Legal Brief:
In re Initial Public Offering Antitrust Litigation
(Memorandum Amicus Curiae)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

MEMORANDUM AMICUS CURIAE OF THE
SECURITIES AND EXCHANGE COMMISSION,
SUBMITTED AT THE REQUEST OF THE COURT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

Plaintiffs in these consolidated cases claim, in essence, that defendants have engaged in misconduct in the course of selling securities, yet they seek to pursue their claims under the antitrust laws, thus avoiding the pleading and other requirements for stating a private right of action for violation of the securities laws. The Court has requested the Securities and Exchange Commission to advise the Court of its views as to whether "the IPO allocation and commission practices challenged" in these consolidated antitrust cases "are comprehensively regulated under the securities laws, and thus impliedly immune from scrutiny under the antitrust laws." Order of August 8, 2002. For the reasons discussed below, the Commission answers yes to the issue raised by the Court. Moreover, implied immunity is necessary in the context of syndicated securities offerings in order to make the regulatory scheme expressed by Congress in the securities laws work.

The IPO allocation and commission practices challenged fall within the very heart of the Commission's regulatory authority over underwriting syndicates under both the Securities Act of 1933, 15 U.S.C. 77a, et seq., and the Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq., and they are comprehensively regulated. Indeed, much of the joint conduct among syndicate members that is alleged by plaintiffs is conduct that is necessary to the offering process, and that is permitted under the Commission's rules. To the extent that plaintiffs allege conduct that may violate current law, or that threatens harm to investors or to the markets, the Commission is well aware of the issues that have been raised in this area, including the types of practices alleged by plaintiffs. It is actively pursuing comprehensive regulatory responses to those concerns, including possible enforcement actions and rulemaking.¹

In particular, the Commission has announced that it is pursuing enforcement investigations to determine whether underwriters have complied with the existing statutes, rules and rules concerning IPOs; securities self-regulatory organizations that it oversees are considering whether to adopt additional rules; and the Commission's Chairman has requested the New York Stock Exchange and National Association of Securities Dealers to jointly convene a Blue Ribbon panel to review the IPO process in order to determine whether additional rulemaking is required to strengthen the integrity of the offering process and to better protect investors.

Permitting the possibility of antitrust liability for conduct that is under comprehensive scrutiny by the agency charged with determining what conduct is permissible and what is not would disrupt the Commission's regulatory regime, as established by Congress, including particularly its ongoing regulatory efforts. It could also interfere with the capital raising activities that are the subject of that regulation. Therefore, the Court should not permit the case to go forward, but should instead hold that the antitrust laws are repealed with respect to defendants' conduct as alleged in this case.²
 

Congress requires the Commission in carrying out its regulatory responsibilities to consider competitive concerns as part if its consideration of relevant factors. Thus, both the Securities Act and the Exchange Act direct that whenever the Commission is engaged in rulemaking "and is required to consider or determine whether an action is necessary or appropriate in the public interest," it shall consider "in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation." Section 2(b) of the Securities Act, 15 U.S.C. 77b(b); Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f).

Similarly, Section 23(a)(2) of the Exchange Act, 15 U.S.C. 78w(a)(2), provides that "in making rules and regulations pursuant to any provisions of this title" the Commission "shall consider among other matters the impact any such rule or regulation would have on competition." And in deciding whether to permit the registration of a national securities association (like NASD), the Commission must determine that the association's rules are designed, among other objectives, "to remove impediments to and perfect the mechanism of a free and open market and a national market system" (Section 15A(b)(6), 15 U.S.C. 78o-3(b)(6)), and that those rules "do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this title" (Section 15A(b)(9), 15 U.S.C. 78o-3(b)(9)). The plain language of these provisions establishes that the Commission may adopt a rule or regulation, even one that may adversely affect competition, as long as the proposed rule's burden on competition is "necessary or appropriate in furtherance of the purposes of" the federal securities laws.

Thus, Congress has instructed the Commission to consider competition in all of its regulatory efforts, but it has not made promoting competition the paramount consideration. As explained in the legislative history to the statute that added Section 23(a) to the Exchange Act in 1975,

This explicit obligation to balance, against other regulatory criteria and considerations, the competitive implications of self-regulatory and Commission action should not be viewed as requiring the Commission to justify that such actions be the least anti-competitive manner of achieving a regulatory objective. Rather, the Commission's obligation is to weigh competitive impact in reaching regulatory conclusions.

S. Rep. 94-75, at 13, reprinted in 1975 U.S.C.C.A.N. 179, 191.³

As the Court of Appeals for the District of Columbia Circuit observed in rejecting an assertion that the Commission in rulemaking must always adopt the least anticompetitive alternative, "the tendency in antitrust adjudication to view business relationships in the black and white terms of legality or illegality, based solely on their competitive or anticompetitive impact, has no place" in evaluating Commission decisions. Bradford National Clearing Corp. v. SEC, 590 F.2d 1085, 1104 (D.C. Cir. 1978). In other words, there is no reason "to treat competitive concerns as any more important or any less subject to judicial deference to administrative choices, than any other factor that is relevant to the legality of administrative action." Id. Therefore, while enhancing competition "is a factor to be considered" by the Commission, it is up to the Commission to "balance' those concerns against all others that are relevant under the statute." 590 F.2d at 1104-05.
 

