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A federal judge has dismissed an antitrust suit brought by a now-defunct company that said it wanted to revolutionize the bond trading market by ending the practice of keeping profit margins secret. But court records show that plaintiff InterVest Financial Services Inc. had already struck settlements with 11 of the 12 defendants named in the suit. In her 35-page opinion in InterVest Financial Services Inc. v. S.G. Cowen Securities Inc., U.S. District Judge Anita B. Brody of the Eastern District of Pennsylvania found that since the plaintiff had only circumstantial evidence of an antitrust conspiracy, it had a modified burden at the summary judgment stage that called for proof that the sole remaining defendant had not acted independently. Brody found that since the evidence against S.G. Cowen was “ambiguous” — allowing equally for the inference that it acted on its own (which is perfectly legal) or in concert with others (which is illegal) — the case failed. In the suit, InterVest claimed that it struck a deal with Bloomberg, the online business information network, to provide an electronic trading system where buyers and sellers could anonymously trade corporate and municipal bonds with a fixed commission. But the suit alleged that InterVest was driven out of business when Bloomberg caved in to pressure from the giants in the industry who wanted to maintain their “closed” practice of bond trading in which buyers are never privy to the profit margin or “spread” — the difference between the price they paid for the bond and the price at which they resell it to the investor. The suit, filed in 1999, originally named 12 defendants, including Bloomberg and some of the biggest names on Wall Street — Merrill Lynch & Co. Inc.; J.P. Morgan Securities Inc.; Bear Stearns Co. Inc.; Deutsche Bank Securities Corp.; Salomon Smith Barney Inc.; Cantor Fitzgerald Securities; and Liberty Brokerage Inc. Court records show that InterVest and its lawyers — Howard Langer and John J. Grogan of Sandals & Langer, along with Judah Labovitz of Wolf Block Schorr and Solis-Cohen and Lawrence Hoyle of Hoyle Morris & Kerr, all based in Philadelphia — reached confidential settlements with 11 of the 12 defendants. But S.G. Cowen and its lawyers — Stuart M. Gerson, Robert J. Hudock and Tanya B. Vanderbilt of Epstein Becker & Green in Washington, D.C. — held out for a ruling on a motion for summary judgment. The litigation began in 1998 when Bloomberg filed suit against InterVest to recover about $100,000 in unpaid advertising fees. InterVest responded with a lawsuit that accused Bloomberg of joining a conspiracy to drive InterVest out of business. The suit focused on the structure of the existing market for corporate and municipal bonds. Unlike common stock, no open market exists for trading these bonds. Instead, institutional investors who wish to purchase bonds must obtain them from a relatively exclusive group of dealers. The dealers obtain their supply of bonds by executing trades with other dealers, sometimes negotiated through “inter-dealer” brokers. While some inter-dealer brokers will sell to other dealers on a fixed commission basis, the dealers do not make similar arrangements available to institutional investors. Instead, each investor must negotiate the price of purchase on an individualized basis, enabling the broker-dealers to earn a profit through the difference between the price they paid for the bond and the price at which they resell it to the investor. Because no open system of trading exists, the institutional investor has little knowledge of what the spread is on a particular transaction. This lack of public reporting or marketing of the bonds gives the trading a lack of “transparency.” (Until 1991, government bonds were also traded in a closed system. However, a system called GovPX now operates as a real-time reporting service for quotes and transactions in Treasury securities.) InterVest sought to change that opaque system when it entered the bond market in 1993, by providing an electronic trading system where buyers and sellers could anonymously trade corporate and municipal bonds. In addition to matching buyers and sellers, InterVest offered an end to undisclosed spreads by charging a fixed commission fee known to both parties. But InterVest’s founder, Larry Fondren, had loftier goals for his company. In 1993, he approached a number of bond dealers with the concept of an “InterDealer” consortium — which would allow these dealers to use the InterVest system as their own trading platform. Although several dealers met with or spoke to Fondren about the project, eventually the dealers universally rebuffed the project. A vice president at Merrill allegedly told Fondren that he hoped his company “crashes and burns” because