08-0420-cv

In re Short Sale Antitrust Litig.

1 UNITED STATES COURT OF APPEALS

2

3 FOR THE SECOND CIRCUIT

4

5 August Term, 2009

6

7

8 (Argued: September 30, 2009 Decided: December 3, 2009)

9

10 Docket No. 08-0420-cv

11

12 - - - - - - - - - - - - - - - - - - - -x

13

14 ELECTRONIC TRADING GROUP, LLC, on

15 behalf of itself and all others 

16 similarly situated,

17

18 Plaintiff-Appellant,

19

20 - v.-

21

22 BANC OF AMERICA SECURITIES LLC, BEAR

23 STEARNS COMPANIES, INC., CITIGROUP INC.,

24 CREDIT SUISSE (USA) INC., DEUTSCHE BANK

25 SECURITIES, INC., GOLDMAN, SACHS & CO.,

26 MERRILL LYNCH, PIERCE, FENNER & SMITH

27 INCORPORATED, MORGAN STANLEY & CO.

28 INCORPORATED, UBS FINANCIAL SERVICES,

29 INC., CIBC WORLD MARKETS CORP., 

30 CITIGROUP GLOBAL MARKETS, INC., CREDIT

31 SUISSE SECURITIES (USA) LLC, GOLDMAN

32 SACHS EXECUTION & CLEARING, L.P.,

33 MORGAN STANLEY DW INC., THE GOLDMAN 

34 SACHS GROUP, INC., and VAN DER MOOLEN 

35 SPECIALISTS USA, LLC,

36

37 Defendants-Appellees,

38

39 JOHN DOES, DAIWA AMERICA CORPORATION, 

40 DAIWA SECURITIES AMERICA INC., BANK OF 

41 NEW YORK, J.P. MORGAN CHASE & CO., J.P.

42 MORGAN SECURITIES INC., and LEHMAN 

43 BROTHERS INC., 
2

1 Defendants. 

2

3 - - - - - - - - - - - - - - - - - - - -x

4

5 Before: JACOBS, Chief Judge, SACK and LYNCH,

6 Circuit Judges.

7

8 Plaintiff-appellant Electronic Trading Group, LLC

9 appeals from a judgment of the United States District Court

10 for the Southern District of New York (Marrero, J.)

11 dismissing a Sherman Act claim with prejudice and dismissing

12 three state law claims without prejudice to refiling in

13 state court. The district court evaluated the four

14 considerations recently articulated by the United States

15 Supreme Court in Credit Suisse Securities (USA) LLC v.

16 Billing, 551 U.S. 264 (2007), and found implied preclusion

17 from antitrust liability. We affirm. 

18 ANDREW J. ENTWISTLE, VINCENT R.

19 CAPPUCCI, HAROLD F. McGUIRE,

20 JR., ARTHUR V. NEALON, and

21 STEPHEN D. OESTREICH, Entwistle

22 & Cappucci LLP, New York, New

23 York, for Appellant Electronic

24 Trading Group, LLC.

25

26 ROBERT F. WISE, JR., and WILLIAM

27 J. FENRICH, Davis Polk &

28 Wardwell LLP, New York, New

29 York, for Appellees Morgan

30 Stanley & Co. Incorporated and

31 Morgan Stanley DW Inc.

32

33
3

1 RICHARD H. KLAPPER and RICHARD 2 C. PEPPERMAN, II, Sullivan & 3 Cromwell LLP, New York, New 4 York, for Appellees Goldman, 5 Sachs & Co., Goldman Sachs 6 Execution & Clearing, L.P., an