Congress has entrusted the Commission with the responsibility to regulate the system of syndicated underwriting through which defendants are alleged to have implemented their scheme, and the conduct that forms the basis for the complaint. This authority stems from three separate congressional grants of authority: (1) the Commission regulates the offering process under the Securities Act; (2) it has the authority to define and permit or prohibit manipulative acts in the purchase and sale of securities under the Exchange Act; and (3) it has oversight responsibility for the securities self-regulatory organizations that also are required to regulate broker-dealers, including in the offering and trading processes. This authority is plenary - it encompasses all aspects of the underwriting syndication system, as well as aftermarket trading. Acting pursuant to it, the Commission has adopted comprehensive sets of regulations.
 

The Securities Act provides the Commission with authority to regulate the public offering of securities. See, Section 5 of the Securities Act, 15 U.S.C. 77e, and the Commission's rules and regulations thereunder; see generally, Louis Loss and Joel Seligman, Fundamentals of Securities Regulation, 82-113 (4^th ed. 2001). Among the restrictions imposed on non-exempt offerings of securities are the prohibition on offers before a registration statement is filed with the Commission, and limitations on the types of oral and written communications that those offering securities may make with potential buyers after the registration statement is filed, but before it becomes effective. The "roadshows" and other communications described by plaintiffs occur during this period. Relevant laws and regulations include Section 2(a)(3) of the Securities Act, 15 U.S.C. 77b(a)(3), which excludes communications among underwriters who are in privity of contract with the issuer of the security from the scope of the offering restrictions; Securities Act Rule 134, 17 C.F.R. 230.134, which assists the process of building the book by permitting collection of indications of interest in the IPO, and Rules 137, 138 and 139, 17 C.F.R. 230.137-139, which are concerned with permitted communications through issuance of research reports.

The Commission's Rules 460 and 461, 17 C.F.R. 230.460, 230.461, further recognize the role the underwriters, acting individually or through a syndicate, play in disseminating information about the securities offering and the issuer of the securities. In making a public interest finding to make a registration statement for an offering effective, the Commission, acting through its Division of Corporation Finance pursuant to delegated authority, will consider, among other things, the adequacy of the disclosures in the registration statement, whether the underwriters have received and disseminated information in sufficient time to enable investors to make decisions and whether the NASD has approved the underwriter's compensation in the offering.
 

A second set of provisions, contained in the Exchange Act, give the Commission authority to define manipulative practices and adopt rules to permit and regulate, or to proscribe and prevent, such conduct. For example, Section 9(a), 15 U.S.C. 78i(a), outlaws certain forms of manipulative conduct involving securities listed on exchanges, and also empowers the Commission to determine whether certain potentially abusive practices involving those securities should be prohibited, permitted, or regulated. Section 10(b), 15 U.S.C. 78j(b), gives the Commission broad rulemaking authority to address manipulation and fraud, declaring it unlawful for any person to employ "any manipulative, deceptive, or other fraudulent device or contrivance in contravention of such rules and regulations as the Commission may prescribe." Section 15(c)(1), 15 U.S.C. 78o(c)(1), prohibits securities broker-dealers, like the underwriter defendants in this case, from effecting any securities transaction "by means of any manipulative, deceptive, or other fraudulent device or contrivance" (Section 15(c)(1)(A)), and also gives the Commission the power for purposes of that section "by rules and regulations, [to] define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." 15 U.S.C. 78o(c)(1)(D).

The Commission has implemented these statutes by adopting rules that address manipulate (and deceptive) conduct. See Exchange Act Rules 10b-1 through 10b-18, 17 C.F.R. 240.10b-1 - 240.10b-18; 15c1-1 through 15c1-9, 17 C.F.R. 240.15c1-1 - 240.15c1-9; 15c2-1 through 15c2-11, 17 C.F.R. 240.15c2-1 - 240.15c2-11. It has also issued interpretations to clarify what conduct violates those provisions, and brought enforcement actions to remedy violations.

Of particular relevance to the allegations in this case is Regulation M,17 C.F.R. 242.100-105, adopted in 1996 pursuant to several provisions of the federal securities laws to replace former Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 (commonly known as the "trading practice rules") under the Exchange Act. See SEC Release No. 33-7375, 62 Fed. Reg. 520 (Dec. 20, 1996).

