In re Short Sale Antitrust Litig., No. 08-0420 (2d Cir. 2009)

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08-0420-cv In re Short Sale Antitrust Litig. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2009 (Argued: September 30, 2009 Decided: December 3, 2009) Docket No. 08-0420-cv - - - - - - - - - - - - - - - - - - - -x ELECTRONIC TRADING GROUP, LLC, on behalf of itself and all others similarly situated, Plaintiff-Appellant, - v.BANC OF AMERICA SECURITIES LLC, BEAR STEARNS COMPANIES, INC., CITIGROUP INC., CREDIT SUISSE (USA) INC., DEUTSCHE BANK SECURITIES, INC., GOLDMAN, SACHS & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, MORGAN STANLEY & CO. INCORPORATED, UBS FINANCIAL SERVICES, INC., CIBC WORLD MARKETS CORP., CITIGROUP GLOBAL MARKETS, INC., CREDIT SUISSE SECURITIES (USA) LLC, GOLDMAN SACHS EXECUTION & CLEARING, L.P., MORGAN STANLEY DW INC., THE GOLDMAN SACHS GROUP, INC., and VAN DER MOOLEN SPECIALISTS USA, LLC, Defendants-Appellees, JOHN DOES, DAIWA AMERICA CORPORATION, DAIWA SECURITIES AMERICA INC., BANK OF NEW YORK, J.P. MORGAN CHASE & CO., J.P. MORGAN SECURITIES INC., and LEHMAN BROTHERS INC., 1 2 3 4 5 6 7 8 9 Defendants. - - - - - - - - - - - - - - - - - - - -x Before: JACOBS, Chief Judge, SACK and LYNCH, Circuit Judges. Plaintiff-appellant Electronic Trading Group, LLC appeals from a judgment of the United States District Court 10 for the Southern District of New York (Marrero, J.) 11 dismissing a Sherman Act claim with prejudice and dismissing 12 three state law claims without prejudice to refiling in 13 state court. 14 considerations recently articulated by the United States 15 Supreme Court in Credit Suisse Securities (USA) LLC v. 16 Billing, 551 U.S. 264 (2007), and found implied preclusion 17 from antitrust liability. 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 The district court evaluated the four We affirm. ANDREW J. ENTWISTLE, VINCENT R. CAPPUCCI, HAROLD F. McGUIRE, JR., ARTHUR V. NEALON, and STEPHEN D. OESTREICH, Entwistle & Cappucci LLP, New York, New York, for Appellant Electronic Trading Group, LLC. ROBERT F. WISE, JR., and WILLIAM J. FENRICH, Davis Polk & Wardwell LLP, New York, New York, for Appellees Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 RICHARD H. KLAPPER and RICHARD C. PEPPERMAN, II, Sullivan & Cromwell LLP, New York, New York, for Appellees Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., and The Goldman Sachs Group, Inc. STEPHEN L. RATNER and HARRY FRISCHER, Proskauer Rose LLP, New York, New York, for Appellee Bear Stearns Companies, Inc. JAY B. KASNER and SHEPARD GOLDFEIN, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for Appellee Merrill Lynch, Pierce, Fenner & Smith Incorporated. JAY P. LEFKOWITZ, MARIA GINZBURG, ANDREW B. CLUBOK, SUSAN E. ENGEL, and ELEANOR R. BARRETT, Kirkland & Ellis LLP, New York, New York and Washington, D.C., for Appellee UBS Financial Services, Inc. ROBERT B. McCAW, FRASER L. HUNTER, JR., and ALI M. STOEPPELWERTH, Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York and Washington, D.C., for Appellees Citigroup Inc., Citigroup Global Markets, Inc., Credit Suisse (USA) Inc., and Credit Suisse Securities (USA) LLC. ANDREW J. FRACKMAN and BRENDAN J. DOWD, O Melveny & Myers LLP, New York, New York, for Appellee Banc of America Securities LLC. 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 GREGORY A. MARKEL and MARTIN L. SEIDEL, Cadwalader, Wickersham & Taft LLP, New York, New York, for Appellee Deutsche Bank Securities, Inc. DANIEL B. RAPPORT, KATHERINE L. PRINGLE, and LISA S. GETSON, Friedman Kaplan Seiler & Adelman LLP, New York, New York, for Appellee Van Der Moolen Specialists USA, LLC. JONATHAN D. POLKES, ROBERT F. CARANGELO, and DEBRA J. PEARLSTEIN, Weil, Gotshal & Manges LLP, New York, New York, for Appellee CIBC World Markets Corp. DENNIS JACOBS, Chief Judge: In this putative class action, plaintiff-appellant 24 Electronic Trading Group, LLC ( ETG ), a short seller, sues 25 certain financial institutions that serve as prime brokers 26 in short sale transactions.1 27 brokers arbitrarily