United States v. Alex. Brown & Sons, Inc., et al.; Public Comments and Response on Proposed Final Judgment
Federal RegisterNov 25, 1996
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DEPARTMENT OF JUSTICE
Antitrust Division
[Civil Action No. 96-5313 (RWS), S.D.N.Y.]
United States v. Alex. Brown & Sons, Inc., et al.; Public
Comments and Response on Proposed Final Judgment
Pursuant to Section 2(d) of the Antitrust Procedures and Penalties
Act, 15 U.S.C. 16(d), the United States publishes below the written
comments received on the proposed Final Judgment in United States v.
Alex. Brown & Sons, Inc., Civil Action No. 96-5313 (RWS), United States
District Court for the Southern District of New York, together with the
response of the United States to the comments.
Copies of the written comments and the response are available for
inspection and copying in Room 9500 of the U.S. Department of Justice,
Antitrust Division, 600 E Street, N.W., Washington, D.C. 20530
(telephone: (202) 307-7200) and for inspection at the Office of the
Clerk of the United States District Court for the Southern District of
New York, Room 120, United States Courthouse, 500 Pearl Street, New
York, New York 10007.
Rebecca P. Dick,
Deputy Director of Operations.
Response of United States to Public Comments
Pursuant to the Antitrust Procedures and Penalties Act (``Tunney
Act''), 15 U.S.C. 16 (b)-(h), the United States make and files this
response to the public comments received regarding the relief described
in the proposed Stipulation and Order (``proposed order'') that, if
entered by the Court, would resolve this civil antitrust proceeding.
The United States has carefully considered the comments received, and
remains convinced that entry of the proposed order is in the public
interest.
This response and the attached public comments have been submitted
to the Federal Register for publication (see 15 U.S.C. 16(d)).
Moreover, the Untied States has today certified to the Court that it
has fulfilled the requirements of the Tunney Act. Upon a determination
that the Untied States and the defendants have fulfilled the
requirements of the Tunney Act and that entry of the proposed order
would be in the public interest, the Court may enter the proposed
order.
This action was initiated by the United States with the filing of a
complaint on July 17, 1996. The complaint charges that the defendants--
all of whom are ``market makers'' in over-the-counter (``OTC'') stocks
quoted for public trading on Nasdaq,\1\ had violated Section 1 of the
Sherman Act, 15 U.S.C. 1, by engaging in a form of price fixing. The
complaint alleges that the defendants and others adhered to and
enforced a ``quoting convention'' that was designed to and did deter
price competition among the defendants and other market makers in their
trading of Nasdaq stocks with the general public. As a result of
adherence to and enforcement of the ``quoting convention'' by the
defendants, investors incurred higher transaction costs to buy and sell
Nasdaq stocks than they otherwise would have.
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\1\ The term ``Nasdaq'' was originally an acronym for the
``National Association of Securities Dealers Automated Quotation
System.'' The automated quotation system is now operated by The
Nasdaq Stock Market, Inc.
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With the filing of its complaint, the United States also filed the
proposed Stipulation and Order, signed by all the defendants, which, if
entered by the Court, would terminate the litigation. In addition, on
July 17, 1996, the United States filed its Competitive Impact Statement
(``CIS''). 15 U.S.C. 16(b). Thereafter, the defendants filed statements
identifying certain communications made on their behalf, as required by
the Tunney Act. 15 U.S.C. 16(g). A summary of the terms of the proposed
order and the CIS, and directions for the submission of written
comments relating to the proposed order to the Department, were
published in The Washington Post, a newspaper of general circulation in
the District of Columbia, and in The New York Times, a newspaper of
general circulation in the Southern District of New York, beginning on
July 29, 1996, and continuing on consecutive days through August 3,
1996, and on August 5, 1996.
The proposed order and the CIS were published in the Federal
Register on August 2, 1996. 61 FR 40433-40451 (Aug. 2, 1996). The 60-
day period public comment period began on August 3, 1996 and expired on
October 2, 1996. In response to the solicitation of public comments,
the United States received comments from three persons. These comments
are attached as Exhibits 1-3.
In addition, the private plaintiffs in In re: Nasdaq Market-Makers
Antitrust Litigation, 94 Civ. 3996 (RWS), M.D.L. No. 1023 (S.D.N.Y.),
commented upon the proposed relief in the form of certain filings they
made with the Court in connection with their pending motion to
intervene in this case, namely (1) a memorandum in support of their
motion to intervene and (2) a reply to the government's opposition to
the motion. These papers are on file with the Court, and the relevant
portions of these documents are attached as Exhibits 4-5.
I. Background
The complaint and proposed order are the culmination of a major,
two-year-long investigation by the Department of Justice into the
trading activities of Nasdaq securities dealers. The Department's
investigation began in the summer of 1994, shortly after the public
disclosure of an economic study by Professors William Christie of
Vanderbilt University and Paul Schultz of Ohio State University (the
``Christie/Schultz study''). The Christie/Schultz study suggested that
securities dealers on Nasdaq might have tacitly colluded to avoid odd-
eighth price quotations on a substantial number of Nasdaq stocks,
including some of the best known and most actively traded issues, such
as Microsoft Corp., Amgen, Apple Computers, Inc., Intel Corp., and
Cisco Systems, Inc. After the Christie/Schultz study had received wide-
spread publicity, several class action lawsuits
[[Page 59896]]
alleging antitrust violations were filed against the defendants and
other Nasdaq market makers.\2\
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\2\ All of the private cases have been consolidated and assigned
to this Court, M.D.L. 1023.
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During the course of its investigation, the Department reviewed
thousands of pages of documents produced by the defendants and other
market participants in response to more than 350 Civil Investigative
Demands (``CIDs''). The Department reviewed hundreds of responses to
interrogatories that were submitted by the defendants (and others) and
took more than 225 depositions of individuals with knowledge of the
trading practices of Nasdaq market makers, including current and former
officers and employees of the defendants and other Nasdaq market
makers, as well as officials and committee members of the National
Association of Securities Dealers, Inc. (``NASD''), the organization
responsible for oversight of the Nasdaq market.
The Department conducted numerous telephone and in-person
interviews of current and former Nasdaq stock traders, Nasdaq
investors, and others with relevant knowledge of the industry, and
listened to approximately 4500 hours of audio tapes of telephone calls
between stock traders employed by the defendants and other Nasdaq
market makers. These audio tapes had been recorded by certain of the
defendants (and other market makers) in the ordinary course of their
business and were produced to the Department in response to its CIDs.
The Department also reviewed and analyzed substantial quantities of
data relating to trading and quoting activity in Nasdaq stocks produced
in computer-readable format by the NASD. These data included data
showing all market maker quote changes on Nasdaq during a twenty-month
period between December 1993 and July 1995, and for selected months
thereafter, including March 1996. The Department also reviewed eighteen
months of data reflecting actual trades in Nasdaq stocks. Finally, the
Department reviewed numerous transcripts of depositions taken by the
Securities and Exchange Commission (``SEC'') in a concurrent inquiry
into the operations and activities of the NASD and the Nasdaq market.
Based upon the evidence discovered during its investigation, the
Department concluded that the defendants and others had been engaged
for a number of years in anticompetitive conduct in violation of the
Sherman Act, as alleged in the complaint. The Department challenged
this conduct as violative of Section 1 of the Sherman Act. Entry of the
proposed order would resolve the Department's competitive concerns
regarding this conduct.
The complaint and proposed order address a mechanism by which the
defendants coordinated their price quotes in certain Nasdaq stocks to
increase the inside spread.\3\ The central allegation of the complaint
is that the defendants and others agreed to abide by a long-standing,
essentially market-wide commitment to a two-part ``quoting
convention.'' This ``quoting convention'' dictates the price increments
a market maker can use to adjust or ``update'' its bid and ask price
quotes on the Nasdaq system. Under the first part of the quoting
convention, if a market maker's dealer spread in a stock is \3/4\ point
(75 cents) or wider, the market maker is required to quote its bid and
ask prices in even-eighth increments (e.g., \1/4\ (25 cents), \1/2\ (50
cents), \3/4\ (75 cents) or \4/4\ ($1). (The minimum quote increment
for Nasdaq stocks trading at a price of $10 or more is \1/8\ point,
i.e., a much narrower increment than the \1/4\ point increment dictated
by the quoting convention when an individual dealer spread in a stock
is \3/4\ point or wider.) The quoting convention thus ensures that the
inside spread in those stocks is maintained at \1/4\ point (25 cents),
or wider.
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\3\ Market makers must continuously quote the prices at which
they are willing both to buy and sell individual stocks. The price
an individual market maker quotes to buy a stock is known as its
``bid'' price. The price it quotes to sell a stock is known as its
``offer'' or ``ask'' price. (A market maker's bid price is always
higher than its ask price.) The difference between a market maker's
``bid'' and ``ask'' is known as its ``dealer spread.'' The Nasdaq
computer screen collects and displays the bid and offer prices of
all the market makers in each stock. The highest bid and the lowest
offer from among the quotes of all the market makers in a stock are
called the ``inside bid'' and the ``inside ask,'' or--together--the
``inside quotes.'' The difference between the inside bid and the
inside ask in a stock is called the ``inside spread.''
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Under the second part of the quoting convention, market makers can
quote bid and ask prices on Nasdaq in odd-eighth increments, e.g., \1/
8\ (12.5 cents), \3/8\ (37.5 cents), \5/8\ (62.5 cents) or \7/8\ (87.5
cents), only if they have a dealer spread of less than \3/4\ point.
This requirement deters market makers from quoting bid and ask prices
in odd-eighth increments because a narrower dealer spread is likely to
create a greater economic risk to the market maker in trading that
stock. A market maker with a narrow dealer spread is more likely than a
market maker with a wide dealer spread, other things equal, to be
required to trade on the ``wrong side'' of the market.\4\ When the
difference between a market maker's bid and ask quotes is \1/2\ rather
than \3/4\, a market maker may be called upon to buy (or sell) more
stock than the trader wants, or buy stock when the market maker wants
to sell (or vice versa).
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\4\ To trade on the ``wrong side'' of the market means to buy a
stock when one would prefer to sell the stock, or vice versa. Being
required to trade on the ``wrong side'' of the market is more likely
to occur if a dealer has a narrow dealer spread, than if a dealer
has a wide dealer spread. For example, if a market maker has a
dealer spread of fifty cents--say, 20 to 20\1/2\--when the best bid
in the market is 20, the market maker is presumably trying to buy
the stock (because its bid is equal to the best bid in the market).
If, however, the market moves up quickly, the market maker's 20\1/2\
ask price could suddenly become the best ask price in the market,
meaning that the market maker would be required to sell stock at
that price. With a wider dealer spread--say, 20 to 20\3/4\--the
possibility of this occurring is less.
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In executing a market order on behalf of a retail customer, market
makers historically bought from the customer at the inside bid, and
sold to the customer at the inside ask. This execution by the market
maker satisfied the retail broker's obligation of ``best execution''
for retail customers. Historically, large institutional customers have
sometimes been able to negotiate prices that are better (higher bid
prices and lower ask prices) than the inside spread, but the width of
the inside spread influences many negotiations between market makers
and their institutional customers.
Market makers thus have a significant interest in each others'
price quotes because those quotes can either set each others' actual
transaction prices or significantly affect those prices. This
relationship creates an incentive for market makers to discourage bid
and ask price competition that may have the effect of narrowing the
inside spread.
Adherence to the quoting convention deterred the use of odd-eighth
quotes in many stocks. This, in turn, tended to maintain the inside
spread in those stocks at no less than one quarter, or twenty-five
cents. This artificial floor on the inside spread in those stocks
raised transaction costs on Nasdaq. The proposed order, if entered by
the Court, would prohibit the defendants from continuing to adhere to
and enforce the quoting convention. In addition, it would establish
mechanisms that would enable the Department to determine whether the
defendants have, in fact, ceased their unlawful conduct and have
complied with the terms of the proposed order designed to ensure
against its repetition.
