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Investors lose major IPO ruling

The Baltimore Sun

NEW YORK -- Wall Street won a major victory yesterday when the Supreme Court ruled that people who lost money on initial public stock offerings in the late-1990s Internet boom could not sue their brokerages under U.S. antitrust laws.

The Supreme Court sided with investment banks that had been accused of conspiring to inflate IPO prices, ruling 7-1 that lawsuits alleging initial public offering abuses have to be brought under securities rather than antitrust statutes.

The ruling reversed a 2nd U.S. Circuit Court of Appeals decision that had allowed the class action suit to move forward. A defeat for the banks could have saddled them with hundreds of millions of dollars in damages.

"Allowing an antitrust lawsuit would threaten serious harm to the efficient functioning of the securities markets," wrote Justice Stephen G. Breyer for the majority.

Justice Clarence Thomas dissented, and Justice Anthony M. Kennedy did not vote.

The plaintiffs - who filed a separate securities-law violation suit that has run into roadblocks - alleged that more than a dozen firms colluded to inflate the prices of hundreds of coveted stock offerings during the Internet bubble, causing huge losses for investors in early 2000 when the market sank.

The plaintiffs' attorney, Fred T. Isquith, said the Supreme Court decision would embolden Wall Street to engage in anti-investor behavior without fear of legal or regulatory consequences.

"They have given the industry the gift of the century," Isquith said. "The opinion is very negative for investors."

Legal experts who agreed with the court's reasoning said a win for the plaintiffs would have created confusing legal overlap with existing securities regulations.

"It makes eminent good sense," said Henry T.C. Hu, a securities-law professor at the University of Texas, Austin. "I don't see how the Supreme Court could have come out any other way."

A federal appellate court in December stripped the other IPO suit of class action status.

The plaintiffs are seeking to have the class recertified but are facing an "uphill battle," said John C. Coffee Jr., a Columbia University securities-law professor.

In that case, the plaintiffs had reached a $1 billion settlement in 2003 with more than 300 of the companies that went public in the 1990s and their insurers. But a judge never approved the deal and given the legal setbacks since then is unlikely to do so, Isquith said.

Among the plaintiffs' claims in the antitrust suit was that the investment banks agreed to impose illegal tie-ins, or "laddering" arrangements, that gave favored customers the chance to obtain highly sought-after new stock issues in exchange for promises to make subsequent purchases at escalating prices.

The investment banks allegedly conspired to levy additional charges for the stock.

In another alleged practice, the banks gave out IPO shares to investors willing to pay extra-large trading commissions.

Wall Street hailed the ruling announced yesterday.

"Had the court taken the opposite view, the industry would have faced massive legal exposure and a major engine of American growth would have been unnecessarily damaged," said Marc E. Lackritz, chief executive of the Securities Industry and Financial Markets Association.

Walter Hamilton writes for the Los Angeles Times.

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