KAI RYSSDAL: It’s a business kind of week for the Supreme Court. Justices heard arguments on a case involving consumer prices today — whether or not manufacturers can set minimums that retailers would have to charge. Wall Street’s keeping an eye on tomorrow’s case. Big investment banks are defendants in a suit over initial public offering prices during the dot-com boom. The accusations are familiar. That IPO prices were unjustifiably inflated in the late 1990s. But Marketplace’s Amy Scott reports the legal infighting has gotten the government involved.
AMY SCOTT: In December 1999 a tiny computer company called VA Linux went public. The pre-IPO hype convinced one Swiss investor to buy some shares as soon as they hit the open market. His attorney, Mel Weiss, says that first day the price jumped from $30 a share to almost $300.
MEL WEISS: He was in the United States visiting, and he got on a plane and he found out when he got to the other side that he spent $3 million for those shares.
SCOTT: And did he end up losing money?
WEISS: Oh yes, he lost most of it.
Weiss claims the investment bank that underwrote the IPO artificially pumped up its price. In a class-action lawsuit, he and other attorneys accused the major banks of doling out shares in hundreds of hot IPOs only if their customers agreed to buy more stock later at higher prices. Or if those customers essentially kicked back some of their profits.
Steve Thel teaches securities law at Fordham University. He says what’s new about the case is that the attorneys argued those practices broke federal and state antitrust laws.
STEVE THEL: Clearly either of those things would be a violation of the securities laws themselves. But the plaintiffs want to bring the action under the antitrust laws, partly because in the antitrust laws the damages are trebled. Instead of getting $1 for each loss you have, you get $3. And so the antitrust laws are much more attractive for a plaintiff.
But they’re also controversial. A district court dismissed Weiss’s lawsuit. The judge ruled that because investment banks are heavily regulated by securities law, antitrust laws don’t apply. But a federal appeals court disagreed. Now it’s up to this country’s highest court to decide. Justices have heard an earful from the business and securities lobbies.
Robin Conrad is with the National Chamber Litigation Center, the legal arm of the U.S. Chamber of Commerce. She says if the Supreme Court allows this case to go forward . . .
ROBIN CONRAD: You’re gonna have duplicative regulatory authorities. You’re going to have the potential for inconsistent rulings. And that’s what’s going to make it very risky for underwriters.
And anything risky is especially alarming to Wall Street these days, what with all the talk of London and Hong Kong siphoning off its IPO business. Regulators have weighed in on the fight as well. The Securities and Exchange Commission says antitrust challenges could interfere with its oversight of the industry. But Fordham Law’s Steve Thel says the government hasn’t done enough to pursue the practices in question. A few cases brought by the SEC settled. And when firms settle, they don’t have to admit or deny any wrongdoing.
THEL: Part of what needs to happen is to examine what really happened, to search the record, look for incriminating e-mails, or find the absence of them. And the only way to do that is to allow a case like this to proceed. Without cases like this, we don’t know.
If the Supreme Court allows this case to go forward, it will return to the district court that originally dismissed it. And Thel says it could still stall. The federal government has asked the Supreme Court to require the district court to examine the case further before letting it proceed.
In New York, I’m Amy Scott for Marketplace.
As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.
Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.
Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.