A Class-Action Suit with the Potential to End US IPOs
In a subscription-only op-ed in Saturday’s Wall Street Journal, Paul Atkins, an SEC Commissioner, points to the grave threat posed by a case that, if the Supreme Court does not choose to consider it, has the potential to end the way initial public offerings (IPOs) have been done in this country.
How can that be, and why does that matter? I’ll let Atkins explain:
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.
….. 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.
Okay, I understand that a lot of people in the mid- and late-1990s got sucked into believing that the only direction stocks could go is up — even stocks of companies without anything resembling a track record. A lot of companies of very little substance went public, and it’s safe to say that many of the lead underwriters knew that a lot of these companies were nothing more than the founders’ vague hopes that something might work. They were really venture capital deals that should have stayed venture capital deals.
That said, the only people who could reasonably have known that any given company was a collection of vapors were the lead underwriters, and certainly not the rest of the outfits to whom they syndicated IPO distribution. The plaintiffs in question are, as plaintiffs often do, trying to use the law, in this case antitrust law, to avoid the hard work of prosecuting (if there is anything criminal involved) or suing those who actually did something wrong.
Antitrust law isn’t a rubber hose to be used to mow down the innocent along with the guilty. If the Second Circuit’s decision stands, it may be that syndication won’t be possible any more, and all but the smallest IPOs will take place overseas.
The Supremes must take this case and put a stop to this nonense.