[[Page 59897]]
II. The Legal Standard Governing the Court's Public Interest
Determination
A. General Standard
When the Untied States proposes to settle a civil antitrust case
with a consent judgment, the Tunney Act requires the district court to
determine whether ``the entry of such judgment is in the public
interest.'' 15 U.S.C. 16(e).\5\ The court is not, however, required
``to determine whether the resulting array of rights and liabilities
`is one that will best serve society,' but only to assess whether that
the resulting settlement is `within the reaches of the public
interest.' '' United States v. Microsoft Corp., 56 F.3d 1448, 1460
(D.C. Cir. 1995) (emphasis in original); accord, United States v.
Western Elec. Co., 993 F.2d 1572, 1576 (D.C. Cir.), cert. denied, 114
S. Ct. 487 (1993); see also United States v. Bechtel, 648 F.2d 660, 666
(9th Cir.), cert. denied, 454 U.S. 1083 (1981); United States v.
Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975). For this reason, a
court should not refuse to enter an order terminating a civil antitrust
case initiated by the United States ``unless `it has exceptional
confidence that adverse antitrust consequences will result--perhaps
akin to the confidence that would justify a court in overturning the
predictive judgments of an administrative agency.' '' Microsoft, 56
F.3d at 1460 (quoting Western Electric, 993 F.2d at 1577). Congress did
not intend the Tunney Act to lead to protracted hearings on the merits,
and thereby undermine the incentives for defendants and the government
to resolve civil antitrust cases through agreed-upon orders. S. Rep.
No. 298, 93d Cong. 1st Sess. 3 (1973).
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\5\ While not styled ``consent judgment,'' the proposed order
serves the same purpose. Violations of the proposed order are
punishable as civil or criminal contempt. See, e.g., United States
v. Schine, 260 F.2d 552 (2d Cir. 1958), cert. denied, 358 U.S. 934
(1959); 18 U.S.C. 401; see also CIS at 3-4, 42, 49, 52.
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Tunney Act review is confined to the terms of the proposed relief
and their adequacy as remedies for the violations alleged in the
complaint. Microsoft, 56 F.3d at 1459.\6\ Thus, in this case, the Court
need decide only whether the proposed order is reasonably directed
toward addressing the competitive concern raised by the quoting
convention.
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\6\ A district court exceeds its authority if it requires
production of information concerning ``the conclusions reached by
the Government'' with respect to the particular practices
investigated but not charged in the complaint, and the areas
addressed in settlement discussions, including ``what, if any areas
were bargained away and the reasons for their non-inclusion in the
decree.'' Microsoft, 56 F.3d at 1455, 1459. To the extent that
comments raise issues not charged in the compliant, those comments
are irrelevant to the Court's review. Id. at 1460.
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No third party has a right to demand that the proposed order be
rejected or modified simply because a different order might better
serve its private interests. Unless the proposed order ``will result in
positive injury to third parties,'' a district court ``should not
reject an otherwise adequate remedy simply because a third party claims
it could be better treated.'' Microsoft, 56 F.3d at 1461 n.9.\7\
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\7\ Cf. United States v. Associated Milk Producers, Inc., 534
F.2d 113, 116 n.3 (8th Cir.) (``The cases unanimously hold that a
private litigant's desire for [the] prima facie effect [of a
litigated government judgment] is not an interest entitling a
private litigant to intervene in a government antitrust case.''),
cert. denied, 429 U.S. 940 (1976).
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The United States--not any third party--represents the public
interest in government antitrust cases. See, e.g., Bechtel Corp., 648
F.2d at 660, 666; Untied States v. Associated Milk Producers, 534 F.2d
113, 117 (8th Cir.), cert. denied, 429 U.S. 940 (1976). Moreover, there
is no allegation that the government has acted in bad faith in
negotiating the relief. The proposed order is intended to ensure that
market makers do not continue to collude through the mechanism of the
quoting convention to increase transaction costs for investors in
Nasdaq stocks. It will effectively accomplish this goal. Moreover, it
is directed at private conduct illegal under the antitrust laws. It is
not intended or designed--nor could it be--to make the Department the
regulator of The Nasdaq Stock Market, Inc. The decree is also not
intended to change the structure of the Nasdaq Stock Market by, for
example, requiring that market-maker quotes be posted anonymously on
Nasdaq, as suggested by one commentor. Exhibit 1 [letter of Professor
Junius Peake, dated July 26, 1996] at 2; see infra text at 14-15.
III. Entry of the Proposed Order is in the Public Interest
Entry of the proposed order is clearly within the reaches of the
public interest under the standards articulated in Microsoft and other
decided cases. If entered by the Court, the proposed order would
prevent each of the defendant market makers, unless otherwise
specifically permitted, in connection with their market-making
activities in OTC stocks, from agreeing with any other market maker:
(1) to fix, raise, lower, or maintain quotes or prices for any
Nasdaq security;
(2) to fix, increase, decrease, or maintain any dealer spreads,
inside spreads, or the size of any quote increment (or any relationship
between or among dealer spread, inside spread, or the size of any quote
increment), for any Nasdaq security;
(3) to adhere to a quoting convention whereby Nasdaq securities
with a three-quarter (\3/4\) point of greater dealer spread are quoted
on Nasdaq in even-eighths and are updated in quarter-point (even-
eighth) quote increments; and
(4) to adhere to any understanding or agreement (other than an
agreement on one or a series of related trades) requiring a market
maker to trade at its quotes on Nasdaq in quantities of shares greater
than either the Nasdaq minimum or the size actually displayed or
otherwise communicated by that market;\8\
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\8\ The reference to agreements ``other than an agreement on one
or a series of related trades'' is intended to make clear that a
market maker is not prohibited from agreeing to buy or sell a
specific quantity of stock, and that agreeing to buy or sell a
quantity of shares greater than the amount initially specified in a
series of related trades also does not violate the proposed order.
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In addition, the proposed order, if entered by the Court, would bar
each of the defendants from engaging in any harassment or intimidation
of any other market maker because such market maker:
(1) decreased its dealer spread or the inside spread in any Nasdaq
security;
(2) refused to trade at its quoted prices in quantities of shares
greater than either the Nasdaq minimum or the size actually displayed
or otherwise communicated by that market maker; or
(3) displayed or quantity of shares on Nasdaq greater than either
the Nasdaq minimum or the size actually displayed or otherwise
communicated by that market maker.
Finally, Section IV(8) of the proposed order, if entered by the
Court, would bar each of the defendants from refusing, or threatening
to refuse, to trade (or agreeing with or encouraging any other market
maker to refuse to trade) with any market maker at the defendant's
published Nasdaq quotes in amounts up to the published quotation size
because such market maker decreased its dealer spread, decreased the
inside spread in any Nasdaq security, or refused to trade at its quoted
prices in a quantity of shares greater than either the Nasdaq minimum
or the size actually displayed or otherwise communicated by that market
maker.
Entry of the proposed order is in the public interest. The United
States urges that the Court to enter the proposed order upon a
determination that the United States and the defendants have satisfied
the requirements of the Tunney Act.
[[Page 59898]]
IV. Response to Public Comments
As noted, this case has generated three formal comments. In
addition, the private plaintiffs in In re: Nasdaq Market-Makers
Antitrust Litigation, 94 Civ. 3996 (RWS), M.D.L. No. 1023 (S.D.N.Y.),
commented upon the proposed relief in the form of certain filings they
made with the Court in connection with their pending motion to
intervene in this case, namely (1) a memorandum in support of their
motion to intervene and (2) a reply to the government's opposition are
on file with the Court. Our response to each of these comments is set
forth below.
Comments of Professor Junius Peake
Professor Peake is Monfort Distinguished Professor of Finance at
the University of Northern Colorado. He served as a member of the Board
of Governors of the NASD. He is frequently quoted nationally and
internationally in both print and electronic media. See Exhibit 1 at 1.
In his letter, Professor Peake expresses concern that the proposed
order ``will not necessarily deter retribution by firms which wish to
keep spreads wider than might otherwise be the case under real
competition.'' Id. at 2. Given his view that the proposed order will
not deter retribution for spread-cutting, Professor Peake suggests that
the appropriate remedy would be to require The Nasdaq Stock Market,
Inc. to display market maker quotes anonymously. This would eliminate
the possibility of retaliation by one market maker against another for
violating the quoting convention or otherwise acting to narrow the
spread in a stock for a simple and obvious reason: a firm inclined to
retaliate in some way would not be able to identify the culprit firm.
Id. at 3. In his letter, Professor Peake identifies some of the ways a
market maker could--despite the proposed order--retaliate against a
spread-cutter without violating the proposed order--all of them a form
of refusal to deal. Id. at 3.\9\
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\9\ In addition to changing the way market-maker quotes are
displayed on Nasdaq, Professor Peake would strengthen competition in
market making by eliminating the practice of ``preferencing.''
Exhibit 1 at 3. ``Preferencing'' occurs when a broker directs an
order to a particular market maker. Pursuant to preferencing
agreements, the market maker may pay the broker several cents per
share for the order. The market maker then executes the order at the
best price displayed on Nasdaq, although this may not be the price
displayed by the market maker receiving the preferenced order.
Agreements that provide for payment for a steady flow of orders are
called ``payment-for-order-flow'' agreements.
Under a ``preferencing'' arrangement, the price quoted by the
market maker receiving the preferenced order is irrelevant. Although
it will execute order at the best price displayed on Nasdaq, the
market maker receives the order without reference to its own quoted
price in the stock. For this reason, some market observers believe
preferencing arrangements significantly reduce incentives for market
makers with preferenced order flow to compete vigorously for orders
on the basis of price. (Normally, of course, in most markets, if a
firm lowers its price, it can expect to increase sales. If, however,
price improvement does not guarantee increased sales (order flow), a
Nasdaq stock dealer will have fewer incentives to improve price and
will therefore do so less frequently.)
The practice of preferencing, and especially payment-for-order-
flow agreements, have been subject to considerable study and
controversy. See, e.g., Market 2000: An Examination of Current
Equity Market Developments, SEC Division of Market Regulation
(January 1994). The SEC has not acted to prohibit payment-for-order-
flow or other types of preferencing arrangements, and the complaint
in this case did not allege that preferencing is an unreasonable
restraint of trade. Under the Tunney Act, 15 U.S.C. 16, ``the court
is only authorized to review the decree itself.'' Microsoft, 56 F.3d
at 1459. The district court in Microsoft was held to have exceeded
its authority, id. at 1459, by requiring production of information
concerning ``the conclusions reached by the Government'' with
respect to practices investigated that the government chose not to
charge as violative of the Sherman Act. Id. at 1455.
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The relief suggested by Professor Peake is not obtainable in this
action. The Department's lawsuit charges a conspiracy among market
makers. This charge involves alleged private conduct by the defendant
firms. The Nasdaq Stock Market, Inc., which owns Nasdaq--and, in turn,
is owned by the NASD--is not a defendant in this action, nor is the
NASD. Under the law, the NASD has the authority to organize the market
and establish the rules governing its operation, subject to oversight
by the SEC. See 15 U.S.C. Secs. 78o.3 and 78s. Thus, even if,
hypothetically, the Department had sought the relief suggested by
Professor Peake from the defendant market makers (and the defendants
had agreed to it), they could not implement the structural changes in
Nasdaq necessary to accomplish this result.
There has been debate in the academic literature for some time on
the question of whether market makers should be required to post quotes
anonymously on Nasdaq. Professor Peake has long advocated anonymity and
other changes in Nasdaq. See Comments of Junius W. Peake and Morris
Mendleson on SEC's Market 2000 Draft Release, SEC File # S7-18-92 (Nov.
3, 1992). As neither the NASD nor the SEC has acted to require
anonymity on Nasdaq (a feature that, as Professor Peake notes, is
available on Instinet), they have not made a judgment that having this
feature on Nasdaq is necessary to the national market system. They are
obviously free to revisit this question at any time.\10\
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\10\ In its 1975 amendments to the securities laws, Congress
established
a statutory scheme clearly granting the * * * [SEC] broad
authority to oversee the implementation, operation, and regulation
of the national market system and at the same time to (sic) charging
it with the clear responsibility to assure that the system develops
and operates in accordance with Congressionally determined goals and
objectives.
Sen. Rep. No. 75, 94th Cong., 1st Sess. at 8-9 (1975). These
goals and objectives include ensuring that the securities markets
(a) provide ``economically efficient mechanisms for the execution of
transactions'' and (b) make available ``information with respect to
quotations for * * * securities.'' Id. at 8. Fair competition is
another goal of the securities laws, but, in assuring fair
competition, the SEC has been admonished by the Congress not ``to
compel elimination of differences between types of markets or types
of firms that might be competition-enhancing.'' Id.
