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Tuesday, June 19, 2007 at 9:02AM In another clear victory for those who would see our jury system destroyed, the Supreme Court has sided with investment banks saying they cannot be held liable for violating time worn princples of the antitrust laws. The Court rejected even the Solicitor General's suggestion that the plaintiffs be allowed to amend:
Link: Justices Back Underwriters on New Issues - New York Times.
Justices Back Underwriters on New Issues
By LINDA GREENHOUSE Published: June 19, 2007
WASHINGTON, June 18 — The securities industry dodged a bullet on Monday when the Supreme Court threw out a private antitrust suit that accused 10 leading investment banks of conspiring to fix prices for the initial public offerings of hundreds of technology companies during the 1990s. Skip to next paragraph Related Supreme Court Opinion (pdf)The conduct described in the lawsuit, which included forming underwriting syndicates, setting the price for the initial offering and allocating shares to investors, was “central to the proper functioning of well-regulated capital markets” and “essential to the successful marketing of an I.P.O.,” the court said in an opinion by Justice Stephen G. Breyer. Opening investment banks to potential antitrust liability for behavior that the securities laws permit would make underwriters subject to “conflicting guidance, requirements, duties, privileges, or standards of conduct,” Justice Breyer said, and “would threaten serious harm to the efficient functioning of the securities markets.”
The vote in the case, Credit Suisse Securities v. Billing, No. 05-1157, was 7 to 1, with Justice Clarence Thomas dissenting and Justice Anthony M. Kennedy not participating. Justice Kennedy’s son, Gregory, is a managing director of Credit Suisse Securities, a defendant in the suit. Justice John Paul Stevens filed a separate concurring opinion and did not sign Justice Breyer’s majority opinion.
The closely watched class-action lawsuit was filed in 2002 by 60 investors who had lost money in technology stocks after prices dropped sharply. The decision overturned a ruling by the United States Court of Appeals for the Second Circuit, which in 2005 reinstated the lawsuit after the Federal District Court in Manhattan dismissed it....
The losers in the case included not only the plaintiffs but the United States, which in a brief filed by Solicitor General Paul D. Clement tried to sell an awkward compromise between the competing views of two federal agencies. The Justice Department’s antitrust division wanted to support the plaintiffs, while the Securities and Exchange Commission supported the defendants in arguing for immunity from the antitrust laws.
The government told the justices that neither of the two lower courts had “adequately accommodated the interests of the two critical statutory frameworks at issue.” While the court of appeals decision “fails to provide adequate protection for the securities laws’ policy of encouraging certain types of collaborative activity,” the solicitor general’s brief said, the lawsuit should not be dismissed; rather, the plaintiffs should be permitted to refine their complaint and resubmit the case.
Justice Breyer said the government’s position “does not convincingly address the concerns we have set forth here,” namely “the difficulty of drawing a complex, sinuous line separating securities-permitted from securities-forbidden conduct.” The line should be drawn by experts and not by juries, Justice Breyer said.
A main theme of the opinion was that to permit juries rather than expert regulators “to distinguish what is forbidden from what is allowed” in the context of securities underwriting would be to invite “unusually serious mistakes,” different outcomes in different courts for the same conduct. Justice Breyer said such inconsistency and unpredictability would result in over-deterrence of “syndicate practices important in the marketing of new issues.” Successful plaintiffs in antitrust suits win triple damages.
Justice Stevens, in his separate concurring opinion, criticized this analysis. Justice Stevens said that rather than focus on whether the securities and antitrust laws were compatible or incompatible, the court should simply have ruled that the defendants’ underwriting practices were not an antitrust violation.
“After the initial purchase, the prices of newly issued stocks or bonds are determined by competition among the vast multitude of other securities traded in a free market,” Justice Stevens said, adding, “To suggest that an underwriting syndicate can restrain trade in that market by manipulating the terms of I.P.O.’s is frivolous.”
In his dissenting opinion, Justice Thomas said that the securities laws, when properly understood, preserved the ability to seek remedies under other laws, like the antitrust laws.
Justice Breyer said the court had rejected that analysis in previous decisions.
Wall Street welcomed the news. “This decision is very important because it reaffirms the primacy of the S.E.C. in supervising the I.P.O. process,” said Stephen M. Shapiro, a partner at Mayer, Brown, Rowe & Maw who tried the case for the defendants. “The trial lawyers tried to make an antitrust issue out of a securities issue and the court said no.”
The plaintiffs in this case described several practices that they claimed were anticompetitive, including soliciting promises from prospective purchasers to buy more shares after the initial offering at higher prices, or to buy stock in other companies in exchange for being allocated more shares of the new issue. The result, the plaintiffs contended, was to inflate the commissions earned by the underwriters.
