08-0420-cv

In re Short Sale Antitrust Litig. 1 UNI TEDSTATE S COURT OF APPEALS 2 3 FOR THE SECOND CIRCUI T 4 5 Aug ustTe rm, 20 09 6 7 (Ar gue d: Sep tember30 , 2 009 Dec ide d: Dec emb er 3, 200 9) 8 9 Doc ketNo . 0 8-0 420 -cv 10 11 12 - - - - - - - - - - - - - - - - - - - - x 13 14 ELE CTRONI C T RAD INGGROUP , L LC, on 15 beh alfofit sel f a nd all ot her s sim ila rlysi tua ted , 16 17 Pla int iff -Ap pel lan t, 18 19 20 - v .- 21 BAN C O F AMER ICASE CUR ITI ES LLC , B EAR 22 STE ARN S C OMPANI ES, IN C., CI TIG ROU P I NC. , 23 24 CRE DITSU ISS E ( USA ) I NC. , D EUT SCH E BANK 25 SEC URI TIE S, INC ., GOL DMAN, SAC HS & C O., 26 MERRIL L L YNC H, PIE RCE , F ENN ER & S MIT H 27 INC ORP ORATED , MORGAN STANLE Y & CO . 28 INC ORP ORATED , U BS FINANC IALSE RVI CES , 29 INC ., CIB C WORL D MARKETS CO RP. , 30 CIT IGROUPGL OBAL MARKETS , I NC. , C RED IT 31 SUI SSE SE CUR ITI ES (US A) LLC , G OLDMAN 32 SAC HS EXE CUT ION& CLE ARI NG, L. P., 33 MORGANST ANL EY DW INC ., THE GO LDMAN 34 SAC HS GRO UP, IN C., an d VAN DERMO OLE N 35 SPE CIALIS TS USA , L LC, 36 Def end ant s-Appe lle es, 37 38 39 JOHN D OES , DAIWA AMER ICACO RPO RAT ION , 40 DAI WA SEC URI TIE S AMER ICAIN C., BANK OF 41 NEWYO RK, J. P. MORGANCHASE & CO. , J .P. 42 MORGANSE CUR ITI ES INC ., andLE HMAN 43 BRO THE RS INC .,2 1 Def end ant s. 2 3 - - - - - - - - - - - - - - - - - - - - x 4 Bef ore : JAC OBS , C hie f Judg e, SAC K a nd LYN CH, 5 6 Cir cui t Judg es. 7 8 Pla int iff -ap pel lan t E lec tro nicTr adi ng Gro up, LL C 9 app eal s f roma judgme nt of the Un ite d S tat es Dis tri ct Cou rt 10 forth e S out her n D ist ric t o f N ew Yor k ( Mar rer o, J.) 11 dis mis sin g aSh erman Actcl aimwi th pre jud ice an d d ism iss ing 12 thr ee sta te lawcl aim s w ith outpr eju dic e t o r efi lin g i n 13 sta te cou rt. T he dis tri ct cou rt eva lua tedth e f our 14 con sid era tio ns rec ent ly art icu lat ed by the Un ite d S tat es 15 Sup reme C our t i n C red it Sui sse Se cur iti es (US A) LLCv. 16 Bil lin g, 551 U. S. 264 (2 007 ), andfo undimpli ed pre clu sio n 17 fro m a nti tru st lia bil ity . We aff irm . 18 AND REWJ. EN TWI STL E, VIN CEN T R . 19 CAP PUC CI, HAROL D F . M cGU IRE , 20 JR. , ARTH UR V. NEALON , a nd 21 STE PHE N D . O EST REI CH, En twi stl e 22 & C app ucc i L LP, Ne w Y ork , N ew 23 Yor k, forAp pel lan t E lec tro nic 24 Tra din g G rou p, LLC . 25 26 ROB ERTF. WI SE, JR ., andWI LLI AM 27 J. FEN RIC H, Dav is Pol k & 28 War dwe ll LLP , N ew Yor k, New 29 Yor k, forAp pel lee s M org an 30 Sta nle y & Co . I nco rpo rat ed and Mor ganSt anl ey DW Inc . 31 32 333 1 RIC HAR D H . K LAP PERan d R ICHARD 2 C. PEP PERMAN , I I, Sul liv an & 3 Cro mwe ll LLP , N ew Yor k, New 4 Yor k, forAp pel lee s G oldman , 5 Sac hs & C o., Go ldm an Sac hs 6 Exe cut ion& Cle ari ng, L. P., an d 7 The Go ldm an Sac hs Gro up, In c. 8 9 STE PHE N L . RATN ER andHARRY 10 FRI SCH ER, Pr osk aue r R ose LL P, 11 NewYo rk, Ne w Y ork , f or App ell ee 12 Bea r S tea rns Co mpa nie s, Inc . 13 14 JAYB. KA SNE R a nd SHE PAR D 15 GOL DFE IN, Sk add en, Ar ps, Sl ate , 16 Mea ghe r & Fl om LLP , N ew Yor k, 17 NewYo rk, fo r Appe lle e Merr ill 18 Lyn ch, Pi erc e, Fen ner& Smi th 19 Inc orp ora ted . 20 21 JAYP. LE FKOWIT Z, MAR IA 22 GIN ZBU RG, AN DRE W B . C LUB OK, 23 SUS AN E. ENG EL, an d E LEANORR. 24 BARRET T, Kir kla nd & E lli s L LP, 25 NewYo rk, Ne w Y orkan d 26 Was hin gto n, D.C ., forAp pel lee 27 UBS Fi nan cia l S erv ice s, Inc . 28 29 ROB ERTB. Mc CAW , F RAS ER L. 30 HUN TER , JR., an d ALI M. 31 STO EPP ELWERT H, Wil merCu tle r 32 Pic ker ingHa le andDo rr LLP , N ew 33 Yor k, NewYo rk andWa shi ngt on, 34 D.C ., forAp pel lee s C iti gro up 35 Inc ., Cit igr oupGl oba l Mark ets , 36 Inc ., Cre ditSu iss e ( USA ) I nc. , 37 andCr edi t S uis se Sec uri tie s 38 (US A) LLC . 39 40 AND REWJ. FRACKMANan d B REN DAN 41 J. DOW D, O’Melv eny& Mye rs LLP , 42 NewYo rk, Ne w Y ork , f or App ell ee 43 Ban c o f Amer icaSe cur iti es LLC . 44Th e d efe nda nts -ap pel lee s a re Ban c o f Amer ica 1 Sec uri tie s L LC; Be ar Ste arn s C omp ani es, In c.; Ci tig rou p Inc .; Cre ditSu iss e ( USA ) I nc. ; D eut sch e B ankSe cur iti es, Inc .; Gol dma n, Sac hs & C o.; Me rri ll Lyn ch, Pi erc e, Fen ner& Smi th Inc orp ora ted ; M org an Sta nle y & Co ., Inc orp ora ted ; U BS Fin anc ial Se rvi ces , I nc. ; C IBCWo rldMa rke ts Cor p.; Cit igr oupGl oba l Mark ets , I nc. ; C red it Sui sse Se cur iti es (US A) LLC ; G oldmanSa chs Ex ecu tio n & Cl ear ing , L .P. ; T he Gol dma n S ach s G rou p, Inc .; VanDe r M ool en Spe cia lis ts USA , LLC ; a nd Mor ganSt anl ey DW Inc . 4 1 GRE GORY A . MARKEL andMARTI N L . 