In a recent rulemaking (see 61 Fed. Reg. 48,290 (Sept. 12,
1996)), the SEC directed that market makers that accept limit orders
must either execute those limit orders upon receipt or, if the
customer limit order is priced better than the market maker's quote,
display the limit order to the market in the market maker's quote.
The Department submitted formal comments to the SEC strongly
supporting the adoption of this rule.
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The proposed order will do much to decrease the likelihood that the
defendants will endeavor to identify and punish spread cutters. It
proscribes the illegal conduct identified in the Department's
complaint. In making the ``public interest'' determination required by
the Tunney Act, 15 U.S.C. 16(e), ``the court's function is not to
determine whether the resulting array of rights and liabilities is the
one that will best serve society, but only to confirm that the
resulting settlement is within the reaches of the public interest.''
United States v. Microsoft Corp., 56 F.3d 1448, 1460-61 (D.C. Cir.
1995) (emphasis in original) (internal quotations omitted). Under this
standard, there is no doubt that the proposed relief is within the
reaches of the public interest.
In addition, it contains terms that go a considerable distance in
increasing the likelihood that recidivist behavior, if it occurs, will
be identified. If entered by the Court, the proposed order will subject
the defendants to punishment for civil or criminal contempt if they
engage--even unilaterally--in any ``harassment or intimidation of any
other market maker'' because such market maker:
(1) ``decreas[ed] its dealer spread or the inside spread in any
Nasdaq security'' (proposed order, IV(A)(5));
(2) ``refus[ed] to trade at its quoted prices in quantities of
shares greater than either (1) the minimum size required by Nasdaq
or NASD rules or (2) the size displayed or otherwise communicated by
that market maker'' (id., IV(A)(6)); or
(3) ``display[ed] a quantity of shares on Nasdaq in excess of
the minimum size required by Nasdaq or NASD rules'' (id., IV(A)(7)).
[[Page 59899]]
The proposed order also addresses the issue of refusals to deal
specifically. Under the proposed order, each defendant is prohibited,
directly or through any trade association, in connection with the
activities of its OTC desk in making markets in Nasdaq securities,
from:
[R]efus[ing], or threaten[ing] to refuse to trade, (or
agree[ing] with or encourag[ing] any other market maker to refuse to
trade) with any market maker at defendant's published Nasdaq quotes
in amounts up to the published quotation size because such market
maker decreased its dealer spread, decreased the inside spread in
any Nasdaq security, or refused to trade at its quoted prices in a
quantity of shares greater than either (1) the minimum size required
by Nasdaq or NASD rules or (2) the size displayed or otherwise
communicated by that market maker.
Id., IV(A)(8).
Importantly, the proposed order would not merely prohibit the
defendants from engaging in the conduct described, but would require
each defendant to monitor and record up to 3.5% of its traders'
conversations (without the traders having knowledge of the time when
this recordation was occurring) and to notify the Department of any
conversation which a defendant's Antitrust Compliance Officer
``believes may violate'' the order. Id., IV(C)(5) (emphasis added).
The Department views these terms as a significant deterrent to
repetition of the unlawful behavior. Further, the proposed order
permits the Department to assure itself--through review of the tapes
required to be created and real-time monitoring of trader
conversations--that the prohibitions of the proposed order are being
obeyed. Id., IV(C)(6)-(8).
The Department recognizes that retaliation could take a large
number of different forms. But the proposed order can and does
proscribe such retaliation, even though it does not, and could not,
anticipate each possible form that such retaliation could take.
Instead, the Department has identified broad but unambiguous categories
of behavior--harassment, intimidation, refusals to deal, or threats of
refusals to deal--and branded any behavior of that type, if directed at
another market maker in response to that other market maker's specific
pro-competitive acts, to be a violation of the proposed order.
Contrary to Professor Peake's suggestion (Exhibit 1 at 1), the
relief that would be provided by the proposed order is not unnecessary
and does not constitute an unwarranted burden upon the investing public
or the country's corporate stock issuers. As shown, the proposed order
would provide significant deterrence to revival of the defendant's
unlawful conspiracy. Under the circumstances, the proposed settlement
is clearly `` `within the reaches of the public interest' ''
(Microsoft, 56 F. 3d at 1460 (emphasis in original)), and ought to be
entered by the Court.\11\
---------------------------------------------------------------------------
\11\ Professor Peake notes that, despite long experience in the
securities industry, including service on the NASD's Board of
Governors, until the week before the Department's complaint and
proposed settlement with the market maker defendants were filed, he
had ``never before heard of * * * [the quoting] convention.''
Exhibit 1 at 2. While Professor Peake may personally have been
unaware of the quoting convention, the complaint, unchallenged by
the defendants, alleges the convention and the CIS describes some of
the abundant evidence of its existence and effects.
---------------------------------------------------------------------------
Comments of William Leighton
Mr. Leighton has bought and sold Nasdaq stocks, and describes
himself as ``a person aggrieved and adversely affected by the proposed
order.'' Exhibit 2 [letter of Sept. 9, 1996] at 1. He has written three
letters to the Department, making a variety of objections to the
proposed settlement. His primary objection is that the relief does not
provide for the payment of damages to aggrieved persons, such as
himself:
The relief sought, which leaves the defendants in possession of
the fruits of their unjust enrichment, does not enable those injured
and damaged by the actions of the ``defendants'' to recover their
losses. There is no provision for disgorgement by the ''defendants''
of the enormous profits which they have realized and which have
occasioned huge losses to the public.
Id. As the Department pointed out in its CIS--and, as is the case with
all of the Department's settlements in civil antitrust cases--the
relief obtained will neither advance or impair private plaintiffs'
ability to bring damages cases.\12\ The assertion by Mr. Leighton that
he will be ``adversely affected by the proposed order'' is, therefore,
incorrect. Mr. Leighton is free to pursue a claim for damages against
the Nasdaq market makers individually or as part of a class. See Zenith
Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 130-31 (1969);
United States v. Borden Co., 347 U.S. 514, 518 (1954). As the Supreme
Court has emphasized, the ``treble damages provision wielded by the
private litigant is a chief tool in the antitrust enforcement scheme,
posing a crucial deterrent to potential violators.'' Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 635 (1985).
---------------------------------------------------------------------------
\12\ Section 4 of the Clayton Act, 15 U.S.C. Sec. 15, provides
that any person who has been injured as a result of conduct
prohibited by the antitrust laws may bring suit in federal court to
recover three times the damages suffered, as well as costs and
reasonable attorney's fees. Entry of the proposed Order will neither
impair nor assist the bringing of such actions. Under the provisions
of Section 5(a) of the Clayton Act, 15 U.S.C. Sec. 16(a), the
proposed Order has no prima facie effect in any subsequent lawsuits
that may be brought against the defendants in this case. CIS at 46.
The defendants, in agreeing to entry of the proposed order, have not
admitted the truth of any of the allegations in the government's
complaint. Entry of the proposed order will not constitute evidence
against or an admission by any defendant with respect to any
allegation in the complaint.
---------------------------------------------------------------------------
As the Court knows, there is a consolidated, class-action lawsuit
pending in this district in which private plaintiffs claiming to have
suffered antitrust injury as a result of a price-fixing conspiracy
among Nasdaq market makers are seeking monetary damages. This avenue,
among others, is available to Mr. Leighton.
Mr. Leighton also objects to the entry of the proposed order
because of alleged legal deficiencies in the action. For example, he
suggests that the Department's complaint ``does not state a claim upon
which relief could be granted because there is no Case or Controversy
present in the constitutional sense.'' Exhibit 2 [letter of Aug. 7,
1996] at 1. Mr. Leighton's assertion of a lack of any Case or
Controversy is based upon the defendants' consent to the entry of the
proposed order before having been sued--in other words, to the
negotiated settlement. Id.; see also id. [letter of Sept. 9, 1960 at 3.
A Case or Controversy exists here because the United States and the
market maker defendants have adverse interests (see Muskrat v. United
States, 219 U.S. 346, 361 (1911)) and because the United States seeks
to enjoin the defendants from engaging in certain specific conduct in
the future and to impose upon them certain requirements designed to
ensure that they do not continue to engage in the conduct identified in
the complaint as unlawful. The fact that the United States and the
defendants have reached a settlement, that, if approved by the Court,
would resolve the issue, does not mean that there is no justifiable
controversy between them. See, e.g., Havens Realty Corp. v. Coleman,
455 U.S. 363, 371 n.10 (1982); Coopers & Lybrand v. Livesay, 437 U.S.
463, 465 n.3 (1978); Dacanay v. Mendoza, 573 F.2d 1075, 1078 (9th Cir.
1978).
Civil antitrust cases brought by the government are, more
frequently than not, resolved via consent decrees. Indeed, in enacting
the Tunney Act, the Congress recognized that such cases would often be
resolved by consent orders. See 15 U.S.C. 16 (passim); 51 Cong. Rec.
15,824-25 (noting Congress' interest in encouraging capitulation in
[[Page 59900]]
government antitrust suits, and providing that no prima facie effect
would flow from such decrees entered before any testimony was taken)
(1914); United States v. Blue Chip Stamp Co., 272 F.Supp. 432, 440
(C.D. Cal. 1967) (the legality of the consent decree procedure is
``beyond question'') (quoting Sam Fox Pub. Co. v. United States, 366
U.S. 683, 689 (1961)).
Mr. Leighton also suggests that the United States is not a ``real
party in interest'' here--and therefore not a proper plaintiff--because
it is ``members of the public [not the government qua government] who
buy or sell securities on the NASDAQ and who have suffered, and may
continue to suffer, damages as a result of the alleged conduct.'' Id.
The United States is a proper party to bring an injunctive action under
Section 1 of the Sherman Act on behalf of the public. 15 U.S.C. Sec. 4;
United States v. Trans-Missouri Freight Assn, 166 U.S. 290, 309-10
(1897).\13\ See also supra text at 22-23. Mr. Leighton's comments do
not state a sound basis upon which to reject the proposed order.
---------------------------------------------------------------------------
\13\ Mr. Leighton makes other technical, legal objections to the
case, the primary one being that ``it does not appear that the
complaint has been served on the `defendants.' '' Id. [letter of
Sept. 9, 1996] at 2. Citing Fed. R. Civ. P. 4, Mr. Leighton claims
that deficiency would enable a defendant later to ``dismiss the
attorney who has signed the stipulation and claim the Court's lack
of jurisdiction over its person.'' Id. The defendants in this case
have expressly waived service of summons, acknowledged receipt of
the complaint, consented to in personam jurisdiction and entered
their general appearance in the action. Stipulation and Order (filed
Aug. 5, 1996). It is clear on this record that defendants have been
adequately notified of the government's case and have acceded to the
jurisdiction of the Court. See Precision Etchings & Findings v. LGP
Gem, LTD., 152 F.R.D. 433,436 (D.R.I. 1993); A.L.T. Corp. v. Small
Business Admin., 801 F.2d 1451, 1458-59 (5th Cir. 1986); Wright &
Miller, Federal Practice and Procedure: Civil 2d Sec. 1062 (1987).
---------------------------------------------------------------------------
Comments of Joel Steinberg
Mr. Steinberg is a plaintiff in a lawsuit against Goldman, Sachs &
Company. He has communicated with the Department on five occasions in
connection with this matter. Exhibit 3. Mr. Steinberg's central
objection to the proposed order is that it does not require that any
parties injured as a result of the conduct alleged in the complaint be
compensated. Id. [letter of August 15, 1996] at 1. Mr. Steinberg
further complains that the Department did not proceed criminally
against the market makers under the antitrust laws. Id. [letter of
August 15, 1996] at 1; id. [letter of August 18, 1996] at 1.
The Department exercised its prosecutorial discretion not to pursue
a criminal case against the defendant market makers based upon the
quoting convention because the evidence did not meet the criteria the
Department has historically required in order to proceed criminally.
See Antitrust Division Manual at III-12 (2d ed. 1987). Furthermore, to
the extent that Mr. Steinberg's comments raised issues not alleged in
the complaint, they are outside the scope of Tunney Act review.
