Pruning the Antitrust Tree: Credit Suisse Securities (usa) Llc v. Billing and the Immunization of the Securities Industry from Antitrust Liability - John P. Lucas
| Citation | Vol. 59 No. 2 |
| Publication year | 2008 |
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Pruning the Antitrust Tree: Credit Suisse Securities (USA) LLC v. Billing and the Immunization of the Securities Industry from Antitrust Liability
I. Introduction
In Credit Suisse Securities (USA) LLC v. Billing,1 the United States Supreme Court, speaking through Justice Breyer, held that the current securities law regime impliedly precludes the application of state and federal antitrust laws to underwriters' and institutional investors' conduct during initial public offerings of securities.2 Justice Stevens concurred in the judgment only and issued his own opinion.3 Justice Thomas delivered the lone dissent.4 Justice Kennedy did not participate in the decision, likely because his son is a managing director of petitioner Credit Suisse Securities.5 Overturning the United States Court of Appeals for the Second Circuit,6 the Court continued its legacy of pruning the reach of potentially crippling class action antitrust suits for treble damages in the hyper-regulated arena of public corporate finance. The Court's decision makes clear that the securities laws impliedly preclude antitrust laws when the two are "clearly incompatible," given the context and likely consequences.7
II. Factual Background
A. Public Offerings of Securities and the Role of Investment Banking Firms
A public offering of securities immediately infuses capital into a company, which may then use the investors' funds for any number of purposes, including the development of new products, the expansion of existing facilities, or the establishment of new markets.8 Companies typically retain investment banking firms to assist with a public offering, which is a highly technical process that can expose an issuing company to crippling liability if improperly performed.9 An important way that investment banking firms assist companies wishing to issue securities is by acting as underwriters.10
"underwriting" generally refers to the process of helping a company sell securities to the public by means of a registered offering.11 The most common underwriting arrangement is known as "firm commitment" underwriting, where the underwriter purchases securities directly from the issuing company and then resells the securities to the public at a profit.12 Firm commitment underwriters often form syndicates with other investment banking firms to market the shares, thus hedging the original underwriter's risk of being unable to dispose of an entire issue.13
In preparation for a public offering, the syndicate investigates and estimates the probable market demand for a company's securities at various prices.14 The syndicate makes a preliminary estimate of an offering's price and quantity, and the offering company submits the estimate to the Securities and Exchange Commission ("SEC") in a registration statement.15 Afterwards, the syndicate conducts a "road show," during which syndicate underwriters meet with potential investors and gauge the strength of the investors' interest in the company's securities.16 During this process, known in the industry as "book building," underwriters learn which investors might buy securities and in what quantities, at what prices, and for how long each is likely to hold purchased securities before reselling them.17 With this information, the underwriting syndicate will negotiate the final details of the offering with the issuing company and will fix the price of the shares and the quantity for which the syndicate will be jointly responsible.18 On the date the registration becomes effective, the syndicate buys the securities from the issuer at a discounted price and resells them to investors at the agreed upon price.19 The underwriters' commission is the difference between the purchase price from the issuer and the sales price to the investors.20
B. History of the Litigated Dispute
In January 2002 a group of sixty investors filed two class action antitrust lawsuits against ten of the most prominent investment banking firms in the world.21 The complaints alleged that during the underwriting of some several hundred technology-related stocks from 1997 to 2000, the named firms formed syndicates and agreed not to allocate shares to investors who would not pay "'additional anticompetitive charges " above the public offering price.22
These additional anticompetitive charges took the form of conditions that the underwriters forced potential investors to comply with in order to purchase securities. These conditions included (1) "laddering" agreements, where the investors promised to place aftermarket bids for additional securities at escalating prices above the initial offering price; (2) "tying" agreements, where the investors committed to purchasing other, usually less attractive, securities; and (3) the payment of excessive commissions. In addition, the investors alleged that these practices artificially inflated the share prices of the securities in question.23