the shift to a transparent system would put an end to large spreads and large profits for the traditional dealers. A breakthrough came in 1995 when InterVest struck a deal with Bloomberg in which Bloomberg would carry the InterVest system on its electronic network. But the suit alleged that problems soon arose when Bloomberg placed a moratorium on the development of the InterVest system, allegedly in response to complaints from its customers. Bloomberg later agreed to reinstitute the InterVest project and made a public announcement of the imminent debut of the InterVest system in December 1996, according to the suit. But just one day later, the suit alleged, Bloomberg again imposed a moratorium on the development of a municipal trading platform, allegedly in response to “tremendous heat” from the major bond dealers. In February 1998, Bloomberg terminated its agreement with InterVest. Although InterVest claimed that Bloomberg ended the deal because it had joined the conspiracy, Bloomberg insisted that it terminated the relationship because of a lack of interest in InterVest’s product among Bloomberg users. During the time InterVest was available on Bloomberg, users completed only 10 trades on the system, and all of these had been prearranged by telephone. InterVest’s 1997 losses exceeded $2.5 million, no active subscriber signed onto the system, and the company had laid off all employees, leaving only a skeleton staff. But InterVest alleged that as a participant in a conspiracy to maintain an opaque market and high spreads in the bond trading market, Bloomberg failed to provide the promised and necessary support to make the InterVest system a successful one. NO DIRECT EVIDENCE Judge Brody found that an antitrust plaintiff may rely solely on indirect or circumstantial evidence, but that “if it does so, it bears an additional burden in order to survive summary judgment.” To qualify as a “direct evidence” case, Brody said, the evidence must be “explicit” and require “no inferences to establish the proposition or conclusion being asserted.” Brody found that InterVest had no direct evidence against S.G. Cowen since its only proffered example was a memo from a Bank New York employee that said Bloomberg had informed the bank of its intention to stop adding buy-side customers because of “pressure from Wall Street.” Brody concluded that the memo “requires a finder of fact to draw too many inferences for this court to consider it direct evidence.” And since the memo failed to mention the specific Wall Street firms involved, Brody found that “the factfinder must infer that Cowen, an admittedly small customer of Bloomberg’s, was a part of the ‘Wall Street’ illegally acting in concert with Bloomberg.” As a result, Brody concluded that “the link between that memo and any illicit actions of Cowen is simply too attenuated to provide compelling and direct evidence of an antitrust violation.” Turning to the circumstantial evidence, Brody found that it, too, was lacking since it proved only that Cowen may have joined the conspiracy or may have acted on its own. “InterVest has not proffered any evidence of meetings that took place between defendant and other broker-dealers, much less any discussion at those meetings concerning a desire to adhere to the current system. So long as it acted alone, Cowen had the unfettered right to refuse to deal with InterVest,” Brody wrote. Likewise, Brody rejected the argument that Cowen’s complaints to Bloomberg showed it had joined the alleged conspiracy. “Any complaint that Cowen made to Bloomberg, and any action taken by Bloomberg in response to that complaint, does not automatically demonstrate concerted action,” Brody wrote. “In addition to showing this contact occurred, plaintiff must present evidence that tends to exclude the possibility that Bloomberg took action independently. InterVest has not presented evidence sufficient to preclude independent action.” Although Cowen had “a motive to conspire” — to maintain high spreads and preserve profits — Brody found that its conduct was “equally consistent” with other, legitimate motives. “Cowen’s desire to perpetuate a system in which it earned significant profits is, in and of itself, perfectly rational and legal. Defendant had no obligation to buck existing practices that worked to its benefit in favor of partnering with a new, largely unknown company to implement a system that would result in smaller profits,” Brody wrote. “Cowen, like all other broker-dealers, had good reason to refuse to deal with InterVest, and it is perfectly plausible that each of the alleged conspirators made that decision individually. The broker-dealers did not need to conspire to reach the conclusion that doing business with InterVest was unhealthy,” she wrote.

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