2 SEI DEL , C adw ala der , W ick ers ham& 3 Taf t L LP, Ne w Y ork , N ew Yor k, 4 forAp pel lee De uts che Ba nk 5 Sec uri tie s, Inc . 6 7 DAN IELB. RA PPO RT, KA THE RIN E L . 8 PRI NGL E, andLI SA S. GET SON , 9 Fri edm an Kap lanSe ile r & Ad elm an 10 LLP , N ew Yor k, NewYo rk, fo r 11 App ell ee VanDe r M ool en 12 Spe cia lis ts USA , L LC. 13 14 JONATHAN D. POL KES , ROBE RT F. 15 CARANG ELO , a nd DEB RA J. 16 PEARLS TEI N, Wei l, Got sha l & 17 Man ges LL P, NewYo rk, Ne w Y ork , 18 forAp pel lee CI BC Wor ld Mar ket s 19 Cor p. 20 21 DENNIS JACOB S, Chi ef Jud ge: 22 23 In thi s p uta tiv e c las s a cti on, pl ain tif f-a ppe lla nt 24 Ele ctr oni c T rad ingGr oup , L LC (“E TG” ), a s hor t s ell er, su es 25 cer tai n f ina nci al ins tit uti ons th at ser ve as “pr ime br oke rs” 26 in sho rt sal e t ran sac tio ns. I t i s a lle gedth at the pr ime 1 27 bro ker s a rbi tra ril y d esi gna tedce rta in sec uri tie s a s h ard

-“Aco mpl ain t p lea din g avi ola tio n o f s ect ion1 mus t 2 all ege a con tra ct, co mbi nat ionorco nsp ira cy tha t unr eas ona blyre str ain s t rad e.” E lec s. Commc’ ns Cor p. v. Tos hib a Am. Con sumer Pro ds. , I nc. , 1 29 F.3 d 2 40, 24 3 ( 2d Cir . 1 997 ). ET G b rou ghtth e b rea ch of fiduci arydu ty cla im 3 aga ins t M org an Sta nle y DW I nc. ; B earSt ear ns Compan ies , Inc .; Gol dma n S ach s E xec uti on & C lea rin g, L.P .; Gol dma n, Sac hs & C o.; UB S F ina nci al Ser vic es, In c.; Me rri ll Lyn ch, Pie rce , F enn er & S mit h I nco rpo rat ed; Ci tig rou p G lob al Mar ket s, Inc .; Cre ditSu iss e S ecu rit ies (U SA) LL C; Deu tsc he Ban k S ecu rit ies , I nc. ; B ancofAmeri ca Sec uri tie s L LC; Va n DerMo ole n S pec ial ist s U SA, LL C; andCI BC Wor ld Mar ket s Cor p. ETGbr oug ht the ai din g a nd abe tti ng bre achoffi duc iar y dut y c lai m a gai nstth e p are nt cor por ati ons ofso me of the pri me bro ker s n ame d i n t he bre achoffi duc iar y dutycl aim

-- Mor ganSt anl ey & C o., In cor por ate d; The Go ldm an Sac hs Gro up, Inc .; Cit igr oupIn c.; an d C red it Sui sse (U SA) In c. 5 1 to- bor rowan d t henfi xedth e p ric e f or bor row ingth em, in 2 vio lat ionofSe cti on 1 o f t he She rma n A ct, 15 U. S.C . §1 3 (th e “ ant itr ustcl aim ”). T hre e s tat e l aw cla ims ar e a lso 2 4 ple ade d: bre achoffi duc iar y duty , a idi ng andab ett ing 5 bre achoffi duc iar y duty , a nd unj usten ric hme nt 6 (co lle cti vel y, the“s tat e l aw cla ims ”). 3 7 ETGap pea ls fro m aju dgmentofth e U nit ed Sta tes 8 Dis tri ct Cou rt forth e S out her n D ist ric t o f N ew Yor k 9 (Ma rre ro, J. ), dis mis sin g t he ant itr ustcl aimwi th pre jud ice 10 on the gr oun d o f i mpl iedpr ecl usi on of the an tit rus t l aw by 11 the se cur iti es law , a nd dis mis sin g t he sta te lawcl aim s6 1 wit hou t p rej udi ce to ref ili ng in sta te cou rt. W e a ffi rm. 2 The pr ecl usi on ana lys is tur ns on fou r c ons ide rat ion s 3 ide nti fie d i n C red it Sui sse Se cur iti es (US A) LLCv. Bi lli ng, 4 551 U. S. 264 , 2 85 (20 07) : whet herth e “ are a o f c onduct[i s] 5 squ are ly wit hinth e h ear tla nd of sec uri tie s r egu lat ion s”; 6 whe the r t he Sec uri tie s a nd Exc han ge Commis sio n ( “SE C”) ha s 7 “cl earan d a dequat e [ ] a uth ori ty to reg ula te” ; whet herth ere 8 is “ac tiv e a nd ong oin g a gen cy reg ula tio n”; an d whet her“a 9 ser iou s c onf lic t” ari ses be twe en ant itr ustla w a nd 10 sec uri tie s r egu lat ion s. 11 Muc h d epe nds onth e l eve l o f p art icu lar ityor 12 gen era lit y a t whic h e achBi lli ng con sid era tio n i s e val uat ed. 13 Obv iou sly , i f t he inquir y i s whet herth e S EC act ive ly 14 reg ula tes th e p ric ingofbo rro wedsh are s, the pl ain tif f w ins 15 the po int . By thesame tok en, ifth e i nqu iryis wh eth er 16 sho rt sel lin g i s w ith in the he art lan d o f s ecu rit ies 17 reg ula tio ns, th e d efe nda nts wi n t he poi nt. 18 Forth e r eas ons se t f ort h i n t his op ini on, th e f our th 19 con sid era tio n-- det ect ionofa ser iou s c onf lic t-- is eva lua ted 20 at the le vel ofth e a lle gedan tic omp eti tiv e c onduct . Eac h 21 of the th reere mai nin g c ons ide rat ion s i s e val uat ed at the 22 lev el mos t u sef ul to the co urtinac hie vin g t he ove rar chi ng7 1 goa l o f a voi din g c onf lic t b etw eenth e s ecu rit ies an d 2 ant itr ustre gimes. 