designated certain securities as hard- It is alleged that the prime 1 The defendants-appellees are Banc of America Securities LLC; Bear Stearns Companies, Inc.; Citigroup Inc.; Credit Suisse (USA) Inc.; Deutsche Bank Securities, Inc.; Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Morgan Stanley & Co., Incorporated; UBS Financial Services, Inc.; CIBC World Markets Corp.; Citigroup Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Goldman Sachs Execution & Clearing, L.P.; The Goldman Sachs Group, Inc.; Van Der Moolen Specialists USA, LLC; and Morgan Stanley DW Inc. 4 1 to-borrow and then fixed the price for borrowing them, in 2 violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 3 (the antitrust claim ).2 4 pleaded: breach of fiduciary duty, aiding and abetting 5 breach of fiduciary duty, and unjust enrichment 6 (collectively, the state law claims ).3 7 Three state law claims are also ETG appeals from a judgment of the United States 8 District Court for the Southern District of New York 9 (Marrero, J.), dismissing the antitrust claim with prejudice 10 on the ground of implied preclusion of the antitrust law by 11 the securities law, and dismissing the state law claims 2 A complaint pleading a violation of section 1 must allege a contract, combination or conspiracy that unreasonably restrains trade. Elecs. Commc ns Corp. v. Toshiba Am. Consumer Prods., Inc., 129 F.3d 240, 243 (2d Cir. 1997). 3 ETG brought the breach of fiduciary duty claim against Morgan Stanley DW Inc.; Bear Stearns Companies, Inc.; Goldman Sachs Execution & Clearing, L.P.; Goldman, Sachs & Co.; UBS Financial Services, Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Citigroup Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities, Inc.; Banc of America Securities LLC; Van Der Moolen Specialists USA, LLC; and CIBC World Markets Corp. ETG brought the aiding and abetting breach of fiduciary duty claim against the parent corporations of some of the prime brokers named in the breach of fiduciary duty claim-Morgan Stanley & Co., Incorporated; The Goldman Sachs Group, Inc.; Citigroup Inc.; and Credit Suisse (USA) Inc. 5 1 2 without prejudice to refiling in state court. We affirm. The preclusion analysis turns on four considerations 3 identified in Credit Suisse Securities (USA) LLC v. Billing, 4 551 U.S. 264, 285 (2007): whether the area of conduct [is] 5 squarely within the heartland of securities regulations ; 6 whether the Securities and Exchange Commission ( SEC ) has 7 clear and adequate [] authority to regulate ; whether there 8 is active and ongoing agency regulation ; and whether a 9 serious conflict arises between antitrust law and 10 11 securities regulations. Much depends on the level of particularity or 12 generality at which each Billing consideration is evaluated. 13 Obviously, if the inquiry is whether the SEC actively 14 regulates the pricing of borrowed shares, the plaintiff wins 15 the point. 16 short selling is within the heartland of securities 17 regulations, the defendants win the point. 18 By the same token, if the inquiry is whether For the reasons set forth in this opinion, the fourth 19 consideration--detection of a serious conflict--is evaluated 20 at the level of the alleged anticompetitive conduct. 21 of the three remaining considerations is evaluated at the 22 level most useful to the court in achieving the overarching 6 Each 1 goal of avoiding conflict between the securities and 2 antitrust regimes. 3 BACKGROUND 4 5 A. Short Selling A short sale transaction proceeds in the following 6 7 sequence. The short seller identifies securities she 8 believes will drop in market price, borrows these securities 9 from a broker (prime brokers have the greatest market 10 share), sells the borrowed securities on the open market, 11 purchases replacement securities on the open market, and 12 returns them to the broker--thereby closing the short 13 seller s position. 