d

7 The Goldman Sachs Group, Inc. 89 STEPHEN L. RATNER and HARRY

10 FRISCHER, Proskauer Rose LLP,

11 New York, New York, for Appellee

12 Bear Stearns Companies, Inc.

13

14 JAY B. KASNER and SHEPARD

15 GOLDFEIN, Skadden, Arps, Slate,

16 Meagher & Flom LLP, New York,

17 New York, for Appellee Merrill

18 Lynch, Pierce, Fenner & Smith

19 Incorporated.

20

21 JAY P. LEFKOWITZ, MARIA

22 GINZBURG, ANDREW B. CLUBOK,

23 SUSAN E. ENGEL, and ELEANOR R.

24 BARRETT, Kirkland & Ellis LLP,

25 New York, New York and

26 Washington, D.C., for Appellee

27 UBS Financial Services, Inc.

28

29 ROBERT B. McCAW, FRASER L.

30 HUNTER, JR., and ALI M.

31 STOEPPELWERTH, Wilmer Cutler

32 Pickering Hale and Dorr LLP, New

33 York, New York and Washington,

34 D.C., for Appellees Citigroup

35 Inc., Citigroup Global Markets,

36 Inc., Credit Suisse (USA) Inc.,

37 and Credit Suisse Securities

38 (USA) LLC.

39

40 ANDREW J. FRACKMAN and BRENDAN

41 J. DOWD, O’Melveny & Myers LLP,

42 New York, New York, for Appellee

43 Banc of America Securities LLC.

44
 The defendants-appellees are Banc of America 1

Securities LLC; Bear Stearns Companies, Inc.; Citigroup

Inc.; Credit Suisse (USA) Inc.; Deutsche Bank Securities,

Inc.; Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner &

Smith Incorporated; Morgan Stanley & Co., Incorporated; UBS

Financial Services, Inc.; CIBC World Markets Corp.;

Citigroup Global Markets, Inc.; Credit Suisse Securities

(USA) LLC; Goldman Sachs Execution & Clearing, L.P.; The

Goldman Sachs Group, Inc.; Van Der Moolen Specialists USA,

LLC; and Morgan Stanley DW Inc.

4

1 GREGORY A. MARKEL and MARTIN L.

2 SEIDEL, Cadwalader, Wickersham &

3 Taft LLP, New York, New York,

4 for Appellee Deutsche Bank

5 Securities, Inc.

6

7 DANIEL B. RAPPORT, KATHERINE L.

8 PRINGLE, and LISA S. GETSON,

9 Friedman Kaplan Seiler & Adelman

10 LLP, New York, New York, for

11 Appellee Van Der Moolen

12 Specialists USA, LLC.

13

14 JONATHAN D. POLKES, ROBERT F.

15 CARANGELO, and DEBRA J.

16 PEARLSTEIN, Weil, Gotshal &

17 Manges LLP, New York, New York,

18 for Appellee CIBC World Markets

19 Corp.

20

21 DENNIS JACOBS, Chief Judge:

22

23 In this putative class action, plaintiff-appellant

24 Electronic Trading Group, LLC (“ETG”), a short seller, sues

25 certain financial institutions that serve as “prime brokers”

26 in short sale transactions. It is alleged that the prime 1

27 brokers arbitrarily designated certain securities as hard-
 “A complaint pleading a violation of section 1 must

2

allege a contract, combination or conspiracy that

unreasonably restrains trade.” Elecs. Commc’ns Corp. v.

Toshiba Am. Consumer Prods., Inc., 129 F.3d 240, 243 (2d

Cir. 1997).

 ETG brought the breach of fiduciary duty claim 3

against Morgan Stanley DW Inc.; Bear Stearns Companies,

Inc.; Goldman Sachs Execution & Clearing, L.P.; Goldman,

Sachs & Co.; UBS Financial Services, Inc.; Merrill Lynch,

Pierce, Fenner & Smith Incorporated; Citigroup Global

Markets, Inc.; Credit Suisse Securities (USA) LLC; Deutsche

Bank Securities, Inc.; Banc of America Securities LLC; Van

Der Moolen Specialists USA, LLC; and CIBC World Markets

Corp. 

ETG brought the aiding and abetting breach of fiduciary

duty claim against the parent corporations of some of the

prime brokers named in the breach of fiduciary duty claim--

Morgan Stanley & Co., Incorporated; The Goldman Sachs Group,

Inc.; Citigroup Inc.; and Credit Suisse (USA) Inc.

