"In our view, this a pro-investor decision," said Stephen Shapiro, an attorney who represented the investment banks. The Securities and Exchange Commission "is very much a pro-investor agency, and they've tried to draw lines that they think are on balance."
Investors who suspect investment banks and stock issuers are engaging in misconduct still have other legal options after Monday's ruling in Credit Suisse Securities USA et al v. Glen Billing et al. Justice Stephen Breyer, in his majority opinion (PDF), noted that the SEC already has "considerable power to forbid, permit, encourage, discourage, tolerate, limit and otherwise regulate" virtually all that underwriting banks do, the justice wrote.
The case, which dates back to the heyday of last decade's high-tech boom, pitted 60 investors against the 10 leading investment banks, including Credit Suisse Securities USA, Citigroup Global Markets and J.P. Morgan Securities, and four mutual fund companies. The investors charged that the companies had conspired to engage in anticompetitive practices designed to inflate the prices of initial stock offerings of several hundred technology companies.
Their antitrust suit claims that those practices included requirements that investors purchase additional shares of the stock later at higher prices (a practice known as "laddering"), pay unusually high commissions or buy less desirable securities.
Even with the possibility of antitrust lawsuits thrown out, Christopher Lovell, the attorney representing the investors, said he was optimistic that at least some of his clients have a good case for claiming that the banks had violated securities laws.
His firm, New York-based Lovell Stewart Halebian, is the lead counsel for the class action suit, which was brought on behalf of purchasers of 829 securities who allegedly paid inflated charges and inflated prices between March 1997 and December 2000. A proposed $425 million settlement with J.P. Morgan in that case is still awaiting final court approval, Lovell said in a telephone interview on Monday.
Of those more than 800 cases, some 500 are based on federal and state antitrust claims and may not be able to proceed as a result of the high court's decision, Lovell said. But the remaining cases, which involve stock purchases of mostly larger companies like Red Hat and Priceline, allege securities law violations and will be able to proceed, he said.
"If the Supreme Court's reasoning (is correct), that there's an (effective) remedy under securities law, then ultimately no, for these investors and these securities, it will not be a setback," Lovell said.
The specter of triple damages
One big reason antitrust lawsuits would pose such a threat is the prospect of triple damages based on lost profits, litigation costs, attorney's fees and so on.
"If juries could make up rules in antitrust cases about how to do an IPO, then nobody could rely on the SEC's standards," said Shapiro, the attorney representing the banks. "The SEC was trying to draw sensitive standards that would encourage capital formation and protect investors. All of these things would be destroyed."
In a dissenting opinion, Justice Clarence Thomas said he believed securities laws do allow allegedly wronged investors to go after underwriters through antitrust law.
Darren Bush, a University of Houston law professor who co-authored a friend-of-the-court brief on behalf of the American Antitrust Institute, said in a telephone interview that he found the decision disappointing. (The AAI, a nonprofit think tank, favors more expansive antitrust laws.)
"I think when you're talking about the intersection of antitrust and any industry that's subject to regulation, that there is no conflict there, antitrust and regulation go hand in hand," he said.
That prospect has drawn sharp disagreement from the business community. A joint brief filed with the court by pro-business groups including the U.S. Chamber of Commerce's legal arm and the Business Roundtable argued that bringing antitrust law into that equation would destabilize U.S. markets by making it riskier for underwriters to have conversations about how to promote and sell stocks.
The Securities Industry and Financial Markets Association, which was also involved in the business community's brief, applauded the ruling on Monday, saying that if it had gone in the other direction, "the industry would have faced massive legal exposure and a major engine of American growth would have been unnecessarily damaged."