14 the difference between the market price at which she sold 15 the borrowed securities and the market price at which she 16 purchased the replacement securities, less borrowing fees, 17 brokerage fees, interest, and any other charges levied by 18 the broker. The short seller s profit (if any) is 19 20 21 22 B. The Role of the Prime Brokers 23 the short seller s requested securities, lends those In the context of short selling, a prime broker locates 7 1 securities to the short seller for a fee, and delivers those 2 securities to the short seller s purchaser. 3 A short seller seeking to borrow securities contacts 4 the broker s securities loan desk. Pursuant to SEC 5 regulations, the securities loan desk must locate the 6 requested securities before it can accept the short seller s 7 order. 8 securities loan desk may locate the securities in its own 9 proprietary accounts, or in the hands of other brokers or 10 institutional investors with significant long positions. 11 Alternatively, the securities loan desk may locate the 12 securities through a third party who assists the broker in 13 exchange for a locate fee. See 17 C.F.R. § 242.203(b)(1)(i)-(iii). The 14 The broker charges the short seller a borrowing fee 15 affected by supply and demand: the harder the security is to 16 find and borrow, the higher the fee. 17 an easy-to-borrow list of securities that are in abundant 18 supply and a hard-to-borrow list of securities that are 19 scarce. 20 83 SEC Docket 1278 (July 28, 2004). 21 22 The broker may develop See Short Sales, Exchange Act Release No. 34-50103, A short seller who has sold the borrowed securities on the open market must deliver those securities to the 8 1 purchaser within three days of the transaction date. If the 2 short seller s broker does not deliver in time, a failure- 3 to-deliver ( FTD ) occurs. 4 5 6 7 C. The Borrowing Fees Conspiracy 8 the prime brokers charged artificially inflated borrowing 9 fees by agreeing on which securities to designate It is alleged that from April 12, 2000 to the present, 10 arbitrarily as hard-to-borrow, and setting minimum borrowing 11 fees for these securities. 12 set out in the margin, which we do not reach.4 ) (There are other allegations, 13 4 ETG s Amended Class Action Complaint (the complaint ) also alleges that the prime brokers (i) failed to enforce the delivery of securities, thereby enabling the prime brokers to charge borrowing fees for securities that were never actually borrowed and giving rise to intentional FTDs; and (ii) charged improper locate fees when the securities were never found and/or borrowed. On appeal, ETG argues that the complaint s references to failures to deliver and improper and unjustified locate fees were pleaded [only] as an adjunct to [ETG s] price-fixing claim. Appellant s Reply Br. 17 & 17 n.12. The prime brokers argue that ETG improperly seeks to amend the complaint on appeal by recharacterizing these allegations from integral components of the conspiracy to ancillary means of expanding the conspiracy s scope. Appellees Opp n Br. 24-25. We do not reach this issue, because dismissal remains appropriate even if we adopt ETG s appellate posture. 9 1 2 D. Procedural History On March 15, 2007, the prime brokers moved to dismiss 3 the antitrust claim pursuant to Federal Rules of Civil 4 Procedure 12(b)(6) and 9(b). 5 States Supreme Court decided Billing. 6 the district court applied Billing, granted the prime 7 brokers motion to dismiss the antitrust claim under Rule 8 12(b)(6), and declined to exercise supplemental jurisdiction 9 over the state law claims.5 On June 18, 2007, the United On December 20, 2007, ETG timely appealed the 10 district court s decision, arguing principally that the 11 district court misapplied Billing. 12 DISCUSSION 13 14 We review the district court s grant of a Rule 15 12(b)(6) motion de novo, drawing all reasonable inferences 16 in plaintiff[ s] favor, and accepting as true all the 17 factual allegations in the complaint. 18 Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per 19 curiam) (internal quotation marks, citations, and brackets 5 In re Elevator The district court did not reach the alternative Rule 9(b) ground for dismissal of the antitrust claim. We do not reach this ground because we affirm the district court s Rule 12(b)(6) dismissal. 