5

1 to-borrow and then fixed the price for borrowing them, in

2 violation of Section 1 of the Sherman Act, 15 U.S.C. § 1

3 (the “antitrust claim”). Three state law claims are also 2

4 pleaded: breach of fiduciary duty, aiding and abetting

5 breach of fiduciary duty, and unjust enrichment

6 (collectively, the “state law claims”).3

7 ETG appeals from a judgment of the United States

8 District Court for the Southern District of New York

9 (Marrero, J.), dismissing the antitrust claim with prejudice

10 on the ground of implied preclusion of the antitrust law by

11 the securities law, and dismissing the state law claims
6

1 without prejudice to refiling in state court. We affirm. 

2 The preclusion analysis turns on four considerations

3 identified in Credit Suisse Securities (USA) LLC v. Billing,

4 551 U.S. 264, 285 (2007): whether the “area of conduct [is]

5 squarely within the heartland of securities regulations”;

6 whether the Securities and Exchange Commission (“SEC”) has

7 “clear and adequate [] authority to regulate”; whether there

8 is “active and ongoing agency regulation”; and whether “a

9 serious conflict” arises between antitrust law and

10 securities regulations. 

11 Much depends on the level of particularity or

12 generality at which each Billing consideration is evaluated.

13 Obviously, if the inquiry is whether the SEC actively

14 regulates the pricing of borrowed shares, the plaintiff wins

15 the point. By the same token, if the inquiry is whether

16 short selling is within the heartland of securities

17 regulations, the defendants win the point. 

18 For the reasons set forth in this opinion, the fourth

19 consideration--detection of a serious conflict--is evaluated

20 at the level of the alleged anticompetitive conduct. Each

21 of the three remaining considerations is evaluated at the

22 level most useful to the court in achieving the overarching
7

1 goal of avoiding conflict between the securities and

2 antitrust regimes. 

3 

4 BACKGROUND

5 A. Short Selling

6 A short sale transaction proceeds in the following

7 sequence. The short seller identifies securities she

8 believes will drop in market price, borrows these securities

9 from a broker (prime brokers have the greatest market

10 share), sells the borrowed securities on the open market,

11 purchases replacement securities on the open market, and

12 returns them to the broker--thereby closing the short

13 seller’s position. The short seller’s profit (if any) is

14 the difference between the market price at which she sold

15 the borrowed securities and the market price at which she

16 purchased the replacement securities, less borrowing fees,

17 brokerage fees, interest, and any other charges levied by

18 the broker. 

19

20 B. The Role of the Prime Brokers

21

22 In the context of short selling, a prime broker locates

23 the short seller’s requested securities, lends those
8

1 securities to the short seller for a fee, and delivers those

2 securities to the short seller’s purchaser.

3 A short seller seeking to borrow securities contacts

4 the broker’s securities loan desk. Pursuant to SEC

5 regulations, the securities loan desk must locate the

6 requested securities before it can accept the short seller’s

7 order. See 17 C.F.R. § 242.203(b)(1)(i)-(iii). The

8 securities loan desk may locate the securities in its own

9 proprietary accounts, or in the hands of other brokers or

10 institutional investors with significant long positions. 

11 Alternatively, the securities loan desk may locate the

12 securities through a third party who assists the broker in

13 exchange for a locate fee. 

14 The broker charges the short seller a borrowing fee

15 affected by supply and demand: the harder the security is to

16 find and borrow, the higher the fee. The broker may develop

17 an easy-to-borrow list of securities that are in abundant

18 supply and a hard-to-borrow list of securities that are

19 scarce. See Short Sales, Exchange Act Release No. 34-50103,

20 83 SEC Docket 1278 (July 28, 2004). 

