The Supreme Court on Monday dealt a setback to investors suing over their losses in the crash of technology stocks seven years ago.
In a 7-1 decision, the court sided with Wall Street banks that allegedly conspired to drive up prices on 900 newly issued stocks.
The justices reversed a federal appeals court decision that would have enabled investors to pursue their case for anticompetitive practices.
The case deals with alleged industry misconduct during the dot-com bubble of the late 1990s.
The outcome of the antitrust case was vital to Wall Street because damages in antitrust cases are tripled, in contrast to penalties under the securities laws.
The question was whether conduct that is the focus of extensive federal regulation under securities laws is immune from liability under federal antitrust laws.
An antitrust action raises “a substantial risk of injury to the securities market,” Justice Stephen Breyer wrote. He said there is “a serious conflict” between applying antitrust law to the case and proper enforcement of the securities law.
In dissent, Justice Clarence Thomas said the securities laws contain language that preserves the right to bring the kind of lawsuit investors filed against the Wall Street investment banks.
In 2005, the 2nd U.S. Circuit Court of Appeals said the conduct alleged in the case is a means of “dangerous manipulation” and that there is no indication Congress contemplated repealing the antitrust laws to protect it.
Investors allege that the investment banks, including Credit Suisse Securities (USA) LLC, agreed to impose illegal tie-ins, or “laddering” arrangements. Favored customers were able to obtain highly sought-after new stock issues in exchange for promises to make subsequent purchases at escalating prices. The investment banks allegedly conspired to levy additional charges for the stock.
As a result of the conspiracy, the investors say, the average price increase on the first day of trading was more than 70 percent in 1999-2000, 8½ times the level from 1981 to 1996.
Private class-action lawsuits, say plaintiffs’ attorneys, provide a significant supplement to the limited resources available to the Justice Department to enforce the antitrust laws.
Lawyers for Wall Street investment banks say it is a highly technical matter where the line is drawn between legal and illegal activity in the sale of newly issued stock. It must be left to highly trained securities regulators to decide, rather than to courtroom juries in antitrust lawsuits brought by investors, the industry says.
The Supreme Court concluded that “antitrust courts are likely to make unusually serious mistakes” that hurt defendants. As a result, investment banks must avoid “a wide range of joint conduct that the securities law permits or encourages.”
In other action, the court also added one case to its calendar for next term. It will consider whether an investor in a large 401k retirement plan can sue to recover losses to his individual account that are the fault of the plan’s manager.
Other Wall Street institutions in the case before the Supreme Court were Bear, Stearns & Co. Inc.; Citigroup Global Markets Inc.; Comerica Inc.; Deutsche Bank Securities Inc.; Fidelity Distributors Corp.; Fidelity Brokerage Services LLC; Fidelity Investments Institutional Services Co. Inc.; Goldman, Sachs & Co.; The Goldman Sachs Group Inc.; Janus Capital Management LLC; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co. Inc.; Robertson Stephens Inc.; Van Wagoner Capital Management Inc.; and Van Wagoner Funds Inc.
The case is Credit Suisse v. Billing, 05-1157.