Microsoft, 56 F.3d at 1448, 1459, 1463; see also ABA Antitrust Section,
Annual Review of 1995 Antitrust Law Developments at 171-72 (1996).
Comments of the Private Plaintiffs
The plaintiffs in In re: Nasdaq Market-Makers Antitrust Litigation,
94 Civ. 3996 (RWS), M.D.L. No. 1023 (S.D.N.Y.), a private, class-action
civil case to recover damages under the antitrust laws for injuries
allegedly sustained by persons who bought or sold Nasdaq stocks that
were subject to an alleged price-fixing conspiracy among Nasdaq market
makers, commented upon the proposed order in briefs filed in connection
with their motion to intervene in the instant action. See Exhibit 4
(Excerpts from Memorandum of Plaintiffs in the In re: Nasdaq Market-
Makers Antitrust Litigation to Intervene or to Appeal as Amicus Curiae
(filed Aug. 28, 1996); Exhibit 5 (Excerpts from Reply Memorandum in
Support of Motion of Plaintiffs in the In re: Nasdaq Market-Makers
Antitrust Litigation to Intervene or to Appeal as Amicus Curiae (filed
Oct. 14, 1996)).
Plaintiffs object to the provision of the proposed order that would
limit use of the audio tapes to be created under it. Paragraphs IV(C)
(2)-(6) of the proposed order, if entered by the Court, would require
that defendants randomly monitor and tape record not less than 3.5% of
their Nasdaq trader telephone conversations (up to a maximum of 70
hours per week). It would also require that they identify and produce
any tapes containing conversations that may violate the proposed order
and furnish the tape of any such conversation to the Antitrust Division
within ten business days of its recordation. Further, paragraph
IV(C)(6) specifically provides:
Tapes made pursuant to this stipulation and order shall not be
subject to civil process except for process issued by the Antitrust
Division, the SEC, the NASD, or any other self-regulatory
organization, as defined in Section 3(a)(26) of the Securities
Exchange Act of 1934, as amended.
Plaintiffs ask ``the Court [to] reject this provision, or clarify
that, by entering the Consent Decree, the Court does not bind any non-
party to the Consent Decree * * *.'' Exhibit 4 at 30.
In reaching the tentative settlement of this case, the defendants
agree, at the government's insistence, to conduct random taping of
their traders' conversations. In negotiating this unusually strict
requirement, the government agreed to the term in the proposed order
that would limit the use to which the tapes could be put.\14\ Since the
tapes would not even be created but for the proposed order, the Court
should accept the provision in the proposed order preventing their use
in private litigation. See In re LTV Securities Litigation, 89 F.R.D.
595, 617-22 (N.D. Tex. 1981) (denying disclosure of
[[Page 59901]]
documents prepared by Special Officer appointed, in accordance with
provisions of a consent decree, to investigate and report on
defendant's accounting and auditing practices).
---------------------------------------------------------------------------
\14\ The disclosure and admissibility limitations of the
proposed order apply only to tape recordings created pursuant to the
proposed order. To the extent that defendants record trader
conversations for their own purposes, such recordings would not be
subject to the provision of paragraph IV(C)(6), which limits the
disclosure and admissibility only of recordings ``made pursuant to''
the proposed order. See also proposed order, paragraph IV(C)(8)
([u]pon request of the Antitrust Division, a defendant must
``immediately identify all tape recordings made pursuant to * * *
[the proposed] order that are in its possession or control * * *''
(emphasis added). Further, as the proposed order requires that a
defendant both ``record (and listen to) not less than three and one-
half percent (3.5%) of the total number of trader hours of such
defendant'' (paragraph IV(C)(4) (emphasis added))--and to report
potential violations to the Antitrust Division (paragraph
IV(C)(5))--a defendant would have great difficultly claiming that
recordings not created pursuant to the proposed order were actually
made as a result of it.
While a firm might record and listen to all trader conversations
for the purpose of ensuring that the tapes of such conversations
would be protected from use in civil damages cases, such a decisions
would be costly for the firm in two respects. In addition to the
obvious economic costs, the firm would incur the obligation of
reporting potential violations of the proposed order discovered
during the listening process to the Department. Were violations
detected, the Department could bring a contempt action. These two
factors provide substantial disincentives for firms to record a
greater number of hours of trader conversations that are required to
be recorded under the proposed order. If a firm were to record all
of its trader conversations and then to claim that they had been
recorded pursuant to the proposed order, the Department could
request their production at any time within 30 days. Further, the
failure to report potential violations of the proposed order from
among all these conversations could result a charge of contempt.
This possibility would act as a disincentive to a firm claiming that
recordings made, but not listened to, were actually made pursuant to
the proposed order. The Department intends to ensure that, as part
of the system each defendant will established to assure compliance
with the proposed order, it is capable of identifying immediately
upon request all tape recordings in its possession made pursuant to
the proposed order. The Department may also require the defendants
routinely to provide it with a schedule of the recordings to be made
in advance of their actual creation. See proposed order, paragraph
IV(C)(8); see also paragraph IV(C)(3). In this way, it will be clear
what recordings have been made pursuant to the proposed order, and,
to the contrary, what additional recordings, if any, fall outside
the scope of the limitations on discovery and use of recordings made
pursuant to the mandate of the proposed order.
---------------------------------------------------------------------------
Contrary to the facts in Ex Parte Uppercu, 239 U.S. 435, 440,
(1915), and Olympic Refining Co. v. Carter, 332 F.2d 260, 265 (9th Cir.
1964), both cases cited by plaintiffs in their motion to intervene, the
proposed order does not withhold from the public or from any present
parties to litigation information that that would otherwise be
available to them. Unless the proposed order is entered, the audio
tapes will not be created. Should the tapes be subpoenaed in future
litigation, the enforceability of this provision can be litigated at
that time by parties with standing to press the issue.
Meanwhile, the Department plans, if the Court enters the proposed
order, to monitor the tapes carefully and, if evidence of new or
continuing violations comes to light, take appropriate enforcement
action. In addition, should violations of the securities laws be
indicated, the Department will refer such evidence to the SEC, the
NASD, or both.
Conclusion
Entry of the proposed order is in the public interest. The United
States has today certified compliance with the Tunney Act. The Court
should enter the proposed order as submitted.
Dated: November 15, 1996, Washington, D.C.
Respectfully submitted,
Hays Gorey, Jr., (HG 1946), John D. Worland, Jr. (JW 1962), Jessica N.
Cohen (JC 2089).
Attorneys, U.S. Department of Justice, Antitrust Division, 600 E
Street, N.W., Room 9500, Washington, D.C. 20530, (202) 307-6200 phone,
(202) 616-8544 fax.
Certificate of Service
I, Hays Gorey, Jr., hereby certify that on November 15, 1996, I
caused to be served a true and correct copy of the foregoing Response
to Public Comments by first-class mail, postage prepaid, upon:
James T. Halverson, Esq., Shearman & Sterling, 153 East 53rd Street,
New York, New York 10022-4676, Attorneys for Defendant Herzog,
Heine, Geduld, Inc.
Lewis A. Noonberg, Esq., Piper & Marbury, 1200 19th Street, NW,
Washington, D.C. 20036-2430, Attorneys for Defendant Alex. Brown &
Sons Incorporated.
Robert M. Heller, Esq., Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York 10022, Attorneys for Defendant Bear
Stearns & Co., Inc.
Richard A. Cirillo, Esq., Rogers & Wells, 200 Park Avenue, 53rd
Floor, New York, New York 10166, Attorneys for Defendant CS First
Boston Corp.
Frank M. Holozubiec, Esq., Kirkland & Ellis, Citicorp Center, 153
East 53rd Street, 39th Floor, New York, New York 10022-4675
Attorneys for Defendant Dean Witter Reynolds, Inc.
Robert F. Wise, Jr., Esq., Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017, Attorneys for Defendant Donaldson,
Lufkin & Jenrette Securities Corporation.
James J. Calder, Esq., Rosenman & Colin, 575 Madison Avenue, New
York, New York 10022, Attorneys for Defendant Furman Selz LLC.
John L. Warden, Esq., Sullivan & Cromwell, 125 Broad Street, New
York, New York 10004, Attorneys for Defendant Goldman Sachs & Co.
Charles E. Koob, Esq., Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York 10017-3954, Attorneys for Defendant
Hambrecht & Quist LLC.
Robert F. Wise, Jr., Esq., Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017, Attorneys for Defendant J.P.
Morgan Securities Inc.
Jeffrey Q. Smith, Esq., Cadwalader, Wickersham & Taft, 100 Maiden
Lane, New York, New York 10038, Attorneys for Defendant Lehman
Brothers, Inc.
Catheirne A. Ludden, Esq., Morgan, Lewis & Bockius, 101 Park Avenue,
New York, New York 10178, Attorneys for Defendant Mayer &
Schweitzer, Inc.
Jay Fastow, Esq., Weil, Gotshal & Manges, 767 Fifth Avenue, New
York, New York 10153, Attorneys for Defendant Merrill Lynch, Pierce,
Fenner & Smith
Robert F. Wise, Jr., Esq., Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017, Attorneys for Defendant Morgan
Stanley & Co. Incorporated.
Paul B. Uhlenhop, Esq., Lawrence, Kamin, Saunders & Uhlenhop, 208
South LaSalle Street, Suite 1750, Chicago, Illinois 60604 Attorneys
for Defendant Nash, Weiss & Co.
Norman J. Barry, Jr., Esq., Donahue Brown Matthewson & Smyth, 20
North Clarke Street, Suite 900, Chicago, Illinois 60602, Attorneys
for Defendant OLDE Discount Corporation.
Robert McCaw, Esq., Wilmer, Cutler & Pickering, 2445 M Street, NW,
Washington, D.C. 20037-1420 Attorneys for Defendant PaineWebber
Incorporated.
Neil S. Cartusciello, Esq., Shanley & Fisher, P.C., One World Trade
Center, 89th Floor, New York, New York 10048, Attorneys for
Defendant Piper Jaffray Inc.
William P. Frank, Esq., Skadden, Arps, Slate, Meagher & Flom, 919
Third Avenue, New York, New York 10022, Attorneys for Defendant
Prudential Securities Incorporated.
Jeffrey I. Weinberger, Esq., Munger, Tolles & Olson, 355 South Grand
Avenue, 35th Floor, Los Angeles, California 90071, Attorneys for
Defendant Salomon Brothers Inc.
Brian J. McMahon, Esq., Crummy, Del Deo, Dolan, Griffinger &
Vecchione, P.C., One Riverfront Plaza, Newark, New Jersey 07102,
Attorneys for Defendant Sherwood Securities Corp.
Charles A. Gilman, Esq., Cahill Gordon & Reindel, 80 Pine Street,
New York, New York 10005, Attorneys for Defendant Smith Barney Inc.
R. Bruce Holcomb, Esq., Dickstein Shapiro Morin & Oshinsky, L.L.P.,
2102 L Street, NW, Washington, DC 20037, Attorneys for Defendant
Spear, Leeds & Kellogg, LP (Troster Singer).
Philip L. Graham, Jr., Esq., Sullivan & Cromwell, 125 Broad Street,
New York, New York 10004, Attorneys for Defendant UBS Securities
LLC.
Hays Gorey, Jr.
Attorney, U.S. Department of Justice, Antitrust Division, 600 E Street,
N.W., Room 9500, Washington, D.C. 20530.
University of Northern Colorado
Junius W. Peake, Monfort Distinguished Professor of Finance, Kepner
Hall 1075F, College of Business Administration, Greeley, Colorado
80639-0019, (970) 351-2737, (970) 351-1062 FAX,
[email protected]
July 26, 1996
Judge Robert Sweet,
United States District Court, The Southern District of New York,
Federal Court House, Foley Square, New York, NY 10007
Re: United States of America v. Alex Brown & Sons., Inc., et al.
Your Honor: Not being an attorney, and unfamiliar with court
protocol, I take the liberty of addressing this letter to you to
point out some facts that you might wish to consider in deciding
whether to approve the proposed Stipulation and Order between the
Department of Justice (``DOJ'') and the 24 broker-dealer defendants
(``the 24'') named in the above-captioned civil litigation. Needless
to say, I will be glad to send copies to anyone else required, as
well as to attorneys for the United States and the defendants.
