Is Securities Fraud Actionable Under the Antitrust Laws?
By Jonathan M. Rich and Alan Gongora

The Second Circuit recently decided that the antitrust laws can apply to underwriting syndicates—an area that traditionally has been regulated by the Securities and Exchange Commission. The open question for securities litigators is whether this case will be an aberration confined to its facts, or will enable many securities plaintiffs to tack on antitrust counts. In particular, will an allegation that several persons conspired to commit securities fraud expose defendants to the more lenient pleading standards and greater penalties of the antitrust laws?

The Second Circuit’s decision, Billing v. Credit Suisse First Boston, Ltd.,¹ dealt with allegations that a group of underwriters and institutional investors reached several agreements that inflated the prices of securities after their initial offering to the public. The complaint alleged the underwriters agreed that, in return for allocations in the initial offering, they would exact a variety of concessions from their customers, including agreements to purchase securities in subsequent offerings or in the aftermarket, or to share the benefits of the expected IPO “pop” with the underwriters.²

The district court dismissed the complaint, relying on the doctrine of “implied repeal” (also known as “implied immunity”), holding that the antitrust laws could not apply to an area so comprehensively regulated by the Securities and Exchange Commission.³ The Second Circuit reversed, finding no basis for a conclusion that Congress intended to sweep away the antitrust laws with respect to the conduct alleged.

Implied Repeal: A Primer

Courts have long been concerned that the securities laws could conflict with the older antitrust laws. Thus, although the securities laws are silent on the point, courts have on occasion decided that Congress must have intended to repeal the antitrust laws with regard to some activities addressed by the securities laws. The courts found such a repeal “by implication” necessary to keep defendants from facing statutes with conflicting requirements. Not surprisingly, courts generally have been reluctant to find a Congressional intent to repeal a statute, even for limited purposes. As the Supreme Court wrote, “repeals by implication are not favored,”⁴ and are found only “in the face of a plain repugnancy between the antitrust laws and regulatory provisions.”⁵

The Supreme Court first considered implied repeal in a securities case in Silver v. New York Stock Exchange⁶ in 1963, and did not find an implied repeal.⁷ Since then, two different routes to a finding of implied repeal have emerged.

First, courts have found situations where the regulatory scheme is so pervasive that there simply is no room for the antitrust laws to apply. The seminal case was Gordon v. New York Stock Exchange,⁸ where the Supreme Court dismissed an antitrust action challenging New York Stock Exchange rules that set retail brokerage commissions. The Court found that the SEC had actively regulated the Exchange’s rate setting activities and that Congress had recognized the practice when it passed the Securities Exchange Act of 1934. The Second Circuit followed Gordon and found an implied repeal when plaintiffs alleged that the equity options exchanges agreed not to list options already listed on other exchanges. There, the court found that the SEC had the authority to authorize such an agreement and, in fact, had once done so. Although the SEC subsequently barred such agreements, the court nonetheless found an implied repeal because the Commission could allow them again in the future and there was a risk that to apply the antitrust laws would subject the exchanges to conflicting standards.⁹

The second line of implied repeal cases involves situations in which the alleged activities were either required or approved by statute or regulation. The Supreme Court found such a situation in United States v. National Association of Securities Dealers,¹⁰ which was decided on the same day as Gordon. The United States alleged that agreements between underwriters and broker-dealers intended to maintain uniform prices for mutual funds violated the antitrust laws. The Supreme Court found an implied repeal because the Commission had the authority to permit such agreements and, according to the legislative history, when Congress granted that authority to the Commission in the Investment Company Act, it contemplated that the Commission would permit activity of the sort alleged.¹¹

The Supreme Court most recently considered implied immunity in a non-securities context in 2004, when the Court considered whether the Telecommunications Act of 1996 shielded regulated telephone companies from the antitrust laws. Although the Court regarded “the enforcement scheme set up by the 1996 Act [as] a good candidate for implication of antitrust immunity, to avoid the real possibility of judgments conflicting with the agency’s regulatory scheme,” the statute included an antitrust-specific saving clause that made clear that Congress intended the antitrust laws to apply.¹² While the concept of implied repeal was not explored in any depth, the dicta arguably implies that the current Court would apply it broadly.¹³

The IPO Case

When the Billing defendants moved to dismiss the complaint arguing that the alleged conduct was immune under either theory of implied repeal, the district court agreed, writing that “the SEC, both directly and through its pervasive oversight of the NASD and other SROs, either expressly permits the conduct alleged in the . . . Complaint or has the power to regulate the conduct.”¹⁴ Thus, the court considered SEC regulation to be so pervasive that the antitrust laws simply could not apply.

