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A decision by the 2nd U.S. Circuit Court of Appeals has dealt a blow to the ability of private plaintiffs to pursue antitrust claims in a securities context. In In re Stock Exchanges Options Trading Antitrust Litigation, 01-7371, 01-7580 (Jan. 9, 2003), the court upheld a lower court’s dismissal of a class action suit that charged five stock exchanges with illegally fixing prices on equity options trades. The plaintiffs alleged that during most of the 1990s, the exchanges colluded to control the “spreads” on exchange-traded equity options by agreeing not to list any options classes that already were listed on another exchange. The spread represents the profit that an exchange makes on a trade. In a unanimous opinion written by Judge Amalya L. Kearse, the 2nd Circuit rejected the claims, finding that the defendants could not be sued in a private action. The court made its ruling despite an amicus brief from the U.S. Department of Justice arguing that the plaintiffs should be able to pursue their case. The Securities and Exchange Commission argued similarly before the lower court. The decision is a major victory for the New York Stock Exchange, the only one of the five exchanges that refused to settle with the plaintiffs. Not only did the court rule in the Big Board’s favor, but it sent a strong signal that it was disinclined to permit private antitrust suits against players in the securities industry. The court made its finding under the doctrine of implied immunity, a somewhat obscure principle that exempts anti-competitive conduct in the securities arena if Congress has given a government agency the power to regulate that conduct. The SEC oversees options trading on the exchanges under SEC Rule 19c-5. The implied immunity doctrine has its genesis in a 27-year-old U.S. Supreme Court ruling, Gordon v. New York Stock Exchange, 422 U.S. 659 (1975). In Gordon, the plaintiffs claimed that the stock exchanges violated antitrust laws by charging fixed brokerage commission rates. At the time, the SEC had sanctioned fixed commissions and had the practice been actionable, the exchanges would have found themselves in an awkward spot, unable to comply with one rule without breaking the other. The justices, recognizing the exchanges’ dilemma, ruled that they were exempt from the antitrust laws based on the SEC’s power to regulate them. However, the high court limited exemptions to circumstances in which there is “a plain repugnancy between the antitrust and the regulatory provisions.” The 2nd Circuit’s opinion in Stock Exchanges extends implied immunity to cover situations in which SEC regulations are actually in accord with the antitrust laws and the exchanges are in violation of both. The court — noting that at one point the SEC had permitted exclusive listings and reasoning that it could do so again — found that a present conflict in the rules was not needed for the doctrine to apply. Rather, the court held, a potential conflict was enough. “The appropriateness of an implied repeal does not turn on whether the antitrust laws conflict with the current view of the regulatory agency; rather it turns on whether the antitrust laws conflict with an overall regulatory scheme that empowers the agency to allow conduct that the antitrust laws would prohibit,” the court held. Although the ruling bodes well for the exchanges in future battles with private plaintiffs, in at least one respect, it was also a setback. SETTLEMENT WITH PLAINTIFFS Four of the exchanges — the American Stock Exchange, the Chicago Board Options Exchange Inc., the Philadelphia Stock Exchange Inc. and the Pacific Exchange Inc. — and 18 of the so-called market-maker defendants had settled with the plaintiffs for more than $84 million before the lower court ruled to dismiss the claims. However, Southern District of New York Judge Richard C. Casey refused to approve the settlement, stating he would first decide whether implied immunity applied. Casey then not only granted the defendants’ motion for summary judgment, but also put the settlement in jeopardy by holding that he had no jurisdiction to approve it. The 2nd Circuit disagreed, finding that implied immunity is an affirmative defense and does not defeat a court’s jurisdiction. The case now goes back to the lower court on the settlement issue. Bernard Persky, a partner at New York-based Goodkind Labaton Rudoff & Sucharow and co-lead counsel for the plaintiffs, said the settlement stands despite the dismissal of the underlying case. “The settling defendants are bound,” he said. The four settling exchanges had good reason to put the case behind them. More than two years ago, in September 2000, the SEC and the Justice Department charged the exchanges with the same price-fixing scheme alleged by the plaintiffs in Stock Exchanges. No charges were filed against the New York Stock Exchange. The government said the exchanges enforced their understanding “by threatening and harassing exchanges and market makers who desired to multi-list option classes.” The exchanges settled the charges by agreeing to spend more money to police trading on their markets, and adopt new rules aimed at promoting competition and toughening penalties for trading violations. After the federal inquiries were launched, the exchanges agreed to abandon their agreement to list the most actively traded options on only one exchange. Since the changes in listing practices began in April 1999, according to the SEC the spreads have narrowed by as much as 40 percent. Harvard Law School Professor Arthur R. Miller argued the case for the plaintiffs. Jay N. Fastow of New York-based Weil, Gotshal & Manges argued on behalf of the defendants.

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