Second Circuit Extends Implied Preclusion Of Antitrust Laws To Prime Brokers

The Second Circuit has extended the implied preclusion doctrine with its recent decision affirming the dismissal by the Southern District of New York of a Sherman Act class action in Electronic Trading Group, LLC v. Banc of America Securities LLC (“Short Sale”).

The Short Sale decision is based on the implied preclusion doctrine established by the Supreme Court in Credit Suisse Securities (USA) LLC v. Billing.  That doctrine asks four questions: (1) whether the regulations are located “within the heartland of securities regulations,” (2) whether the regulatory agency had “the authority to regulate,” (3) whether there is “ongoing” regulation, and (4) whether there is “conflict between the two regimes,” i.e., whether there is a conflict between the regulatory scheme and the antitrust laws.  

In Billing, the Supreme Court found that the regulatory scheme established by the securities laws precluded antitrust liability for IPO underwriters accused of, among other things, “laddering” (price discrimination as to bundled services) and tying.

In Short Sale, the plaintiffs accused several prime brokers of colluding with each other on the borrowing fees charged for “hard to find” securities connected with short selling.  The Second Circuit applied the four-part Billing analysis and held that the securities laws precluded antitrust liability. 

Regarding the fourth factor, appellants argued no such conflict existed because a court could distinguish between legitimate broker communications and communications used to further illegal agreements.  The Second Circuit disagreed.  It found that communications between short sellers that are allowed under the securities law would likely also “serve as evidence of conduct forbidden by the antitrust laws.”  In other words, the specter of antitrust liability might “curb [the prime brokers’] permissible exchange of information and thereby harm the efficient functioning of the short selling market.”

The Second Circuit also found that a potential conflict existed because the SEC could regulate borrowing fees at some point in the future.  The Second Circuit stated that it was “not decisive that neither securities law nor antitrust law allows – or encourages – the collusive fixing of borrowing fees.”  Instead, the “possibility that the SEC will act upon its authority to regulate the borrowing fees set by prime brokers” satisfied the Billing test.

Note that Supreme Court reversed the Second Circuit in its Billing decision.. Accordingly, the Short Sale opinion not only represents the Second Circuit’s first implied preclusion case since Billing, but it also demonstrates the implementation of the implied preclusion doctrine in the Second Circuit.  In addition, the Second Circuit extended the doctrine beyond the conduct at issue in Billing, thereby suggesting that implied preclusion cannot be cabined to a specific regulatory setting.  For these reasons, this area of the law bears watching in the future.