysis on the fourth prong: whether these practices present an incompatible conflict between securities and antitrust laws. The Court found that they did.
Unlike the lower courts, however, the conflict the Court found was not based on past conflicts in this area, nor was it rooted in the potential for future squabbles between antitrust and securities laws. The real conflict discussed by the Court is between regulators and the legal system. The linchpin of the Court’s decision is the perceived inability of “nonexpert judges” and “nonexpert juries,” as opposed to the regulators, to draw a line between what is a permitted practice in the securities field and what is prohibited. The necessity for this line-drawing is derived from the standard itself: if antitrust and securities directives do not conflict (either both permit or both prohibit the questioned behavior), then the defendant does not have implied immunity protection from antitrust enforcement. The Court has essentially left it up to industry regulators to determine the existence of a conflict under the fourth prong of the implied antitrust immunity standard.
Industry experts, in this case the SEC, should be afforded regulatory deference in drawing this line where the harms of antitrust enforcement greatly outweigh its benefits, according to the Court. Without implied immunity in this case, “antitrust courts are likely to make unusually serious mistakes” given the fact-intensive nature of determining what is permitted versus prohibited behavior in the IPO context. For example, the Court warned that these mistakes would lead to a chilling of not only unlawful behavior by underwriters, but also behavior that the SEC would encourage for the efficient functioning of capital markets. The Court closed the door on an avenue which otherwise would “circumvent [procedural] requirements by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing,” especially where, as here, securities laws provide relief for the complained-of harm.
By extending antitrust immunity to the collaborative conduct here, the Court endorsed joint efforts by underwriters to market and sell new securities as nothing less than “central to the proper functioning of well-regulated capital markets.” The players in the IPO game no longer need to worry about the proverbial 300-pound gorilla of antitrust implications of their behavior; their behavior simply must not run afoul of SEC directives. The securities industry, however, should not read this decision as a free pass. With the reaffirming of the plenary authority of the SEC, the CSFB decision provides a potential boost to the SEC’s enforcement efforts.
Beyond staving off interference with the efficiency of the capital markets and handing a victory to Wall Street, this decision also offers two areas for further consideration. First, and more broadly, it signals a potentially significant doctrine of the Roberts Supreme Court – regulators may have more expertise to govern disputes than the justice system. This principle of regulatory deference could have far-reaching impact in other heavily-regulated areas. Second, the CSFB standard provides a means to take antitrust claims out of cases where broad oversight statutes are in effective. For instance, the FCC’s overarching regulation of both media and telecommunications industries could impact future antitrust claims based on the increasing overlap of these industries. This may very well be the next stage on which the CSFB standard is played out.