In my professional opinion the proposed sanctions and agreements
between the DOJ and the 24 will not serve their stated purposes, and
will, therefore, merely be an unnecessary and expensive added
regulatory and financial burden on the investing public and
America's stock issuers.
First, may I state my personal qualifications to comment on this
matter. As you will note from my letterhead, I am Monfort
Distinguished Professor of Finance at the University of Northern
Colorado, and have been a member of that university's faculty since
1993. Prior to that time I was in the securities industry as a
practitioner and consultant from 1951 onward. I served on a number
of securities industry organizations, including the National
Association of Securities Dealers, Inc. (``NASD''), at which I
served as district committeeman, member of several national
committees, member of the Board of Governors and Vice-Chairman of
the Board. I have testified before congressional committees of both
the House and Senate as an expert in securities operational and
structural matters, and have written and delivered papers on
financial market microstructure since 1976, a number of which have
been published in recognized
[[Page 59902]]
academic journals, and others which have appeared as chapters in
books on finance. I am frequently quoted nationally and
internationally in both print and electronic media.
I have also been a paid consultant to the Securities and
Exchange Commission (``SEC'' or ``Commission''), the Commodity
Futures Trading Commission (``CFTC'') and the Antitrust Division of
the Department of Justice, although not on this matter. I have
testified as an expert in Federal and state courts in securities
cases, and am presently engaged as a consultant to the plaintiffs in
the private civil litigation on a similar matter before your Court.
However, I wish to make it clear that this letter is written solely
at my own initiative as a student of market structure, and that I
have had no conversations with any of the plaintiffs' attorneys or
anyone else in formulating these opinions, but I have discussed the
contents of this letter and my conclusions with my colleague and
frequent co-author, Dr. Morris Mendelson, Professor Emeritus of
Finance at the Wharton School of the University of Pennsylvania. Dr.
Mendelson has asked me to state that he endorses the analysis in
this letter and concurs with its conclusions.
The Nasdaq system of the NASD was designed and built at the
instigation of the SEC to replace its predecessor, the Pink
Sheets published by the National Quotation Bureau. Market
makers' quotations were sent to the Pink Sheets in the
afternoon, and distributed the following morning by messenger to
over-the-counter traders nationally. Nasdaq commenced operations in
1971, just 25 years ago. At the time I was a member of the Board of
Governors of the NASD, and participated in policy making for the
Association, including the development of Nasdaq and the automation
efforts of the Association.
Let me explain why the DOJ's proposed solution to the issue of
alleged price-fixing, which the DOJ also refers to as a ``quoting
convention,'' will not necessarily deter retribution by firms which
wish to keep spreads wider than might otherwise be the case under
real competition.
DOJ defines ``Quoting Convention'' as: ``any practice of quoting
Nasdaq securities whereby stocks with a three-quarter (\3/4\) point
or greater dealer spread are quoted on Nasdaq in even eighths and
are updated in quarter-point (even eighth) quote increments.'' (DOJ
draft Stipulation and Order, page 4.)
Before newspaper articles referred to this term the week prior
to the DOJ's press release on July 17th, I had never before heard of
such a ``convention'' in Wall Street. However, even assuming there
was a ``quoting convention'' on Nasdaq, the fact is (as documented
by the DOJ) that it did not exist on Instinet, a competing
proprietary trading system. Therefore, I believe that the ``quoting
convention'' is a convenient fiction. Nasdaq requires the identity
of market makers and their quotations to be disclosed; Instinet
keeps them confidential. That is the key difference, and the reason
the same market makers who berated and harassed those who ``broke
the spread'' on Nasdaq would break it themselves with impunity on
Instinet.
Nothing in the DOJ's proposals would require anonymity of
quotations over Nasdaq. Nothing in the DOJ's proposals would require
disclosure of market makers' bids and offers over Instinet. Thus,
any market maker wishing to punish economically any other market
maker that narrowed a spread and violated an ``unwritten'' quotation
convention would be able to do so with impunity, since
``unadvertised'' economic reprisals appear not to be prohibited by
the DOJ proposal, and would be almost impossible to prove.
Here is an example. Assume the following situation:
50 market makers are quoting hypothetical stock XYZA at an
inside spread of \1/4\ point ($.25/share), such as 20 bid, offered
at 20\1/4\. Under Nasdaq and Commission rules, investors' orders
must be executed at these prices or better (sales at $20/share;
purchases at $20.25/share) to meet the Commission's ``best
execution'' mandate. Further assume that a fifty-first ``maverick''
market maker, ``Competitive Markets & Co.''. raises its bid to 20\1/
8\, narrowing the spread to 20\1/8\ bid, offered at 20\1/4\, or \1/
8\ spread.
Despite the fact that not a signal one of the other 50 market
makers has raised its bid, all would now be required to execute any
sell orders received from firms with which they have preferencing
agreements (typically retail firms which may or may not also be
Nasdaq market makers) at 20\1/8\ per share, since the highest bid on
Nasdaq is at that price. By raising its bid, Competitive Markets &
Co. has cut the potential market making profits of all 50
competitors in half, from $.25/share to $.125/share. Interestingly
enough, Competitive Markets & Co. may not receive any sell orders to
execute at its best bid, since it probably has no preferencing
arrangements with other firms. Under Nasdaq rules, it will receive
only unpreferenced orders.
What form could this retaliation take without violating the
DOJ's list of prohibited conduct? Here are some examples:
A refusal to deal ( or a reduction of dealings) with
the ``offending'' market maker;
Cancellation (or cost increase) of a clearing
arrangement;
Reduction or refusal to continue sending research
reports;
Removal of the offender from participation in desirable
underwritings;
Stoppage or reduction of reciprocal order flow;
Delays in answering the telephone in trading room; and/
or
Removal of a private telephone connection.
A small or new firm, such as Competitive Markets & Co., does not
wish to antagonize the larger ones, especially those as prestigious
as are many of the 24. As a result, regardless of any specific
prohibitions against certain conduct, the mere fact that the entire
world will see better bids or offers than have been posted by the
leaders will serve as a significant deterrent to firms like
Competitive Markets & Co. against bettering prices, regardless of
other competitive forces.
So long as the Nasdaq system requires the disclosure of the
identity of market makers, and so long as the NASD permits the
practice of ``preferencing,'' in which market makers agree with
other firms to execute trades at the best prices being displayed on
Nasdaq, regardless of whether or not that particular market maker is
quoting that price, investors will not achieve the ``national market
system'' the SEC was mandated to ``facilitate'' a generation ago.
Please let me know if there is anything else I should do. The
reason this letter is so brief is that my wife had major cancer
surgery earlier this week, and I have spent most of the time at her
bedside. I am confident you understand my situation. However, I
believe the American investor is entitled to the finest and most
efficient market possible, and wanted to do my best to ensure that
will be the case.
Respectfully submitted,
Junius W. Peake
John F. Greaney, Esq.,
Chief, Computers and Finance Section, Antitrust Division, Room
#9500, U.S. Department of Justice,600 East Street, N.W., Washington,
D.C. 20530
Re: 96 Civ 5313, U.S.A. v. Alex Brown & Sons, Inc., U.S.D.C.,
S.D.N.Y.
Dear Mr. Greaney: I refer to the ``newspaper notice'' that has
appeared on August 5, 1996 in the New York Times relative to the
above.
From the tenor of the notice, it would appear that the complaint
does not state a claim upon which relief could be granted because
there is no Case or Controversy present in the constitutional sense.
Apparently, the defendants, who do not appear to have been served
with the summons and complaint, have ``consented'' to a proposed
order as a result of discussions with the Division before they were
even charged with any wrongdoing. Such a procedure removes the
matter from the Case or Controversy category and relegates it to a
contract between the Division and the putative defendants. I see no
jurisdictional basis for a Federal district court to enforce such a
contract through contempt proceedings for violation of the contract
since the putative defendants are not subject to the jurisdiction of
the court unless and until they have been served.
Assuming the truth of the allegations made in the complaint, the
real parties in interest appear to be the members of the public who
buy or sell securities on the NASDAQ and who have suffered, and may
continue to suffer, damages as a result of the alleged conduct.
Millions of shares are traded every day on the NASDAQ which may or
may not have been traded in violation of the acts complained of. The
``newspaper notice'' does not state how members of the public who
have sustained injury and damage as a result of such conduct may
invoke remedies based on the proposed order. Ordinarily this would
be by intervention in the case.
The ``newspaper notice'' refers ``interested persons'' to the
office of the court clerk for an examination of the file. This would
entail spending several hours during a business day and the
expenditure of money at 25 cents per page for copies of the
documents on file. As a minimum of Due Process of Law, your office
should have negotiated an agreement with the putative defendants to
have the
[[Page 59903]]
papers printed and mailed at their expense to each and every buyer
and seller of NASDAQ stocks. Each and every ``interested person'',
that is, each person aggrieved by the putative defendants' conduct,
should be given an opportunity to decide whether or not to invoke
the ``remedies available to persons who may have been injured by the
alleged violations'' after studying the papers. At the present time,
each aggrieved person is required to go to the court clerk's office
and determine for himself or herself just what these remedies are.
This constitutes an imposition on millions of people who are
innocently trading on NASDAQ.
This letter constitutes an initial comment on the matter. Please
send me a complete set of the papers filed by the Division with the
court for my further examination and comment. Thank you for your
attention to this matter.
Sincerely,
William Leighton
John F. Greaney, Esq.,
Chief, Computers and Finance Section, Antitrust Division, DOJ, 600 E
Street, N.W., #9500, Washington, DC 20530
Re: 96 Civ. 5313 RWS U.S.A. v. Alex Brown & Sons, Inc.
Dear Mr. Greaney: This is in further reference to the newspaper
notice (``notice''), copy attached, that has appeared in The New
York Times of August 5, 1996 inviting comments on the proposed
settlement of the captioned action. At my request, your office has
since provided me with copies of (1) the complaint, (2) the proposed
stipulation and order and (3) the competitive impact statement. I
have also received the Division's letter of August 30, 1996 replying
to my letter dated August 7, 1996. I have traded in NASDAQ stocks
during the period before and after the filing of the complaint and,
therefore, I am a person aggrieved and adversely affected by the
proposed order.
The relief sought, which leaves the defendants in possession of
the fruits of their unjust enrichment, does not enable those injured
and damaged by the actions of the ``defendants'' to recover their
losses. There is no provision for disgorgement by the ``defendants''
of the enormous profits which they have realized and which have
occasioned huge losses to the public. For example, according to the
August 25, 1996 issue of the New York Times, copy attached, during
the week ending on August 22, 1996, the following securities, among
others, were traded on the NASDAQ in the stated amounts. Assuming an
illegal ``inside spread'' as charged at paragraph (39) of the
complaint, the loss to the public amounts to hundreds of millions of
dollars, as follows:
------------------------------------------------------------------------
Number of
shares
traded Illegal
Security during the charge Damage to
week of per the public
August 22, share
1996
------------------------------------------------------------------------
Iomega............................ 292,092,000 25 cents $73,023,000
Cisco............................. 259,053,000 25 cents 73,013,250
Intel............................. 249,473,000 25 cents 62,368,250
------------------------------------------------------------------------
Multiplying these huge amounts by the number of weeks covered by
the complaint (this period of time is not specifically defined at
paragraph (32)), it follows that the public has been ``fleeced'' of
hundreds of millions of dollars and is left without any remedy. The
complaint does not seek recovery of these sums of money but it does
seek ``such other relief as the Court may deem just and proper''.
Such relief should consist of monetary awards to those who have been
damaged and injured. The promise that there will be no damage or
injury to those who will trade on NASDAQ in the future (the ``post-
judgment class'') does not constitute an adequate remedy for those
already the victims of the proscribed conduct (the ``pre-judgment
class''). Apparently, there are pending before the Court actions on
behalf of the pre-judgment class none of which have been certified
as class actions and none of which can claim the benefit of the
proposed Stipulation and Order. If approved by the Court, the
stipulation and order will enable the ``defendants'' to resist any
meaningful judgment against them based on the facts recited in the
complaint.
