Billing v. Credit Suisse First Boston Ltd.

426 F.3d 130

Glen BILLING, individually and on behalf of all those similarly situated, Mita Aggarwal, as trustee of the Mita Aggarwal IRA and on behalf of all those similarly situated, Tom Barnett, David Pazarella, Henry Sklanowsky, Ross Wiczer, Wayne H. Jones, Efriam Simcha, Robert H. Thomas, Robert Grovich, Binh Nguyen, Michael Weiss, Kenneth Shives, Demetrios Petratos, Deming Zhous, Brad Harrison, Bert Zauderer, Glenn Kerr, Hans Reihl, Heinz Wahl, Bruce J. Jiorle, Mark Sculnick, Susan Katz, Anthony Voto, Estelle L. Augustine, Don K. Burris, Rachel Schwartz, Milton Pfeiffer, Roderick Lau, Raymond Litwin, Joe Braswell, Buddy Dukeman, Anupkumar Bhasin, Anita Budich, Troy Brooks, Philip Warner, Carlos Reeberg, Jerry Cobb, David Federico, Farideh Sigari, Matthew Weiner, Joe Goldgrab and Local 144 Nursing Home Pension Fund, Plaintiffs-Appellants, Bajrang Agarwal, Brad Harrison, Raymond Lance Huffman and Lennard Steinberg, Plaintiffs, v. CREDIT SUISSE FIRST BOSTON LTD., Goldman, Sachs & Co., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Stanley Dean Witter, BancBoston Robertson, Stephens, Inc., Citigroup Global Markets, Inc., J.P. Morgan & Co., Merrill Lynch & Co., Inc., Fidelity Distributors Corporation, Fidelity Brokerage Services, Inc., Fidelity Investments Institutional Services Co., Janus Capital Corporation, Comerica, Inc., Van Wagoner Capital, Van Wagoner Funds, Inc., and J.P. Morgan Securities, Inc., Defendants-Appellees.

Docket No. 03-9284L.

Docket No. 03-9288CON.

United States Court of Appeals, Second Circuit.

Argued: December 13, 2004.

Decided: September 28, 2005.

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Christopher Lovell (Gary S. Jacobson, on the brief), Lovell Stewart Halebian, LLP, New York, New York (Melvyn Weiss, J. Douglas Richards, Milberg, Weiss Bershad & Schulman LLP, New York, New York, on the brief; Fred Taylor Isquith, Mary Jane Fait, Thomas Burt, Wolf Haldenstein, Adler Freeman & Herz LLP, New York, New York, on the brief; Richard S. Schiffrin, Krishna Narine, Schiffrin & Barroway, LLP, Bala Cynwyd, Pennsylvania, on the brief; Howard B. Sirota, Rachell Sirota, Saul Roffe, Sirota & Sirota, New York, New York, on the brief), for Plaintiffs-Appellants in Appeal No. 03-9288L.

Russel H. Beatie (Philip J. Miller, Matthew P. Heiskell, Christopher J. Marino, on the brief), Beatie and Osborn LLP, New York, New York, for Plaintiff-Appellant, in Appeal No. 03-9284.

Robert B. McCaw (Ali M. Stoeppelwerth, Fraser L. Hunter, Jr., Noah A. Levine, Anjan Sahni, on the brief), Wilmer Cutler Pickering Hale & Dorr LLP, New York, New York, for Defendant-Appellee Citigroup Global Markets, Inc.

Andrew J. Frackman (Richard G. Parker, Brendan Dowd, on the brief), O'Melveny & Myers LLP, New York, New York, for Defendant-Appellee, Robertson Stephens, Inc.

Richard A. Cirillo (Rishona Fleishman, on the brief), King & Spalding LLP, New York, New York, for Defendant-Appellee Credit Suisse First Boston, LLC.

Moses Silverman (Philip G. Barber, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, for Defendant-Appellee Lehman Brothers Inc.

Gandolfo V. DiBlasi (John L. Hardiman, Penny Shane, David M.J. Rein, on the brief), Sullivan & Cromwell LLP, New York, New York, for Defendants-Appellees The Goldman Sachs Group, Inc. and Goldman, Sachs & Co.

Steven Wolowitz, Mayer, Brown, Rowe & Maw LLP, New York, New York, for Defendant-Appellee Comerica, Inc.

Andrew B. Clubok (Richard Cordray, Brant W. Bishop, Steven A. Engel, on the, brief), Kirkland & Ellis LLP, Washington, District of Columbia, for, Defendant-Appellee Morgan Stanley & Co. Incorporated.

Paul Gonson (Glenn R. Reichardt, on the brief), Kirkpatrick & Lockhart LLP, Washington, District of Columbia (James N. Benedict, Jon R. Roellke, Clifford Chance U.S. LLP, New York, New York, on the brief), for Defendant-Appellee Merrill Lynch, Pierce, Fenner & Smith, Incorporated.

A. Robert Pietrzak (Joel M. Mitnick, on the brief), Sidley Austin Brown & Wood LLP, New York, New York, for Defendant-Appellee Deutsche Bank, Securities Inc.

Gerald J. Fields (Kevin C. Logue, on the brief), Paul Hastings Janofsky & Walker LLP, New York, New York, for Defendants-Appellees Van Wagoner Capital Management, Inc. and Van Wagoner Funds, Inc.

David W. Ichel (Jayma Meyer, on the brief), Simpson Thacher & Bartlett LLP, New York, New York, for Defendant-Appellee J.P. Morgan Securities, Inc.