21 A short seller who has sold the borrowed securities on

22 the open market must deliver those securities to the
 ETG’s Amended Class Action Complaint (the 4

“complaint”) also alleges that the prime brokers (i) failed

to enforce the delivery of securities, thereby enabling the

prime brokers to charge borrowing fees for securities that

were never actually borrowed and giving rise to intentional

FTDs; and (ii) charged improper locate fees when the

securities were never found and/or borrowed. On appeal, ETG

argues that the complaint’s “references to failures to

deliver” and “improper and unjustified locate fees” were

“pleaded [only] as an adjunct to [ETG’s] price-fixing

claim.” Appellant’s Reply Br. 17 & 17 n.12. The prime

brokers argue that ETG improperly seeks to amend the

complaint on appeal by recharacterizing these allegations

from integral components of the conspiracy to ancillary

means of expanding the conspiracy’s scope. Appellees’ Opp’n

Br. 24-25. We do not reach this issue, because dismissal

remains appropriate even if we adopt ETG’s appellate

posture. 

9

1 purchaser within three days of the transaction date. If the

2 short seller’s broker does not deliver in time, a failure3 to-deliver (“FTD”) occurs.

4 

5 C. The Borrowing Fees Conspiracy

6

7 It is alleged that from April 12, 2000 to the present,

8 the prime brokers charged “artificially inflated” borrowing

9 fees by agreeing on which securities to designate

10 arbitrarily as hard-to-borrow, and setting minimum borrowing

11 fees for these securities. (There are other allegations,

12 set out in the margin, which we do not reach. )

4

13
 The district court did not reach the alternative Rule 5

9(b) ground for dismissal of the antitrust claim. We do not

reach this ground because we affirm the district court’s

Rule 12(b)(6) dismissal. 

10

1 D. Procedural History

2 On March 15, 2007, the prime brokers moved to dismiss

3 the antitrust claim pursuant to Federal Rules of Civil

4 Procedure 12(b)(6) and 9(b). On June 18, 2007, the United

5 States Supreme Court decided Billing. On December 20, 2007,

6 the district court applied Billing, granted the prime

7 brokers’ motion to dismiss the antitrust claim under Rule

8 12(b)(6), and declined to exercise supplemental jurisdiction

9 over the state law claims. ETG timely appealed the

5

10 district court’s decision, arguing principally that the

11 district court misapplied Billing. 

12

13 DISCUSSION

14 “We review the district court’s grant of a Rule

15 12(b)(6) motion de novo, drawing all reasonable inferences

16 in plaintiff[’s] favor, and accepting as true all the

17 factual allegations in the complaint.” In re Elevator

18 Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per

19 curiam) (internal quotation marks, citations, and brackets
11

1 omitted).

2 Credit Suisse Securities (USA) LLC v. Billing, 551 U.S.

3 264 (2007), was an antitrust action against underwriting

4 firms that marketed and distributed shares in initial public

5 offerings (“IPO”). The plaintiffs alleged “that the

6 underwriters unlawfully agreed with one another that they

7 would not sell shares of a popular new issue to a buyer

8 unless that buyer committed (1) to buy additional shares of

9 that security later at escalating prices (a practice called

10 ‘laddering’), (2) to pay unusually high commissions on

11 subsequent security purchases from the underwriters, or (3)

12 to purchase from the underwriters other less desirable

13 securities (a practice called ‘tying’).” Id. at 267. 

14 The Supreme Court ruled that federal securities law

15 implicitly precluded application of the antitrust law to the

16 underwriters’ alleged anticompetitive conduct. The Court

17 articulated four considerations that bear upon whether “the

18 securities laws are ‘clearly incompatible’ with the

19 application of the antitrust laws” in a particular context: 

20 (A) location within the heartland of securities regulations;

21 (B) SEC authority to regulate; (C) ongoing SEC regulation;

22 and (D) conflict between the two regimes. Id. at 285. In
12

1 selecting the level of particularity at which to address

2 each consideration, we draw guidance from the specifics of

3 the Supreme Court’s analysis in Billing, without suggesting,

4 however, that the level of particularity applied to each

5 consideration in this case is prescriptive in every context.