Like the former trading practice rules, Regulation M's prophylactic prohibitions are intended to prevent those having a financial interest in a distribution from either manipulating the price of a security or boosting its trading volume and thereby misleading potential investors as to the "true" state of the public market for the security being distributed. In particular, Regulation M prohibits issuers, selling security holders, underwriters, and other distribution participants from bidding for or purchasing, or attempting to induce others to bid for or purchase, the securities being distributed during the specified restricted period. Regulation M also governs "stabilization" (efforts to prevent the price to fall below the offering price during the offering) and related activities in connection with an offering, such as syndicate covering transactions and penalty bids.
 

Finally, through its regulatory oversight pursuant to the Exchange Act of National Association of Securities Dealers, Inc., the sole national securities association registered with the Commission, the Commission has direct and pervasive authority to oversee the regulation of broker-dealer conduct, such as communications, commissions, and underwriter fee arrangements. See e.g., Exchange Act Sections 3(a)(26), 15A(a) and (b), 15 U.S.C. 78c(a)(26), 78o-3(a) and (b) (conditions for registration with the Commission of a national securities association that will function as a self-regulatory organization). Section 15A(e) of the Exchange Act, 15 U.S.C. 78o-3(e), and NASD Rule 2740 have the effect of requiring that members of underwriting syndicates be members of the NASD, so that NASD rules governing offerings apply to all syndicate participants.

The NASD comprehensively regulates syndicate practices pursuant to rules that are formally reviewed and approved by the Commission. For example, the NASD's corporate financing rule addresses underwriter compensation, including the amount of compensation that underwriters may receive. See NASD Rule 2710. NASD Rule 2330 prohibits member firms from profit sharing in customer accounts. NASD Rule 2110 and IM 2110-1 protect the integrity of the public offering process by requiring participants in the offering syndicate to make bona fide offerings, and not to withhold securities for their own benefit or use allocation of securities to reward persons for future business.⁴

* * *

The scope of these three grants of authority, particularly when considered together as parts of a unified regulatory system, demonstrates that Congress intended for the Commission to exercise its broad regulatory mandate with a wide zone of conduct by those involved in the securities industry, and in the public offering process in particular.
 

1. When it proposed and adopted Regulation M, the Commission announced that it would gather information about activities in the aftermarket for offerings so that it could evaluate whether any additional regulation was necessary. SEC Release No. 33-7283, 61 Fed. Reg. 17108, 17124 (April 11, 1996); SEC Release No. 33-7375, 62 Fed. Reg. at 537-38. The Commission planned this review in order to address commenters' concerns that certain aftermarket activities were manipulative. Pursuant to that announcement, the Division of Market Regulation has been conducting an ongoing review of certain aftermarket practices (e.g., overselling, syndicate covering transactions, and penalty bids), in order to decide whether the provisions of Regulation M adequately regulate syndicate underwriting practices and provide adequate protection to investors.
    
2. The Commission recently brought an injunctive action alleging that an underwriter violated the federal securities laws and the rules of the NASD by engaging in practices similar to some of those alleged in the complaint. See Hunter Dec. Ex. Y, Z.⁵The NASD brought a related disciplinary proceeding alleging that the misconduct also violated NASD rules. The underwriter settled the cases by consenting to the entry of an injunction in the Commission's case and of findings by the NASD, without admitting or denying them. Ex. Z at 3-14. Among the remedial relief agreed to as part of the settlement of the two proceedings, the underwriter agreed to pay a total of $100 million, to be enjoined from future violations, and to adopt extensive new policies and procedures.
    
3. The Commission has also announced that it and the SROs are investigating possible violations of existing statutes, regulations and rules concerning the price setting process and the allocation practices of the underwriters of some hot issues. "Chairman Pitt Seeks Review of Initial Public Offering Process," SEC Press Release No. 2002-127 (Aug. 22, 2002) (copy attached). Among the allegations the Commission described were that "to obtain IPO allocations, some investors paid excessive commissions, or may have been induced to purchase shares in the aftermarket, distorting the market for these securities."
    
4. The NASD is actively reviewing these issues, as well. During the past four years, the NASD and the Commission have been involved in the process of restructuring the Free Riding and Withholding Interpretation, NASD IM 2110-1. The Commission has recently issued a release noticing for comment the fourth amendment to the NASD's proposal. If approved, the revised rule would become NASD Rule 2790. See SEC Release 34-46942 (Dec. 4, 2002).
    
   In addition, the NASD recently sought comment from its members on proposed new rules regarding the regulation of IPO allocations and distributions. See, NASD Notice to Members No. 02-55: "Regulation of IPO Allocations and Distributions" (August 2002)). Among other things, the proposal would prohibit allocation arrangements involving the payment of undisclosed excessive commissions; aftermarket "tie-in" agreements; and the allocation of IPO shares to an executive officer or director of a company on the condition that the officer or director send the company's investment banking business to the member, or as consideration for investment banking services previously rendered. While no proposals have yet been submitted to the Commission, any that are eventually made would present an opportunity for the Commission and others, through the notice and comment process, to consider whether additional regulatory responses are appropriate.
    
