Capital Markets

High Court to Hear IPO Case

Investment banks square off against investors in an antitrust case that could ripple through other industries.
Stephen TaubDecember 8, 2006

The U.S. Supreme Court has agreed to review an appeal from investment banks that are fighting antitrust charges. According to some experts, the high court’s decision could have implications that extend to a number of other, unrelated industries.

The case stems from charges that 16 investment banks rigged initial public offerings, reported Bloomberg. The group, which includes Goldman Sachs and Merrill Lynch, wants to overturn a decision by the New York–based 2nd U.S. Circuit Court of Appeals, which said the IPO suits could go forward, according to the report. That ruling “threatens the public offering process” by limiting the ability of underwriters to work together on IPOs, the investment banks reportedly assert in their appeal.

The banks are seeking immunity from antitrust suits over underwriting and other activities heavily regulated by the Securities and Exchange Commission, said the wire service. For its part, the 2nd Circuit contended that the suits make allegations of “an epic Wall Street conspiracy” to profit at the expense of the investing public by artificially inflating the prices of 800 Internet stocks that had just been offered. The companies are accused of demanding kickbacks from clients and engaging in a tactic called “laddering,” which requires clients to buy more stock, at higher prices, after the stock is sold in the IPO. In April, JPMorgan Chase & Co. agreed to pay $425 million to settle IPO-rigging claims, according to Bloomberg.

The key issue in the case is the extent to which SEC oversight immunizes the securities industry from antitrust claims, the wire service explained. The investment-banking industry wants a broad shield to bar the IPO suits, arguing that the SEC specifically authorized companies to work together in syndicates to share the risk of offerings. The court should “prevent the securities regulatory scheme from being undermined by antitrust litigation,” the investment banks argue, according to the report.

The investors, however, assert that Congress did not intend to immunize the type of conduct that is at the core of the case. They say should suits can go forward because the alleged wrongdoing violates the securities laws as well as the antitrust laws.

University of Iowa antitrust professor Herbert Hovenkamp, who is advising the Wall Street firms, told Bloomberg that if the banks win, it could help other regulated businesses, including the trucking, airline, natural gas, and electricity industries. The case is the fourth antitrust dispute the court agreed to hear for the current term, Bloomberg noted.