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Investment banks may restrict the flipping of stock by individual investors without violating the antitrust laws, the 2nd U.S. Circuit Court of Appeals ruled Friday. The circuit, upholding the dismissal of a case brought by small investors, agreed that Salomon Smith Barney and more than a dozen other banks enjoy “implied immunity” from the antitrust laws because those laws conflict with the federal securities regulation scheme. The small investors in Friedman v. Salomon Smith Barney, 01-7207, charged that institutional investors were allowed to flip stocks in the aftermarket for public offerings, but that individuals were restrained from selling stock for between 30 and 90 days after purchase. The complaint characterized the disparate treatment as a price-fixing scheme that began in 1990, when the banks enforced the restrictions on flipping — the quick resale of stocks — by denying stock allocations to retail investors who had flipped stock or refused stock allocations to brokers whose customers had engaged in practice. The result, they alleged, was that the restrictions artificially drove up stock prices and institutional investors benefited because they were able to sell their own allocations at the higher prices. The banks defended the restrictions on the grounds that allowing retail investors to immediately flip stocks would cause wide fluctuations in prices, a problem the banks said did not arise with institutional investors. Southern District of New York Judge Naomi Reice Buchwald dismissed the case, finding that the banks had implied immunity from antitrust charges. Buchwald found the Securities and Exchange Commission had exclusive jurisdiction over price stabilization and that Congress was aware of stabilization practices when it established the regulatory scheme and created the SEC in 1934. The judge also said the SEC had studied the issue for 60 years and found “that the benefits of price stabilization to the capital markets outweigh the admitted anti-competitive aspects of stabilizing manipulation.” Finally, Buchwald found a clear conflict between the antitrust laws and SEC regulation under � 9(a)(6) of the Securities Exchange Act of 1934, which allowed certain price stabilization mechanisms unless the SEC specifically disapproved. On the appeal, 2nd Circuit Judge Rosemary S. Pooler said that Congress, in passing the 1934 act, “declined to prohibit pegging, fixing, or stabilizing prices outright and instead gave the SEC authority to regulate them.” And while the SEC in 1940 acknowledged that the longstanding practice of stabilizing prices to facilitate the distribution of shares to the public had some “vicious and unsocial aspects,” Pooler said the SEC also recognized the benefits of stabilization. She said the SEC subsequently revisited the issue on three occasions, eventually issuing a rule in 1994, Regulation M, which “did not regulate price stabilization in the aftermarket.” The plaintiffs had countered that the SEC’s history in this regard was irrelevant because price stabilization in the aftermarket is a practice that only emerged in the 1990s. But Pooler said the plaintiffs were relying on an “artificial distinction between price stabilization in the aftermarket and price stabilization during distributions” of stock. “As technology has evolved and distributions have taken shorter and shorter periods of time, the problem of flipping — and its ‘solution’ of price stabilization — simply has spilled into the aftermarket as well as the distribution period,” a trend “explicitly recognized” by the SEC in 1994, she said. DELIBERATE DECISION The 2nd Circuit viewed the decision not to regulate price stabilization with the adoption of Regulation M in 1994 as both “deliberate and significant,” Pooler said. The plaintiffs’ view of � 9(a)(6) as a ban on any price stabilization that the SEC did not specifically allow, was a “misinterpretation” that the judge said drove all of their arguments attacking implied immunity from antitrust violations. “But once the correct interpretation of Section 9(a)(6) is in place — the interpretation that the district court and defendants espouse — a finding of implied immunity is the direct consequence,” she said. Senior Judge James L. Oakes joined in the opinion. Roger Kirby, Alice McInerney, Randall K. Berger and W. Mark Booker of New York’s Kirby McInerney & Squire represented the plaintiffs. Robert F. Wise Jr., John J. Clarke Jr. and Kevin Wallace of New York-based Davis Polk & Wardwell represented the defendant banks.

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