5. Finally, in August of this year, the Commission Chairman requested the NYSE and NASD to appoint a Blue Ribbon Panel to investigate whether additional rulemaking beyond that now under consideration is required. See "Chairman Pitt Seeks Review of Initial Public Offering Process." As explained in the press release, the Chairman asked those SROs "to undertake a broader review of the IPO process to determine if the additional rulemaking being contemplated will be sufficient to strengthen the integrity of the offering process and to better protect investors." Specifically, he "requested that the NASD and NYSE jointly convene a high-level group of business and academic leaders to conduct this broader review, and suggested that this committee should consist of distinguished representatives of issuers, underwriters, investors, academics and other market participants." August 22 Press Release. The committee appointed in response to this request has met twice, and hopes to issue a report by March, 2003.
    

Syndicated underwritings are, by definition, joint activities in which potential competitors fix prices and engage in other collective activity that would raise substantial antitrust concerns, absent an appropriately broad finding of immunity.⁶Immunity is particularly important at this time, when the Commission is actively engaged in determining whether various aspects of the regulatory regime applicable to activities related to syndicated underwritings should be revised in light of current conditions to strengthen the integrity of the offering process and to better protect investors, including investigating claims that underwriters have engaged in the sorts of purportedly illegal conduct alleged by plaintiffs.

Though implied immunity is generally to be disfavored, and is to be found "only if necessary to make the subsequent law work, and even then only to the minimum extent necessary," it is well-established that Congress is deemed to have repealed the antitrust laws in enacting statutes creating a regulatory system when there is a "a convincing showing of clear repugnancy between the antitrust laws and the regulatory system ." National Gerimedical Hospital and Gerontology Center v. Blue Cross of Kansas City, 452 U.S. 378, 388-89 (1981) (emphasis added). "Intent to repeal the antitrust laws is much clearer when a regulatory agency has been empowered to authorize or require the type of conduct under antitrust challenge." Id., citing United States v. NASD, 422 U.S. 694, 730-34 (1975); Gordon v. NYSE, 422 U.S. 659, 689-90 (1975).

To paraphrase the Supreme Court's language in discussing immunity for securities exchanges performing their self-regulatory function, courts in deciding whether conduct by regulated entities is immune should ascertain whether there is something "built into the regulatory scheme which performs the antitrust function of insuring that" those entities "will not in some cases" act "so as to injure competition which cannot be justified as furthering legitimate" ends within the scope of regulatory regime. Silver v. NYSE, 373 U.S. 341, 358 (1963). Under the federal securities laws, it is the Commission, not private antitrust plaintiffs, that is charged with performing the antitrust function of insuring that participants in a syndicated underwriting do not act so as to do injury to competition that is not justified by legitimate regulatory objectives.

In this case, Congress has made its intentions manifest, not implicit, in the express language of the federal securities laws. Thus, in 1975 and again in 1996 Congress amended those laws to expressly direct the Commission to balance competition in its rule makings, establishing a different, and more hospitable, standard for overruling competition than that adopted by the courts when Congress has not spoken. And, as noted above, the Commission is actively in the process of performing that function, both by considering whether enforcement actions are appropriate, and by examining whether regulations and rules should be revised. This process should not be disrupted by allowing antitrust plaintiffs to step in with their own set of standards, which could potentially be inconsistent with the Commission's determinations.

Plaintiffs claim that there can be no repugnance between the antitrust laws and the securities regulatory regime whenever the challenged conduct, if proven, would be contrary to some provision of the securities laws (Pl. Br. 15).⁷This argument - that rather than determining whether Congress has entrusted the antitrust function to a regulator, courts should consider whether the challenged conduct is consistent with the regulatory regime - was considered and expressly rejected in the leading decision in this area, Gordon v. NYSE, 422 U.S. 659 (1975).

In that case, the Supreme Court found immunity for the then-existing system of minimum fixed commissions established by the New York and American Stock Exchanges, even though, like syndicates, fixed commissions involved inherently anticompetitive conduct, and even though the Commission had earlier decided to abolish them after a five year phase-in period. Plaintiff (supported by the Department of Justice) urged that because the Commission had determined to abolish fixed commissions, those commissions could not be thought necessary to the proper functioning of the securities laws. The Court explained that plaintiffs in Gordon, like plaintiffs in this case, had "confused two questions," namely the factual question of whether "fixed commission rates are actually necessary to the operation of the exchanges" and the legal question of "whether allowance of an antitrust suit would conflict with the operation of the regulatory scheme which specifically authorizes the SEC to oversee the fixing of commission rates." 422 U.S. at 688. The relevant question was not whether the fixed commissions were consistent with the securities laws, but "whether antitrust immunity, as a matter of law, must be implied in order to permit the Exchange Act to function as envisioned by the Congress." Id . The issue of whether fixed rates were appropriate would become important "only when it is determined that there is no antitrust immunity." Id .