3 4 BACKGR OUND 5 A. Sho rt Sel ling 6 A s hor t s ale tr ans act ionpr oce eds inth e f oll owi ng 7 sequen ce. T he sho rt sel lerid ent ifi es sec uri tie s s he 8 bel iev es wil l d ropinma rke t p ric e, bor row s t hes e s ecu rit ies 9 fro m abr oke r ( pri me bro ker s h ave th e g rea tes t m ark et 10 sha re) , s ell s t he bor row ed sec uri tie s o n t he ope n m ark et, 11 pur cha ses re pla cementse cur iti es on the op en mar ket , a nd 12 ret urn s t hemtoth e b rok er- -th ere by clo sin g t he sho rt 13 sel ler ’s pos iti on. T he sho rt sel ler ’s pro fit(i f a ny) is 14 the di ffe ren ce bet wee n t he mar ketpr ice atwh ichsh e s old 15 the bo rro wedse cur iti es andth e m ark et pri ce at whi ch she 16 pur cha sedth e r epl ace men t s ecu rit ies , l ess bo rro win g f ees , 17 bro ker agefe es, in ter est , a nd anyot herch arg es lev iedby 18 the br oke r. 19 20 B. TheRo le of thePr imeBroke rs 21 22 In the co nte xt of sho rt sel lin g, a p rime b rok er loc ate s 23 the sh ortse lle r’s re que ste d s ecu rit ies , l end s t hos e8 1 sec uri tie s t o t he sho rt sel lerfo r afe e, andde liv ers th ose 2 sec uri tie s t o t he sho rt sel ler ’s pur cha ser . 3 A s hor t s ell er see kin g t o b orr ow sec uri tie s c ont act s 4 the br oke r’s se cur iti es loa n d esk . Pur sua nt to SEC 5 reg ula tio ns, th e s ecu rit ies lo an des k mustlo cat e t he 6 reques tedse cur iti es bef ore itca n a cce pt the sh ortse lle r’s 7 ord er. S ee 17 C.F .R. § 242 .20 3(b )(1 )(i )-( iii ). Th e 8 sec uri tie s l oande sk maylo cat e t he sec uri tie s i n i ts own 9 pro pri eta ry acc oun ts, orinth e h and s o f o the r b rok ers or 10 ins tit uti ona l i nve sto rs wit h s ign ifi can t l ongpo sit ion s. 11 Alt ern ati vel y, these cur iti es loa n d eskma y l oca te the 12 sec uri tie s t hro ugha thi rd par ty whoas sis ts the br oke r i n 13 exc han ge fora loc atefe e. 14 The br oke r c har ges th e s hor t s ell er a b orr owi ng fee 15 aff ect ed by sup plyan d d ema nd: th e h ard er the se cur ityis to 16 fin d a nd bor row , t he hig herth e f ee. T he bro kerma y d eve lop 17 an eas y-t o-b orr ow lis t o f s ecu rit ies th at are inab und ant 18 sup plyan d aha rd- to- bor rowli st of sec uri tie s t hatar e 19 sca rce . See Short Sales, Exchange Act Release No. 34-50103, 2 0 83 SEC Docket 1278 (July 28, 2004). 21 A s hor t s ell er whoha s s oldth e b orr owe d s ecu rit ies on 22 the op en mar ketmu st del ive r t hos e s ecu rit ies toth eET G’s Amend ed Cla ss Act ionCo mpl ain t ( the 4 “co mpl ain t”) al so all ege s t hatth e p rime b rok ers (i ) f ail ed to enf orc e t he del ive ry of sec uri tie s, the reb y e nab lin g t he pri me bro ker s t o c har ge bor row ingfe es forse cur iti es tha t wer e n eve r a ctu all y b orr owe d a nd giv ingri se to int ent ion al FTD s; and(i i) cha rge d i mpr ope r l oca te fee s whenth e sec uri tie s w erene verfo undan d/o r b orr owe d. Onap pea l, ETG arg ues th at theco mpl ain t’s “r efe ren ces tofa ilu res to del ive r” and“i mpr ope r a nd unj ust ifi ed loc ate fe es” we re “pl ead ed [on ly] as anad jun ct to [ET G’s ] p ric e-f ixi ng cla im. ” App ell ant ’s Rep ly Br. 17 & 17 n.1 2. Th e p rime bro ker s a rgu e t hatET G i mpr ope rlyse eks toamendth e compla intonap pea l b y r ech ara cte riz ingth ese al leg ati ons fro m i nte gra l c omp one nts ofth e c ons pir acytoan cil lar y mea ns of exp and ingth e c ons pir acy ’s sco pe. Appe lle es’ Op p’n Br. 24 -25 . We do notre achth is iss ue, be cau se dis mis sal rem ain s a ppr opr iat e e venifwe ad optET G’s ap pel lat e pos tur e. 9 1 pur cha serwi thi n t hre e d ays ofth e t ran sac tio n d ate . If the 2 sho rt sel ler ’s bro kerdo es notde liv er in time, a f ail ure 3 to- del ive r ( “FT D”) oc cur s. 4 5 C. TheBo rrowing FeesConsp ira cy 6 7 It is all ege d t hatfr om Apr il 12, 20 00 to the pr ese nt, 8 the pr imebr oke rs cha rge d “ art ifi cia llyin fla ted ” b orr owi ng 9 fee s b y a gre ein g o n whic h s ecu rit ies tode sig nat e 10 arb itr ari ly as har d-t o-b orr ow, an d s ett ingmi nimum bor row ing 11 fee s f or the se sec uri tie s. (T her e a re oth er all ega tio ns, 12 setou t i n t he mar gin , whic h w e d o n ot rea ch. ) 4 13Th e d ist ric t c our t d id notre achth e a lte rna tiv e Rule 5 9(b ) g rou nd fordi smi ssa l o f t he ant itr ustcl aim . We do not rea ch thi s g rou nd bec aus e w e a ffi rm the di str ictco urt ’s Rul e 1 2(b )(6 ) d ism iss al. 10 1 D. Pro ced

