June 21, 2007

IPO Underwriting Practices Are


from Antitrust Claims

Certain IPO stock underwriting practices are immune from antitrust scrutiny, according to the United States Supreme Court. In Credit Suisse v. Billing, purchasers of securities in IPOs alleged that certain underwriters’ “tie-in” and “laddering” arrangements grossly inflated the securities’ price, in violation of Section 1 of the Sherman Act and other federal and state antitrust laws. Reversing the United States Court of Appeals for the Second Circuit, the Supreme Court held that the underwriters could not be liable because the securities laws implicitly preclude application of the antitrust laws to those practices.

In addition to reducing antitrust exposure for securities firms, the decision could have implications for the reach of the antitrust laws in other areas of pervasive federal regulation when the legislative scheme is silent concerning antitrust immunity.

Decisive Factor: Conflict between Antitrust and Securities Regimes

Writing for a 7-1 majority, Justice Stephen Breyer rejected the argument that a broad, generic savings clause in the securities laws could preserve all antitrust claims. He then distilled the critical question for purposes of implied preclusion: are the securities laws “clearly incompatible” with the application of the antitrust laws in this context? Relying on three prior cases exploring antitrust preclusion in the securities area, Justice Breyer identified four elements necessary for a “clear incompatibility” finding:

(1) an area of conduct squarely within the heartland of securities regulation;
(2) clear and adequate SEC authority to regulate;
(3) active and ongoing agency regulation; and
(4) a serious conflict between the antitrust and securities regimes.

The parties did not dispute that the first three elements were present, leaving the fourth as the decisive factor.

The Court found that a serious conflict exists between the securities laws and the antitrust laws with respect to the conduct in question because
(a) permitting antitrust actions in this context would threaten serious securities-related harm; and (b) the SEC is an active regulator and takes competition into account when reaching its decisions, making the enforcement-related need for an antitrust lawsuit in the securities arena unusually small.

Court’s Decision Not Dependent on Substance of SEC Enforcement

Importantly, the Court’s decision does not depend on the likelihood that the SEC, which historically has forbidden and prosecuted the underwriters’ practices at issue, would reverse course. Rather, the Court found that securities-related harm would result from the fact that the lines separating permissible from impermissible conduct under the securities laws are fine, requiring securities-related expertise for appropriate interpretation; that the same types of evidence of the conduct in question could give rise to contradictory inferences under each regime; and that, under these circumstances, the risk of inconsistent or seriously mistaken court results is high, with the consequence that allowing antitrust suits in this context would chill conduct by underwriters that the securities laws not only permit, but encourage.

The Court acknowledged that the problem of chilling lawful conduct through mistakes in antitrust adjudication exists, to some degree, in other areas. Because of the importance of IPOs to the effective functioning of the capital markets, however, the Court found that such mistakes would be unusually likely and costly in the context of the underwriting practices at issue.