U.S. v. Alex. Brown & Sons, Inc., 96 Civil 5313(RWS).

• Decision Date: 23 April 1997
• Docket Number: No. 96 Civil 5313(RWS).,96 Civil 5313(RWS).
• Citation: 963 F.Supp. 235
• Parties: UNITED STATES of America, Plaintiff, v. ALEX. BROWN & SONS, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

Page 235

963 F.Supp. 235

UNITED STATES of America, Plaintiff, v. ALEX. BROWN & SONS, INC., et al., Defendants.

No. 96 Civil 5313(RWS).

United States District Court, S.D. New York.

April 23, 1997.

U.S. Department of Justice, Antitrust Division, Washington, DC, for United States of America; Hays Gorey, Jr., Andrea Limmer, John D. Worland, Jr., Jessica N. Cohen, of counsel.

Shearman & Sterling, New York City, for Defendants; James T. Halverson, Joseph T. McLaughlin, of counsel.

Fine, Kaplan and Black, Philadelphia, PA, for Intervenors; Arthur M. Kaplan, of counsel.

Lovell & Skirnick, New York City, for Intervenors; Christopher Lovell, Robert A. Skirnick, of counsel.

Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, for Intervenors; Leonard B. Simon, of counsel.

SWEET, District Judge.

In this civil antitrust enforcement action, the United States has moved, pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act (the "APPA" or "Tunney Act"), 15 U.S.C. § 16(b)-(h), for entry of a stipulation and order (the "Order" or the "Consent Decree") terminating the action.

For the reasons set forth below, the motion will be granted, and the Order will be entered.

Parties

Defendants Alex. Brown & Sons Inc., Bear, Stearns & Co., Inc., CS First Boston Corp., Dean Witter Reynolds, Inc., Donaldson, Lufkin & Jenrette Securities Corp., Furman Selz LLC, Goldman, Sachs & Co., Hambrecht & Quist LLC, Herzog, Heine, Geduld, Inc., J.P. Morgan Securities, Inc., Lehman Brothers, Inc., Mayer & Schweitzer, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Stanley & Co., Inc., Nash, Weiss & Co., Olde Discount Corp., Painewebber Inc., Piper Jaffray Inc., Prudential Securities Inc., Salomon Brothers Inc., Sherwood Securities Corp., Smith Barney Inc., Spear, Leeds & Kellogg, LP, and UBS Securities LLC (collectively, the "Defendants") are or were market makers on the NASDAQ exchange and purchased and sold stock on NASDAQ.

The Antitrust Division of the United States Department of Justice (the "Government" or the "DOJ") initiated this action alleging that the Defendants violated Section 1 of the Sherman Act, 15 U.S.C. § 1, by engaging in a form of price fixing.

The Intervenors are plaintiffs in In re NASDAQ Market-Makers Antitrust Litigation, M.D.L. No. 1023, a private multidistrict class action (the "Multidistrict Action") alleging antitrust violations and seeking damages and injunctive relief.

Prior Proceedings

The facts and prior proceedings in this action are set forth fully in the prior opinion of this court, familiarity with which is assumed. See, United States v. Alex. Brown &amp Sons, Inc., 169 F.R.D. 532 (S.D.N.Y.1996). Further background is provided in the opinions on the related Multidistrict Action. See, In re NASDAQ Market-Makers Antitrust Litigation, 894 F.Supp. 703 (S.D.N.Y.1995); 164 F.R.D. 346 (S.D.N.Y.1996); 1996 WL 187409 (S.D.N.Y.1996); 929 F.Supp. 723 (S.D.N.Y. 1996); 929 F.Supp. 174 (S.D.N.Y. 1996); 938 F.Supp. 232 (S.D.N.Y.1996); 169 F.R.D. 493 (S.D.N.Y.1996); 172 F.R.D. 119 (S.D.N.Y.1997).

After extensive investigation, the Government filed the complaint in this civil action on July 17, 1996, pursuant to Section 4 of the Sherman Act, as amended, 15 U.S.C. § 4, seeking equitable and other relief to prevent and restrain violations of Section 1 of the Sherman Act, as amended, 15 U.S.C. § 1.

On the same day the complaint was filed, the United States and the Defendants filed the Order to resolve the allegations in the complaint. In accordance with procedures outlined in the APPA, the Government submitted materials to the Court, including a Competitive Impact Statement ("CIS") summarizing the evidence supporting the allegations in the complaint and describing the resolution set forth in the proposed Consent Decree. The Government also published proposed settlement documents in the Federal Register and newspapers, thus initiating the process of public comment and court consideration of the proposed Consent Decree required by the Tunney Act.

