The following argument preview is by Brian Walker of the Stanford Supreme Court Litigation Clinic.
At oral argument today in Credit Suisse v. Billing (No. 05-1157), the Court will consider the overlap between securities regulations and antitrust law generally and, more specifically, whether aftermarket tie-in arrangements between stock underwriters and purchasers during an IPO — which are illegal under securities laws — also create a right of action for treble damages under antitrust law.
Mayer Brown’s Stephen M. Shapiro of Washington, D.C will argue on behalf of the petitioners; he will split his time with Solicitor General Paul D. Clement, who will argue on behalf of the United States as an amicus. Christopher Lovell of New York’s Lovell, Stewart, & Halebian will argue on behalf of the respondents. The briefs of the parties are available here; the brief of the United States is available here.
When a privately held company wishes to go public, it has two options. First, it may attempt to sell shares directly to investors, but this process entails heavy risks because of the uncertainty and volatility of the market for newly traded companies. Second, it may hire an underwriting firm, which — in exchange for a commission on the value of the company — will bear the risk of the IPO by acting as a wholesaler: it guarantees the company a fixed sum on a fixed date for a fixed amount of its securities and recovers its investment by selling the securities to IPO purchasers.
To mitigate its risk, an underwriter has a strong incentive to sell all of the IPO allocation. To maintain its reputation among the IPO investors and remain competitive, an underwriter also has an incentive to ensure that the stocks it sells perform well on the “aftermarket” — i.e., after the IPO. It may respond to these incentives in a number of ways, including underpricing the IPO and entering into “tie-in†arrangements (expressly prohibited by the SEC), in which the purchaser agrees to execute certain future trades in exchange for participating in a lucrative IPO. In one kind of tie-in arrangement, known as “laddering,†the investor agrees to purchase additional shares of the IPO security in the aftermarket at escalating prices. In another such arrangement, underwriters in an overperforming IPO may require purchasers also to invest in a different, underperforming IPO or to purchase a high-commission product from the underwriter.
The plaintiffs in this case (who are respondents in the Supreme Court proceedings) are IPO purchasers and aftermarket purchasers. The IPO purchasers that ten underwriting firms responsible for technology-related IPOs in the late 1990s colluded to exact an above-market price for the IPO shares by demanding various tie-in arrangements. The aftermarket purchasers claim to have purchased aftermarket securities at prices inflated by the underwriters’ illegal manipulations. Both groups brought this suit in the Southern District of New York, seeking (inter alia) treble damages under the Sherman and Robinson-Patman Acts.
The district court dismissed the case, holding that the SEC’s heavy regulation of IPOs implied immunity from antitrust law. On appeal, the Second Circuit reversed. In its view, implied antitrust immunity is available if either of two conditions are met: (1) if the securities regulatory scheme is so pervasive that Congress must be assumed to intend antitrust immunity; or (2) if an agency, operating at the direction of Congress, has the discretion to compel, permit or forbid the conduct at issue. Neither of these conditions, the Second Circuit concluded, had been met here, as at least some of the conduct alleged by the plaintiffs — including laddering — was not within the SEC’s power to permit. The Supreme Court granted certiorari to decide whether aftermarket tie-in arrangements are subject to state and federal antitrust liability.
Three Supreme Court cases shed light on the doctrine of implied antitrust immunity. The first, Silver v. New York Stock Exchange, considered a challenge to one of the barriers to membership that the NYSE imposed. While Congress authorized exchanges with the Securities Exchange Act and permitted them to impose barriers on membership, the SEC lacked jurisdiction over the challenged Exchange order. In the absence of another regulatory check, the Court refused to exempt the NYSE from antitrust regulation. It left the converse an open question – that is, whether the presence of a regulatory check would have exempted the organization from antitrust review. The second case concerned exactly that scenario: in Gordon v. New York Stock Exchange, Congress was aware of a particular anticompetitive practice, but gave the SEC the power to regulate it rather than forbidding it outright. In combination with an apparent congressional intent to afford immunity, the high stakes of the rule, and the relative expertise of the SEC, this sufficed to grant the Exchange implied immunity from antitrust regulation. The third case in the trilogy of securities antitrust immunity, United States v. National Association of Securities Dealers (NASD), concerned a statute that forbade a type of conduct except when the SEC permitted it. Although the SEC had not addressed the issue, the Court concluded that implied immunity was established.
In this case, because the SEC has already deemed tie-in arrangements illegal, the question is thus whether tie-ins are illegal only at the SEC’s say-so – that is, whether the SEC would be within its statutory authority if it instead chose to permit them. Although the Second Circuit answered this question in the negative, such as result is not exactly evident from the text of the governing statute — the Exchange Act — which forbids trading for the purpose of “pegging, fixing, or stabilizing the price of such security in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.†Notably, not all such market manipulation is illegal: the SEC has permitted manipulation designed to prevent or slow the decline of the price of a security, but not, as with laddering, to inflate the price of a security.
The petitioners argue that the tie-in arrangements at issue are “indisputably†within the SEC’s regulation power. They note that the SEC balances the interest of competition with the interests of investor protection and capital formation, a delicate tightrope-walk that the courts could not replicate. They claim that securities laws are a delicate instrument, allowing recovery only of actual damages and providing a variety of safeguards in caselaw as well as in the Private Securities Litigation Reform Act, next to which the treble damages and relaxed standard for causation of antitrust law are crude and undesirable remedies. They argue that to substitute the latter for the former would frustrate Congress’s intent and wreak havoc upon the formation of capital in the United States.
The respondents argue that the tie-in arrangements at issue were prohibited by statute and by the SEC, and in fact could never be authorized by the SEC. They claim that there is no evidence of congressional intent to imply antitrust immunity, and that, at least with respect to conduct where this is true, antitrust law and securities laws do not conflict.
Appearing as an amicus curiae supporting vacatur of the judgment below, the United States recommends a middle ground. The Solicitor General argues that the conduct at issue is “inextricably linked to legitimate collaborative underwriting activity.†However, he rejects petitioners’ contention that implied immunity covers all activity related to IPOs. Instead, he argues the policies of both the securities law and the antitrust law can be protected by drawing a line between what is “inextricably intertwined†with legitimate collaborative underwriting and what is not. He gives no indication of where the line is or how the Court should derive it except to note that it should be neither where the SEC chooses to draws it nor at the theoretical outer boundary of the SEC’s discretion.
One final note: this case saw both a belated recusal by Justice Kennedy and a last-minute un-recusal by the Chief Justice (see the docket here). As of today’s oral argument, only Justice Kennedy is recused from the case.
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