6

7 A. Heartland

8 To ascertain whether “the possible conflict” between

9 securities law and antitrust law affects “practices that lie

10 squarely within an area of financial market activity that

11 the securities law seeks to regulate,” the Supreme Court

12 looked to the broad underlying market activity. Billing,

13 551 U.S. at 276. In deciding that the antitrust allegations

14 “concern practices that lie at the very heart of the

15 securities marketing enterprise,” the Court considered “the

16 activities in question,” which were found to consist of “the

17 underwriters’ efforts jointly to promote and to sell newly

18 issued securities.” Id. Accordingly, the Court focused on

19 whether “[t]he IPO process” (the underlying market activity

20 in Billing) was within the heartland (and ruled that it

21 was); it did not focus on the laddering and tying

22 arrangements (the alleged anticompetitive conduct in
13

1 Billing). Id. This analysis suggests that the first

2 consideration is properly evaluated at the level of the

3 underlying market activity. 

4 Accordingly, in this case, we consider whether short

5 selling is within the heartland of the securities business. 

6 The district court found that “the liquidity and pricing

7 benefits created by the short sales place these transactions

8 ‘within the heartland’ of federal securities regulation and

9 are ‘central to the proper functioning of well-regulated

10 capital markets.’” In re Short Sale Antitrust Litig., 527

11 F. Supp. 2d 253, 259 (S.D.N.Y. 2007) (quoting Billing, 551

12 U.S. at 276). ETG itself recognizes that “short selling is

13 market activity regulated by the securities law.” 

14 Appellant’s Reply Br. 3. 

15 Short selling--the underlying market activity in this

16 case--is “an area of conduct squarely within the heartland

17 of securities regulations.” Billing, 551 U.S. at 285. The

18 first consideration thus weighs in favor of implied

19 preclusion.

20

21 B. Authority to Regulate

22 To ascertain “the existence of regulatory authority
14

1 under the securities law to supervise the activities in

2 question” in Billing, 551 U.S. at 275, the Supreme Court

3 looked to the role of the underwriters in the IPO process as

4 well as to the alleged laddering and tying arrangements, see

5 id. at 276-77. The Court determined that “the law grants

6 the SEC authority to supervise all of the activities here in

7 question. Indeed, the SEC possesses considerable power to

8 forbid, permit, encourage, discourage, tolerate, limit, and

9 otherwise regulate virtually every aspect of the practices

10 in which underwriters engage.” Id. at 276. The Court thus

11 gauged regulation of activity that is more particular than

12 the IPO process (the underlying market activity) and more

13 general than the laddering and tying arrangements (the

14 alleged anticompetitive conduct). 

15 In addition, the Court cited regulations that grant the

16 SEC power to regulate “communications between underwriting

17 participants and their customers, including those that occur

18 during road shows,” which suggests that the Court also

19 gauged regulation of the specific alleged anticompetitive

20 conduct. Id. at 277.

21 Accordingly, we consider the existence of SEC authority

22 to regulate (i) the role of the prime brokers in short
15

1 selling, and (ii) the borrowing fees charged by prime

2 brokers. We find such authority in Section 10(a), Section

3 6, and 15 U.S.C. §§ 78o(c)(2)(D) and 78j(b). 

4 Section 10(a) of the Securities Exchange Act of 1934

5 provides that it is unlawful “[t]o effect a short sale . . .