10 1 2 omitted). Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 3 264 (2007), was an antitrust action against underwriting 4 firms that marketed and distributed shares in initial public 5 offerings ( IPO ). 6 underwriters unlawfully agreed with one another that they 7 would not sell shares of a popular new issue to a buyer 8 unless that buyer committed (1) to buy additional shares of 9 that security later at escalating prices (a practice called The plaintiffs alleged that the 10 laddering ), (2) to pay unusually high commissions on 11 subsequent security purchases from the underwriters, or (3) 12 to purchase from the underwriters other less desirable 13 securities (a practice called tying ). Id. at 267. 14 The Supreme Court ruled that federal securities law 15 implicitly precluded application of the antitrust law to the 16 underwriters alleged anticompetitive conduct. 17 articulated four considerations that bear upon whether the 18 securities laws are clearly incompatible with the 19 application of the antitrust laws in a particular context: 20 (A) location within the heartland of securities regulations; 21 (B) SEC authority to regulate; (C) ongoing SEC regulation; 22 and (D) conflict between the two regimes. 11 The Court Id. at 285. In 1 selecting the level of particularity at which to address 2 each consideration, we draw guidance from the specifics of 3 the Supreme Court s analysis in Billing, without suggesting, 4 however, that the level of particularity applied to each 5 consideration in this case is prescriptive in every context. 6 7 8 9 A. Heartland To ascertain whether the possible conflict between securities law and antitrust law affects practices that lie 10 squarely within an area of financial market activity that 11 the securities law seeks to regulate, the Supreme Court 12 looked to the broad underlying market activity. 13 551 U.S. at 276. 14 concern practices that lie at the very heart of the 15 securities marketing enterprise, the Court considered the 16 activities in question, which were found to consist of the 17 underwriters efforts jointly to promote and to sell newly 18 issued securities. 19 whether [t]he IPO process (the underlying market activity 20 in Billing) was within the heartland (and ruled that it 21 was); it did not focus on the laddering and tying 22 arrangements (the alleged anticompetitive conduct in Billing, In deciding that the antitrust allegations Id. Accordingly, the Court focused on 12 1 Billing). Id. This analysis suggests that the first 2 consideration is properly evaluated at the level of the 3 underlying market activity. Accordingly, in this case, we consider whether short 4 5 selling is within the heartland of the securities business. 6 The district court found that the liquidity and pricing 7 benefits created by the short sales place these transactions 8 within the heartland of federal securities regulation and 9 are central to the proper functioning of well-regulated 10 capital markets. In re Short Sale Antitrust Litig., 527 11 F. Supp. 2d 253, 259 (S.D.N.Y. 2007) (quoting Billing, 551 12 U.S. at 276). 13 market activity regulated by the securities law. 14 Appellant s Reply Br. 3. ETG itself recognizes that short selling is 15 Short selling--the underlying market activity in this 16 case--is an area of conduct squarely within the heartland 17 of securities regulations. 18 first consideration thus weighs in favor of implied 19 preclusion. Billing, 551 U.S. at 285. 20 21 22 B. Authority to Regulate To ascertain the existence of regulatory authority 13 The 1 under the securities law to supervise the activities in 2 question in Billing, 551 U.S. at 275, the Supreme Court 3 looked to the role of the underwriters in the IPO process as 4 well as to the alleged laddering and tying arrangements, see 5 id. at 276-77. 6 the SEC authority to supervise all of the activities here in 7 question. 