The majority agrees subjecting IPO underwriters to both antitrust and securities laws would "threaten serious harm" to the securities markets.
NEW YORK — The U.S. Supreme Court on Monday blocked an antitrust lawsuit against leading investment banks, a blow to investors who questioned the tactics of Wall Street firms during the tech bubble.
The class-action suit accused the firms of illegally rigging the initial public stock offerings of hundreds of technology companies. The New York-based U.S. Court of Appeals for the 2nd Circuit had ruled that the suit could proceed.
But by a 7-1 vote, the Supreme Court agreed with the securities industry, which argued that federal securities law pre-empted the suit.
The essential issue, Justice Stephen Breyer wrote for the majority, was whether allowing an antitrust suit over the alleged practices would prove “practically incompatible” with the smooth enforcement of securities law by the Securities and Exchange Commission (SEC).
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In answering that question in the affirmative, Breyer emphasized the confusion that would result from subjecting IPO underwriters to both antitrust and securities laws — confusion, Breyer wrote, that would “threaten serious harm to the efficient functioning of the securities markets.”
SEC’s power reaffirmed
Stephen Shapiro, a Chicago lawyer who represented the Wall Street firms, said the Supreme Court’s ruling “reaffirms the SEC’s power and authority to speak with one voice in the securities industry. … That’s very important for investor welfare, as well as the industry.”
The SEC “has issued very detailed rules and regulations in this area,” Shapiro said. “And if juries around the country can come up with their own rules in private antitrust lawsuits, then nobody has an incentive to obey the SEC rules. They become something like wastepaper.”
Steven Caruso, a New York securities lawyer who frequently represents investors, said the ruling brings antitrust lawsuits by investors “closer to the realm of impossibility.”
“It’s unfortunate that the protection of investors is being left strictly to the SEC and that ordinary investors aren’t able to get the protection of things like the antitrust laws,” Caruso said.
Investment banks would have faced three times the amount of damages in lawsuits brought forth under federal antitrust laws compared with penalties under securities rules, lawyers said.
Suit filed 5 years ago
The case originated in 2002, when a group of 60 investors filed suit in U.S. District Court in New York. They accused the Wall Street firms of inflating prices of newly issued stocks by agreeing to impose certain conditions on those who wanted the shares. Those conditions, the plaintiffs charged, included purchasing less desirable securities and buying additional shares at escalating prices.
Those named in the lawsuit included units of Credit Suisse Group, Goldman Sachs, Bear Stearns, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Citigroup, Deutsche Bank, Morgan Stanley, Janus Capital Group and Fidelity Investments.
“This was a monster, huge case that tried to sue everybody for everything on behalf of all investors,” said Roy Englert, a lawyer who filed a brief in the case on behalf of the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association.
The antitrust lawsuits said the securities firms profited at the investing public’s expense by ensuring that the prices of Amazon.com, eBay and hundreds of other Internet stocks would soar soon after they began trading publicly.
The suit had threatened to roil the IPO business. Wall Street’s revenue from stock underwriting has climbed an average 13 percent a year since 1995, reaching a record $19 billion in 2006, and is on pace to surpass that figure this year, based on estimates by Bank of America analyst Michael Hecht. Goldman Sachs had the most revenue from the business, $1.47 billion, according to Hecht, followed by Citigroup, UBS, Morgan Stanley and Merrill Lynch.
“A real hornet’s nest”
The antitrust suits “would have opened up a real hornet’s nest,” said James Cox, a professor of corporate and securities law at Duke University. “The practices that were being challenged were a variety of practices that the underwriters customarily follow.”
“Had the court taken the opposite view, the industry would have faced massive legal exposure and a major engine of American growth would have been unnecessarily damaged,” Marc Lackritz, chief executive officer of the Securities Industry and Financial Markets Association, said in a statement.