Friedman v. Salomon/Smith Barney, Inc., Docket No. 01-7207.

• Decision Date: 20 December 2002
• Docket Number: Docket No. 01-7207.
• Citation: 313 F.3d 796
• Parties: Alan FRIEDMAN, Sybil Meisel, Steven Langsom, Trustees u/w/o Benjamin Meisel and Sybil Meisel, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. SALOMON/SMITH BARNEY, INC., Goldman Sachs, Merrill Lynch & Co., Inc., Credit Suisse First Boston, Corp., Morgan Stanley Dean Witter, Painewebber Inc., Natwest Securities, Deutsche Bank Alex Brown, Inc., Coburn & Meredith, Inc., Shamrock Partners Ltd., Prudential Securities Inc., Raymond James & Associates, Inc., Donaldson Lufkin & Jenrette, Legg Mason Wood Walker, Inc., Nations Banc Montgomery Securities, LLC, Lazard Freres & Co., LLC, and Morgan Keegan & Co., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

313 F.3d 796

Alan FRIEDMAN, Sybil Meisel, Steven Langsom, Trustees u/w/o Benjamin Meisel and Sybil Meisel, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. SALOMON/SMITH BARNEY, INC., Goldman Sachs, Merrill Lynch & Co., Inc., Credit Suisse First Boston, Corp., Morgan Stanley Dean Witter, Painewebber Inc., Natwest Securities, Deutsche Bank Alex Brown, Inc., Coburn & Meredith, Inc., Shamrock Partners Ltd., Prudential Securities Inc., Raymond James & Associates, Inc., Donaldson Lufkin & Jenrette, Legg Mason Wood Walker, Inc., Nations Banc Montgomery Securities, LLC, Lazard Freres & Co., LLC, and Morgan Keegan & Co., Defendants-Appellees.

Docket No. 01-7207.

United States Court of Appeals, Second Circuit.

Argued: December 11, 2001.

Decided: December 20, 2002.

Roger Kirby, Kirby McInerney & Squire LLP (Alice McInerney, Randall K. Berger, W. Mark Booker, on the brief) New York, NY, for Plaintiffs-Appellants.

Robert F. Wise, Jr., Davis Polk & Wardwell (John J. Clarke, Jr., Kevin Wallace, on the brief) New York, NY, for Defendants-Appellees.

Jay N. Fastow, Weil, Gotshal & Manges LLP (Adam P. Strochak, on the brief), New York, NY, for amicus curiae New York Stock Exchange, Inc.

David M. Becker, General Counsel, Securities and Exchange Commission (Meyer Eisenberg, Deputy General Counsel, Mark Pennington, Assistant General Counsel, on the brief) Washington, DC, for amicus curiae Securities and Exchange Commission.

Before OAKES and POOLER, Circuit Judges.^*

POOLER, Circuit Judge.

Plaintiffs Alan Friedman, et al., appeal from the December 11, 2000, judgment of the United States District Court for the Southern District of New York (Naomi Reice Buchwald, Judge) dismissing their class action complaint pursuant to Fed. R.Civ.P. 12(b)(6). Plaintiffs alleged that defendants participated in a price-fixing scheme concerning the sale of securities in violation of federal antitrust laws. The district court correctly held, however, that defendants' action enjoys implied immunity from antitrust laws because the antitrust laws conflict with securities regulatory provisions.

BACKGROUND

Plaintiffs are a class of retail investors who bought stock in public offerings. Plaintiffs are buyers. Defendants are underwriters and brokerage firms that manage public offerings through which they distribute shares of stock. Defendants are sellers. According to plaintiffs, defendants do not permit plaintiffs to re-sell their public offering stock during a prescribed "retail restricted period" of between 30 and 90 days after the initial offering distribution. First Am. Compl. at ¶¶ 2.b, 3. This retail restricted period occurs in the "aftermarket," which concerns any sales after the initial distribution. The re-sale of stock shortly after purchasing it in a public offering is known as "flipping." Generally, flipping causes stock prices to fluctuate — usually downward — and after-market sales restrictions are a form of price stabilization. According to plaintiffs, stock that institutional investors purchased from the same public offerings is not subject to aftermarket sales restrictions. Id. at ¶ 4. Plaintiffs also claim that defendants do not disclose the restrictions in an offering's registration statement or prospectus. Id. at ¶ 2.b.

Plaintiffs allege a conspiracy beginning in approximately 1990 among defendants to impose the restrictions on retail investors. According to plaintiffs, defendants discourage flipping but do not strictly forbid the practice. Instead, defendants enforce the retail restricted period by denying stock allocations in future public offerings to retail investors who previously flipped stock. Defendants also enforce the retail restricted period by denying or restricting stock allocations or commissions to brokers whose retail customers engage in flipping. First Am. Compl. at ¶¶ 60, 63. Defendants monitor stock sales and flipping on a customer-by-customer basis through the Depository Trust Co., "a clearing house for the settlement of securities traded on all major exchanges and the NASDAQ system." Id. at ¶ 8.

