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Jul 31, 2007
This article was previously published in The Daily Deal. It is reprinted here with permission.
A recent U.S. Supreme Court decision could help bolster America’s standing as a competitive location for capital formation. Or at the very least, the decision has forestalled the onslaught of plaintiff antitrust claims against Wall Street’s IPO underwriting process.
In a 7-1 vote, the U.S. Supreme Court held in Credit Suisse Securities (USA) LLC v. Billing that the securities laws implicitly precluded application of the antitrust laws to the practice of tying the sale of IPO shares to the sale of less desirable shares in the aftermarket and “laddering” the sales of such shares.
In the case, a group of investment banks including Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup, J.P. Morgan, and others petitioned the Court to reverse the Second Circuit Court of Appeals and grant implied antitrust immunity to their IPO underwriting process, which investors complained violated the Sherman Act. The respondent investors argued that a horizontal conspiracy was entered into among the investment banks to create pools of orders to drive up the price of less attractive shares in the aftermarket. Tie-ins between allocation of shares in the IPO and purchases of stock in the aftermarket and laddering agreements both made this possible.
The investors brought a class action suit in U.S. District Court, Southern District of New York. The District Court ruled in favor of the banks and dismissed the case on the grounds that the pervasive regulation of the sale of securities by the Securities and Exchange Commission (SEC) immunized the banks from antitrust liability. The Second Circuit Court of Appeals reversed and reinstated the complaint against the investment banks.
Much was at stake in the Supreme Court’s decision. If the Court decided in favor of the investors, investment banks could suddenly be subjected to an onslaught of antitrust litigation, including treble damages under Section 4 of the Clayton Act. The immediate impact on the U.S. economy would have been apparent: the cost of capital formation could increase and the appeal of the U.S. as a location for new start-up companies could have been significantly diminished. Companies seeking capital could have structured their IPOs in London, Hong Kong, or Frankfurt and avoided the problem entirely.
