United States: U.S. Supreme Court’s Decision Grants Antitrust Immunity to Investment Banks

The U.S. Supreme Court has sided with several of the largest U.S. investment banks by dismissing a class action alleging that the banks violated antitrust laws while underwriting several hundred initial public offerings in the late nineties. This decision effectively immunizes underwriters from antitrust liability (and its threat of treble damages) for syndication and marketing practices used in IPOs.

In Credit Suisse v. Billing, the plaintiffs launched a class action alleging that the defendant investment banks, which underwrote over 900 technology-company IPOs from 1997 to 2000, violated antitrust laws by, among other things, soliciting promises from prospective purchasers to buy additional shares in the aftermarket at higher prices (known as "laddering") or to buy other, less attractive, securities in exchange for IPO allocations (known as "tying"). The underwriters moved to dismiss the claim on the grounds that U.S. securities laws preclude the application of antitrust laws to the conduct in question. The trial court agreed with the underwriters and dismissed the action, but the U.S. Court of Appeals for the Second Circuit reversed this decision and reinstated the complaint.

The underwriters appealed to the U.S. Supreme Court.

In holding that securities laws implicitly preclude application of antitrust laws to the underwriting of IPOs, the Court expressed concern that judges and juries are not as qualified as experts at the Securities and Exchange Commission to determine the legality of underwriter conduct—noting that "only a fine, complex, detailed line separates activity that the SEC permits or encourages … from activity that the SEC must forbid." Allowing judges and juries rather than expert regulators "to distinguish what is forbidden from what is allowed" in IPO regulation would result in "unusually serious mistakes" and inconsistent outcomes from different courts. Indeed, the Court held that there was no practical way to limit private antitrust suits to unlawful activity under U.S. securities laws, and that applying the antitrust laws to underwriting would lead to instances in which underwriters must not only comply with securities laws but also avoid a wide range of conduct that securities laws otherwise permit.

In sum, the Court held that allowing antitrust actions "would threaten serious harm to the efficient functioning of the securities markets."

The complaint in Credit Suisse, although asserting antitrust claims exclusively, reads like a securities fraud action. The plaintiffs alleged "an epic Wall Street conspiracy" involving IPO pricing where laddering and tying agreements guaranteed that stock prices would rise artificially in the aftermarket until the conspirators dumped the stock on unsuspecting buyers. In addition to immunizing underwriters from antitrust liability, the Supreme Court's decision suggests that U.S. courts will not allow plaintiffs to camouflage securities complaints as antitrust actions to avoid recent U.S. legislation designed to weed out frivolous securities claims.