Supreme Court to Decide When Antitrust Laws Apply to Underwriting Syndicates and IPOs
By Jonathan M. Rich & Alan Gongora

The Supreme Court has granted certiorari in a case that will require the Court to consider when the antitrust laws can apply to regulated securities markets. The case comes on appeal from the Second Circuit Court of Appeals, which held that the antitrust laws can apply to the activities of syndicates that underwrite initial public offerings (“IPO’s”). The United States urged the Court to grant certiorari. The Solicitor General’s brief is best understood in the context of another antitrust case that is before the Court this term.¹

Billing Redux

We reported previously (See Wall Street Lawyer, December 2005) that the Second Circuit’s decision in Billing v. Credit Suisse First Boston, Ltd.² would permit very broad application of the antitrust laws in the securities markets.³ The plaintiffs alleged that a group of “underwriters agreed that, in return for allocations in the initial offering, they would exact a variety of concessions from their customers.” Some of those agreements involved activity that affected prices paid by investors and that is barred by the securities laws, such as “laddering,” which is aftermarket activity designed to inflate prices of the newly issued securities. Absent immunity, the alleged agreements would violate Section 1 of the Sherman Act.

The District Court dismissed the claim because it considered the activity immune from the antitrust laws. That conclusion was based on a broad application of the doctrine of “implied repeal” (also known as “implied immunity”), under which courts can find that the antitrust laws do not apply to regulated activity when they conclude that Congress, when it established the regulatory scheme, intended to supplant the antitrust laws with regulation. The courts have decided that implied immunity applies to a variety of activities in the securities markets.⁴ The District Court’s view in Billing was that the “pervasive” Securities and Exchange Commission (“SEC”) regulation of the IPO process rendered the antitrust laws entirely inapplicable.⁵

The Second Circuit’s holding went to the other extreme (indeed, the Court of Appeals noted that its holding was more generous to the plaintiffs than the standard that they had advocated), holding that because some of the alleged activity is barred by the securities laws, there could be no implied repeal. The court, therefore, refused to dismiss any of the claims.⁶ As we wrote in Wall Street Lawyer, the Second Circuit’s decision raises the prospect that most securities frauds committed by two or more persons could be actionable under the antitrust laws.⁷

The United States Weighs In

After the defendants filed for a writ of certiorari in the United States Supreme Court, the Court asked the Solicitor General for the views of the United States on whether the Court should grant the writ. The Solicitor General’s brief noted that, while the complaint contained a number of very specific factual allegations about defendants’ activities, those allegations were of activities “that are either permitted under the securities laws or inextricably intertwined with such permitted activities.”⁸ The Solicitor General made clear that SEC-authorized collaboration among members of underwriting syndicates is immune from the antitrust laws and that the immunity extends to activities “inextricably intertwined” with that immune conduct.⁹ The United States rejected the Second Circuit’s narrow interpretation of implied immunity, writing that the Second Circuit did not “make sufficient accommodation for the securities laws’ policy of encouraging certain types of collaborative activity.”¹⁰

The United States was equally dismissive of the standard adopted by the District Court, which has been advocated by the petitioners, writing that they are “wrong in their view that all conduct connected with IPOs is implicitly immune from antitrust liability simply because the SEC exercises ‘pervasive regulatory authority over it.’”¹¹

A main focus of the Solicitor General’s brief is what it describes as the complaint’s “conclusory” allegations of conduct forbidden by the antitrust laws. The government maintains that the Second Circuit “erroneously held that the implied immunity issue is conclusively resolved merely because the complaint alleges, in rather conclusory fashion, certain conduct that is forbidden by the securities laws.”¹² The brief notes the contrast between those conclusory allegations and the very detailed allegations of conduct that is permitted under the securities laws. The United States wrote that it is concerned that the Court of Appeals regarded sorting out the immune from non-immune conduct as an evidentiary issue when, to the government, it is a fundamental pleading problem. For example, as the Solicitor General wrote, facts that the complaint alleges to support the laddering claims are “sufficiently vague Wall Street Lawyer © 2006 Thomson/West that [they] encompass permissible book-building conduct … that the SEC has specifically approved.”¹³ As we note below, the government’s focus on pleading standards may be derived from its interest in another case before the Court.

