US: Justices Back Underwriters On New Issues

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.

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 decision ''eliminates the huge risk to forming capital in this country that was posed by conflicting and overlapping regulatory regimes,'' Robin Conrad, executive vice president of the National Chamber Litigation Center, said on Monday.

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.

In other action on Monday, the court declined to weigh in on an increasingly disputed question of state tax law: whether the Constitution permits states to impose corporate income and franchise taxes on companies that have no physical presence in the state.

The justices made no comment in turning down appeals filed nearly simultaneously by companies challenging rulings by appellate courts in West Virginia and New Jersey. In the West Virginia case, MBNA Bank, which has its principal place of business in Delaware and is now owned by the Bank of America Corporation, was seeking refunds of nearly $500,000 in taxes it had been assessed on income from its credit card customers in West Virginia.

The challenge to the New Jersey taxes was brought by Lanco Inc., which holds the trademarks and other intellectual property once owned by Lane Bryant, the women's clothing retailer. Lanco, incorporated in Delaware, is known as an ''intangible property holding company,'' or I.H.C. It receives monthly royalties based on sales by Lane Bryant in New Jersey but has no presence in the state itself.

The issue in both cases, MBNA America Bank v. Tax Commissioner, No. 06-1228, and Lanco Inc. v. Director, Division of Taxation, No. 06-1236, was whether the Constitution's Commerce Clause allowed states to impose taxes under these conditions. In 1992, the Supreme Court maintained a ''physical presence'' test for imposing sales taxes; the question is whether the same rule applies for corporate taxes. With a growing conflict among state courts, the justices are likely to take up the issue eventually.

• 208 Regulation