ura l H istory 2 On Mar ch 15, 20 07, th e p rime b rok ers mo vedtodi smi ss 3 the an tit rus t c lai m p urs uan t t o F ede ral Ru les ofCi vil 4 Pro cedure12 (b) (6) an d 9 (b) . On Jun e 1 8, 200 7, the Un ite d 5 Sta tes Su pre me Cou rt dec ide d B ill ing . On Dec emb er 20, 20 07, 6 the di str ictco urtap pli ed Bil lin g, gra nte d t he pri me 7 bro ker s’ mot iontodi smi ss the an tit rus t c lai m u nde r Rule 8 12( b)( 6), an d d ecl ine d t o e xer cis e s upp lement al jur isd ict ion 9 ove r t he sta te lawcl aim s. E TG timelyap pea ledth e 5 10 dis tri ct cou rt’ s d eci sio n, arg uin g p rin cip all y t hatth e 11 dis tri ct cou rt mis app lie d B ill ing . 12 13 DIS CUS SION 14 “We re vie w t he dis tri ct cou rt’ s g ran t o f aRu le 15 12( b)( 6) mot iondeno vo, dr awi ng all re aso nab le inf ere nce s 16 in pla int iff [’s ] f avo r, andac cep tin g a s t rue al l t he 17 fac tua l a lle gat ion s i n t he compla int .” Inre El eva tor 18 Ant itr ustLi tig ., 502 F. 3d 47, 50 (2 d C ir. 20 07) (p er 19 cur iam ) ( int ern al quo tat ionma rks , c ita tio ns, an d b rac ket s11 1 omi tte d). 2 Cre ditSu iss e S ecu rit ies (U SA) LL C v . B ill ing , 5 51 U.S . 3 264 (2 007 ), was anan tit rus t a cti on aga ins t u nde rwr iti ng 4 firms tha t mark ete d a nd dis tri but ed sha res inin iti al pub lic 5 off eri ngs (“ IPO ”). T he pla int iff s a lle ged“t hatth e 6 und erw rit ers un law ful ly agr eedwi th one an oth er tha t t hey 7 wou ld notse ll sha res ofa pop ula r n ew iss ue to a b uye r 8 unl ess th at buy er commit ted(1 ) t o b uy add iti ona l s har es of 9 tha t s ecu rit y l ate r a t e sca lat ingpr ice s ( a p rac tic e c all ed 10 ‘la dde rin g’) , ( 2) to payun usu all y h ighco mmi ssi ons on 11 sub sequen t s ecu rit y p urc has es fro m t he und erw rit ers , o r ( 3) 12 to pur cha se fro m t he und erw rit ers ot herle ss des ira ble 13 sec uri tie s ( a p rac tic e c all ed ‘ty ing ’). ” Id. at26 7. 14 The Su pre me Cou rt rul ed tha t f ede ral se cur iti es law 15 imp lic itl y p rec lud ed app lic ati on of the an tit rus t l aw to the 16 und erw rit ers ’ a lle gedan tic omp eti tiv e c onduct . The Co urt 17 art icu lat ed fou r c ons ide rat ion s t hatbe ar upo n whet her“t he 18 sec uri tie s l aws ar e ‘ cle arl y i nco mpa tib le’ wi th the 19 app lic ati on of thean tit rus t l aws ” i n apa rti cul ar con tex t: 20 (A) lo cat ionwi thi n t he hea rtl andofse cur iti es reg ula tio ns; 21 (B) SE C a uth ori ty to reg ula te; (C ) o ngo ingSE C r egu lat ion ; 22 and(D ) c onf lic t b etw eenth e t wo reg ime s. Id . a t 2 85. I n12 1 sel ect ingth e l eve l o f p art icu lar ityatwh ichtoad dre ss 2 eac h c ons ide rat ion , w e d rawgu ida nce fr om the sp eci fic s o f 3 the Su pre me Cou rt’ s a nal ysi s i n B ill ing , w ith outsu gge sti ng, 4 how eve r, tha t t he lev el of par tic ula rit y a ppl iedtoea ch 5 con sid era tio n i n t his ca se is pre scr ipt ive inev eryco nte xt. 6 7 A. Hea rtl and 8 To asc ert ainwh eth er “th e p oss ibl e c onf lic t” bet wee n 9 sec uri tie s l aw andan tit rus t l aw aff ect s “ pra cti ces th at lie 10 squ are ly wit hinanar ea of fin anc ial ma rke t a cti vit y t hat 11 the se cur iti es lawse eks tore gul ate ,” the Su pre me Cou rt 12 loo kedtoth e b roa d u nde rly ingma rke t a cti vit y. Bi lli ng, 13 551 U. S. at 276 . In dec idi ng tha t t he ant itr ustal leg ati ons 14 “co nce rn pra cti ces th at lie atth e v eryhe artofth e 15 sec uri tie s mark eti ng ent erp ris e,” th e C our t c ons ide red“t he 16 act ivi tie s i n ques tio n,” wh ichwe re fou nd to con sis t o f “ the 17 und erw rit ers ’ e ffo rts jo int ly to pro mot e a nd to sel l n ewl y 18 iss uedse cur iti es. ” Id. A cco rdi ngl y, the Co urtfo cus ed on 19 whe the r “ [t] he IPOpr oce ss” (t he und erl yin g m ark et act ivi ty 20 in Bil lin g) was wi thi n t he hea rtl and(a nd rul ed tha t i t 21 was ); it didno t f ocu s o n t he lad der ingan d t yin g 22 arr ang eme nts (t he all ege d a nti compet iti ve con duc t i n13 1 Bil lin g). I d. Th is ana lys is sug ges ts tha t t he fir st 2 con sid era tio n i s p rop erl y e val uat ed at the le vel ofth e 3 und erl yin g mark et act ivi ty. 4 Acc ord ing ly, inth is cas e, we con sid er whe the r s hor t 5 sel lin g i s w ith in thehe art lan d o f t he sec uri tie s b usi nes s. 6 The di str ictco urtfo undth at “th e l iqu idi ty andpr ici ng 7 ben efi ts cre ate d b y t he sho rt sal es pla ce the se tra nsa cti ons 8 ‘wi thi n t he hea rtl and ’ o f f ede ral se cur iti es reg ula tio n a nd 9 are ‘c ent ral toth e p rop er fun cti oni ng of wel l-r egu lat ed 10 cap ita l mark ets .’” I n r e S hor t S ale An tit rus t L iti g., 52 7 11 F. Sup p. 2d 253 , 2 59 (S. D.N .Y. 20 07) (quot ingBi lli ng, 55 1 12 U.S . a t 2 76) . ETGit sel f r eco gni zes th at “sh ortse lli ng is 13 mar ketac tiv ityre gul ate d b y t he sec uri tie s l aw. ” 14 App ell ant ’s Rep ly Br. 3. 