Analysis: Antitrust “mistakes” and the IPO process
on Jun 18, 2007 at 12:55 pm
Analysis
Federal officials who regulate the stock markets do not have to fret that antitrust law will get in their way as they oversee the process of bringing new stocks to the public exchanges. The Supreme Court, worried that judges and juries sitting in antitrust cases lack the sophistication about the markets necessary to avoid making “unusually serious mistakes,” opted on Monday to exempt much — though perhaps not all — of the “initial public offering” (IPO) process from federal antitrust laws. The Court was even unwilling to accept a suggestion by U.S. Solicitor General Paul D. Clement that would have salvaged some role for antitrust.
Although Justice Stephen G. Breyer’s opinion for the majority in the 7-1 decision stressed that it was confined to “the conduct alleged in this case,” the language and rationale of the ruling was broad enough to immunize syndicates bringing new shares to market from many and probably most potential antitrust complaints by investors. It thus appears that the Securities and Exchange Commission will mainly have the duty of monitoring what is allowed or prohibited in IPOs.
Here is the specific assignment the Court said it was leaving to the SEC: the task, using its securities expertise, of drawing a “complex, sinuous line separating securities-permitted from securities-forbidden conduct” so as to assure that the process of bringing new stocks to market by underwriting syndicates continues to function quite freely. (A “sinuous line” would be one that is wavering.)
The decision was a very broad victory for 16 of the nation’s largest underwriters of stock — the major investment banking houses that were challenging a Second Circuit Court decision that had cleared the way for a trial of the antitrust claims of 60 investors joined in two class-action lawsuits. The investors had sued under the Sherman Act, Clayton Act and state antitrust laws, claiming that the investment banking houses had joined in syndicates to control the initial issuance and post-IPO trading in the stocks of several hundred high-tech companies.
The lawsuits complained of a pact among the underwriters not to sell shares of popular tech stocks unless a buyer agreed to buy added shares of that securities in the after-market at higher prices — so-called “laddering”; to pay very high commissions on later stock purchases from the underwriters, or to buy from those underwriters other, less desirable stocks (so-called “tying.”
The targeted activity of joint underwriters’ promotion and sale of new securities, Justice Breyer wrote on Monday, “is central to the proper functioning of well-regulated capital markets.” The antitrust complaints, he went on, “concern practices that lie at the very heart of the securities marketing enterprise.”
In the end, the Court reversed the Second Circuit, concluding that “the securities laws are clearly incompatible with the application of the antitrust laws in this context.” Justice John Paul Stevens joined in the result only, concluding that the challenged conduct did not violate the antitrust laws; he did not join, he said, in a “holding that Congress has implicitly granted [the underwriters] immunity from those laws.” Justice Clarence Thomas dissented alone, relying on “savings clauses” in federal securities laws “that preserve rights and remedies existing outside of the securities laws.”
The Court’s main opinion did not specifically declare that each of the challenged practices was, in fact, legal under securities laws. “In the present context,” Breyer wrote, there is “only a fine, complex, detailed line” that separates activity that the SEC permits or encourages from activity that the SEC “must (and inevitably will) forbid” — the latter being the very kind of activity that the investors here were trying to attack under antitrust laws.
Exploring further the perceived difficulty in such line-drawing, Breyer said that “evidence tending to show unlawful antitrust activity and evidence tending to show unlawful securities marketing activity may overlap, or prove identical.”
But, in sentiment as well as in logic, much of the reasoning of the Court in reaching its conclusions against a joint securities-antitrust regulatory regime could be attributed to its perceptions about the inability of antitrust lawsuits to avoid serious disruption of the securities markets. “The factors we have mentioned make mistakes unusually likely” in the antitrust regime, Breyer said. “Antitrust plaintiffs may bring lawsuits throughout the Nation in dozens of different courts with different nonexpert judges and different nonexpert juries…[T]here is no practical way to confine antitrust suits so that they challenge only activity of the kind the investors seek to target, activity that is presently unlawful and will likely remain unlawful under the securities law. Rather, these factors suggest that antitrust courts are likely to make unusually serious mistakes in this respect.”
“An antitrust action in this context,” Breyer commented, “is accompanied by a substantial risk of injury to the securities markets and by a diminished need for antitrust enforcement to address anticompetitive conduct. Together, these considerations indicate a serious conflict between, on the one hand, application of the antitrust laws and, on the other, proper enforcement of the securities law.”
The opinion noted that the U.S. Solicitor General had joined in the case with a suggestion that the case be sent back to U.S. District Court, with the assignment of deciding whether the investors’ claims of prohibited conduc could be separated out from conduct permitted under securities regulation, or whether they were “inextricably intertwined.” SG Clement had made the argument, Breyer said, out of a fear that “we might read the law as totally precluding application of the antitrust law to underwriting syndicagte behavior, even were underwriters, say, overtly to divide markets.”
That suggestion, the Court found, would not deal with the line-drawing dilemma it had discussed. But it also noted, in passing, that market division by the underwriters, should that occur, would seem to “fall well outside the heartland of activities related to the underwriting process than the conduct before us here, and we express no view in respect to that kind of activity.”