6 of any security registered on a national securities

7 exchange, in contravention of such rules and regulations as

8 the Commission may prescribe as necessary or appropriate in

9 the public interest or for the protection of investors.” 15

10 U.S.C. § 78j(a)(1). Citing legislative history, ETG argues

11 that Section 10(a) was intended only to regulate the

12 manipulation of share price through short selling. See

13 Appellant’s Br. 20-21. However, nothing in the wording of

14 Section 10(a) so limits its reach; and the SEC has

15 interpreted Section 10(a) as a grant of “plenary authority

16 to regulate short sales of securities registered on a

17 national securities exchange . . . .” Short Sales, Exchange

18 Act Release No. 34-48709, 68 Fed. Reg. 62,972 (proposed Nov.

19 6, 2003). The SEC thus has the authority to regulate the

20 role of the prime brokers in short selling, as well as the

21 borrowing fees charged by the prime brokers, pursuant to

22 Section 10(a). 
16

1 Section 6 of the Securities Exchange Act of 1934

2 provides that the SEC may “permit a national securities

3 exchange, by rule, to impose a schedule or fix rates of

4 commissions, allowances, discounts, or other fees to be

5 charged by its members for effecting transactions” if such

6 fees are “reasonable” and “do not impose any burden on

7 competition not necessary or appropriate” to further the

8 purposes of the securities law. 15 U.S.C. § 78f(e)(1)(B). 

9 ETG characterizes Section 6 as a grant of limited authority

10 to permit exchanges to deviate from “the general prohibition

11 on fixed commission rates.” Appellant’s Br. 22. Even

12 accepting this characterization, the SEC thus has indirect

13 authority to regulate the rates (including the borrowing

14 fees) charged by the prime brokers in short selling.

15 In Billing, the Supreme Court relied in part on 15

16 U.S.C. §§ 78o(c)(2)(D) and 78j(b) as evidence of the SEC’s

17 broad power to define and prevent fraudulent, deceptive, and

18 manipulative conduct by brokers and dealers. 551 U.S. at

19 277. These provisions apply with equal force to the role of

20 the prime brokers in short selling and the borrowing fees

21 they charge. 

22 This second Billing consideration--focused as it is on
17

1 whether the SEC has authority to regulate the role of the

2 prime brokers in short selling and the borrowing fees

3 charged by the prime brokers--thus weighs in favor of

4 implied preclusion, even though none of the provisions

5 discussed above explicitly references the regulation of

6 borrowing fees.

7

8 C. Ongoing Regulation

9 To evaluate “evidence that the responsible regulatory

10 entities exercise [their] authority,” Billing, 551 U.S. at

11 275, the Supreme Court looked to the role of the

12 underwriters in the IPO process, see id. at 277. The Court

13 determined that “the SEC has continuously exercised its

14 legal authority to regulate conduct of the general kind now

15 at issue. It has defined in detail, for example, what

16 underwriters may and may not do and say during their road

17 shows.” Id. The Court thus looked to activity more

18 particular than the IPO process (the underlying market

19 activity) and more general than the laddering and tying

20 arrangements (the alleged anticompetitive conduct). 

21 In this case, we therefore consider whether there is

22 ongoing SEC regulation of the role of the prime brokers. 
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]ctive and ongoing agency regulation” is evidenced by

4 Regulation SHO and a recent SEC roundtable. Id. at 285. 

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)

10 [b]orrowed the security, or entered into a bona-fide

11 arrangement to borrow the security; or (ii) [r]easonable

12 grounds to believe that the security can be borrowed so that

13 it can be delivered on the date delivery is due. . . .”). 

14 Regulation SHO also imposes a “delivery” requirement on such

15 brokers. See 17 C.F.R. § 242.203(b)(3) (with certain

16 enumerated exceptions, “[i]f a participant of a registered

17 clearing agency has a fail to deliver position at a

18 registered clearing agency in a threshold security for

19 thirteen consecutive settlement days, the participant shall

20 immediately thereafter close out the fail to deliver

21 position by purchasing securities of like kind and

22 quantity”). Regulation SHO thus constitutes an exercise of
19

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

10 practices and participants, compensation arrangements and

11 conflicts, the benefits and risks of securities lending,

12 risks related to cash collateral reinvestment, improvements

13 to transparency, and consideration of whether the securities

14 lending regulatory regime can be improved for the benefit of

15 investors.” Id. The roundtable also intended to focus on

16 “short sale disclosure topics” and addressed “the potential

17 impact of imposing a pre-borrow or enhanced ‘locate’

18 requirement on short sellers . . . as a way to curtail

19 abusive ‘naked’ short selling.” Id. This roundtable

20 indicates active SEC monitoring of the role of the prime

21 brokers in short selling. 