8 forbid, permit, encourage, discourage, tolerate, limit, and 9 otherwise regulate virtually every aspect of the practices The Court determined that the law grants Indeed, the SEC possesses considerable power to 10 in which underwriters engage. 11 gauged regulation of activity that is more particular than 12 the IPO process (the underlying market activity) and more 13 general than the laddering and tying arrangements (the 14 alleged anticompetitive conduct). 15 Id. at 276. The Court thus In addition, the Court cited regulations that grant the 16 SEC power to regulate communications between underwriting 17 participants and their customers, including those that occur 18 during road shows, which suggests that the Court also 19 gauged regulation of the specific alleged anticompetitive 20 conduct. 21 22 Id. at 277. Accordingly, we consider the existence of SEC authority to regulate (i) the role of the prime brokers in short 14 1 selling, and (ii) the borrowing fees charged by prime 2 brokers. 3 6, and 15 U.S.C. §§ 78o(c)(2)(D) and 78j(b). 4 We find such authority in Section 10(a), Section Section 10(a) of the Securities Exchange Act of 1934 5 provides that it is unlawful [t]o effect a short sale . . . 6 of any security registered on a national securities 7 exchange, in contravention of such rules and regulations as 8 the Commission may prescribe as necessary or appropriate in 9 the public interest or for the protection of investors. 15 10 U.S.C. § 78j(a)(1). Citing legislative history, ETG argues 11 that Section 10(a) was intended only to regulate the 12 manipulation of share price through short selling. 13 Appellant s Br. 20-21. 14 Section 10(a) so limits its reach; and the SEC has 15 interpreted Section 10(a) as a grant of plenary authority 16 to regulate short sales of securities registered on a 17 national securities exchange . . . . 18 Act Release No. 34-48709, 68 Fed. Reg. 62,972 (proposed Nov. 19 6, 2003). 20 role of the prime brokers in short selling, as well as the 21 borrowing fees charged by the prime brokers, pursuant to 22 Section 10(a). See However, nothing in the wording of Short Sales, Exchange The SEC thus has the authority to regulate the 15 Section 6 of the Securities Exchange Act of 1934 1 2 provides that the SEC may permit a national securities 3 exchange, by rule, to impose a schedule or fix rates of 4 commissions, allowances, discounts, or other fees to be 5 charged by its members for effecting transactions if such 6 fees are reasonable and do not impose any burden on 7 competition not necessary or appropriate to further the 8 purposes of the securities law. 9 ETG characterizes Section 6 as a grant of limited authority 10 to permit exchanges to deviate from the general prohibition 11 on fixed commission rates. 12 accepting this characterization, the SEC thus has indirect 13 authority to regulate the rates (including the borrowing 14 fees) charged by the prime brokers in short selling. 15 U.S.C. § 78f(e)(1)(B). Appellant s Br. 22. Even In Billing, the Supreme Court relied in part on 15 15 16 U.S.C. §§ 78o(c)(2)(D) and 78j(b) as evidence of the SEC s 17 broad power to define and prevent fraudulent, deceptive, and 18 manipulative conduct by brokers and dealers. 19 277. 20 the prime brokers in short selling and the borrowing fees 21 they charge. 22 551 U.S. at These provisions apply with equal force to the role of This second Billing consideration--focused as it is on 16 1 whether the SEC has authority to regulate the role of the 2 prime brokers in short selling and the borrowing fees 3 charged by the prime brokers--thus weighs in favor of 4 implied preclusion, even though none of the provisions 5 discussed above explicitly references the regulation of 6 borrowing fees. 7 8 C. Ongoing Regulation 9 To evaluate evidence that the responsible regulatory 10 entities exercise [their] authority, Billing, 551 U.S. at 11 275, the Supreme Court looked to the role of the 12 underwriters in the IPO process, see id. at 277. 13 determined that the SEC has continuously exercised its 14 legal authority to regulate conduct of the general kind now 15 at issue. 16 underwriters may and may not do and say during their road 17 shows. 