15 Sho rt sel lin g-- the un der lyi ng mar ketac tiv ityinth is 16 cas e-- is “anar ea of con duc t s qua rel y w ith in the he art lan d 17 of sec uri tie s r egu lat ion s.” B ill ing , 5 51 U.S . a t 2 85. T he 18 fir st con sid era tio n t hus we igh s i n f avo r o f i mpl ied 19 pre clu sio n. 20 21 B. Author itytoRe gul ate 22 To asc ert ain“t he exi ste nce ofre gul ato ry aut hor ity14 1 und er these cur iti es lawtosu per vis e t he act ivi tie s i n 2 que sti on” inBi lli ng, 55 1 U .S. at27 5, the Su pre me Cou rt 3 loo kedtoth e r oleofth e u nde rwr ite rs in the IP O p roc ess as 4 wel l a s t o t he all ege d l add eri ng andty ingar ran gement s, see 5 id. at27 6-7 7. Th e C our t d ete rmi nedth at “th e l aw gra nts 6 the SE C a uth ori ty to sup erv ise al l o f t he act ivi tie s h erein 7 que sti on. I nde ed, th e S EC pos ses ses co nsi der abl e p owe r t o 8 for bid , p erm it, en cou rag e, dis cou rag e, tol era te, li mit , a nd 9 oth erw isere gul atevi rtu all y e ver y a spe ct of the pr act ice s 10 in whi ch und erw rit ers en gag e.” I d. at 276 . The Co urtth us 11 gau gedre gul ati on of act ivi ty tha t i s m ore pa rti cul ar tha n 12 the IP O p roc ess (t he und erl yin g m ark et act ivi ty) an d m ore 13 gen era l t hanth e l add eri ng andty ingar ran gement s ( the 14 all ege d a nti compet iti ve con duc t). 15 In add iti on, th e C our t c ite d r egu lat ion s t hatgr antth e 16 SECpo wertore gul ate“c ommuni cat ion s b etw eenun der wri tin g 17 par tic ipa nts an d t hei r c ust ome rs, in clu din g t hos e t hatoc cur 18 dur ingro ad sho ws, ” whic h s ugg est s t hatth e C our t a lso 19 gau gedre gul ati on of the sp eci fical leg ed ant ico mpe tit ive 20 con duc t. Id . a t 2 77. 21 Acc ord ing ly, we co nsi derth e e xis ten ce of SECau tho rit y 22 to reg ula te (i) th e r ole ofth e p rime b rok ers insh ort15 1 sel lin g, and(i i) thebo rro win g f ees ch arg ed by pri me 2 bro ker s. Wefi nd suc h a uth ori ty in Sec tio n 1 0(a ), Sec tio n 3 6, and15 U. S.C . § § 7 8o( c)( 2)( D) and78 j(b ). 4 Sec tio n 1 0(a ) o f t he Sec uri tie s E xch ang e A ct of 193 4 5 pro vid es tha t i t i s u nla wfu l “ [t] o e ffe ct a s hor t s ale . . . 6 of anyse cur ityre gis ter ed on a n ati ona l s ecu rit ies 7 exc han ge, inco ntr ave nti on of suc h r ule s a nd reg ula tio ns as 8 the Co mmi ssi on maypr esc rib e a s n ece ssa ry or app rop ria te in 9 the pu bli c i nte res t o r f or the pr ote cti on of inv est ors .” 15 10 U.S .C. § 78j (a) (1) . Cit ingle gis lat ive hi sto ry, ET G a rgu es 11 tha t S ect ion10 (a) wa s i nte nde d o nlytore gul ate th e 12 man ipu lat ionofsh arepr ice th rou gh sho rt sel lin g. Se e 13 App ell ant ’s Br. 20 -21 . How eve r, not hin g i n t he wor din g o f 14 Sec tio n 1 0(a ) s o l imi ts its re ach ; a nd the SE C h as 15 int erp ret ed Sec tio n 1 0(a ) a s agr antof“p len aryau tho rit y 16 to reg ula te sho rt sal es of sec uri tie s r egi ste redona 17 nat ion al sec uri tie s e xch ang e . . . . ” Sho rt Sal es, Ex cha nge 18 ActRe lea se No. 34 -48 709 , 6 8 F ed. Re g. 62, 972 (p rop ose d N ov. 19 6, 200 3). T he SECth us has th e a uth ori ty to reg ula te the 20 rol e o f t he pri me bro ker s i n s hor t s ell ing , a s w ell as th e 21 bor row ingfe es cha rge d b y t he pri me bro ker s, pur sua nt to 22 Sec tio n 1 0(a ).16 1 Sec tio n 6 ofth e S ecu rit ies Ex cha nge Ac t o f 1 934 2 pro vid es tha t t he SECma y “ permita nat ion al sec uri tie s 3 exc han ge, byru le, toimpos e asc hedule orfi x r ate s o f 4 commis sio ns, al low anc es, di sco unt s, or oth er fee s t o b e 5 cha rge d b y i ts member s f or eff ect ingtr ans act ion s” if suc h 6 fee s a re “re aso nab le” an d “ do notimpos e a ny bur denon 7 compet iti on notne ces sar y o r a ppr opr iat e” to fur the r t he 8 pur pos es of these cur iti es law . 15 U.S .C. § 78f (e) (1) (B) . 9 ETGch ara cte riz es Sec tio n 6 as a gra nt of lim ite d a uth ori ty 10 to permitex cha nge s t o d evi ate fr om “th e g ene ral pr ohi bit ion 11 on fix ed commis sio n r ate s.” Appe lla nt’ s B r. 22. E ven 12 acc ept ingth is cha rac ter iza tio n, the SE C t hus ha s i ndi rec t 13 aut hor itytore gul ateth e r ate s ( inc lud ingth e b orr owi ng 14 fee s) cha rge d b y t he pri me bro ker s i n s hor t s ell ing . 15 In Bil lin g, the Su pre me Cou rt rel iedinpa rt on 15 16 U.S .C. §§78 o(c )(2 )(D ) a nd 78j (b) as ev ide nce ofth e S EC’ s 17 bro ad pow er to def inean d p rev entfr audule nt, de cep tiv e, and 18 man ipu lat iveco ndu ct by bro ker s a nd dea ler s. 55 1 U .S. at 19 277 . The se pro vis ion s a ppl y w ithequal fo rce toth e r oleof 20 the pr imebr oke rs in sho rt sel lin g a nd the bo rro win g f ees 21 the y c har ge. 22 Thi s s eco nd Bil lin g c ons ide rat ion --f ocu sedas itis on17 1 whe the r t he SECha s a uth ori ty to reg ula te the ro le of the 2 pri me bro ker s i n s hor t s ell ingan d t he bor row ingfe es 3 cha rge d b y t he pri me bro ker s-- thu s w eig hs in fav or of 4 imp lie d p rec lus ion , e venth oug