December 22, 2009 | Posted By
Second Circuit Affirms Dismissal Of Antitrust Class Action Due To
Implied Preclusion By The Securities Laws
In Electronic Trading Group, LLC v. Banc of America Securities LLC (In re Short Sale Antitrust Litigation),
2009 WL 4350035 (2d Cir. Dec. 3, 2009), the United States Court of Appeals for the Second Circuit affirm ed
the dismissal of a putative antitrust class action against certain financial institutions that serve as “prime
brokers” in connection with short sale transactions, on the ground that the federal securities laws precluded
application of antitrust law to the matters at hand. This was the first time the Second Circuit applied the
considerations for the implied preclusion of antitrust laws by the securities laws outlined by the United
States Supreme Court in Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007).
In Short Sale, plaintiff Electronic Trading Group, LLC was a “short seller” of securities. In a “short sale”
transaction, the “short seller” identifies securities that he or she believes will drop in market price. The
short seller borrows those securities from a broker (prime brokers have the greatest market share), sells the
borrowed securities on the open market, purchases replacement securities on the open market, and returns
them to the broker — thereby closing the short seller’s position. The short seller’s profit (if any) is the
difference between the market price at which she sold the borrowed securities and the market price at
which she purchased the replacement securities, less borrowing fees, brokerage fees, interest, and any
other charges levied by the broker.
Plaintiff here alleged that prime brokers arbitrarily designated certain securities as “hard-to-borrow,” and
then fixed the minimum price of hard-to-borrow lists in violation of Section 1 of the Sherman Act, which
caused the short-sellers to pay artificially inflated fees. Defendants moved to dismiss, arguing that plaintiff’s
Sherman Act antitrust claims were subject to the doctrine of implied preclusion of antitrust laws by the
securities laws. Plaintiff argued, among other things, that no actual or potential conflict necessitates
immunity because neither securities law nor antitrust law allow collusive fixing of borrowing fees.
The United States District Court for the Southern District of New York considered defendants’ preclusion
argument and held that implied preclusion from antitrust liability precluded plaintiff’s antitrust claims. The
Second Circuit explained that the Supreme Court’s decision in Billing sets forth four considerations that must
be examined to determine whether the securities laws are “clearly incompatible” with the antitrust laws
and thus preclusive of antitrust liability. Those considerations are whether (1) the area of conduct is