Randy M. Mastro (John A. Herfort, Peter J. Beshar, on the brief), Gibson, Dunn, & Crutcher LLP, New York, New York, for Defendant-Appellee Bear, Sterns & Co., Inc.

Robert G. Jones, Ropes & Gray LLP, Boston, Massachusetts, for Defendants-Appellees, Fidelity Distributors Corporation, Fidelity Brokerage Services, LLC and Fidelity Investments Institutional Services Co., Inc.

Daniel A. Pollack, Pollack & Kaminsky, New York, New York, for Defendant-Appellee Janus Capital Management LLC.

Eliot Spitzer, Attorney General of the State of New York (Caitlin Halligan, Solicitor General, Michelle Aronowitz, Deputy Solicitor General, Jay L. Himes, Chief, Antitrust Bureau, Richard E. Grimm, Peter D. Bernstein, Assistant Attorneys General, Antitrust Bureau, Jean Lin, Assistant Solicitor General, on the brief; Paul J. Sirkis, Legal Intern, Antitrust Bureau, of counsel), New York, New York, for Amicus Curiae State of New York in Support of Plaintiffs-Appellants.

Giovanni P. Prezioso, General Counsel of the Securities and Exchange Commission, Washington, District of Columbia, for Amicus Curiae Securities and Exchange Commission in Support of Defendants-Appellees.

R. Hewitt Pate, Assistant Attorney General, Antitrust Division, Department of Justice, Washington, District of Columbia, for Amicus Curiae United States Department of Justice in Support of Plaintiffs-Appellants.

Before: OAKES, KATZMANN, and WESLEY, Circuit Judges.

WESLEY, Circuit Judge:

Plaintiffs allege an epic Wall Street conspiracy. They charge that the nation's leading underwriting firms entered into illegal contracts with purchasers of securities distributed in initial public offerings ("IPOs"). Through these contracts and by other illegal means, the underwriting firms allegedly executed a series of manipulations that grossly inflated the price of the securities after the IPOs in the so-called aftermarket. Plaintiffs contend that the firms capitalized on this artificial inflation, profiting at the expense of the investing public.

Plaintiffs tell a compelling story and are not the first to tell it. Similar allegations have appeared in a separate class action, see In re Initial Pub. Offering Sec. Litig., 241 F.Supp.2d 281, 293-94 (S.D.N.Y.2003), in a report of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD"), see NYSE/NASD IPO ADVISORY COMMITTEE, NYSE/NASD, REPORT AND RECOMMENDATIONS 1-2 (May 2003) ("IPO ADVISORY COMMITTEE REPORT"), available at http://www.nasd. com/web/groups/rules_regs/docum ents/rules_regs /nasdw_010373.p df, and in complaints filed by the Securities and Exchange Commission (the "SEC" or "Commission").¹ What most immediately distinguishes the present charges from prior ones is that the earlier allegations were made in the context of the laws governing securities—laws and regulations arising primarily from the Securities Act of 1933, Pub.L. No. 73-22, 48 Stat. 74 ("the Securities Act" or "the 1933 Act"), and the Securities Exchange Act of 1934, Pub.L. No. 73-290, 48 Stat. 881 ("the Securities Exchange Act," "the Exchange Act," or "the 1934 Act"). By contrast, the present actions arise under the antitrust laws—specifically, section 1 of the Sherman Act, ch. 647, 26 Stat. 209 (1890) (codified as amended at 15 U.S.C. § 1), section 2(c) of the Robinson-Patman Act, Pub.L. No. 74-692, 49 Stat. 1526, 1527 (1936) (codified as amended at 15 U.S.C. § 13(c)), and various state antitrust provisions.²

The question on appeal is whether these antitrust claims can stand. Defendants argue that, assuming plaintiffs' allegations are true, only securities laws can provide a remedy. The district court agreed. See In re Initial Pub. Offering Antitrust Litig., 287 F.Supp.2d 497, 499, 523-25 (S.D.N.Y.2003) ("IPO Antitrust Litig."). It held that, regarding the alleged conduct, the securities laws impliedly repealed federal antitrust laws and preempted state antitrust laws. See id. It therefore dismissed the complaints. Id. at 525.

The district court's decision goes too far. The heart of the alleged anticompetitive behavior finds no shelter in the securities laws. Accordingly, we vacate and remand for further proceedings.

I

Essential to this appeal is a basic understanding of the securities underwriting process and certain manipulations of the process, most particularly the practice of tying excess consideration to an IPO securities allocation.

A

An underwriting firm provides underwriting services to issuers of securities. The most common delivery of those services is by firm-commitment agreements. 1 THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 2.1[2][B], at 156 (5th ed.2005). The appeal of this type of agreement is certainty for the issuer: "The underwriting investment banker agrees that on a fixed date the corporation will receive a fixed sum for a fixed amount of its securities." Statement of the Commission on the Problem of Regulating the "Pegging, Fixing and Stabilizing" of Security Prices Under Sections 9(a)(2), 9(a)(6), and 15(c)(1) of the Securities Exchange Act, Exchange Act Release No. 2446 (March 18, 1940), 11 Fed.Reg. 10,971, 10,972 (Sept. 27, 1946) ("1940 Statement"). The underwriting agreement thus removes "factors of uncertainty" for the issuer, see id., and transfers to the underwriter the risk of any inability to sell an issue, see GOING PUBLIC AND LISTING ON THE U.S. SECURITIES MARKETS, NASD 167.

Syndicates emerged in the first half of the twentieth century as an essential means by which underwriters...