On appeal, the Second Circuit solicited the views of the Department of Justice, which argued for reversal (the Department has invariably argued for application of the antitrust laws),¹⁵ and of the SEC, which argued that the district court opinion should be affirmed (in contrast to the Justice Department, the SEC generally has argued for implied repeal).¹⁶

The court sided with the plaintiffs, finding no evidence to support the view that Congress intended to repeal the antitrust laws. The court first observed that the cases that have found implied repeals invariably have determined that at some point the alleged conduct was explicitly permitted and that often, as in Gordon, Congress contemplated that a regulatory agency would permit the conduct.¹⁷ Here, unlike many of the cases (including Gordon and NASD), there was no legislative history giving any indication that Congress intended to immunize the conduct.

The court also determined there was no potential for an irreconcilable conflict; there was no provision in the securities laws that would have been “‘rendered nugatory’” if the antitrust laws were to apply.¹⁸ Moreover, there was no contention that the SEC would or even could compel agreements of the nature alleged. Indeed, the SEC’s submission stopped short of arguing that the Commission could approve the agreements.¹⁹ Not only had the SEC never authorized the alleged conduct, it never even contemplated doing so. The Commission wrote “it is difficult to envision the circumstances in which” the conduct alleged in the complaint would be allowed.²⁰ That was the deciding factor for the court: it saw no way that Congress could have intended to repeal the antitrust laws if the Commission would never authorize the alleged activities.²¹

The court summarily dismissed the defendants’ argument that SEC regulation is so pervasive as to compel immunity because it found no inconsistency between the securities laws and the antitrust laws. “We will not halt operation of the antitrust laws on the rationale that the misconduct equally threatens the markets for trading securities.”²² The court called the “pervasive regulation” standard “vague” and suggested its primary application was to SRO activities, which are extensively regulated by the SEC.²³

The plaintiffs must have been surprised by how far the court went. They had argued that implied immunity would apply to any conduct that the SEC could permit and that, therefore, “immunity would not be appropriate in this case because the SEC lacks the power to approve the alleged tie-in arrangements and conspiracies.” The court did not agree with the plaintiffs that “the authority to permit, alone, will establish that a statute has impliedly repealed the antitrust laws.” Rather, the court decided to apply “a legal framework more favorable to plaintiffs than the doctrine they have pressed,” and to require a greater showing of legislative intent to repeal the antitrust laws while being satisfied that the Commission would not allow the conduct, even if it could.²⁴

Does Billing Redefine the Implied Repeal Landscape?

The Billing decision does not necessarily move the Second Circuit away from its decision in the options case, where it found an implied repeal in an instance where the alleged conduct violated SEC regulations, but was once permitted and could be again in the future.²⁵ There are two apparent distinctions between the two cases. First, the options case involved activities of exchanges. Exchanges occupy a special place in the securities laws, performing important regulatory and law enforcement functions and operating under the close scrutiny of the SEC. SROs serve as semi-private regulators “under the ever-watchful and omnipresent eye of the SEC.”²⁶ The conduct of private parties, though subject to regulation, cannot be said to be actively approved by the SEC. Second, the alleged agreement in the options case is one that the SEC once clearly permitted (and, indeed, encouraged). That is in marked contrast to the manipulations alleged in the IPO case, which the SEC could not conceive of ever permitting.

The Aftermath of Billing

Billing serves as a reminder to firms that they cannot assume their activities in the regulated securities markets are beyond the reach of the antitrust laws. The big risk is that many allegations of fraud—those involving concerted activity by two or more persons—could include antitrust counts. At least in those cases where plaintiffs can show that the alleged fraud is of the type Congress hoped to bar when it passed the securities laws, they might very well be able to escape dismissal early in the litigation. That, of course, substantially increases the litigation risks for defendants in two ways: the heightened pleading requirements of the Private Securities Litigation Reform Act²⁷ do not apply to antitrust counts, and prevailing plaintiffs in antitrust actions can get treble damages and attorney’s fees.²⁸ Many antitrust defendants have been induced to settle solely because of the massive risks posed by treble damages. Some securities defendants, even those with strong cases, could find themselves in similar positions.