Moreover, the complaint is fatally defective for a number of
reasons. First, it does not appear that the complaint has been
served on the ``defendants''. The ``defendants'' have allegedly
appointed twenty-five law firms, paying substantial fees, in order
to enter into a ``stipulation and order''. There is no proof that
these law firms have the authority to bind the ``defendants'' to the
terms of the proposed order. Any ``defendant'' who so chooses may
dismiss the attorney who has signed the stipulation and claim the
Court's lack of jurisdiction over its person. The ``stipulation'' is
not the equivalent of the process prescribed by F.R.Civ.P. 4.
F.R.Civ.P. 12(b)(2) expressly provides for the dismissal of an
action for lack of jurisdiction over the person. It is elementary
that failure to serve a summons and complaint results in lack of
jurisdiction over the person. F.R.Civ.P. 12(b)(3) provides for the
dismissal of an action for ``insufficiency of process''. Here, no
process at all was served upon the twenty-four ``defendants''.
F.R.Civ.P. 17(a) provides that every action shall be prosecuted in
the name of the real party in interest. Here, the complaint does not
specify how the United States has been injured or damaged by the
alleged conduct of the ``defendants'' since the United States is not
trading in NASDAQ stocks. The real parties in interest are those who
have traded on the NASDAQ and have lost the money which is safely
ensconced in the pockets of the ``defendants''. These ``real parties
in interest'' will not even be heard from unless they take the time
and trouble of commenting on the proposed stipulation and order on
the basis of the ``newspaper notice'' of August 5, 1996. Time will
tell if other comments will be filed by other persons aggrieved.
Overriding this case is the lack of a Case or Controversy, the
basic constitutional requirement for maintaining a suit in a federal
court. Since the ``defendants'' have not been served with a summons
and a complaint, their presence in this action is suspect because
they have ``consented'' to a ``stipulation and order'' without
having the obligation to do so. A complaint which is consented to by
those named as defendants does not satisfy the Case or Controversy
requirement. It is elementary that the federal courts do not sit to
enforce contracts between agencies of the United States, such as the
Antitrust Division, and private parties. Here, enforcement is to be
had by invoking the Court's contempt power. In the S.D.N.Y., the
contempt power in a civil case is exercised pursuant to Civil Rule
43. Therefore, to provide in a ``stipulation and order'' for the
exercise of the contempt power means that the Court's docket would
be flooded by proceedings pursuant to Civil Rule 43. The defendants'
unjust enrichment leaves them particularly apt to resist any
enforcement action by the Division. There is no provision for
security for the costs of enforcement to be posted by the
``defendants''. In effect, the Division contemplates providing the
``defendants'' with a free ride in the event enforcement proceedings
become necessary.
Another objectionable provision in the ``stipulation and order''
is the ``defendants' right'' to engage in conduct protected under
Noerr-Pennington doctrine. The proposed ``stipulation and order'' is
in the nature of an injunction which requires observance of
F.R.Civ.P. 65(d). The ``Noerr-Pennington'' doctrine is not spelled
out in the ``stipulation and order'', thus creating the possibility
of unlimited litigation, in the context of a contempt proceeding,
concerning the meaning of that doctrine.
Conclusion
For the foregoing reasons, the proposed ``Stipulation and
Order'' should be rejected and the complaint dismissed, with leave
to amend. A hearing on this matter should be held with the
participation of persons who have filed objections or comments on
the proposed action. Please advise me of the time and place of such
a hearing.
Sincerely,
William Leighton
Chart and newspaper notice have not been reprinted here, however
they may be
[[Page 59904]]
inspected in Room 3229, Department of Justice, Washington, D.C. and
at the Office of the Clerk of the United States District Court for
the Southern District of New York.
John F. Greaney, Esq.,
Chief, Computers and Finance Section, Antitrust Division, DOJ, 600 E
Street, N.W., #9500, Washington, D.C. 20530
Re: 96 Civ. 5313 RWS, U.S.D.C., S.D.N.Y., U.S.A. v. Alex Brown &
Sons, Inc. et al.
Dear Mr. Greaney: This is a further comment to the newspaper
notice concerning the above case concerning which I have submitted
comments on August 7 and September 9, 1996.
I have examined the docket entries in this case and have noted
that on August 5, 1996, an order was entered permitting the
defendants to waive service of summons, acknowledge receipt of the
complaint and consent to in personam jurisdiction etc. I note that
the Division's letter to me dated August 30, 1996 did not include a
copy of the August 5 order.
As to those defendants who have complied with this order, my
comments and objections concerning issues under F.R.Civ.P. 12(b)(2)
and (3) no longer apply. The fact remains that these defendants have
consented to be sued by signing the proposed stipulation and order
on or about July 17, 1996, some three weeks before they have entered
their appearances within the meaning of F.R.Civ.P. 4. The
defendants' actions converts this case into a consent proceeding,
not to a Case or Controversy in the constitutional sense.
I also note that on August 28, a motion to intervene was filed
and is awaiting adjudication. Please send me a copy of the
Division's papers answering that motion. No such papers were
docketed as of September 26.
Sincerely,
William Leighton
Hon. Robert R. Sweet,
U.S.D.J., U.S.D.C., S.D.N.Y., 500 Pearl Street, New York, N.Y. 10007
Re: U.S.A. v. Alex Brown & Sons, Inc., et al. 96 Civ. 5313 RWS
Dear Judge Sweet: The comment period with respect to this case
has expired on October 2, 1996. As a person aggrieved and adversely
affected by the defendants' actions, I have filed comments with the
Antitrust Division of the U.S. Department of Justice.
1. On August 5, 1996, an Order has been entered on the docket
extending and adjourning sine die the defendants' time to answer or
move with respect to the complaint. For ready reference, copies of
the first two pages of that Order are attached.
The Order refers to a stipulation and proposed order submitted
for the Court's consideration on July 17, 1996. As I have already
advised the Antitrust Division, I would like to be heard in
opposition to the entry of that proposed order. Thus, the purpose of
this letter is to ensure that the request for oral argument is
before the Court.
I would also like to take the witness stand and testify as to my
own recent (1996) experiences in NASDAQ trading. F.R. Evidence
614(a) and 701. There are literally thousands of trades in NASDAQ
stocks being consummated every business day. The record should show
how some of these trades were made. The stipulation and proposed
order of July 17, 1996 provides that no testimony should be heard.
Thus, thousands of other individuals, similarly situated, will not
be heard for want of a procedure to bring them before the Court.
2. I would also like to point out that the public is not
represented before this Court and was not represented before the
Antitrust Division for want of notice. The Antitrust Division first
gave public notice of this matter on August 5, 1996. It has not
given notice of a hearing before the Court. It has submitted a
proposed order, copy attached, which recites that ``the entry of
this stipulation and order is in the public interest''. Whereas the
defendants have pocketed millions of dollars from their illegal
conduct and thus have the means to retain counsel in support of
their positions, the public is totally unrepresented. It is
unrealistic to expect that the public, which has lost the money
pocketed by the defendants, would engage in litigation over these
losses. Issues such as these should he heard and decided by this
Court before the matter is settled by the entry of an order. I fail
to see how the ``public interest'' can be served by the elimination
of the public from a proceeding looking to foreclose the assertion
of damages suffered by the public.
3. Finally, I would like to point out that because no answers
have been filed by the defendants, this case does not present this
Court with a Controversy in the constitutional sense, see Article
III of the Constitution of the United States. The proposed order
would require the Court to (i) ``review the complaint'', that is the
allegations of the Antitrust Division, without knowing how the
defendants would plead, (ii) decide that it has ``jurisdiction over
the parties to this stipulation and order'', (iii) open the
courthouse doors to many contempt proceedings during the next ten
years, which would require the appointment of several magistrate
judges, and (iv) under these circumstances, grant ``such other
relief as to the Court may seem proper''. There were no defendants
before this Court on July 17, 1996 because the Order permitting them
to file notices of appearance was not entered until August 5, 1996.
Respectfully,
William Leighton
cc: Hays Gorey, Jr., Esq.,
John F. Greaney, Esq.,
Attorneys for the plaintiff, United States of America, U.S. Department
of Justice, Antitrust division, 600 E. Street, NW. #9500, Washington,
DC 20530, and to all attorneys for the defendants:
Lewis A. Noonberg, Esq., Piper & Marbury,
Robert M. Heller, Esq., Kramer, Levin, Naftalis & Frankel.
Frank M. Holozubiec, Esq., Kirkland & Ellis
Stuart M. Gerson, Esq., Epstein Becker & Green, P.C.
John L. Warden, Esq., Sullivan & Cromwell
Jeffrey Q. Smith, Esq., Cadwalader, Wickersham & Taft
Catherine A. Ludden, Esq., Morgan Lewis & Bockus
A. Douglas Melamed, Esq., Wilmer Cutler & Pickering
Norman J. Barry, Jr., Esq., Donahue Brown Mathewson & Smyth
James J. Calder, Esq., Rosenman & Colin
Robert H. Munheim, Esq., Salomon Brothers, Inc.
Brian J. McMahon, Esq., Crummy, Del Deo, Dolan Griffinger &
Vecchione
Paul B. Unlenhof, Esq., Lawrence, Kamin, Saunders & Unlenhop
Richard A. Cirillo, Esq., Rogers & Wells
Robert F. Wise, Jr., Esq., Davis Polk & Wardwell
Charles E. Koob, Esq., Simpson Thacher & Bartlett
James T. Halverson, Esq., Shearman & Sterling
Otto G. Oberemaier, Esq., Weil, Gotshal & Manges
Neil Cartusciello, Esq., Shanley & Fisher
William P. Frank, Esq., Skadden Arps Slate Meagher & Flom
Charles A. Gilman, Esq., Cahill Gordon & Reindel
Howard Schiffman, Esq., Dickstein Shapiro Morin & Oshinsky
Philiip L. Graham, Jr., Esq., Sullivan & Cromwell.
Stipulation and Order
It is hereby stipulated and agreed by the counsel of record for the
parties that:
1. Defendants waive service of summons, acknowledge receipt of the
Complaint, and consent to in personam jurisdiction before this Court.
2. Each defendant hereby enters its general appearance in the
action by counsel of record listed below.
The Clerk is directed to enter the appearances as shown herein.
Unless specifically objected to for reasonable cause by any party
within twenty (20) days after the attorney appears herein, each
attorney not a member of the Bar of this Court who is a member of the
bar of any United States District Court or the highest court of any
state and is acting as counsel for a party herein shall be deemed
admitted pro hac vice to practice before this Court in connection with
these proceedings.
3. The time for defendants to answer or move with respect to the
Complaint is extended and adjourned sine die pending consideration by
the Court of a stipulation and order submitted for approval on July 17,
1996.
For Plaintiff
United States of America:
Hays Gorey, Jr. (HG-1946)
John D. Worland, Jr. (JW-1962),
Attorneys, U.S. Department of Justice, Antitrust Division, 600 E.
Street, N.W., Room 9500, Washington, D.C. 20530, 202/616-5119 phone,
202/616-8544 fax.
The Court having reviewed the Complaint and other filings by the
United States, having found that this Court has jurisdiction over the
parties to
[[Page 59905]]
this stipulation and order, having heard and considered the respective
positions of the United States and the defendants [at a hearing on
________________, 1996,] and having concluded that entry of this
stipulation and order is in the public interest, it is hereby ORDERED:
THAT the parties comply with the terms of this stipulation and
order;
THAT the Complaint of the United States is dismissed with
prejudice;
THAT the Court retains jurisdiction to enable any of the parties to
this stipulation and order to apply to the Court at any time for such
further orders and directions as may be necessary or appropriate for
the construction or implementation of this stipulation and order, for
the enforcement or modification of any of its provisions, or for
punishment by contempt.
So ordered this ________ day of ________, 1996.
----------------------------------------------------------------------
United States District Judge
Ms. Janet Reno,
US Attorney General, 10th & Constitution Avenue NW, Washington, DC
20500
Dear Ms. Reno. I wrote to you a month ago concerning Goldman
Sachs and their abuse of the system that we are all generally
supposed to adhere to. Since that time even more abuses have
surfaced including a disgusting report on Prudential Bache, and
their own nefarious style of doing business.
In today's Wall St. Journal, and LA Times we see an egregious
price fixing example that has been going on for thirty years.
