Banbridge_Town_F.C.

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.

Cox Hard to Figure Out

In a recent article by Bloomberg, we see that Chris Cox is a complicated and often unpredictable regulator who has drifted from his legislative roots. See http://www.bloomberg.com/apps/news?pid=20601103&sid=ax1WWAMfrL6A&refer=us .This is a maturity one can respect.

....

SEC Chief Cox, Seeking Consensus, Draws Fire From Both Sides

By Jesse Westbrook and Otis Bilodeau

June 18 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox, entering his third year as head of the nation's top market regulator, says he's trying to strike a balance between protecting investors and keeping American companies competitive.

``There's no question that regulation has benefits; it also has costs,'' he said in a June 15 interview in New York. ``The job of the regulator at all times is to make sure that the equation works out in favor of investors and markets.''

That approach is a departure from Cox's predecessor, William Donaldson, who riled business groups by voting with Democrats on the panel to impose record fines and ram through new rules on hedge funds and mutual funds. Yet it's also drawing heat from SEC constituents on both sides.

Cox, 54, a Republican nominated by President George W. Bush, in February came under fire from shareholder advocates including the Consumer Federation of America after the SEC backed efforts to thwart an investor lawsuit at the Supreme Court. Then earlier this month, Cox caught flak from the other side when he angered the U.S. Chamber of Commerce by urging the solicitor general to side with shareholders in a securities- fraud case.

``This is a guy who looks at problems from many different angles and proceeds cautiously after considering the consequences of each step,'' said former SEC general counsel David Becker, now in private practice. ``You can't just look at one or two considerations and from that predict how Cox is going to act.''

Frank Holds Hearing

House Financial Services Committee Chairman Barney Frank, who has scheduled a hearing this month to examine the agency and will hear from all five SEC commissioners, praises Cox, a former congressman.

``Chris Cox understands the difference between being a legislator on the one hand and being a law-enforcement officer on the other,'' said Frank, a Democratic representative from Massachusetts who has been quick to criticize regulators he considers lax. ``He appreciates the role he is playing as a law- enforcement officer in interpreting the law instead of a legislator who can change the law.''

After months of accusations by shareholder advocates that he favors business over investors, Cox recently has taken steps to push for company fines and punish compensation abuses. He also joined the SEC's two Democrats in calling on the solicitor general to back shareholders who are trying to sue two companies for helping a third commit fraud. Cox's deciding vote overruled the agency's other two Republican commissioners.

`Controversy-Free Zone'

Since arriving at the SEC, Cox mostly has avoided partisan rifts, pressing for unanimous decisions in every public vote on rules and regulatory proposals, in contrast to Donaldson, another Republican.

Cox said he has worked to create ``a very collegial atmosphere'' on the commission. Still, ``when so much money and so much responsibility is at stake, it's hard to imagine a controversy-free zone,'' he said in the interview.

``The purpose of consulting with my fellow commissioners is to get a better quality result, it's not to dumb down the result,'' he said. ``If I ever stopped gaining useful information that I thought was improving the product, that's the time to blow the whistle and say we're done talking.''

Cox's efforts aren't producing a consensus with Bush administration policy makers: The Treasury Department recently signaled in a letter to the Justice Department that it was at odds with the SEC over the Supreme Court case involving third- party securities fraud. Treasury Secretary Henry Paulson, former chief of Goldman Sachs Group Inc., has argued the cost of shareholder suits may be driving U.S. companies overseas.

Paulson's Campaign

Paulson, 61, has led a campaign to make the U.S. legal and regulatory frameworks less burdensome on companies, at times stepping on the SEC's turf. Last month, he said he would form a committee led by former SEC Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen to study the accounting industry.

Cox, who served in Congress for 17 years representing California, also is facing critics from the states, including the attorneys general from Ohio and Utah. They complained that he has restrained the SEC enforcement unit and advocated limits on shareholder litigation.

The state officials were critical of the SEC's position on a shareholder lawsuit before the Supreme Court that accuses Tellabs Inc., a Naperville, Illinois-based phone-equipment maker, of making false business projections. That suit hinges on whether cases should be dismissed unless plaintiffs can prove executives knew they were deliberately providing false information. The SEC said it would lower the bar for shareholder suits, leading to more frivolous litigation.

Enforcement Crackdown

At the same time, Cox has stepped up the agency's pace of enforcement.

On May 31, the SEC announced the first corporate fines in a probe of stock-option backdating that has ensnared more than 100 companies. Cox pushed through the penalties against Brocade Communications Systems Inc. and Mercury Interactive Corp., ending a months-long dispute among the five commissioners over how to punish companies that falsified the dates of option grants to inflate their value.

Republican Commissioners Paul Atkins and Kathleen Casey had questioned whether the companies benefited from the misconduct. Democratic Commissioner Roel Campos has typically supported corporate fines on the grounds they deter fraud. Atkins declined to comment. Casey, Campos and Annette Nazareth, another Democrat, didn't return phone calls seeking comment.

Fines Over Fraud

The SEC also decided last month to seek a fine from Nortel Networks Corp. for accounting fraud, in the first test of a new policy that requires staff lawyers to obtain approval from commissioners before negotiating corporate penalties.

Cox authorized the staff to extract a fine from Toronto- based Nortel within a set range that tops out at less than $100 million, a person familiar with the matter said on June 8.

Critics including former SEC Chairman Levitt had argued that the new policy might undermine the enforcement unit. Levitt is a board member of Bloomberg LP, the parent of Bloomberg News.

Levitt said last week he doesn't think the Nortel case is ``terribly significant'' in showing how the new enforcement policy will work. ``It's one case,'' he said.

Rejecting the SEC

Solicitor General Paul Clement, who argues government cases before the Supreme Court, declined to follow the SEC's advice to back shareholders in the securities-fraud case involving St. Louis-based Charter Communications Inc. The investor suit at issue accuses Motorola Inc. and Cisco Systems Inc.'s Scientific Atlanta unit of helping Charter inflate its revenue.

The Bush administration voiced concern that so-called third-party lawsuits -- those targeting a company's business partners -- would harm the U.S. economy.

In a June 9 editorial, the Wall Street Journal said Cox's decision was ``a shocker, given that few people have campaigned more against frivolous securities lawsuits than the former California congressman.''

During his tenure on Capitol Hill, Cox helped draft a law making it tougher for shareholders to mount suits.

If the Supreme Court adopts the SEC's view of the case, other companies may be sued for unwittingly participating in transactions with businesses that were later deemed fraudulent, said Peter Wallison, a White House counsel to former President Ronald Reagan.

`Very Disappointing'

Cox's position ``is very disappointing,'' said Wallison, now a fellow at the Washington-based American Enterprise Institute. ``We are trying to attract companies to our markets. The danger of class-action lawsuits is very severe.''

Until now, Cox has tended to hold off on bringing contentious matters to the commission table for a vote. The 3-2 vote on the Supreme Court recommendation indicates Cox is becoming more willing to go out on his own, said Harvey Goldschmid, a former SEC commissioner.

``It's of considerable significance,'' said Goldschmid, now a law professor at Columbia University in New York. ``While it would be ideal to have all five commissioners voting together on an issue, it is of far greater importance to do the right thing.''

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Otis Bilodeau in Washington at obilodeau@bloomberg.net .