h n one ofth e p rov isi ons 5 dis cus sedab oveexpli cit ly ref ere nce s t he reg ula tio n o f 6 bor row ingfe es. 7 8 C. Ongoing Regu lation 9 To eva lua te “ev ide nce th at the re spo nsi ble re gul ato ry 10 ent iti es exe rci se [th eir ] a uth ori ty, ” B ill ing , 5 51 U.S . a t 11 275 , t he Sup reme C our t l ook ed to the ro le of the 12 und erw rit ers inth e I PO pro ces s, see id . a t 2 77. T he Cou rt 13 det erm ine d t hat“t he SECha s c ont inu ous ly exe rci sedit s 14 leg al aut hor itytore gul ate co ndu ct of the ge ner al kin d n ow 15 at iss ue. I t h as def ine d i n d eta il, fo r e xample , what 16 und erw rit ers ma y a nd mayno t d o a nd saydu rin g t hei r r oad 17 sho ws. ” Id. T he Cou rt thu s l ook ed to act ivi ty mor e 18 par tic ula r t hanth e I PO pro ces s ( the un der lyi ng mar ket 19 act ivi ty) an d m orege ner al tha n t he lad der ingan d t yin g 20 arr ang eme nts (t he all ege d a nti compet iti ve con duc t). 21 In thi s c ase , w e t her efo re con sid er whe the r t her e i s 22 ong oin g S EC reg ula tio n o f t he rol e o f t he pri me bro ker s.18 1 Ample evidence reveals that the SEC exercises its authority 2 to regulate the role of the prime brokers in short selling. 3 “[A ]ct ivean d o ngo ingag enc y r egu lat ion ” i s e vid enc ed by 4 Reg ula tio n S HO anda rec entSE C r oun dta ble . Id. at28 5. 5 Regulation SHO, adopted by the SEC in 2004, imposes a 6 “locate” requirement on brokers involved in short selling. 7 See 17 C.F.R. § 242.203(b)(1)(i)-(iii) (“A broker or dealer 8 may not accept a short sale order in an equity security from 9 another person . . . unless the broker or dealer has: (i) 1 0 [b]orrowed the security, or entered into a bona-fide 1 1 arrangement to borrow the security; or (ii) [r]easonable 1 2 grounds to believe that the security can be borrowed so that 1 3 it can be delivered on the date delivery is due. . . .”). 1 4 Regulation SHO also imposes a “delivery” requirement on such 1 5 brokers. See 17 C.F.R. § 242.203(b)(3) (with certain 1 6 enumerated exceptions, “[i]f a participant of a registered 1 7 clearing agency has a fail to deliver position at a 1 8 registered clearing agency in a threshold security for 1 9 thirteen consecutive settlement days, the participant shall 2 0 immediately thereafter close out the fail to deliver 2 1 position by purchasing securities of like kind and 2 2 quantity”). Regulation SHO thus constitutes an exercise of19 1 the SEC’s authority to supervise the role of the prime 2 brokers in short selling. 3 On September 29-30, 2009 (at the time of oral argument 4 in this appeal), the SEC hosted a roundtable “regarding 5 securities lending and short sales.” Securities Lending and 6 Short Sale Roundtable, Exchange Act Release No. 34-60643, 7 2009 WL 2915632, at *1 (Sept. 10, 2009) (announcing the 8 roundtable). The roundtable intended to focus on “a range 9 of securities lending topics, such as current lending 1 0 practices and participants, compensation arrangements and 1 1 conflicts, the benefits and risks of securities lending, 1 2 risks related to cash collateral reinvestment, improvements 1 3 to transparency, and consideration of whether the securities 1 4 lending regulatory regime can be improved for the benefit of 1 5 investors.” Id. The roundtable also intended to focus on 1 6 “short sale disclosure topics” and addressed “the potential 1 7 impact of imposing a pre-borrow or enhanced ‘locate’ 1 8 requirement on short sellers . . . as a way to curtail 1 9 abusive ‘naked’ short selling.” Id. This roundtable 2 0 indicates active SEC monitoring of the role of the prime 2 1 brokers in short selling. 2 2 ETG’s complaint implicitly confirms active regulation.20 1 The complaint affirmatively alleges, presumably to flesh out 2 claims of wrongdoing, that certain prime brokers “have been 3 fined for not borrowing securities or failing to enter into 4 agreements to borrow securities that are sold in short sale 5 transactions and/or having reasonable grounds to believe 6 that the securities could be borrowed so that they could be 7 delivered on the delivery due date,” Compl. ¶ 91, and that 8 “federal prosecutors and the [New York Stock Exchange] have 9 launched a joint investigation into [certain prime brokers’] 1 0 alleged price gouging . . . by artificially inflating 1 1 borrowing fees and by charging fees for which no services 1 2 were rendered,” id. ¶ 92. A fair inference from these 1 3 allegations is that the SEC and securities self-regulating 1 4 organizations actively exercise regulatory authority over 1 5 the role of the prime brokers in short selling. 