Instead of our Justice Dept. moving to stop these same offenders
from ever doing business again, we see another compromise. They pay
off the government with a fine, and get away ``scot free'' without
so much as having to plead guilty. I am embarrassed for the
Attorneys that work for you. If there is smoke and they prove it why
are these thieves allowed to continue the rape of our investment
community?
If your office will not stop this ongoing parade of malfeasance,
then who in our government shall I write to in order to voice my
concerns? How is it that companies like Goldman Sachs, Prudential
Bache, Smith Barney and many more are able to continue this type of
behavior as typified by their everyday course of conduct?
Please look into this situation personally. We in the investment
community regardless of how small an entity, have nowhere else to
turn in order to find the kinds of law enforcement necessary to
prevent these financial highwaymen from their antics. The
unfortunate truth is, that as long as we allow these activities to
continue, our greater financial community suffers in confidence. Ask
any small investor what he or she feels about this issue and see for
yourself. Who do you invest with? Please help.
Respectfully yours,
Joel Steinberg
Ms. Janet Reno,
US Attorney General, 10th & Constitution Avenue NW, Washington, DC
20500
Dear Ms. Reno: I know you are busy, and would not be writing
this letter were it not for the significance of the issue. I want to
inform you of the course of conduct of the Goldman Sachs Company. I
would not be privy to this information, but for the fact that I am
involved in a lawsuit with them for fraud among other things. I am
not alone in my complaints against them, thus my statement about
their course of conduct.
In California they are being sued by the State Attorney Generals
Office, for many things, and as the investigation moves forward the
suit has grown from $180,000,000.00 to a whopping $600,000,000.00
with the potential for even more as the state pursues its' claims.
At the SEC we have determined a long list of securities
violations, that have resulted in fines, censure, restrictions for
doing business, and the list goes on in states all over the country.
The point is this, if a outlaw commits a crime in one state, and
then crosses a state line for the commission of yet another crime,
my understanding is that the federal government is now a potential
partner in the prosecution of the offender. This is exactly the case
with Goldman Sachs, and there is substantial proof to support this
claim. If this is the case why are they able to keep paying fines
for all these incidents of criminal activity.
In my case they have stolen my business with Fraud, Fraud in the
Inducement, Lies, and blatant misrepresentation, and we have proved
it in the Arbitration phase of our lawsuit against them. Nonetheless
they are free to operate without any disciplinary actions against
them short of perhaps a monetary fine. Charging them with financial
penalties for transgressions in the business community, is
tantamount to charging a Cocaine dealer Crack for what he has done
wrong to society.
Goldman Sachs has thousands of tenants in dozens of shopping
centers that we know of, and I can assure you that many people have
been financially injured by these people.
With the false premise of being part of a redevelopment agency
they have positioned themselves, and executed Mello Roos Bonds to
renovate a privately owned mall outside of the redevelopment zone.
This parcel of land is a distance away from the redevelopment zone,
but made to look contiguous to the Thousand Oaks Blvd. Zone for the
necessary approvals.
Because this Mall is privately owned, and as such would not
qualify for the Mello Roos Bonds, they have manufactured a parking
deck to donate to the city for the purpose of qualifying for the
bonds. As I understand Mello Roos this is also inappropriate. They
have misrepresented information to this community, so the Thousand
Oaks City Council would approve the bond request. The City Attorney
for the City of Thousand Oaks was the only one privy to much of this
information until the completed bond books were in place.
Accordingly the votes taken at the City Council meetings might in
fact have been different. The bondbooks themselves have several
misrepresentations including a bold faced distortion of fact
relative to our lawsuit against the beneficiary of the Mello Roos
Bonds, as well as others.
It is our hope in the writing of this letter to have you please
look into this matter prior to the conclusion of any mediation,
between the State of California and the Goldman Sachs Company.
We hope that you will take a much closer look into the
activities for they should not have the privilege of doing business
in this or any other state. If this sounds excessive, I will remind
you that they are causing extreme hardship in my family for their
purposeful acts. At the age of fifty I am first beginning to search
for employment in the work force. They have stolen a business, with
purposeful fraud that we loved, and operated for thirteen years. I
do not have the luxury of a huge lawfirm to take our case on a
contingency. So far at least the larger lawfirms that we have spoken
with fear the cost, expense, and strain on their resources to get
involved in a protracted battle with Goldman Sachs. We have spent
our entire life savings on defending ourselves from Goldman Sachs.
I am a Veteran, a proud American, I vote always, and try to live
my life as an example to my two children. My incredible loving wife
of almost thirty years, and I have worked so hard to build the
business they stole from us, that it defies description.
One would have to realize what it is to struggle through the
retail world starting from nothing, and developing the reputation
for quality and service to even begin to comprehend the enormous
sacrifice we have made for our business. That struggle has all been
for naught for they are trying to grind us into submission with
legal fees, so that they can win by attrition, as opposed to proving
their case. Please help us before we become another Goldman Sachs
statistic. We are desperate for help.
We appreciate any assistance you can provide.
Very truly yours,
Joel Steinberg
Second Request for Action
From wdcun1.usdoj.gov!wdcsun1!daemon Thu Aug 1 17:10:23 1996
Date: Thu, 1 Aug 1996 17:14:09--0400
From: httpd server login
Message-Id: [email protected]>
Reply-To: [email protected]
MMDF-Warning: Parse error in original version of preceding line at
justice.usdoj.gov
Apparently-To: [email protected]
content-length: 2636
WWW comments (Forms submission)
[email protected] (Joel Steinberg) sent the following comment
about The Antitrust Division's WWW server:
Joel Steinberg PO Box 2134 Thousand Oaks, CA 91358 805 497 1366
Dear Sir: I have watched in astonishment, as article after
article has been written relevant to rogue dealers and brokers. In
my utter amazement as virtually every newspaper that has established
itself in the reporting of financial matters continues to report
these violations, no one seems to take definitive action.
Where are our Government agencies, and why is this allowed to
continue? In the last
[[Page 59906]]
year or so we have seen dozens of articles on companies like Goldman
Sachs, Prudential Bache, Merrill Lynch and many others. How long
will these large trading corporations be permitted to legally steal
from investors throughout this country, and get away with a slap on
the hand or some other ludicrous compromise? These bandits and their
normal course of conduct have cost the private sector billions. Is
there no agency in this country that seeks to look out for and
protect the private investor from the pirates. The recent expose on
the Prudential Bache fiasco left billions of dollars lost from the
pockets of the private sector. The Goldman Sachs company has a
disciplinary file a mile long at the SEC and no one does any thing
about it. Is our government incapable of protecting its citizens, or
is the hive too sweet to tamper with? Goldman Sachs donated to both
the Clinton and Bush campaign. Is that why they are still in
business?
They do business interstate, intrastate, internationally, and
also provide Local, State and Federal Banking Services.
Among a host of other services not the least of which is the
highly abused Bond business, they have been charged with the most
egregious activities in the field. Their refusal to meet the
criteria set up by the SEC is substantiated by the fact that their
latest publicized violation show the IRS on the case for 2.5 Billion
Dollars with some other offenders as well. If our officials let out
the perception that any Broker, Bond Dealer, Securities Company can
operate with out a care when committing these crimes they will set
the tone for disaster. Why should these thieves be allowed to
operate with impunity? If they only have to concern themselves with
the fine they might have to pay then why should they care at all.
Sincerely,
----------------------------------------------------------------------
Server protocol: HTTP/1.0 Remote host: 206.250.91.54 Remote IP
address: 206.250.91.54
Birgitta C. Dickerson,
US Department of Justice, Anti-Trust Division, Bicentennial
building, 600 E Street NW, Washington DC 20530
Re: United States v. Alex. Brown & Sons Inc., et al., Civil No. 96
CIV 5313 (RWS) (S.D.N.Y., July 17, 1996)
Dear Ms. Dickerson: I want to thank you for your response to my
correspondence. It is my feeling that if enough people in the
appropriate agencies are involved in a dialogue, that there will be
a positive result.
I would like to first clarify my position. I applaud and
appreciate the Justice Departments agents being involved in the
process of searching out the many culprits that violate the laws
that make our society so great.
My problem has more to do with the favorite son treatment the
violators are given. The slap on the hand is no longer appropriate,
once a company has established a recognizable ``course of conduct.''
Why allow them to pay a fine, when the conduct is repetitive?
When companies like Prudential Bache, Goldman Sachs, Morgan
Stanley, and many others demonstrate their company's willingness to
pay fine after fine, as settlement for their crimes and malfeasance
in the market, then something is amuck. In courts all over this
great land when a criminal repeatedly violates the law, the judge
usually applies sterner penalties with each offense. Not so in the
market dealings taking place today. Only monetary compensation seems
to be the punishment for what amounts to thoroughly outrageous
behavior on the part of many large traders.
In the newest well spring, Mello Roos Bonds through the
Community Facilities District, large traders like Goldman Sachs find
inexpensive money through redevelopment agencies, and there are
repeated violations using US Government Money.
My personal mission because I am a victim of just such a ploy,
has become to expose this wherever and whenever I find it. For
instance, in my case the Mello Roos Bonds were used to renovate a
``Privately Owned Shopping Center.'' All my research shows me this
is a clear violation of the rules. About 15 local businesses that
were hardworking, taxpaying, solid Americans with families were put
out of business, by this abuse of the rules for Mello Roos Bonds.
Thus my interest in the punishment of these scoundrels. As a veteran
and a family man I am trying to stop these abuses from going
further, and hopefully find some agency that cares enough to take a
closer look.
It is too late to help us, for we have lost everything in this
ruse, but perhaps a stronger stance from the government will match
the punishment to the crime. Conceivably when this begins, the
deliberate conduct against the rules in pursuit of the easy profits
will begin to ebb.
Sincerely yours,
Joel Steinberg
Hays Gorey Jr.,
U.S. Department of Justice, Antitrust Division, Bicentennial
Building, 600 E Street NW 20530
Re: United States v. Alex. Brown & Sons Inc., et al., Civil No. 96
CIV 5313 (RWS) (S.D.N.Y., July 17, 1996)
Dear Mr. Hays, Thank you for your letter dated August 6, 1996,
delivered August 12, 1996.
In your letter you have raised several points I am compelled to
respond to. Although not my preference you raised some issues that
as an American I can not let stand.
I think it is admirable that as stated in your letter, ``As a
result of the proposed settlement, millions of investors will no
longer be subject to the anti-competitive conduct which resulted in
higher trading costs for individual investors and institutions who
bought or sold stocks.'' That is great but where do those who lost
as a result of these activities find their recompense?
You are correct in your assumption, I do not share the view that
your agency has accomplished some great feat for justice. The
Antitrust Division taking the position that the proposed relief,
given the violation of law as alleged in the complaint, is adequate
and effective, in my view is part of the problem. It is tantamount
to charging a thief part of what he has stolen, to allow him to
continue doing business, in lieu of genuine punishment for the
crime.
The act of monetary compensation for the constant purposeful
violations in this case and others, simply allows the ``Course of
Conduct'' to continue. So you are correct I do not share your
enthusiasm. In my opinion there is no equity in matching the
punishment, to these crimes. It would gratify investors all over, if
the Justice Department categorized these actions as criminal,
because that is exactly what they are. Large dealers throughout the
investment community have repeatedly demonstrated a history of
trying to use loopholes to not be punished after being caught, or
claim foul to misdirect the blame when cast in their direction. The
pure lack of ethical conduct is demonstrated persistently in
articles daily in the national print media.
Lastly, as your innuendo implies in the closing paragraph of
your letter, you may presume anything you like, but in fact we have
been in contact and supplied all the documentation to the President
of the United States, SEC, The Attorney General for the State of
California, The Attorney General for the United States Janet Reno,
and in each case have done what we could to impart the relevant
information as requested. It is no coincidence that Goldman Sachs is
being sued by the State of California for $600,000,000.00. Perhaps
you should look to see what states are involved in similar cases.
You are aware or should be that they have a disciplinary file. Read
it for yourself.
In our case, Mello Roos Bonds through the Community Facilities
District, being compromised by the skillful manipulation of
procedure, and regulation served to induce our lawsuit. So your
inference, to that being my reason for correspondence with your
office, is also patently incorrect.