22 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’]

10 alleged price gouging . . . by artificially inflating

11 borrowing fees and by charging fees for which no services

12 were rendered,” id. ¶ 92. A fair inference from these

13 allegations is that the SEC and securities self-regulating

14 organizations actively exercise regulatory authority over

15 the role of the prime brokers in short selling. 

16 Regulation SHO and the recent roundtable do not focus

17 on the regulation of borrowing fees (the particular conduct

18 alleged to be anticompetitive); but it is enough for this

19 purpose that the SEC’s ongoing regulation is focused on the

20 role of the prime brokers in short selling. The third

21 consideration thus weighs in favor of implied preclusion.

22
21

1 D. Conflict

2 To ascertain the “risk that the securities and

3 antitrust laws, if both applicable, would produce

4 conflicting guidance, requirements, duties, privileges, or

5 standards of conduct,” Billing, 551 U.S. at 275-76, the

6 Supreme Court considered whether allowing antitrust

7 liability for the conduct alleged to have the

8 anticompetitive effect would inhibit permissible (and even

9 beneficial) market behavior. See id. at 282 (“And the

10 threat of antitrust mistakes, i.e., results that stray

11 outside the narrow bounds that plaintiffs seek to set, means

12 that underwriters must act in ways that will avoid not

13 simply conduct that the securities law forbids (and will

14 likely continue to forbid), but also a wide range of joint

15 conduct that the securities law permits or encourages (but

16 which they fear could lead to an antitrust lawsuit and the

17 risk of treble damages).”). In evaluating conflict,

18 therefore, the proper focus is on the alleged

19 anticompetitive conduct: 

20 [W]e do not read the complaints as attacking the

21 bare existence of IPO underwriting syndicates or

22 any of the joint activity that the SEC considers a

23 necessary component of the IPO-related syndicate

24 activity. . . . Nor do we understand the complaints

25 as questioning underwriter agreements to fix the
22

1 levels of their commissions, whether or not the

2 resulting price is “excessive.” We . . . read the

3 complaints as attacking the manner in 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) . . . .

10 Id. at 278 (citations omitted). 

11 In this case, therefore, we consider the impact that

12 antitrust liability may have on arrangements for borrowing

13 fees. ETG argues (i) that “there should be little

14 difficulty in distinguishing collusive fee-fixing agreements

15 from routine communications concerning stock availability

16 and market pricing permissible under Regulation SHO”; and

17 (ii) that “there is no actual or potential conflict that

18 necessitates immunity” because neither the securities law

19 nor the antitrust law permit the collusive fixing of

20 borrowing fees. Appellant’s Br. 32-33. The district court

21 found otherwise. See In re Short Sale Antitrust Litig., 527

22 F. Supp. 2d at 260. 

23 We conclude that antitrust liability would create

24 actual and potential conflicts with the securities regime. 

25 An actual conflict arises because antitrust liability would

26 inhibit the prime brokers (and other brokers) from engaging
23

1 in other conduct that the SEC currently permits and that

2 benefits the efficient functioning of the short selling

3 market. There is a potential conflict because the SEC in

4 the future may decide to regulate the borrowing fees charged

5 by brokers. 

6 1. Actual Conflict

7 Antitrust liability would inhibit conduct that the SEC

8 permits and that assists the efficient functioning of the

9 short selling market. The thrust of ETG’s case is that the

10 prime brokers communicated with one another to designate

11 hard-to-borrow securities and to fix inflated borrowing fees

12 for those securities. However, it is permissible for

13 brokers to communicate about the availability and price of

14 securities. As the district court observed, “such exchanges

15 are implicitly permitted by the SEC’s Regulation SHO.” In

16 re Short Sale Antitrust Litig., 527 F. Supp. 2d at 260

17 (citing 17 C.F.R. § 242.203(b)(1) (requiring that a broker

18 borrow the securities or have reasonable grounds to believe

19 that the securities can be borrowed before accepting an

20 order from a short seller)). It is a lot to expect a broker

21 “to distinguish what is forbidden from what is allowed,” so

22 that the broker collects just so much information as
24

1 required to satisfy the locate requirement and for the

2 efficient functioning of the short selling market--but not

3 an iota more--or suffer treble damages. Billing, 551 U.S.

