Commentary: Investment Banks Have a Bad Case of Immunity

What do baseball and Wall Street have in common? Not much, apart from the sky-high salaries that their stars earn. But if the securities industry keeps hitting home runs in court, it could end up with just as much immunity from antitrust law as baseball famously enjoys. And that could really hurt investors.

In the past two months, appellate courts have thrown out two class actions filed by investors. One alleged that investment banks violated the Sherman Antitrust Act by conspiring to restrict investors from selling newly issued shares. The other charged that stock exchanges colluded to prevent certain shares from listing as options on multiple exchanges. The courts' rationale in both cases: Securities law trumps federal antitrust law because the Securities & Exchange Commission has authority over anticompetitive behavior in both areas.

Now, in a third suit involving antitrust issues, some heavy hitters have again stepped up to the plate. The Justice Dept. has allied with investors in a face-off with investment banks and the SEC. The industry and its regulator are asking Federal Judge William H. Pauley III in Manhattan to dismiss the suit, arguing that they're immune from antitrust law in this case. The suit alleges that 10 top investment banks conspired to overcharge investors who bought stocks in initial public offerings of high-tech outfits such as Ariba Inc. (ARBA ) and Global Crossing, which aren't defendants. The suit also charges that banks later manipulated the market so that investors ended up paying inflated prices, even after the IPOs. Banks deny the charges.

The investors, backed by a Justice brief, argue that the banks aren't exempt because price-fixing is prohibited under both industry rules and antitrust law. In support of the banks, the SEC counters that it is dealing with the alleged misconduct in a "variety of ways," according to a letter submitted to Pauley on Jan. 13.

The plaintiffs don't buy that line. "It's the job of the SEC to protect investors," argues Fred T. Isquith of Wolf Haldenstein Adler Freeman & Herz LLP, one of their lawyers. "The argument the SEC makes is troubling in that they are seeking to take away one of the tools that protect [investors] from anticompetitive conduct."

There's also a larger issue: The industry's growing list of exceptions from antitrust law makes sense only if the SEC is a watchdog with a bite as well as a bark. "The rationale [for immunity] is that the agency is a more efficient regulator [than the courts]," says Herbert J. Hovenkamp, professor of antitrust law at the University of Iowa.

But there's plenty of evidence the SEC needs serious outside help to be an effective cop. Three years after the stock-market peak in 2000, the SEC is only now thinking of disciplining the analysts who hyped stocks to win banking deals. And, arguably, investment banks were punished in December for doling out tainted research only because New York Attorney General Eliot Spitzer shamed officials into striking a $1.4 billion settlement.

The SEC has been slow to penalize firms engaged in practices akin to those alleged in the latest suit. In a brief submitted to Pauley in December, the SEC noted that it forced Credit Suisse First Boston (CSR ) to pay a $100 million fine in January, 2002, for allegedly allocating hot IPOs to customers who agreed to steer part of their profits back to the bank by paying outsize commissions for transactions on other shares. But CSFB got off the hook without admitting that it did anything wrong, and investors didn't see a penny from the settlement. So far, the SEC hasn't acted against other banks.

Letting bankers get away with bending, if not violating, regulations contributed to the bubble market of the late 1990s. The way to prevent that from happening again is not to allow investment bankers to escape antitrust scrutiny. "I don't see how one of the biggest equity markets in the world can be exempt from antitrust law," says Nicholas Economides, a professor of economics at the Stern School of Business at New York University who specializes in financial antitrust issues.

Neither do investors. If bankers have schemed to manipulate stock prices, the culprits need to be outed and disciplined. The idea of insulating firms from antitrust law and leaving this to the SEC is not just a bad idea. It's no way to play ball.

By Emily Thornton

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