What Firms Can Do

Because Billing increases the uncertainty as to where the line will be drawn between conduct that is the subject of “implied immunity” and that which is not, firms need to continue and enhance their antitrust compliance efforts in areas where conduct involving two or more firms is involved. Areas such as trading in stocks and bonds, investment banking, and syndicate practices should be reviewed for possible exposure based on coordinated activity. Even though firms have guidelines for NASDAQ trading (because of SEC and Justice Department settlements), they need to look at other areas where the appearance of coordinated (as opposed to independent) activity may be present. The fact is that the interdependence of constructing a syndicate and of needing a counterparty to trade (and direct contact for many trades) immediately opens the way for aggressive plaintiffs to argue for inferences of illicit agreements among competitors, particularly when someone makes an ill-advised or ambiguous statement.

All personnel in regular contact with competitors need to be sensitized to antitrust pitfalls and how to avoid them. They also need clear guidelines that define what kinds of coordination are permissible and opportunities to ask questions about what they face every day. Counsel must be available to them constantly to answer questions as they arise. It can be useful to equip them with a few questions to ask themselves about contacts with competitors, such as:

• Is this contact necessary to benefit investors, such as by spreading risk and by increasing liquidity, or does it only benefit me (or my firm) and the competitor by reducing competition between us?
• Am I ceding the authority to make decisions that affect my firm to someone at another firm?
• Could someone be victimized by this agreement?

Firms can’t do much to prevent changing legal standards, such as the Second Circuit’s decision in Billing. What they can do is protect themselves by making sure their personnel are appropriately sensitized to these issues and can easily contact counsel. In this way, they can avoid conduct that could be exploited by enterprising plaintiffs.

Notes

1. 426 F.3d 130 (2d Cir. 2005).

2. The IPOs all took place during the height of the Internet bubble, when equities almost invariably jumped dramatically in price in the first few days after an offering.

3. In re Initial Pub. Offering Antitrust Litig., 287 F.Supp.2d 497, 499, 523 (S.D.N.Y. 2003).

4. Silver v. New York Stock Exch., 373 U.S. 341, 357 (1963).

5. Gordon v. New York Stock Exch., 422 U.S. 659, 682 (1975).

6. 373 U.S. 341 (1963).

7. The courts have considered, but not found, implied repeals in other areas. See U.S. v. The Philadelphia National Bank, 374 U.S. 321 (1963) (banking); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) (electric power); Northeastern Telephone Co. v. American Telephone and Telegraph Co., 651 F.2d 76 (2d Cir. 1981) (telecommunications); Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP., 540 U.S. 398 (2004) (telecommunications).

8. 422 U.S. 659 (1975).

9. In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d 134, 149 (2d Cir. 2003).

10. 422 U.S. 694 (1975).

11. Id. at 721-22, 727.

12. Verizon, 540 U.S. at 406.

13. Id. at 413.

14. IPO Antitrust Litig., 287 F.Supp.2d at 506.

15. See Letter dated May 5, 2005, from R. Hewitt Pate, Assistant Attorney General, to Roseann B. MacKechnie, Clerk of the Second Circuit Court of Appeals, available at <www.usdoj.gov/atr/cases/f208800/208898.htm>.

16. See Letter dated March 21, 2005, from Giovanni Prezioso, SEC General Counsel, to Roseann B. MacKechnie, Clerk of the Second Circuit Court of Appeals, available at <www.sec.gov/litigation/briefs/csfb032105.pdf>.

17. Billing, 426 F.3d at 169-70.

18. Id. at 169 (quoting Gordon, 422 U.S. at 689-90).

19. Id. at 168; see Prezioso letter, supra note 16, pp. 1-3.

20. Prezioso letter, supra note 16, p. 3.

21. Billing, 426 F.3d at 169-70.

22. Id. at 171.

23. Id. at 161, 171 (quoting Northeastern Telephone Co. v. American Telephone and Telegraph Co., 651 F.2d 76, 83 (2d Cir. 1981)).

24. Id. at 167.

25. See In re Stock Exchs. Options Trading Antitrust Litig., supra note 9.

26. Billing, 426 F.3d at 171.

27. 15 U.S.C.A. § 78u-4(b) (1995).

28. See 15 U.S.C.A. § 15.

About the Author

Mr. Rich (jrich@morganlewis.com) is a partner and Mr. Gongora (agongora@morganlewis.com) is an associate in the antitrust group of Morgan Lewis & Bockius LLP.