18 particular than the IPO process (the underlying market 19 activity) and more general than the laddering and tying 20 arrangements (the alleged anticompetitive conduct). 21 22 The Court It has defined in detail, for example, what Id. The Court thus looked to activity more In this case, we therefore consider whether there is ongoing SEC regulation of the role of the prime brokers. 17 1 Ample evidence reveals that the SEC exercises its authority 2 to regulate the role of the prime brokers in short selling. 3 [A]ctive and ongoing agency regulation is evidenced by 4 Regulation SHO and a recent SEC roundtable. Id. at 285. 5 Regulation SHO, adopted by the SEC in 2004, imposes a 6 locate requirement on brokers involved in short selling. 7 See 17 C.F.R. § 242.203(b)(1)(i)-(iii) ( A broker or dealer 8 may not accept a short sale order in an equity security from 9 another person . . . unless the broker or dealer has: (i) 10 [b]orrowed the security, or entered into a bona-fide 11 arrangement to borrow the security; or (ii) [r]easonable 12 grounds to believe that the security can be borrowed so that 13 it can be delivered on the date delivery is due. . . . ). 14 Regulation SHO also imposes a delivery requirement on such 15 brokers. 16 enumerated exceptions, [i]f a participant of a registered 17 clearing agency has a fail to deliver position at a 18 registered clearing agency in a threshold security for 19 thirteen consecutive settlement days, the participant shall 20 immediately thereafter close out the fail to deliver 21 position by purchasing securities of like kind and 22 quantity ). See 17 C.F.R. § 242.203(b)(3) (with certain Regulation SHO thus constitutes an exercise of 18 1 the SEC s authority to supervise the role of the prime 2 brokers in short selling. 3 On September 29-30, 2009 (at the time of oral argument 4 in this appeal), the SEC hosted a roundtable regarding 5 securities lending and short sales. 6 Short Sale Roundtable, Exchange Act Release No. 34-60643, 7 2009 WL 2915632, at *1 (Sept. 10, 2009) (announcing the 8 roundtable). 9 of securities lending topics, such as current lending Securities Lending and The roundtable intended to focus on a range 10 practices and participants, compensation arrangements and 11 conflicts, the benefits and risks of securities lending, 12 risks related to cash collateral reinvestment, improvements 13 to transparency, and consideration of whether the securities 14 lending regulatory regime can be improved for the benefit of 15 investors. 16 short sale disclosure topics and addressed the potential 17 impact of imposing a pre-borrow or enhanced locate 18 requirement on short sellers . . . as a way to curtail 19 abusive naked short selling. 20 indicates active SEC monitoring of the role of the prime 21 brokers in short selling. 22 Id. The roundtable also intended to focus on Id. This roundtable ETG s complaint implicitly confirms active regulation. 19 1 The complaint affirmatively alleges, presumably to flesh out 2 claims of wrongdoing, that certain prime brokers have been 3 fined for not borrowing securities or failing to enter into 4 agreements to borrow securities that are sold in short sale 5 transactions and/or having reasonable grounds to believe 6 that the securities could be borrowed so that they could be 7 delivered on the delivery due date, Compl. ¶ 91, and that 8 federal prosecutors and the [New York Stock Exchange] have 9 launched a joint investigation into [certain prime brokers ] 10 alleged price gouging . . . by artificially inflating 11 borrowing fees and by charging fees for which no services 12 were rendered, id. ¶ 92. 13 allegations is that the SEC and securities self-regulating 14 organizations actively exercise regulatory authority over 15 the role of the prime brokers in short selling. A fair inference from these 16 Regulation SHO and the recent roundtable do not focus 17 on the regulation of borrowing fees (the particular conduct 18 alleged to be anticompetitive); but it is enough for this 19 purpose that the SEC s ongoing regulation is focused on the 20 role of the prime brokers in short selling. 