The Court in Gordon thoroughly examined the history of fixed commissions, and of the Commission's authority over commission rates under the Exchange Act, 422 U.S. at 663-82, including the Commission's review and approval of fixed commissions and of the challenged rules over the years, as well as the then-recent amendment to the Exchange Act (Section 19(b)(9)) that explicitly gave the Commission authority to approve fixed commissions in the future. Based on that examination, the Court concluded that the exchange rules establishing minimum commission rates were not subject to the antitrust laws.

The Court's language reached beyond conduct that was permissible under the Commission's rules, and held that the statutory framework and the Commission's active execution of its duties under that framework foreclosed antitrust examination of conduct within the Commission's regulatory jurisdiction because of the potential that the regulator and the antitrust court could impose different standards:

to deny antitrust immunity with respect to commission rates would be to subject the exchanges and their members to conflicting standards. * * * [T]he commission rate practices of the exchanges have been subjected to the scrutiny and approval of the SEC. If antitrust courts were to impose different standards or requirements, the exchanges might find themselves unable to proceed without violation of the mandate of the courts or of the SEC. Such different standards are likely to result because the sole aim of antitrust legislation is to protect competition, whereas the SEC must consider, in addition, the economic health of the investors, the exchanges, and the securities industry. Given the expertise of the SEC, the confidence the Congress has placed in the agency, and the active roles the SEC and the Congress have taken, permitting courts throughout the country to conduct their own antitrust proceedings would conflict with the regulatory scheme authorized by Congress rather than supplement that scheme.

422 U.S. at 689 (emphasis added, footnote omitted).

The Court reiterated this conclusion in language that referred not only to past practices, but also to Congress's then-recent amendment of Section 19(b) of the Exchange Act, which made the Commission's continuing authority explicit:

In sum, the statutory provision authorizing regulation, § 19(b)(9), the long regulatory practice, and the continued congressional approval illustrated by the new legislation, point to one, and only one, conclusion. The Securities Exchange Act was intended by the Congress to leave the supervision of the fixing of reasonable rates of commission to the SEC . Interposition of the antitrust laws, which would bar fixed commission rates as per se violations of the Sherman Act, in the face of positive SEC action, would preclude and prevent the operation of the Exchange Act as intended by Congress and as effectuated through SEC regulatory activity. Implied repeal of the antitrust laws is, in fact, necessary to make the Exchange Act work as it was intended; failure to imply repeal would render nugatory the legislative provision for regulatory agency supervision of exchange commission rates .

422 U.S. at 691 (emphasis added). Thus, in the words of the leading treatise, Gordon holds that the antitrust laws are "inapplicable" to the practice of prescribing fixed commission rates "because the Securities Exchange Act had authorized the Securities and Exchange Commission to control or prevent such practices." 1A Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law, ¶ 240c5 (2d ed. 2000). For the same reasons, the antitrust laws should be held to be inapplicable to the practices challenged in the case now before the Court because the securities laws authorize the Commission to control or prevent those practices.

Further guidance is found in United States v. NASD, 422 U.S. 694 (1975), handed down on the same day as Gordon . In that case, the Court upheld immunity for conduct subject to pervasive Commission regulation. Investors and the Department of Justice brought an antitrust challenge against certain restrictions imposed on resale in the secondary market of mutual fund shares. Plaintiffs alleged that the restrictions were both vertical (imposed by mutual fund underwriters in their agreements with broker-dealers) and horizontal (agreed to by the members of the NASD among each other). The purpose of these restrictions was to prevent development of a secondary market for mutual funds, i.e., a market existing outside the usual distribution and redemption channels.

The Court upheld the vertical agreements because Section 22(f) of the Investment Company Act authorized mutual funds to impose restrictions on the negotiability and transferability of their shares, provided, inter alia, that the restrictions did not contravene any rules and regulations of the Commission, and the Commission had not adopted any rules that prohibited the challenged conduct. The Court found that agreements were immune from antitrust liability because the Commission's decision not to act was "an informed administrative judgment that the contractual restrictions employed by the funds to protect their shareholders were appropriate means for combating the problems of the industry." 422 U.S. at 728.

More pertinent to this case is what the Court said about the alleged horizontal agreements, which did not fall within the scope of Section 22(f), but which were nevertheless held to be immune. The Court framed the issue as whether the Commission's "exercise of regulatory authority" under the ICA and the Maloney Act "is sufficiently pervasive to confer implied immunity." 422 U.S. at 730. The Court held that an antitrust challenge was "precluded by the regulatory authority" vested in the Commission:

There can be little question that the broad regulatory authority conferred upon the SEC by the Maloney and Investment Company Acts enables it to monitor the activities questioned * * * , and the history of Commission regulations suggests no laxity in the exercise of this authority. To the extent that any of appellees' ancillary activities frustrate the SEC's regulatory objectives it has ample authority to eliminate them .

422 U.S. at 734 (emphasis added). Using the same reasoning, we conclude that Congress gave the Commission "ample authority" to eliminate practices like those alleged in this case, to the extent that the Commission finds they are inappropriate, and it should be left free to do so.

