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High Court Backs Banks In Antitrust Suit on IPOs

By Tomoeh Murakami Tse and Charles Lane
Washington Post Staff Writers
Tuesday, June 19, 2007

NEW YORK, June 18 -- 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 to 1 vote, the Supreme Court agreed with the securities industry, which argued that federal securities law preempted the suit.

The essential issue, Justice Stephen G. 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.

In answering that question in the affirmative, Breyer emphasized the confusion that, he wrote, would result from subjecting IPO underwriters to both antitrust and securities laws -- confusion that would "threaten serious harm to the efficient functioning of the securities markets."

Stephen M. 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 B. 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 damages in lawsuits brought forth under federal antitrust laws compared with penalties under securities rules, lawyers said.

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.

The lawsuit named 16 investment banks and institutional investors, including 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. The case is Credit Suisse Securities v. Billing.

The SEC and the Justice Department's Antitrust Division had taken different sides in the lower courts, with the SEC supporting the investment banks and the Antitrust Division backing the plaintiffs.

In the Supreme Court, the Bush administration proposed a compromise that would have sent the case back to the district court for it to decide whether the alleged antitrust violations were separable from conduct the SEC permits. Breyer rejected that suggestion, saying it "does not convincingly address the concerns we have set forth here."

Breyer's opinion was joined by Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, David H. Souter, Ruth Bader Ginsburg and Samuel A. Alito Jr.

Justice John Paul Stevens agreed with the decision but wrote a separate opinion outlining his view that "to suggest that an underwriting syndicate can restrain trade . . . by manipulating the terms of IPOs is frivolous."

Justice Clarence Thomas dissented, arguing that securities law expressly permits plaintiffs to pursue claims based on "all other rights and remedies that may exist in law or equity," including antitrust law.

Justice Anthony M. Kennedy did not take part in the case.

Lane reported from Washington.

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