Public Statement by SEC Commissioner:
A Serious Threat to Our Capital Markets
Commissioner Paul Atkins
"Op-Ed" for the Wall Street Journal
June 10, 2006
In 2000, nine of every 10 dollars raised by non-U.S. companies through new stock offerings were raised in the U.S. Last year the reverse was true: nine of every 10 dollars were raised abroad. Many fear that these figures indicate that the U.S. has lost its position as center of the world's capital markets. Litigation risks and burdensome regulations, including out-of-control paperwork and accounting requirements under Section 404 of the Sarbanes-Oxley Act, lessen the international appetite for our capital markets. To help combat this negative image, the Securities and Exchange Commission has pledged to take steps to address the Section 404 regulatory overload. We have to leave fixing the overall litigation environment to Congress and the courts.
A serious threat to our capital markets, however, looms in the form of a class action lawsuit that is now at the doorstep of the Supreme Court. This suit seeks to trump the securities laws with the antitrust laws. At risk are the cautious reforms that Congress painfully passed in 1995 to try and rein in terribly costly, frivolous class action lawsuits. If this legal gambit is not turned back, it could devastate America's process of capital formation, wreak unprecedented havoc on the underwriting business, and accelerate the marginalization of our capital markets.
The lawsuit is Billing v. Credit Suisse First Boston, et al. The et al. among the defendants is virtually the entire investment banking industry.
Billing alleges violations arising from the underwriters' efforts while taking public hundreds of technology companies in the late 1990s. The plaintiffs bought stock primarily in the IPO aftermarket; they blame the losses that they suffered when the technology bubble burst in 2000 on the underwriters' allegedly anticompetitive practices in marketing the IPOs.
If securities claims can be restructured as antitrust claims, as the plaintiffs seek to do in this case and other similar ones, Congress's clear intent to block abusive suits will once again be thwarted. Syndicate underwriting of public offerings inherently involves agreements and joint actions among potential competitors, including agreements about price; but the underwriting process is extensively regulated by the SEC as well as by the NASD under SEC supervision. The practices in question are governed by regulations crafted through a public process of notice-and-comment, with an appreciation for the effects on both capital formation and competition. An awkward antitrust overlay could disable the resulting finely tuned regulatory framework. For this reason, the SEC supported the underwriters' calls for dismissal of the suit on the basis of antitrust immunity.
By asserting that underwriters should be immune from antitrust challenges by the plaintiffs' bar, the SEC was not suggesting that underwriters are entitled to act with abandon or collusion. The SEC keeps vigilant watch over the IPO marketplace. We and the NASD can take action to prevent and punish abusive practices among securities dealers in the marketplace. Indeed, we have done so in the past, most notably in the 1990s, when the SEC attacked collusion in pricing in the over-the-counter marketplace; and we are continuing to do so in cases dealing with the very practices at issue in Billing.
The federal district court decided that there was antitrust immunity and dismissed the case, but the Second Circuit Court of Appeals reversed the decision. Now the Supreme Court is being asked to take up the question. For the sake of stability in our capital markets, I hope that it will do so. The principles that the Supreme Court laid out in its recent Verizon v. Trinko decision are directly on point. In that case, the Supreme Court explained that, when a detailed regulatory scheme exists, antitrust intervention offers only slight benefits and high potential costs.
But if the decision of the Court of Appeals is permitted to stand, the reverberations will be widespread. Class action suits based in antitrust law could be used to dismantle the system that has been developed over the years for getting IPOs efficiently and effectively to the market. And as a practical matter, if the Supreme Court declines to hear the appeal, it may well be deciding the future of this and all cases like it.
The risks involved make Billing itself difficult to try rather than settle. Moreover, the kind of preemptive appeal that the defendants are making is barred once the Supreme Court has ruled that a particular kind of case can be taken to trial. The stakes are especially high here because antitrust liability yields treble damages, compared to the single damages available under the securities laws. The Supreme Court needs to resolve the issue of antitrust immunity before the plaintiffs' bar can wield its new weapon to strike a blow to the American capital markets, which already are suffering under the weight of new regulatory burdens.