Court sides with Wall Street banks

By PETE YOST, Associated Press Writer, AP, June 18 2007

WASHINGTON - Investors who lost money when the dot-com bubble burst suffered a Supreme Court setback Monday, and the justices are poised to issue yet another important decision that could restrict shareholder lawsuits.

The court sided with Wall Street banks that were alleged to have conspired to drive up prices on about 900 newly issued stocks in the late 1990s.

The justices reversed a federal appeals court decision that would have enabled investors to pursue their case for anticompetitive practices.

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.

But the Supreme Court may be about to raise the bar as well for cases under the securities laws.

Upcoming this week or next is a ruling in a stockholders' suit against high-tech company Tellabs Inc., alleged to have misled investors by engaging in a scheme to inflate Tellabs' stock price. The suit says the company's CEO provided false assurances of robust demand for the company's products in 2001.

The Bush administration is supporting the company's position that would impose a stringent standard on such investor lawsuits.

The Supreme Court term that begins next fall could provide still more problems for trial lawyers and their clients who bring securities fraud cases, particularly those in the Enron scandal.

At issue are efforts to recover investment losses from Wall Street institutions that allegedly collude with scandal-ridden companies.

Companies like Enron have few assets for investors to recover. So that leaves investment banks, attorneys, accountants and others who did business with Enron and companies like it as the only places to sue.

President Bush recently conveyed his feelings about lawsuits to the Justice Department solicitor general, who decided not to side with investors in the Supreme Court case that will impact Enron.

The president's message was that it's important to reduce unnecessary lawsuits and that federal securities regulators are in the best position to sue.

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.

Monday's decision focused on whether Wall Street's allegedly anticompetitive conduct regarding new high-tech stock issues was immune from antitrust suits. The conduct is already the focus of extensive federal regulation by the Securities and Exchange Commission.

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.

Temple University law professor Salil K. Mehra said Breyer's use of the word "risk" is significant because it sets up a low legal threshold that will result in immunity applying in a greater number of cases.

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 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, 8 1/2 times the level from 1981 to 1996.

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 opinion 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."

Wall Street institutions in the case before the Supreme Court were Credit Suisse Securities (USA) LLC, formerly Credit Suisse First Boston LLC; 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.
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