21 consideration thus weighs in favor of implied preclusion. 22 20 The third 1 2 D. Conflict To ascertain the risk that the securities and 3 antitrust laws, if both applicable, would produce 4 conflicting guidance, requirements, duties, privileges, or 5 standards of conduct, 6 Supreme Court considered whether allowing antitrust 7 liability for the conduct alleged to have the 8 anticompetitive effect would inhibit permissible (and even 9 beneficial) market behavior. Billing, 551 U.S. at 275-76, the See id. at 282 ( And the 10 threat of antitrust mistakes, i.e., results that stray 11 outside the narrow bounds that plaintiffs seek to set, means 12 that underwriters must act in ways that will avoid not 13 simply conduct that the securities law forbids (and will 14 likely continue to forbid), but also a wide range of joint 15 conduct that the securities law permits or encourages (but 16 which they fear could lead to an antitrust lawsuit and the 17 risk of treble damages). ). 18 therefore, the proper focus is on the alleged 19 anticompetitive conduct: 20 21 22 23 24 25 In evaluating conflict, [W]e do not read the complaints as attacking the bare existence of IPO underwriting syndicates or any of the joint activity that the SEC considers a necessary component of the IPO-related syndicate activity. . . . Nor do we understand the complaints as questioning underwriter agreements to fix the 21 1 2 3 4 5 6 7 8 9 10 11 levels of their commissions, whether or not the resulting price is excessive. We . . . read the complaints as attacking the manner in which the underwriters jointly seek to collect excessive commissions. The complaints attack underwriter efforts to collect commissions through certain practices (i.e., laddering, tying, collecting excessive commissions in the form of later sales of the issued shares) . . . . Id. at 278 (citations omitted). In this case, therefore, we consider the impact that 12 antitrust liability may have on arrangements for borrowing 13 fees. 14 difficulty in distinguishing collusive fee-fixing agreements 15 from routine communications concerning stock availability 16 and market pricing permissible under Regulation SHO ; and 17 (ii) that there is no actual or potential conflict that 18 necessitates immunity because neither the securities law 19 nor the antitrust law permit the collusive fixing of 20 borrowing fees. 21 found otherwise. 22 F. Supp. 2d at 260. ETG argues (i) that there should be little Appellant s Br. 32-33. The district court See In re Short Sale Antitrust Litig., 527 23 We conclude that antitrust liability would create 24 actual and potential conflicts with the securities regime. 25 An actual conflict arises because antitrust liability would 26 inhibit the prime brokers (and other brokers) from engaging 22 1 in other conduct that the SEC currently permits and that 2 benefits the efficient functioning of the short selling 3 market. 4 the future may decide to regulate the borrowing fees charged 5 by brokers. 6 1. 7 Antitrust liability would inhibit conduct that the SEC There is a potential conflict because the SEC in Actual Conflict 8 permits and that assists the efficient functioning of the 9 short selling market. The thrust of ETG s case is that the 10 prime brokers communicated with one another to designate 11 hard-to-borrow securities and to fix inflated borrowing fees 12 for those securities. 13 brokers to communicate about the availability and price of 14 securities. 15 are implicitly permitted by the SEC s Regulation SHO. 16 re Short Sale Antitrust Litig., 527 F. Supp. 2d at 260 17 (citing 17 C.F.R. § 242.203(b)(1) (requiring that a broker 18 borrow the securities or have reasonable grounds to believe 19 that the securities can be borrowed before accepting an 20 order from a short seller)). 21 to distinguish what is forbidden from what is allowed, so 22 that the broker collects just so much information as However, it is permissible for As the district court observed, such exchanges In It is a lot to expect a broker 23 1 required to satisfy the locate requirement and for the 2 efficient functioning of the short selling market--but not 3 an iota more--or suffer treble damages. 