The Second Circuit has distilled the rules of Gordon and NASD as follows:

There are two narrowly-defined situations in which repeal' of the Sherman Act will be inferred: first, when an agency acting pursuant to a specific Congressional directive, actively regulates the particular conduct challenged, [Gordon ], and second, when the regulatory scheme is so pervasive that Congress must be assumed to have forsworn the paradigm of competition [NASD ].

Northeastern Telephone Co. v. AT&T, 651 F.2d 76, 82 (2d Cir. 1981); see also Finnegan v. Campeau Corp., 915 F.2d 824 (2d Cir. 1990) (reviewing antitrust immunity under the securities laws, and discussing the Gordon and NASD decisions); 1A Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law 34-61 (2d ed. 2000). As we have noted, the Commission believes that the challenged conduct is immune under both theories.

The parties before this Court have focused on the Second Circuit's decision in Strobl v. New York Mercantile Exchange, 768 F.2d 22 (2d Cir. 1985), see Def. Br. at 17-18; Pl. Br. at 24-25. Plaintiff in that case was the victim of a massive price manipulation scheme in potatoes futures, and he sued the perpetrators under both the Commodity Exchange Act and the antitrust laws. Those defendants argued that because of the regulatory regime in place, "conduct specifically prohibited by the [CEA] cannot be the basis for a treble damage award under the antitrust laws." 768 F.2d at 24. The Second Circuit rejected the argument with respect to the conduct and the regulatory regime in that case, but its reasons for doing so support a finding of immunity in the case at bar. The court summarized its views of the relevant teachings of Silver and Gordon as follows:

antitrust laws may not apply when such laws would prohibit an action that a regulatory scheme might allow. * * * The "plain repugnancy" found in Gordon was the potential for conflicting standards and the fact that application of antitrust laws would render § 19(b)(9) of the Securities Exchange Act [granting the Commission authority over exchange rules governing the fixing of commission rates] nugatory. Thus, repeal of antitrust jurisdiction cannot be implied simply when the antitrust laws and a regulatory scheme overlap.

768 F.2d at 27 (emphasis added, internal citations omitted).

The court found no immunity because the manipulative conduct alleged was absolutely prohibited by both the antitrust laws and the CEA, so there could be no conflict: "There is no built-in balance in the regulatory scheme of the Act that permits a little price manipulation in order to further some other statutory goal. Quite the opposite, price manipulation is an evil that is always forbidden under every circumstance by both the Commodity Exchange Act and the antitrust laws. Therefore, application of the latter cannot be said to be repugnant to the purposes of the former." 768 F.2d at 28.⁸

The situation under the securities laws is quite different. In contrast to the CEA, "a little price manipulation" is permitted under the securities laws in the form of price stabilization in connection with an offering, subject to detailed Commission regulation. See Regulation M, 17 C.F.R. 242.104 (permitting certain conduct to stabilize the price of securities at or below the offering price, providing that the requirements of the regulation are met). And, in contrast to the commodities situation, syndicate underwriting requires potential competitors to come together for the purpose of setting prices and otherwise agreeing on how securities will be offered. More fundamentally, rather than laying down broad statutory bars on all types of manipulative conduct, the securities laws authorize the Commission to adopt and enforce appropriate regulations that balance competition along with other public interest and investor protection concerns.

We have already noted that Sections 9(a), 10(b) and 15(c) of the Exchange Act give the Commission broad authority to define and permit or prohibit activities that could be deemed forms of manipulation. Furthermore, the Securities Act and the Exchange Act grant the Commission broad exemptive authority even with respect to statutory prohibitions and requirements. Section 28 of the Securities Act, 15 U.S.C. 77z-3; Section 36 of the Exchange Act, 15 U.S.C. 78mm. Taken together, the grants of rulemaking authority and exemptive authority give the Commission broad authority to determine what sorts of conduct should be banned as improper manipulation, and also to set the terms under which such conduct may be permitted, if it serves the public interest.

Given this statutory approach of delegating rulemaking and exemptive power instead of adopting broad statutory prohibitions, there is a much greater possibility under the securities laws than under the CEA that the antitrust laws "would prohibit an action that a regulatory scheme might allow," creating the "potential for conflicting standards" and rendering Commission authority over various practices "nugatory." That continues to be true even if the conduct alleged, if properly pleaded and proved, is unlawful under current statutes, rules and regulations. Indeed, it is true even if the Commission ultimately brings enforcement actions challenging this conduct because, as the Supreme Court indicated in Gordon, the concern is with protecting the full scope of the regulatory regime, and of the Commission's freedom to act, not with whether the particular conduct has been approved. Consequently, immunity is required here for the same reasons that it was not required in Strobl .