Plaintiffs contend that defendants' practice artificially drives up the price of stock in the aftermarket by restricting the supply of shares. Plaintiffs also contend that the practice causes them to pay inflated prices for shares during the initial distribution of public offering stock. According to plaintiffs, institutional investors benefit from defendants' practice because they can re-sell their shares at a higher price in the aftermarket. First Am. Compl. at ¶ 4. Defendants also benefit from the scheme by, among other things, receiving more business and even kickbacks from institutional investors. Plaintiffs also note that defendants benefit from the artificially high prices because they do not have to spend as much of their own capital to support the price of public offering shares, and defendants attract future business based on the stock price performance of current public offerings. Id. at ¶ 11.e.

Plaintiffs filed a class action lawsuit in federal court on August 21, 1998, alleging a violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Plaintiffs also alleged a cause of action under New York law for breach of fiduciary duty. Plaintiffs filed an amended complaint on March 10, 1999, and defendants moved to dismiss it pursuant to Rule 12(b)(6). After hearing oral argument, the district court granted defendants' motion in a Memorandum and Order in December 2000. Friedman v. Salomon/Smith Barney, Inc., 2000 WL 1804719 (S.D.N.Y. Dec.8, 2000) ("Friedman I"). In addition to dismissing plaintiffs' federal claim on the merits, the district court dismissed their state law claim by declining to exercise supplemental jurisdiction over it. Id. at *12. Plaintiffs moved for reconsideration, and the district court denied the motion in a January 2001 Memorandum and Order. Friedman v. Salomon/Smith Barney, Inc., 2001 WL 64774 (S.D.N.Y. Jan.23, 2001) ("Friedman II"). Plaintiffs now appeal. Our review is de novo. Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir.1994).

DISCUSSION

Both parties agree that the only issue on appeal is whether defendants' conduct is immune from antitrust enforcement based on the regulatory authority and actions of the Securities and Exchange Commission ("SEC"), principally under Section 9(a)(6) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78i(a)(6).¹ The relevant legal doctrine is known as implied immunity. The parties also agree that the SEC has not regulated price stabilization in the aftermarket, but they draw opposite inferences from this circumstance.

According to plaintiffs, defendants' conduct does not benefit from the shield of implied immunity because the SEC's failure to regulate the manipulation of stock prices in the aftermarket is not the product of its consideration of antitrust or competitive concerns, and the SEC never has implied or held that defendants' conduct was permissible. Plaintiffs also argue that because defendants' conduct is anti-competitive, applying antitrust laws would reinforce the purpose of the Exchange Act rather than subject defendants to conflicting directives of securities and antitrust laws. Defendants and amici contend that the SEC has exercised its statutory authority in permitting — through the deliberate absence of regulation — defendants' conduct, so punishing that same conduct under antitrust principles would create an impermissible conflict.

I. Implied immunity

The doctrine of implied immunity rests on three Supreme Court cases: Silver v. New York Stock Exch., 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963), Gordon v. New York Stock Exch., Inc., 422 U.S. 659, 95 S.Ct. 2598, 45 L.Ed.2d 463 (1975), and United States v. National Ass'n of Sec. Dealers, Inc., 422 U.S. 694, 95 S.Ct. 2427, 45 L.Ed.2d 486 (1975) ("NASD"). Generally, courts should not abrogate antitrust laws through implied immunity, also known as implied repeal or revocation, "casually" because "repeal by implication is not favored." Finnegan v. Campeau Corp., 915 F.2d 824, 828 (2d Cir.1990) (quotation marks and citation omitted). Implied immunity will exist "[o]nly where there is a plain repugnancy between the antitrust and regulatory provisions." Id. (quotation marks and citation omitted). "[R]epeal of antitrust jurisdiction cannot be implied simply when the antitrust laws and a regulatory scheme overlap." Strobl v. New York Mercantile Exch., 768 F.2d 22, 27 (2d Cir.1985). Importantly, the "plain repugnancy," or conflict, between antitrust and securities laws extends to potential as well as actual conflicts. Id.

As the district court below recognized, implied immunity analysis requires a fairly fact-specific inquiry into the nature and extent of regulatory action that allegedly conflicts with antitrust law. See Friedman I, 2000 WL 1804719, at *4-5 (listing relevant factors to implied immunity analysis). In their arguments on appeal, the parties largely compare the case at bar to the facts of prior cases, making a brief review of those cases helpful here.

In Finnegan, we found implied immunity where a direct conflict existed between antitrust law, which would prohibit joint takeover bidders, and the Williams Act, 15 U.S.C. §§ 78m(d)-(e) & 78n(d)-(f), which allowed competing bidders to make joint bids as long as they complied with SEC disclosure regulations. Finnegan, 915 F.2d at 829-31. In light of the direct conflict, implied immunity was necessary for the "proper functioning of the securities laws." Id. at 831. In Finnegan, we held that "[w]e cannot presume that Congress has allowed competing bidders to make a joint bid under the Williams Act and the SEC's regulations and taken that right away by authorizing suit against such joint bidders under the antitrust laws." Id. at 830.

In Strobl, we found that no implied immunity existed where both the Sherman Act and Commodity Exchange Act forbid price manipulation,...