The United States suggests a test that the courts can apply when considering a motion to dismiss a complaint that includes allegations of some conduct that is immune and some that is not:

When a complaint merely combines a conclusory allegation that the defendants engaged in impermissible anticompetitive conduct with more detailed allegations of collaborative conduct authorized by a regulatory scheme – or activities inextricably intertwined with such conduct … the complaint must allege facts providing concrete notice and giving rise to a reasonably grounded explanation, … that the alleged antitrust offense can be established without relying on activities that are authorized under the regulatory scheme or inextricably intertwined with such immune activities.¹⁴

The brief makes clear that the United States is concerned about the implications of permitting unfettered discovery on the basis of such a complaint. Rather, the Solicitor General recommends that a district court look into whether the allegations of conduct that would not be immune rest entirely on the allegations of immune conduct.

The Antitrust Context

The Solicitor General’s focus on pleading standards likely stems from its interest in another antitrust case that is currently before the court (and on which the Court heard oral argument a week after the Solicitor General filed its brief in Billing). The issue in Bell Atlantic v. Twombly is whether a complaint that alleges an antitrust conspiracy, but includes no allegations in support of the conspiracy other than parallel conduct is sufficient to withstand a motion to dismiss. The Twombly case has the potential to affect the detail and support necessary for an antitrust complaint and how the Supreme Court decides it could affect all future antitrust litigation. Because of the risks and burdens of antitrust litigation, Twombly could make it more difficult for plaintiffs to get into court and to get discovery. The United States wrote in Twombly that for an antitrust complaint, to survive a motion to dismiss, it must contain “more than mere allegations of an agreement or conspiracy… ”¹⁵ The Solicitor General appears to have carried that principle over to its brief in Billing, giving its focus on the nature of the allegations in the complaint of conduct that is unambiguously subject to the antitrust laws.

The Supreme Court is likely to hear oral arguments in Spring 2007 and decide the case by the end of the term.

Notes

1. Glen Billing et al. v. Credit Suisse First Boston Ltd., et al. 426 F.3d 130 (2d Cir. 2005). Billing v. Credit Suisse First Boston Ltd., et al. No. 05-1157 (U.S. March 13, 2006). Brief for the United States as Amicus Curiae on Petition for a Writ of Certiorari to the United States Court of Appeals for the Second Circuit, Billing, 426 F.3d 130 (2d Cir. 2005) (No. 05-1157).
2. Billing, 426 F.3d 130 (2d Cir. 2005).
3. Jonathan Rich and Alan Gongora. “Is Securities Fraud Actionable Under the Antitrust Laws?” Wall Street Lawyer. 9.7 (2005): 1-4.
4. Id. at 1-2. See also Gordon v. New York Stock Exch., 422 U.S. 659, 682 (1975); and United States v. National Association of Securities Dealers 422 U.S. 694 (1975).
5. In re Initial Pub. Offering Antitrust Litig., 287 F.Supp.2d 497, 499, 523 (S.D.N.Y 2003).
6. 426 F.3d 130 (2d Cir. 2005). The United States (through the Antitrust Division of the Department of Justice) filed a letter brief with the Second Circuit urging reversal while the SEC filed a letter brief urging affirmance. The Solicitor General’s brief rejected the tests advocated in both of the previous briefs, but made clear in a footnote that the standard advocated in its memorandum “reflects the considered view of the United States.” Attorneys from Antitrust Division and SEC are on the brief. Brief for the United States as Amicus Curiae, Billing v. Credit Suisse First Boston, Ltd., 426 F.3d 130 (2d Cir. 2005) (No. 05-1157) 4 n.2.
7. Rich, supra note 1-4.
8. Brief for the United States, No. 05-1157 at 8.
9. Id. at 8.
10. Id. at 12.
11. Id. at 15.
12. Id. at 12.
13. Id. at 15.
14. Id. at 13.
15. Brief for the United States as Amicus Curiae Supporting Petitioners, Bell Atlantic Corp. v. William Twombly, 425 F.3d 99 (No. 05-1126) at 7.

About the Authors

Jonathan M. Rich is a partner and Alan Gongora is an associate in the antitrust practice group of Morgan, Lewis & Bockius LLP. The authors are grateful to Greta Burkholder for editorial and research assistance. Contact: jrich@morganlewis.com.