Thus, unlike the situation addressed in Strobl, this case is similar to Austin Municipal Securities, Inc. v. NASD, 757 F.2d 676 (5^th Cir. 1985), where the court agreed with the Commission that broad immunity was required for an entire process that was subject to Commission oversight. Plaintiffs in Austin Municipal Securities, a securities brokerage firm and five of its associates, alleged that competing firms had conspired to initiate an NASD disciplinary proceeding against it as a means of interfering with its business. The court's concern, similar to the Supreme Court's in Gordon and the Second Circuit's in Strobl, was that "[s]uperimposing the antitrust laws on the securities laws would unduly interfere with the SEC's jurisdiction" because "[c]ourts might fashion standards that are duplicative or inconsistent with the securities laws and SEC rules." 757 F.2d at 695. Furthermore, the court emphasized, the concerns of the antitrust laws will be addressed in the context of Commission oversight of the NASD disciplinary process because Congress required the Commission to evaluate the anticompetitive effects of its actions. Id . "Therefore, the federal antitrust laws are not to be applied to the NASD disciplinary process." 757 F.2d at 695. Or, we would add, to the conduct by members of underwriting syndicates challenged here.

In In re: Stock Exchanges Options Trading Antitrust Litigation, 171 F. Supp.2d 174 (S.D.N.Y. 2001), the Commission urged that antitrust immunity was not necessary with respect to conduct that the Commission had decided, in the exercise of its policy-making judgment, should be governed by the competition in a free market rather than by regulation.⁹The Commission cautioned, however, that this did not mean that any conduct that was contrary to Commission rules or regulations could never be immune. Rather, it observed that Gordon was not entirely clear on this point, and indicated that in another case there might be a strong indication that Congress "intended the regulator to be the sole authority with respect to the conduct at issue," citing Ricci v. Chicago Mercantile Exchange, 409 U.S. 289, 303 (1973), or "there may be ongoing regulatory supervision and fine-tuning of conduct by the regulator that would be impaired if the conduct were subject to antitrust liability." In our view, the conduct alleged by plaintiffs falls into these categories, and it should therefore be immune, even if the Commission decides after investigation that the conduct violated the securities laws.¹⁰ We believe this result is particularly required now, as the Commission is actively engaged in considering appropriate responses to the very same types of conduct that plaintiffs' allege.
 

Plaintiffs seek to replace the securities regulatory regime applicable to syndicate underwriting with the antitrust laws. The Commission is not suggesting that any good purpose is served by conduct that violates the securities laws, or that such illegal activities should go unremedied. Rather, it seeks to protect its Congressionally created regulatory authority, and important economic activities that are carried on subject to that authority, from being disrupted by private plaintiffs pursuing claims under the antitrust laws. Decisions on whether the securities laws have been violated, or on whether particular conduct should be regulated or prohibited under those laws, ought to be made in the context of the securities regulatory regime, not as an ancillary question in an antitrust case. It is important to that regime, and to the proper functioning of the economic system that it regulates, to avoid the uncertainties that would arise if an antitrust court ruled that conduct that the Commission considers improper is permissible, or that conduct that the Commission believes should be allowed is unlawful.

In that regard, plaintiffs' complaint raises two substantial difficulties: First, to a large extent, it asks this Court to draw an inference of illegality from the mere fact that defendants acted jointly as participants in syndicate underwritings. Second, and more fundamentally, even if it is assumed that plaintiffs have adequately alleged illegal conduct, that conduct is subject to the Commission's comprehensive regulation, which has been, and is at this time being, actively implemented.
 

Plaintiffs' core allegations of violative conduct seem to be that underwriters of technology stocks agreed among themselves to require purchasers of "hot issue" initial public offerings to promise, as a prerequisite to the purchasers receiving allocations in the offering, that they would make aftermarket purchases of securities at times and prices determined by the underwriters, and that they would kick back some of the profits from their transactions in these securities to the underwriters. This scheme, plaintiffs assert, was implemented "through and in connection with their agreements to combine together into underwriting syndicates" (Complaint, ¶ 49).

When plaintiffs turn from these conclusory allegations of an illegal conspiracy to the relatively concrete allegations of specific conduct that is claimed to violate the antitrust laws, however, they allege almost entirely that defendants engaged in joint activities that are necessary to conduct syndicated underwriting under the system that has been used in the United States for decades, joint activities that are pervasively regulated and approved by the Commission.

Thus, the complaint describes the syndicate underwriting process, and avers that, in plaintiffs' opinion, syndicates are no longer necessary to effectuate offerings. Complaint ¶¶ 36-37. Nonetheless, plaintiffs say, and contrary to the way that plaintiffs believe securities should be offered, "defendants still regularly combine with one another * * * into underwriting syndicates." Complaint ¶ 38. Furthermore, plaintiffs state, defendants agreed that the lead underwriter could distribute all the shares for each offering, and that syndicate members who did not sell all of their allotment nevertheless shared in the underwriters' discount. Complaint ¶ 39. The aforementioned conduct alleged in paragraphs 38 and 39 is permissible under Commission regulations and governing self-regulatory organization rules.