4 at 280. 5 Billing, 551 U.S. Conflict is a risk unless there is a practical way to 6 confine antitrust suits so that they challenge only activity 7 of the kind the [plaintiffs] seek to target without 8 inhibiting other conduct that is permitted or encouraged 9 under the securities law. Id. at 282. The drawing of such 10 intricate lines demands securities-related expertise. 11 Moreover, it is likely that the very communications in which 12 short sellers do what the securities law allows would by 13 reasonable but contradictory inferences serve as evidence 14 of conduct forbidden by the antitrust law. 15 a jury therefore gives rise to a serious risk of 16 inconsistent court results. 17 Id. Id. Reliance on Id. Antitrust liability, with the prospect of treble 18 damages, would be an incentive for the prime brokers to curb 19 their permissible exchange of information and thereby harm 20 the efficient functioning of the short selling market. 21 inhibiting effect weighs in favor of implied preclusion. 22 2. Potential Conflict 24 This 1 In addition to the actual conflict described above, a 2 potential conflict exists based on the possibility that the 3 SEC will act upon its authority to regulate the borrowing 4 fees set by prime brokers. 5 acknowledged in Billing, a potential conflict of this kind 6 may exist even if there is no conflict that is actual and 7 immediate. 8 upshot of Gordon v. N.Y. Stock Exch., Inc., 422 U.S. 659, 9 690-91 (1975), as in light of potential future conflict, As the Supreme Court See Billing, 551 U.S. at 273 (describing the 10 the Court found that the securities law precluded antitrust 11 liability even in respect to a practice that both antitrust 12 law and securities law might forbid ). 13 implied repeal case, this Court observed that the proper 14 focus is not on the Commission s current regulatory position 15 but rather on the Commission s authority to permit conduct 16 that the antitrust laws would prohibit. 17 Exchs. Options Trading Antitrust Litig., 317 F.3d 134, 149 18 (2d Cir. 2003). 19 In the context of an In re Stock It is therefore not decisive that neither securities 20 law nor antitrust law allows--or encourages--the collusive 21 fixing of borrowing fees. 22 expressly allows prime brokers to rely on easy-to-borrow The present securities regime 25 1 lists as reasonable grounds to believe that the security 2 sold short is available for borrowing without directly 3 contacting the source of the borrowed securities. 4 Sales, Exchange Act Release No. 34-50103, 83 SEC Docket 1278 5 (July 28, 2004). 6 lists are not widely used by broker-dealers and that, 7 therefore, the fact that a security is not on a hard to 8 borrow list cannot satisfy the reasonable grounds test 9 described above. Short The SEC has taken note that hard-to-borrow Id. But if and when such hard-to-borrow 10 lists come into broader use, it is easy to see how they 11 could increase the efficiency of the short selling market, 12 in which event the SEC could move quickly to regulate the 13 borrowing fees charged by brokers for securities appearing 14 on such lists. 15 implied preclusion. This potential conflict weighs in favor of 16 CONCLUSION 17 18 19 All four Billing considerations weigh in favor of implied preclusion.6 We therefore affirm the district 6 Because all four of the Billing considerations point in the direction of implied preclusion, we need not address the weight to be accorded these considerations when they point in different directions. 26 1 court s Rule 12(b)(6) dismissal of ETG s antitrust claim 2 with prejudice. 3 state law claims without prejudice because we find no abuse 4 of discretion in the district court s decision to decline to 5 exercise supplemental jurisdiction over these claims. 6 Kolari v. N.Y.-Presbyterian Hosp., 455 F.3d 118, 122 (2d 7 Cir. 2006). Moreover, we affirm the dismissal of ETG s 8 9 27 See

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