16 Reg ula tio n S HO andth e r ece nt rou ndt abl e d o n ot foc us 17 on the re gul ati on of bor row ingfe es (th e p art icu larco ndu ct 18 all ege d t o b e a nti compet iti ve) ; b ut it is eno ughfo r t his 19 pur pos e t hatth e S EC’ s o ngo ingre gul ati on is foc use d o n t he 20 rol e o f t he pri me bro ker s i n s hor t s ell ing . The th ird 21 con sid era tio n t hus we igh s i n f avo r o f i mpl iedpr ecl usi on. 2221 1 D. Con fli ct 2 To asc ert ainth e “ ris k t hatth e s ecu rit ies an d 3 ant itr ustla ws, ifbo th app lic abl e, wou ld pro duc e 4 con fli cti ng gui dan ce, re qui rement s, dut ies , p riv ile ges , o r 5 sta nda rds ofco ndu ct, ” Bil lin g, 551 U. S. at 275 -76 , t he 6 Sup reme C our t c ons ide redwh eth er all owi ng ant itr ust 7 lia bil ityfo r t he con duc t a lle gedtoha ve the 8 ant ico mpe tit iveef fec t w oul d i nhi bitpe rmi ssi ble (a nd eve n 9 ben efi cia l) mar ketbe hav ior . See id . a t 2 82 (“And the 10 thr eatofan tit rus t m ist ake s, i.e ., res ult s t hatst ray 11 out sid e t he nar rowbo und s t hatpl ain tif fs see k t o s et, me ans 12 tha t u nde rwr ite rs mus t a ct in way s t hatwi ll avo id not 13 simplyco ndu ct tha t t he sec uri tie s l aw for bid s ( andwi ll 14 lik elyco nti nuetofo rbi d), bu t a lsoa wid e r ang e o f j oin t 15 con duc t t hatth e s ecu rit ies la w p erm its oren cou rag es (bu t 16 whi ch the y f earco uldle ad to an ant itr ustla wsu it andth e 17 ris k o f t reb le damage s). ”). I n e val uat ingco nfl ict , 18 the ref ore , t he proper focus is on the alleged 1 9 anticompetitive conduct: 2 0 [W]e do not read the complaints as attacking the 2 1 bare existence of IPO underwriting syndicates or 2 2 any of the joint activity that the SEC considers a 2 3 necessary component of the IPO-related syndicate 2 4 activity. . . . Nor do we understand the complaints 2 5 as questioning underwriter agreements to fix the22 1 levels of their commissions, whether or not the 2 resulting price is “excessive.” We . . . read the 3 complaints as attacking the mannerin which the 4 underwriters jointly seek to collect “excessive” 5 commissions. The complaints attack underwriter 6 efforts to collect commissions through certain 7 practices (i.e., laddering, tying, collecting 8 excessive commissions in the form of later sales of 9 the issued shares) . . . . 1 0 Id. at 278 (citations omitted). 11 In thi s c ase , t her efo re, we co nsi derth e i mpa ct tha t 12 ant itr ustli abi lit y may hav e o n a rra nge men ts forbo rro win g 13 fee s. ET G a rgu es (i) th at “th ere sh oul d b e l itt le 14 dif fic ult y i n d ist ing uis hin g c oll usi ve fee -fi xin g a gre eme nts 15 fro m r out ineco mmu nic ati ons co nce rni ng sto ck ava ila bil ity 16 andma rke t p ric ingpe rmi ssi ble un derRe gul ati on SHO ”; and 17 (ii ) t hat“t her e i s n o a ctu al or pot ent ial co nfl ictth at 18 nec ess ita tes immun ity ” b eca use ne ith er the se cur iti es law 19 north e a nti tru st lawpe rmi t t he col lus ive fi xin g o f 20 bor row ingfe es. Appe lla nt’ s B r. 32- 33. T he dis tri ct cou rt 21 fou nd oth erw ise . SeeInre Sh ortSa le Ant itr ustLi tig ., 527 22 F. Sup p. 2d at 260 . 23 We con clu de tha t a nti tru st lia bil itywo uldcr eat e 24 act ual an d p ote nti al con fli cts wi th the se cur iti es reg ime . 25 An act ual co nfl ictar ise s b eca use an tit rus t l iab ili ty wou ld 26 inh ibi t t he pri me bro ker s ( andot herbr oke rs) fr om eng agi ng23 1 in oth er con duc t t hatth e S EC cur ren tlype rmi ts andth at 2 ben efi ts theef fic ien t f unc tio nin g o f t he sho rt sel lin g 3 mar ket . The re is a p ote nti al con fli ct bec aus e t he SECin 4 the fu tur e may dec idetore gul ate th e b orr owi ng fee s c har ged 5 by bro ker s. 6 1. ActualConfl ict 7 Ant itr ustli abi lit y w oul d i nhi bitco ndu ct tha t t he SEC 8 permit s a nd tha t a ssi sts th e e ffi cie nt fun cti oni ng of the 9 sho rt sel lin g mark et. The thrust of ETG’s case is that the 1 0 prime brokers communicated wit h o ne ano the r t o d esi gna te 11 har d-t o-b orr ow sec uri tie s a nd to fixin fla tedbo rro win g f ees 12 forth osese cur iti es. H owe ver , i t i s p erm iss ibl e f or 13 bro ker s t o c ommuni cat e a bou t t he ava ila bil ityan d p ric e o f 14 sec uri tie s. As th e d ist ric t c our t o bse rve d, “su ch exc han ges 15 are impli cit ly permit tedbyth e S EC’ s Regu lat ionSH O.” I n 16 re Sho rt Sal e Anti tru st Lit ig. , 5 27 F. Sup p. 2d at 260 17 (ci tin g 1 7 C .F. R. § 2 42. 203 (b) (1) (r equ iri ng tha t abr oke r 18 bor rowth e s ecu rit ies orha ve rea son abl e g rou nds tobe lie ve 19 tha t t he sec uri tie s c an be bor row ed bef ore ac cep tin g a n 20 ord er fro m ash ortse lle r)) . It is a l ot to exp ecta bro ker 21 “todi sti ngu ishwh at is for bid denfr om wha t i s a llo wed ,” so 22 tha t t he bro kerco lle cts ju st so muc h i nfo rma tio n a s24 1 requir ed to sat isf y t he loc ate re qui rementan d f or the 2 eff ici entfu nct ion ingofth e s hor t s ell ingma rke t-- butno t 3 an iot a m ore --o r s uff er tre ble damag es. B ill ing , 5 51 U.S . 