Justice Breyer said that the challenged practices “lie at the very heart of the securities marketing enterprise,” over which the S.E.C. “has continuously exercised its legal authority.” To the extent that underwriters cross the line, he said, it is a line that is often ambiguous and that the S.E.C. is in the best position to define and enforce. Because “securities law and antitrust law are clearly incompatible” in this context, Justice Breyer concluded, antitrust law had to give way.
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Investors have more to prove in fraud suits. High court decides in favor of Tellabs
By James P. MillerTribune staff reporterPublished June 22, 2007
In a closely watched case that centered on Naperville-based Tellabs Inc., the U.S. Supreme Court on Thursday issued a ruling that will make it significantly harder for shareholders to file securities-fraud suits against corporations.
Corporate interests were quick to praise the court's decision, saying it offers welcome relief to companies that are plagued by frivolous suits filed by investors hoping to score an undeserved courtroom payoff.
The justices have properly reined in "overly aggressive trial attorneys" by "limiting their ability to drag American businesses before a judge based on only speculative allegations," contended Marc Lackritz, head of the Securities Industry and Financial Markets Association trade group.
Investor groups, on the other hand, predicted the 8-1 ruling will make it harder than ever for defrauded stockholders to get their rightful day in court.
"We're concerned this will have a chilling effect," causing shareholders to think twice before they move ahead with legitimate lawsuits against deceptive corporations, said Hank Kim, executive director of the National Conference on Public Employee Retirement Systems.
The Tellabs case got its start when the Internet stock-market bubble burst in 2001. As a maker of telecom equipment, Tellabs had been a major beneficiary of the tech sector's surge, but its once-highflying stock went into a painful swan dive after orders dried up.
Shareholders who had purchased the company's stock between late 2000 and mid-2001 then filed a class-action suit, claiming that Richard Notebaert, the company's chief executive at the time, knew he wasn't being truthful when he offered upbeat public statements about Tellabs' financial prospects. Tellabs denied the allegations, and said it had been as surprised as investors when customers suddenly began canceling orders.
The Tellabs litigation became the focus of a nationwide legal controversy because it offered the high court a chance to clarify a troubling ambiguity in the law.
When a company issues profit forecasts that later turn out to have been excessively optimistic, shareholders frequently sue, claiming the corporation defrauded them. But under U.S. law, in order to win their case they must prove "scienter," a phrase that means company executives knew about and concealed the bad news that eventually drove the stock down.
By the early 1990s, such lawsuits had grown to a flood tide. The reason: Plaintiff lawyers had learned that many corporations would pay millions of dollars to settle even the shakiest allegations out of court, just to save themselves the expense of going through costly pretrial hearings and to avoid the long-shot possibility that a friendly jury might award plaintiffs an unwarranted jackpot verdict.
In 1995, Congress moved to curb such abusive suits by raising the hurdle that plaintiffs must clear to prove scienter. The new law holds that, in the face of competing claims between the defendant company and the plaintiffs, the court must be able to make a "strong inference" that officials were knowingly holding back information. If the evidence for such a conclusion is not there, the judge is free to throw out the case before it goes to trial.
Since then, however, federal appeals courts have interpreted the law in different ways, creating confusion on both sides.
In the Tellabs case, the federal court ruled that investors had not met the "strong inference" threshold, and threw out the suit without holding a trial. When the plaintiffs appealed to the 7th U.S. Circuit Court of Appeals in Chicago, the appeals court used an investor-friendly interpretation of the 1995 law and ruled the case should be able to go to trial.
As the case moved to the Supreme Court, the Securities and Exchange Commission, in a controversial move, filed a friend-of-the-court document backing Tellabs' more restrictive interpretation of the law's language.
But the plaintiffs and their backers in the investing community argued that interpretation could very well gut the class-action suit as a viable legal remedy for investors who have been cheated.
On Thursday, the justices made their decision, coming down in favor of Tellabs' interpretation.
In a decision written by Justice Ruth Bader Ginsburg, the court said that under the law's requirement for a "strong inference" of deliberate corporate misrepresentation as the legal threshold, "it must be cogent and compelling," and not "merely 'reasonable' or 'permissible.' "
The court overturned the ruling by the U.S. Court of Appeals in Chicago and sent the lawsuit back to the federal court that originally threw it out for reconsideration in light of Thursday's ruling.
Tellabs hailed the decision, saying the justices "appropriately established a strict standard" that will help deter abusive shareholder suits. "We are confident," the company added, that the shareholder suit that sparked the Supreme Court ruling will ultimately "be found to be without merit."
Although Thursday's ruling dismayed investors who had been hoping the court would offer a less daunting barrier to shareholder fraud suits, investors "can breathe a sigh of relief" that the court didn't embrace an even more stringent interpretation favored by Justices Antonin Scalia and Samuel Alito in a concurring opinion, securities-law plaintiffs attorney Barbara Hart told The Associated Press.
Justice John Paul Stevens cast the lone dissenting vote.
--Jack Payne