4 at 280. 

5 Conflict is a risk unless there is a “practical way to

6 confine antitrust suits so that they challenge only activity

7 of the kind the [plaintiffs] seek to target” without

8 inhibiting other conduct that is permitted or encouraged

9 under the securities law. Id. at 282. The drawing of such

10 intricate lines demands “securities-related expertise.” Id.

11 Moreover, it is likely that the very communications in which

12 short sellers do what the securities law allows would by

13 “reasonable but contradictory inferences” serve as evidence

14 of conduct forbidden by the antitrust law. Id. Reliance on

15 a jury therefore gives rise to a serious “risk of

16 inconsistent court results.” Id. 

17 Antitrust liability, with the prospect of treble

18 damages, would be an incentive for the prime brokers to curb

19 their permissible exchange of information and thereby harm

20 the efficient functioning of the short selling market. This

21 inhibiting effect weighs in favor of implied preclusion.

22 2. Potential Conflict
25

1 In addition to the actual conflict described above, a

2 potential conflict exists based on the possibility that the

3 SEC will act upon its authority to regulate the borrowing

4 fees set by prime brokers. As the Supreme Court

5 acknowledged in Billing, a potential conflict of this kind

6 may exist even if there is no conflict that is 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,

10 the Court found that the securities law precluded antitrust

11 liability even in respect to a practice that both antitrust

12 law and securities law might forbid”). In the context of an

13 implied repeal case, this Court observed that “the proper

14 focus is not on the Commission’s current regulatory position

15 but rather on the Commission’s authority to permit conduct

16 that the antitrust laws would prohibit.” In re Stock

17 Exchs. Options Trading Antitrust Litig., 317 F.3d 134, 149

18 (2d Cir. 2003).

19 It is therefore not decisive that neither securities

20 law nor antitrust law allows--or encourages--the collusive

21 fixing of borrowing fees. The present securities regime

22 expressly allows prime brokers to rely on easy-to-borrow
 Because all four of the Billing considerations point 6

in the direction of implied preclusion, we need not address

the weight to be accorded these considerations when they

point in different directions. 

26

1 lists as reasonable grounds “to believe that the security

2 sold short is available for borrowing without directly

3 contacting the source of the borrowed securities.” Short

4 Sales, Exchange Act Release No. 34-50103, 83 SEC Docket 1278

5 (July 28, 2004). The SEC has taken note that hard-to-borrow

6 lists “are not widely used by broker-dealers” and that,

7 therefore, “the fact that a security is not on a hard to

8 borrow list cannot satisfy the ‘reasonable grounds’ test”

9 described above. Id. But if and when such hard-to-borrow

10 lists come into broader use, it is easy to see how they

11 could increase the efficiency of the short selling market,

12 in which event the SEC could move quickly to regulate the

13 borrowing fees charged by brokers for securities appearing

14 on such lists. This potential conflict weighs in favor of

15 implied preclusion. 

16

17 CONCLUSION

18 All four Billing considerations weigh in favor of

19 implied preclusion. We therefore affirm the district

6
27

1 court’s Rule 12(b)(6) dismissal of ETG’s antitrust claim

2 with prejudice. Moreover, we affirm the dismissal of ETG’s

3 state law claims without prejudice because we find no abuse

4 of discretion in the district court’s decision to decline to

5 exercise supplemental jurisdiction over these claims. See

6 Kolari v. N.Y.-Presbyterian Hosp., 455 F.3d 118, 122 (2d

7 Cir. 2006).

8

9