Second Circuit Decision Paves the Way for IPO Antitrust Litigation
October 31, 2005
The recent decision of the United States Court of Appeals for the Second Circuit in Billing v. Credit Suisse[1] green-lighted application of the antitrust laws to what the Court called allegations of “an epic Wall Street conspiracy” involving IPO pricing. Here's how the alleged scheme worked according to the underlying complaints in the case.
Securities underwriters allocated the right to buy shares of “hot IPOs” to certain institutional customers in return for the customers agreeing to not only buy the IPO shares, but also buy the stock in the hours and days following the IPO at a specified price in the resale market, known as the after-market. The alleged “tie-in agreements” essentially pre-arranged sales at set prices which guaranteed the stock price would go up and up in the after-market until the conspirators “dumped” the stock on unsuspecting buyers. In the usual case, purchasers who bought after the dump found that the stock quickly plummeted in price, generating large losses.
Tie-in agreements that pre-sell the after-market have long been considered illegal by the Securities Exchange Commission (“SEC”). 2005 SEC Guidance Statement, 70 Fed. Reg. at 19, 674. Tie-in agreements like the ones alleged in Billing v. Credit Suisse are particularly harmful because they “ladder” the after-market so that potential buyers of the stock are enticed to buy on momentum upon seeing the continually escalating price of the IPO shares in the after-market. According to the underlying complaints, buyers (not knowing that the sales and prices they were seeing were pre-arranged) lined up to pay inflated prices which generated billions of dollars of illegal profits for the securities underwriters and their customers at the expense of the investing public. It is even alleged that the underwriters instructed their analysts to issue “booster shot” buy recommendations to keep the market hot. According to the allegations, the underwriters' customers returned a large share of the profits of the illegal dealing to the underwriters through a variety of sham arrangements.
The Second Circuit's opinion mentions some of the IPOs allegedly subject to the tie-in conspiracy. The names are household names many investors will recall from recent years including Amazon.com, eBay, Priceline, Red Hat and Global Crossing.
In Billing v. Credit Suisse, the specific legal question before the Second Circuit was whether the alleged scheme, if proven, would violate the antitrust laws. The district court had concluded that the scheme fell within the jurisdiction of the securities laws and therefore the antitrust laws did not apply. The Second Circuit reversed, finding that the securities laws did not expressly or impliedly repeal the applicability of the antitrust laws to tie-in arrangements.
The Second Circuit found that the legislative history of the securities laws did not support a finding of express or implied repeal of the antitrust laws in this context. The Court also found that the statutory regimes of the securities laws and the antitrust laws did not present the potential for irreconcilable mandates or conflicts in regulating IPO misconduct of the type alleged. The Court distinguished precedents including Gordon v. NYSE,[2] and U.S. v. NASD[3] which had found an implied repeal of the antitrust laws for rate-fixing and mutual find market stabilization practices regulated or approved by the SEC.
The Second Circuit's use of language in rejecting the underwriters' implied immunity claims is forceful:
The claim of implied immunity in this case is, in many ways, unlike any we have seen. Tie-in agreements are recognized as means of dangerous manipulation, and there is no indication that Congress contemplated repealing the antitrust laws to protect them.
2005 WL 2381653 at p. 29. The Second Circuit's conclusion naturally followed that “the doctrine of implied antitrust immunity does not shield the alleged misconduct from antitrust scrutiny . . .” Id.
The Court's conclusion bookends the Court's comments on the alleged IPO pricing scheme at the outset of Billing v. Credit Suisse opinion:
Plaintiffs allege an epic conspiracy [involving] the nation's leading underwriting firms . . . [T]he underwriting firms allegedly executed a series of manipulations that grossly inflated the price of [IPO securities] . . . profiting at the expense of the investing public. . . Plaintiffs tell a convincing story and are not the first to tell it.
2005 WL 2381653 at p. 6. The comments reflect the many suits and investigations on alleged IPO misconduct that have arisen in the last few years.
Although the Second Circuit never passes on the merits of the claims at issue, the opinion reflects the Court's observation that allegations of IPO manipulation are, at least, a convincing story. From the practitioner's perspective, Billing v. Credit Suisse signals the Second Circuit's willingness, at least in this case, to apply the antitrust laws to securities manipulation cases.
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