4 at 280 . 5 Con fli ct is a r iskun les s t her e i s a“p rac tic al wayto 6 con fin e a nti tru st sui ts so tha t t heych all eng e o nlyac tiv ity 7 of the ki nd the[p lai nti ffs ] s eektota rge t” wit hou t 8 inh ibi tin g o the r c onductth at is permit tedoren cou rag ed 9 und er these cur iti es law . Id. at28 2. Th e d raw ingofsu ch 10 int ric ateli nes de man ds “se cur iti es- rel ate d e xpe rti se. ” Id. 11 Mor eov er, itis li kel y t hatth e v eryco mmu nic ati ons inwh ich 12 sho rt sel ler s d o whatth e s ecu rit ies la w a llo ws wou ld by 13 “re aso nab le butco ntr adi cto ry inf ere nce s” ser ve as evi den ce 14 of con duc t f orb idd en by the an tit rus t l aw. I d. Re lia nceon 15 a j uryth ere for e g ive s r ise toa ser iou s “ ris k o f 16 inc ons ist entco urtre sul ts. ” Id. 17 Ant itr ustli abi lit y, wit h t he pro spe ct of tre ble 18 dam age s, wou ld be an inc ent ive fo r t he pri me bro ker s t o c urb 19 the ir permis sib le exc han ge of inf orm ati on andth ere by harm 20 the ef fic ien t f unc tio nin g o f t he sho rt sel lin g m ark et. T his 21 inh ibi tin g e ffe ct wei ghs infa vorofimpli ed pre clu sio n. 22 2. PotentialConfl ict25 1 In add iti on to the ac tua l c onf lic t d esc rib ed abo ve, a 2 pot ent ial co nfl ictex ist s b ase d o n t he pos sib ili ty tha t t he 3 SECwi ll actup on its au tho rit y t o r egu lat e t he bor row ing 4 fee s s et by pri me bro ker s. As th e S upr eme Co urt 5 ack now ledgedinBi lli ng, a pot ent ial co nfl ictofth is kin d 6 mayex istev en if the re is no con fli ct tha t i s actual and 7 immediate. See Billing, 551 U.S. at 273 (describing the 8 “upshot” of Gordon v. N.Y. Stock Exch., Inc., 422 U.S. 659, 9 690-91 (1975), as “in light of potential future conflict, 1 0 the Court found that the securities law precluded antitrust 1 1 liability even in respect to a practice that both antitrust 1 2 law and securities law might forbid”). In the context of an 1 3 implied repeal case, this Court observed that “the proper 1 4 focus is not on the Commission’s current regulatory position 1 5 but rather on the Commission’s authority to permit conduct 1 6 that the antitrust laws would prohibit.” In re Sto ck 17 Exc hs. Op tio ns Tra din g Anti tru st Lit ig. , 3 17 F.3 d 1 34, 14 9 18 (2dCi r. 200 3). 19 It is the ref ore no t d eci siv e t hatne ith er sec uri tie s 20 lawno r a nti tru st lawal low s-- or enc our age s-- the co llu siv e 21 fix ingofbo rro win g f ees . The pr ese nt sec uri tie s r egi me 22 exp res slyal low s p rime b rok ers tore ly on eas y-t o-b orr owBe cau se all fo ur of the Bi lli ng con sid era tio ns poi nt 6 in the di rec tio n o f i mpl iedpr ecl usi on, we ne ed notad dre ss the we igh t t o b e a cco rde d t hes e c ons ide rat ion s whenth ey poi nt in dif fer entdi rec tio ns. 26 1 lis ts as rea son abl e g rou nds “t o b eli eve th at the se cur ity 2 sol d s hor t i s a vai lab le forbo rro win g w ith outdi rec tly 3 con tac tin g t he sou rceofth e b orr owe d s ecu rit ies .” Sh ort 4 Sal es, Ex cha ngeAc t Rele ase No . 3 4-5 010 3, 83 SECDo cke t 1 278 5 (Ju ly 28, 20 04) . TheSE C h as tak en not e t hatha rd- to- bor row 6 lis ts “ar e n ot wid elyus ed by bro ker -de ale rs” an d t hat , 7 the ref ore , “ thefa ct tha t ase cur ityis no t o n aha rd to 8 bor rowli st can notsa tis fy the ‘r eas ona ble gr oun ds’ te st” 9 des cri bedab ove . Id. B ut if andwh en suc h h ard -to -bo rro w 10 lis ts come i ntobr oad er use , i t i s e asytose e h ow the y 11 cou ld inc rea se theef fic ien cy of the sh ortse lli ng mar ket , 12 in whi ch eve nt theSE C c oul d m ove qu ick ly to reg ula te the 13 bor row ingfe es cha rge d b y b rok ers fo r s ecu rit ies ap pea rin g 14 on suc h l ist s. Th is pot ent ial co nfl ictwe igh s i n f avo r o f 15 imp lie d p rec lus ion . 16 17 CONCLUSION 18 All fo ur Bil lin g c ons ide rat ion s w eig h i n f avo r o f 19 imp lie d p rec lus ion . W e t her efo re aff irmth e d ist ric t 627 1 cou rt’ s Rule12 (b) (6) di smi ssa l o f E TG’ s a nti tru st cla im 2 wit h p rej udi ce. M ore ove r, we aff irmth e d ism iss al of ETG ’s 3 sta te lawcl aim s w ith outpr eju dic e b eca use we fi nd no abu se 4 of dis cre tio n i n t he dis tri ct cou rt’ s d eci sio n t o d ecl ineto 5 exe rci se sup ple men tal ju ris dic tio n o verth ese cl aim s. Se e 6 Kol ari v. N. Y.- Pre sby ter ianHo sp. , 4 55 F.3 d 1 18, 12 2 ( 2d 7 Cir . 2 006 ). 8 9