Securities Enforcement Alert
June 2007
Authors:
Glenn R. Reichardt
+1.202.778.9065
glenn.reichardt@klgates.com
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U.S. Supreme Court Reinforces Antitrust
Immunity of Securities Firms
On June 18, 2007, the U.S. Supreme Court ruled, in Credit Suisse Securities (USA)
LLC v. Billing (No. 05-1157), that antitrust claims could not be pursued by investors
against ten leading investment banks that were accused of engaging in anticompetitive
conduct when allocating shares of jointly underwritten initial public offerings (IPOs)
during the tech boom in the late 1990s. The Supreme Court’s 7-1 decision was a
major victory for securities firms and for securities regulators, including the Securities
and Exchange Commission, which argued that application of the antitrust laws to
the activities of securities underwriting syndicates would interfere with the SEC’s
regulatory responsibilities and chill joint conduct that is important to the nation’s
economy. The Court’s decision was a setback for plaintiffs’ class action lawyers and
for the Justice Department’s Antitrust Division.
More than 30 years ago, the Supreme Court held that certain conduct subject to SEC
regulation was immune from attack under the antitrust laws. In its decision on June 18,
the Court expanded the scope of antitrust immunity by holding that the antitrust laws
cannot apply to conduct regulated under the securities laws when the two legal regimes
are “incompatible.” The “incompatibility” test appears to be significantly less onerous
than the “clear repugnance” test for immunity that the Supreme Court previously used.
According to Justice Breyer, who wrote the Court’s majority opinion in Credit Suisse,
the four critical tests for determining “incompatibility” (and, thus, antitrust immunity)
are: (1) whether the securities laws give the SEC and securities regulators authority
“to supervise the activities in question”; (2) evidence that securities regulators have
exercised that authority; (3) a “risk” that, if both the securities and antitrust laws were
applicable to the activities in question, they “would produce conflicting guidance,
requirements, duties, privileges or standards of conduct”; and (4) a determination
that the practices potentially affected by this conflict “lie squarely within an area of
financial market activity that the securities law seeks to regulate.”
Justice Breyer said there could be no reasonable dispute that the plaintiffs’ IPO-related
claims met three of the four tests for antitrust immunity, because: (1) the activities in
question were “central to the proper functioning of well-regulated capital markets”;
(2) the securities laws granted the SEC authority to supervise those activities; and
(3) the SEC has continuously exercised that authority. The only issue in dispute,
according to Justice Breyer, was whether application of the antitrust laws to IPO
syndicate activity could potentially result in conflicting guidance that would “prove
practically incompatible with the SEC’s administration of the Nation’s securities
laws.” The plaintiffs (and the Antitrust Division) had argued that there was no such
conflict because the conduct at issue was also unlawful under the securities laws. The
Supreme Court disagreed with that argument.
Securities Enforcement Alert
The Court held that even if the securities laws and the
antitrust laws might prohibit the same types of IPOrelated conduct, the two legal regimes are “clearly
incompatible” because, under the securities laws, “a
fine, complex, detailed line separates activity that
the SEC permits or encourages . . . from activity
that the SEC must (and inevitably will) forbid.”
The Court held that only a “securities expert” like
the SEC could draw that line “with confidence.”
The Court expressed concern that, because antitrust
suits could be brought “in dozens of different
courts with different nonexpert judges and different
nonexpert juries,” there is “an unusually high risk
that different courts will evaluate similar factual
circumstances differently.” In the Court’s view,
under these circumstances “there is no practical
way” to confine antitrust suits to activity that is
clearly unlawful under the securities laws. Instead,
the Court said, “. . . these factors suggest that
antitrust courts are likely to make unusually serious
mistakes . . .” and the threat of such mistakes is
likely to mean that underwriters would avoid “a
wide range of joint conduct that the securities
law permits or encourages.” In the Court’s view,
given “the important role IPOs play in relation to
the effective functioning of capital markets,” the
“securities-related costs of mistakes is unusually
high.”
By comparison, the Court held that the “need for
an antitrust lawsuit” under these circumstances
is “unusually small” because the SEC is actively
regulating the conduct at issue and investors may
bring lawsuits under the securities laws if they
are damaged. The Court also expressed concern
that, if antitrust immunity did not bar such suits,
plaintiffs’ lawyers would “dress what is essentially
a securities complaint in antitrust clothing” in order
to avoid the tightened procedural requirements that
Congress has applied to securities class actions.
Balancing the “unusually high” risks of adverse
consequences of antitrust suits against their
“unusually small” benefits, the Court found
“a serious conflict between, on the one hand,
application of the antitrust laws and, on the other,
proper enforcement of the securities laws.”
Although the Court’s decision in Credit Suisse
focused specifically on antitrust claims related to
IPO syndicates and allocations of IPOs, the Court’s
reasoning is likely to create insurmountable barriers
to antitrust attacks against other joint conduct by
securities firms. The Court suggested that certain
behavior, even by underwriting syndicates, might
not be immune from antitrust attack if it fell “well
outside the heartland of activities related to the
underwriting process.” But the only example of
such conduct mentioned by the Court was an overt
agreement “to divide markets”—a very unlikely
example of joint conduct by securities firms.
Collaboration, agreements, and joint conduct are
central to many securities-related activities, so
a different decision by the Court in Credit Suisse
could have raised the possibility of many future
antitrust class actions. But, in light of the strong
language and reasoning the Court adopted, most
antitrust suits against securities firms are likely
to encounter stiff obstacles, at least if those suits
challenge conduct that the SEC or another securities
regulator is actively regulating pursuant to a clear
grant of statutory authority. Given that securities
regulation often involves the drawing of “fine,
complex, detailed line[s]” that separate lawful from
unlawful activity, it should be easier now, in the
wake of Credit Suisse, for a securities firm to argue
that application of the antitrust laws by dozens of
“nonexpert judges” and “nonexpert juries” is likely
to interfere with careful securities regulation and to
deter at least some conduct that securities regulators
would encourage.
In reaching its decision in Credit Suisse, the Court
clearly placed great importance on the views of
the SEC. Although the SEC could not submit its
own separate brief directly to the Supreme Court in
Credit Suisse, the Court frequently quoted from the
June 2007 | 2
Securities Enforcement Alert
SEC’s briefs to the lower courts in reaching its proimmunity decision. The Court’s heavy reliance
on the SEC’s reasoning sharply contrasts with
the Court’s dismissive treatment of the position
advocated by the Solicitor General, which, the
Court recognized, was “a compromise” between
the opposing positions on immunity that the SEC
and the Antitrust Division had argued in the courts
below.
The Supreme Court’s decision in Credit Suisse
represents the latest in a string of decisions in
which the Court has rejected class action claims
or made such claims more difficult to bring by
imposing heightened pleading requirements. It
remains to be seen whether the Supreme Court’s
apparent antipathy toward securities and antitrust
class action claims will result in fewer such claims
being filed or in more frequent dismissal of such
claims by lower court judges.
_____________________
Glenn R. Reichardt is a partner in our Washington, D.C., office
who regularly represents clients of our securities enforcement and
class action practices. Along with Paul Gonson, who is counsel to
the firm in Washington, D.C., he was a member of the legal team
that represented Merrill Lynch & Co., Inc., one of the defendants
in Credit Suisse.
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