The Securities and Exchange Commission says brokerage bans on customer “flipping” of initial public stock offerings--reselling shares right after the stocks are issued--aren’t subject to fair-competition laws and shouldn’t be addressed in court.
Siding with Wall Street’s largest firms in an investor antitrust lawsuit, the SEC argues in a friend-of-the-court brief that the agency alone has authority to oversee underwriters who bar individual investors from quickly reselling shares bought in an IPO.
An investor suit seeking class-action status alleges that the prohibitions Merrill Lynch & Co., Goldman Sachs Group and 15 other firms placed on “flipping” by retail purchasers of IPO shares were intended to artificially inflate the value of the stock, which could be quickly resold by institutional investors such as pension and mutual funds that often have continual dealings with underwriters.
The lawsuit charges that the brokerages “conspire to impose trading restrictions upon retail investors” in violation of antitrust law.
The SEC brief requested a dismissal of the suit, saying that flipping shouldn’t be addressed by the courts or antitrust regulators.
The SEC’s 20-page brief said the agency has never issued any rules to address brokers’ disparate treatment of individual and institutional investors during the 1- to 3-month period after IPOs.
One reason the SEC hasn’t acted is that it feels that flipping restrictions help stabilize IPO prices that might otherwise drop before the underwriter sells all its shares, the brief said.
“Clearly, stabilization is a form of ‘manipulation’ of the price of securities, but it is a form that has arguable benefits as well as dangers,” the SEC’s brief said.
Applying antitrust laws to flipping “would adversely impact and indeed could well undermine the operation of the securities laws as intended by Congress,” it said.
The SEC said it might regulate flipping in the future. The agency has had to balance the interests of investors who might pay excessively high prices for shares immediately after IPOs against the interests of companies, underwriters and other investors, the brief said.
The investor suit was dismissed in December by a federal judge, who found that the SEC alone has authority to regulate flipping.
The investors appealed to the 2nd U.S. Circuit Court of Appeals in New York, where the SEC brief was filed.
The SEC filed the brief at the request of the sued firms, agency spokesman John Heine said.
Antitrust and securities lawyers were split on the merits of the SEC position.
“The SEC is trying to carve out more of the economy for their review,” said Stephen Calkins, a former Federal Trade Commission general counsel who now is a Wayne State University law professor.
Ep 155: Before Trading or Investing in an IPO: What YOU Should KNOW!
“It’s troubling for the SEC to say that, while they haven’t yet regulated flipping, this area should be immune from antitrust law while they decide whether to regulate it.”
Former SEC General Counsel James Doty praised the SEC brief.
“This is an area where the SEC is entitled to a good deal of deference because it’s the agency charged by Congress with analysis of market conduct,” said Doty, a partner with Baker Botts in Washington.
The flipping issue is unrelated to another underwriting practice that has caught the attention of federal regulators: At least nine of Wall Street’s largest brokerages are under federal investigation over whether they allotted hot technology IPOs to favored investors in the late 1990s, in return for excessive commissions and commitments to buy more post-IPO shares.