Plaintiffs further aver that defendants engaged in the following activities, none of which are improper under the governing regulations:

continuously communicating and working together as co-underwriters and members of syndicates and as market makers (Complaint ¶ 45);

collaborating with one another in trade associations such as the SIA (Complaint ¶ 46);

communicating with each other as members of the NASD, belonging to and trading on NASDAQ and securities exchanges, and creating joint ventures such as Stock Edge LLC and Bond Book LLC (Complaint ¶ 47);

holding meetings among top investment bankers, legal officers, and marketing managers (Complaint ¶ 48);

disclosing to each other the identities of the customers to whom they allocated, or intended to allocate, offered securities (Complaint ¶ 56); and

maintaining systems that promptly informed defendants of commission, charges, and other payments that their customers were making and the customers commissions-to-equity rations and turnover ratios (Complaint ¶ 62).

We do not address whether the allegations in the complaint meet the requirements of Fed. R. Civ. P. 8(a). Our concerns are not with pleading standards, but with the harm that will be done to the securities regulatory system, and to the system for offering securities through underwriting syndicates, if antitrust claims may rest on "allegations" that defendants engaged in certain permissible, regulated conduct, combined with conclusory assertions that during the course of these activities, defendants conspired to violate the law.

To sustain a case based on these sorts of allegations threatens the Commission's regulatory authority because certain conduct that the Commission has approved will be the basis for potential antitrust liability, which would have the effect of negating the Commission's determination that the conduct should be permitted, or even that it is necessary in the public interest. It also threatens the syndicate offering system because mere participation in a syndicate could be construed to be sufficient, without more, to uphold a finding of an antitrust violation against all the participants. For that reason alone, the challenged conduct should be held immune.
 

We have briefly described above the Commission's authority with respect to syndicate underwritings under the Securities Act and the Exchange Act. Pursuant to that authority, the Commission engages in four functions that would be threatened if immunity is denied in this case.

1. The Commission must make rules and regulations that interpret and implement the governing statutory provisions. As noted, the securities laws rely on Commission rulemaking authority to carry out Congress's objectives. For example, in contrast to the commodities statute at issue in Strobl, which flatly prohibited manipulation, the securities statutes combine specific statutory provisions with broad grants of rulemaking authority and exemptive authority to the Commission. Competition is to be considered as one factor, but it is not given predominance. Plaintiffs seek to overlay antitrust principles on the Commission's jurisdiction, overruling the Congressional regulatory regime in this respect.
    
2. In addition to adopting rules and regulations, the Commission must interpret the statutes it administers, as well as its rules and regulations, in various contexts. For instance, plaintiffs allege that defendants' failed to make required prospectus disclosure (Pl. Br. 25-27), while defendants respond that the disclosure was not required by the applicable Commission regulation and NASD rules (Def. Br. 10-12). The Commission has not had occasion to address that issue, yet plaintiffs now ask this Court to interpret those provisions as part of the determination of whether defendants violated the antitrust laws, to lift the antitrust immunity if defendants' interpretation is incorrect, and to hold defendants liable for treble damages.
    
   Plaintiffs also allege that defendants have engaged in a market manipulation. However, as noted, much of the more specific conduct alleged regarding the syndicated offering process is lawful, and other of it may or may not be permissible, depending upon the facts. Certainly there can be clear cut violations of the governing regulations, but application of the securities laws to particular conduct may involve complex considerations of fact, law and policy. These questions should be addressed under the securities laws, not in an antitrust case.
3. The Commission investigates the facts, both of particular transactions and of industry-wide trends and practices. It is currently investigating both aspects of IPO practices. An antitrust court cannot be expected to substitute for the Commission's responsibility to assess whether enforcement actions, legal interpretations, additional rulemaking, or other actions are necessary or appropriate in the public interest, for the protection of investors, to promote capital formation, while protecting competition to an appropriate degree. The proper mechanism to make the relevant determinations is to allow the Commission to administer the regulatory process.
    
4. Finally, the Commission has an obligation to continue to develop the law in the public interest, to better protect investors and the securities markets in the light of new circumstances. It is doing so at the present time, including through the Blue Ribbon panel the Commission's Chairman asked the NASD and the NYSE to convene. Permitting private antitrust plaintiffs to provide their own solutions to these perceived problems could impede and frustrate the Commission's ongoing efforts.

CONCLUSION

A failure to hold that the alleged conduct was immunized would threaten to disrupt the full range of the Commission's ability to exercise its regulatory authority. Furthermore, the threat of antitrust liability and remedies will likely have a chilling effect on syndicate underwritings and other lawful joint activities, activities of tremendous importance to the economy of the country. Last year, underwriters raised some $2.5 trillion for American companies and, in the past decade, this number was $12 trillion. Regulation of this crucial segment of the economy should remain in the hands of the Commission, where Congress placed it. For those reasons, this Court should follow the lead of the Supreme Court in Gordon and NASD and hold that the alleged conduct in this case is immune from challenge under the antitrust laws.

December 20, 2002

Footnotes

http://www.sec.gov/litigation/briefs/ipo-antitrust