By opinion dated November 26, 1996, the plaintiffs in the parallel Multidistrict Action were granted leave to intervene in this action for the limited purpose of objecting to Paragraph IV(C)(6) of the Consent Decree, which provides that tape recordings of trader conversations made by the Defendants for enforcement purposes would not be subject to civil process or admissible in evidence, except at the instance of specified Government enforcement and self-regulatory agencies. The November 26 opinion also denied the Intervenors' motion to compel disclosure of a "Settlement Memorandum" created by the Government. See United States v. Alex. Brown & Sons, Inc., supra.

On November 18, 1996, the Government made the instant motion to enter the Order and filed with the Court its Response to Public Comments, as required by the Tunney Act. 15 U.S.C. § 16(d). The Government, Defendants and Intervenors submitted further briefing on Paragraph IV(C)(6) of the proposed Order. Pursuant to 15 U.S.C. 16(f), a public hearing on the consent decree was held on January 14, 1997, at which time the matter was deemed fully submitted.

The Facts

In its complaint, the Government alleged that the Defendants and other NASDAQ market-makers adhered to and enforced a "quoting convention" that was designed to and did deter price competition among the Defendants and other market makers in their trading of NASDAQ stocks with the general public. Specifically, the complaint alleged that the Defendants had agreed among themselves to avoid "odd-eighth" quotes on certain securities, thus effectively raising the minimum transaction cost to purchasers and sellers, since one-eighth is the smallest ask-bid increment that can be quoted. The Government believed that investors incurred higher transaction costs for buying and selling NASDAQ stocks than they would have incurred had the Defendants not restrained competition through their illegal agreement.

The Government contends that the proposed Order will eliminate the anticompetitive conduct identified in the complaint and establish procedures that will ensure that such conduct does not recur. Specifically, the proposed Order seeks to prevent the Defendants from agreeing with other market makers to adhere to the quoting convention, or to fix, raise, lower, or maintain prices or quotes for NASDAQ securities. The proposed Order also requires each Defendant to adopt an antitrust compliance program and designate an antitrust compliance officer (the "ACO") to ensure the firm's future compliance with the antitrust laws. To this end, the proposed decree requires the compliance officer to: (1) randomly monitor and tape record telephone conversations between stock traders; and (2) report any violations of the proposed Order within ten business days to the Antitrust Division of the Department of Justice. The taping provisions are to remain in effect for five years. The remainder of the Decree expires ten years after entry.

The proposed Decree also requires that these tape recordings be made available to the DOJ for its review. The proposed Order gives the DOJ authority to receive complaints of possible violations, to visit Defendants' offices unannounced to monitor trader conversations as they are ongoing, to direct taping of particular suspected violators, and to request copies of tapes as they are made.

Paragraph IV (C)(6) of the proposed Order provides:

Tapes made pursuant to this stipulation and order shall be retained by each defendant for at least thirty (30) days from the date of recording, and may be recycled thereafter. Tapes made pursuant to this stipulation and order shall not be subject to civil process except for process issued by the Antitrust Division, the SEC, the NASD, or any other self-regulatory organization, as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended. Such tapes shall not be admissible in evidence in civil proceedings, except in actions, proceedings, investigations, or examinations commenced by the Antitrust Division, the SEC, the NASD, or any other self-regulatory organization, as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended.

In this opinion, Paragraph IV(C)(6) will be referred to as the "non-disclosure" provision or the "prospective protective order."

Prior to the initiation of this lawsuit, at least ten of the Defendants taped trader telephone conversations. None of the Defendants currently tapes its telephone calls. Defendants' counsel has submitted an affidavit indicating that the Defendants will not voluntarily tape trader conversations without the protections of Paragraph IV(C)(6).

Discussion

The Tunney Act directs the district court to determine whether the proposed Consent Decree is "in the public interest" before entering judgment and identifies several factors that the Court may consider in making this determination. 15 U.S.C. § 16(e).

Section 16(e) provides:

Before entering any consent judgment proposed by the United States under this section, the court shall determine that the entry of such judgment is in the public interest. For the purpose of such determination, the court may consider —

(1) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration of relief sought, anticipated effects of alternative remedies actually considered, and any other considerations bearing upon the adequacy of such judgment;

(2) the impact of such judgment upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial.

While the Tunney Act was designed to prevent "judicial rubber stamping" of proposed Government consent decrees, see H. Rep. No. 93-1463, 93rd Cong., 2d Sess., reprinted in 1974 U.S.C.C.A.N. 6535, 6538, ...