The United States District Court for the Southern District of New York dismissed the complaints on the ground that the federal securities laws impliedly precluded application of antitrust laws to the conduct in question.24 The United States Court of Appeals for the Second Circuit reversed and reinstated the complaints.25 The United States Supreme Court granted certiorari to decide whether there was a "'plain repugnancy'" between the antitrust claims and the federal securities laws.26
III. Legal Background
A. Introduction
Public corporate finance is an integral part of the American economic system. Without the opportunity to raise capital through public offerings, many companies would be unable to grow and develop. The current securities law regime endows the SEC with extensive authority to regulate all areas of the securities field. The Supreme Court has three times before examined the interplay between the antitrust laws, designed solely to foster competition, and the securities laws, which take competition into consideration along with a number of other factors, including the health of the economy and the public interest.27
B. The Three Precedents: Silver, Gordon, and NASD
The first case to examine the relation of securities law to antitrust law was Silver v. NYSE.28 The Supreme Court in Silver considered a claim by a broker-dealer that the New York Stock Exchange ("NYSE" or "Exchange") and its members had violated the antitrust prohibition against group boycotts by collectively barring the broker-dealer from the network of instant simultaneous communication used to communicate timely offers to buy and sell securities in the over-the-counter market.29
The broker-dealer had obtained private telephone wire connections between his companies and various other securities trading firms.30 The firms that were members of the NYSE applied to the NYSE for approval of the connections, and the Exchange granted "'temporary approval.'"31 Later, without notice, explanation, or any opportunity for a hearing, the Exchange instructed its member firms to disconnect the direct wire connections, and the member firms complied. Despite every effort on the part of the injured broker-dealer to exact an explanation from the Exchange for its action, he received none. After the wires were disconnected, the broker-dealer alleged, his volume of business and profits dropped substantially. The broker-dealer sued under the antitrust laws, seeking, inter alia, an injunction and treble damages. The district court granted summary judgment and a permanent injunction to the broker-dealer.32 The Court of Appeals for the Second Circuit reversed, however, holding that the Exchange was exempt from the antitrust laws because it was exercising its power of self-regulation, which it was required to exercise under the Securities Exchange Act of 1934 (the "Exchange Act").33
On appeal to the Supreme Court, the majority noted that, as a cardinal rule of construction, implied repeals are not favored.34 The Court cautioned that, where possible, lower courts should attempt to reconcile the operation of both statutory schemes rather than completely ousting one.35 Fashioning a guiding principle in the quest to reconcile the two schemes, the Court explained that "[r]epeal is to be regarded as implied only if necessary to make the Securities Exchange Act work, and even then only to the minimum extent necessary."36
The Court began its analysis in Silver by recognizing that if this conduct had occurred in a context free from other federal regulation, it would have constituted a per se violation of the Sherman Act.37 Such concerted agreements not to deal with other traders had long been included in the forbidden category of injurious restraints on trade.38 Therefore, unless the conduct was justified by some other policy, the Exchange had violated the Sherman Act.39 The Court held that the Exchange Act did not justify the NYSE's anticompetitive collective action taken without according fair procedure.40
In Silver the Exchange Act gave the SEC power to request that registered exchanges, such as the NYSE, make changes to their rules.41 However, the Exchange Act did not give the SEC jurisdiction to review specific instances of enforcement of exchange rules.42 This absence of SEC jurisdiction demonstrated that nothing in the securities regulation regime performed the antitrust function of insuring that exchanges did not apply their rules in a manner that injured competition and that was not justified by some other regulatory end.43
In the absence of administrative oversight, the Court decided that some form of review of exchange self-regulation by the courts was not incompatible with the fulfillment of the aims of the Exchange Act.44 The Court noted in dicta, however, that a "different case" would arise concerning antitrust immunity were there SEC jurisdiction and ensuing judicial review of a particular application of an exchange rule.45
The Court had an opportunity to decide this different case twelve years later in...
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