We have learned through our own personal experience, and it is
our opinion formed from investigating issues relative to our case,
that the new ``in vogue'' place to violate, is the Mello Roos cache
for large traders. In our case used on privately owned property,
which as I understand it, is in itself a violation.
Your lack of compassion is obvious, and your tone naive. Someone
needs to reexamine the whole industry, and that is the point.
Punish, not settle when you find abuses. Restrict from any profit
taking for one day at each offense. Charge a day or two of trading
for each offense after that. Progressively increase the punishment
for each offense against any faction of the investment community or
the marketplace. After several offenses charge them a week.
The point is that monetary compensation for the crimes against
the marketplace is not a deterrent. The Justice Department should do
something about it.
Sincerely,
Joel Steinberg,
Citizen who cares.
Memorandum of Plaintiffs in the in Re: Nasdaq Market-Makers Antitrust
Litigation to Intervene or to Appear as Amicus Curiae
Arthur M. Kaplan, Esq. (AK 6357),
Fine, Kaplan and Black, 23rd Floor, 1845 Walnut Street,
Philadelphia, PA 19103, (215) 567-6565
[[Page 59907]]
Christopher Lovell, Esq. (CL 2595),
Robert A. Skirnick, Esq. (RS 2636),
LOVELL & SKIRNICK, L.L.P., 63 Wall Street, New York, NY 10005 (212)
608-1900
Leonard B. Simon, Esq. (LS 2068),
Milberg Weiss Bershad Hynes & Lerach, 600 West Broadway, 1800 One
America Plaza, San Diego, CA 92101-5050, (619) 231-1058
Co-Lead Counsel for Plaintiffs in the In Re: Nasdaq Market-Makers
Antitrust Litigation MDL 1023 (RWS)
I. Introduction
This memorandum is submitted in support of the motion by plaintiffs
in the In re: Nasdaq Market-Makers Antitrust Litigation,\1\ pursuant to
Section 2(f)(3) of the Tunney Act and Rules 24(a) and 24(b) of the
Federal Rules of Civil Procedure, to intervene or, in the alternative,
to appear as amicus curiae in the above-captioned case. Plaintiffs make
this motion for the purpose of (a) requiring the Department of Justice
to disclose the compilation of evidence it made available to the
twenty-four defendants who are parties to the Consent Decree in the
process of negotiating that decree, and all evidentiary materials
expressly referenced in that compilation of evidence (collectively, the
``Compilation of Evidence''); and (b) challenging the Consent Decree to
the extent that it is intended or interpreted to impair the
discoverability or admissibility of audiotapes made in accordance with
the Consent Decree, as described in the proposed Stipulation and Order
at Paragraph IV (C)(6), p. 13 and in the Competitive Impact Statement
at 42-44 (the ``future audiotapes'').
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\1\ M.D.L. No. 1023, 94 Civ. 3996 (RWS) (the ``Multidistrict
litigation'').
---------------------------------------------------------------------------
The Consent Decree is the culmination of an intensive investigation
during which the Antitrust Division amassed a huge volume of documents,
enormous computerized data, and extensive testimony (i.e., the Civil
Investigative Demand (``CID'') materials. From these materials, the
Department of Justice (``DOJ'') prepared the Compilation of Evidence.
All twenty-four defendants who are parties to the Consent Decree have
reviewed the Compilation of Evidence. Press reports reveal that the
Compilation of Evidence was instrumental in the parties' entering into
the Consent Decree.
Importantly, this is a ``now or never'' moment for discovery of the
Compilation of Evidence. The Court expressly has discretion to disclose
this evidence to plaintiffs in the Multidistrict litigation under 15
U.S.C. Sec. 16(b) or (f)(3) at the time of consent decree approval, and
as a condition of consent decree approval. After consent decree
approval, the Court's power to do so disappears. Since defendants
contend that the Compilation of Evidence is not within their ``custody,
possession, or control'' for purposes of civil discovery, the
Compilation of Evidence will slip out of the Court's control, unless it
is impounded now for use in the Multidistrict litigation.
There are two separate, independently sufficient, reasons for
impounding the Compilation of Evidence and releasing it to plaintiffs
(pursuant to the terms of the existing Confidentiality Order). First,
plaintiffs are entitled to the Compilation of Evidence to assist them
in the prosecution of the private antitrust claims. Those claims, which
overlap substantially with the government's allegations at issue here,
have now been pending for more than two years. During that time,
defendants have resisted all merits discovery.
This Court already has ruled that the CID materials are relevant to
the plaintiffs' case, and not privileged. See In re Nasdaq Market
Makers Antitrust Litigation, 929 F. Supp. 723 (S.D.N.Y. 1996). Indeed,
the Department of Justice itself acknowledged the relatedness of the
government and multidistrict cases by filing the government action as a
related case for assignment to this Court. Release of the Compilation
of Evidence will greatly expedite discovery in the Multidistrict
litigation.
Second, the disclosure of the Compilation of Evidence will
substantially assist the Court in deciding, pursuant to 15 U.S.C.
Sec. 16(e), whether the proposed Stipulation and Order (``Consent
Decree'') is in the interest of ``the public generally and individuals
alleging specific injury from the violations set forth in the complaint
* * *. Indeed, only following disclosure of the Compilation of Evidence
(which is material that the Antitrust Division itself considered key in
settlement negotiations) can plaintiffs comment on the adequacy of the
Consent Decree in an informed way.
Plaintiffs currently challenge the Consent Decree only to the
extent that it purports to impair the discoverability and admissibility
of audiotapes made in accordance with the Consent Decree. (See
Stipulation and Order at Paragraph IV(C)(6), p. 13.) This provision is
an apparently unprecedented effort by defendants to withhold raw
evidence from victims of anticompetitive acts, and should not be
countenanced.
Significantly, 15 U.S.C. Sec. 16(e)(2) expressly provides that in
approving, rejecting or modifying proposed consent decrees, the Court
shall consider not only the interests of the public generally, but also
specially the interests of ``individuals alleging specific injury from
the violations set forth in the Complaint.''
II. Relevant Background
A. The DOJ Investigation
The Department of Justice began its investigation in October, 1994.
As is clearly demonstrated by the Competitive Impact Statement, that
investigation was extensive. The Department of Justice deserves
congratulations on the vigor of its investigation.\2\
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\2\ The Competitive Impact Statement has been filed by the DOJ
in support of the proposed consent decree, and is appended for
convenience as Exhibit A hereto. Likewise, for convenience the
proposed Stipulation and Order (``Consent Decree'') is appended
hereto as Exhibit B.
---------------------------------------------------------------------------
During its nearly two-year investigation, the Antitrust Division
amassed a huge volume of documents, enormous computerized data, and
extensive testimony, i.e., the CID materials. According to the
Competitive Impact Statement at 5, the Antitrust Division took ``over''
225 depositions.
On July 17, 1996, twenty-four market makers entered into a
settlement of the civil antitrust claims brought by the United States
for engaging in price fixing of spreads in violation of Section 1 of
the Sherman Act, 15 U.S.C. Sec. 1.
Along with its Complaint, the DOJ filed a Competitive Impact
Statement, which summarizes a portion of the enormous body of evidence
accumulated by the DOJ during the course of its two-year investigation.
According to the Competitive Impact Statement:
The Department has reviewed thousands of pages of documents that
were produced by the defendants and other market participants in
response to over 350 Civil Investigative Demands (``CIDS'') * * *
[and] has reviewed hundreds of responses to interrogatories that
were submitted by the defendants (and others). The Department has
taken over 225 depositions. * * *
The Department has reviewed and analyzed substantial quantities
of market data produced in computer-readable format by the NASD *
* *. Finally, the Department reviewed numerous transcripts of
depositions taken by the Securities and Exchange Commission
(``SEC'') in a concurrent inquiry into the operations and activities
of the NASD and the Nasdaq market since the fall of 1994.
Competitive Impact Statement at 5-6 (emphasis added).
It was not until after the DOJ provided the defendants with the
Compilation of Evidence, that the defendants agreed to settle the
government's antitrust charges. For example, according to a May 21,
1996 Los Angeles Times report:
[[Page 59908]]
The Justice Department, nearing the end of its antitrust
investigation of the Nasdaq Stock Market, is poised to notify major
Wall Street trading firms of the evidence against them * * *,
sources close to the investigation said Monday.
* * * [J]ustice is now prepared to show its cards, the sources
said.
``Antitrust Probe Is Bearing Down on Nasdaq,'' Los Angeles Times, May
21, 1996 (Exhibit C hereto).
Subsequently, on June 7, 1996, the Los Angeles Times reported the
impact that the disclosure of the Compilation of Evidence had on these
defendants:
Big Wall Street firms are scrambling to come up with a strategy
after being shown what the Justice Department contends is massive
evidence of collusion in setting prices of Nasdaq stocks, sources
close to the civil antitrust investigation said Thursday.
Over the last week, more than 20 Nasdaq dealer firms * * * were
finally shown a compilation of the department's evidence in an
investigation that has been underway since late 1994 * * *.
After months of intense investigation, the department decided to
show its strongest cards in hope of persuading dealers to negotiate
a settlement * * *. The sources said lawyers for these firms are now
mulling over the evidence and consulting with their clients on
whether to begin settlement talks.
``Nasdaq Dealers Mull Next Move in Light of U.S. Probe Evidence,'' Los
Angeles Times, June 7, 1996 (Exhibit D hereto, emphasis added).
In a follow-up article on July 13, 1996, the Los Angeles Times
reported that, according to a source close to the government, ``the
strength of the Justice Department's evidence convinced the firms that
they would probably lose if the case came to trial.'' ``Nasdaq Dealers
Reportedly Settle in Federal Probe,'' Los Angeles Times, July 13, 1996.
(Exhibit E hereto.)
B. The Multidistrict Litigation
The first of the private lawsuits against Nasdaq market makers
alleging collusion to widen spreads was filed in May, 1994. Those
lawsuits were all consolidated before this Court by the Judicial Panel
for Multidistrict Litigation.
The allegations in the Multidistrict litigation overlap
substantially with those in the DOJ's complaint. However, as a result
of two successive stays obtained by defendants in the Multidistrict
litigation (first pending defendants' motion to dismiss and later
pending class determination) defendants have not even begun an
independent production of documents and audiotapes pursuant to
plaintiffs' first set of discovery requests served in January 1995, and
have declined to accept service of Plaintiffs' second set of requests.
Currently, discovery is stayed by Paragraph 24 of Pretrial Order No. 3.
* * * * *
V. Future Audiotapes Should Not Be Rendered Unavailable to
Plaintiffs in the Multidistrict Litigation
According to the Competitive Impact Statement:
[T]apes made pursuant to the proposed Order are required to be
retained by each defendant for at least 30 days from the date of
recording. The tapes made pursuant to the proposed Order are not
subject to civil process except for process issued by the Antitrust
Division, the SEC, the NASD or any other self-regulatory
organization. The proposed Order directs that such tapes not be
admissible in evidence in civil proceedings, except in actions,
proceedings, investigations, or examinations commenced by the
Antitrust Division, the SEC, the NASD, or any other self-regulatory
organization.
Competitive Impact Statement at 43 (emphasis added). The proposed
Stipulation and Order provides at Paragraph IV (C)(6), p. 13 (emphasis
added):
Tapes made pursuant to this stipulation and order shall not be
subject to civil process except for process issued by the Antitrust
Division, the SEC, the NASD, or any other self-regulatory
organization. . . . Such tapes shall not be admissible in evidence
in civil proceedings, except in actions, proceedings,
investigations, or examinations commenced by the Antitrust Division,
the SEC, the NASD, or any other self-regulatory organization * * *.
Plaintiffs do not believe that this proposed provision, limiting
discovery or admissibility of future audiotapes, is binding or
enforceable in private antitrust litigation, as against plaintiffs and
other non-parties to the Consent Decree. However, unless the Department
of Justice and defendants join in this remedial construction, then
plaintiffs necessarily object to this provision of the proposed Decree.
Unlike, for example, the reports by defendants' monitors regarding
the tapes (see Competitive Impact Statement at 43), the audiotapes are
raw evidence that is ordinarily discoverable to the victims of the
market makers' collusion. To purportedly render future audiotapes
undiscoverable and inadmissible is to tie the hands of this Court in
the current Multidistrict proceedings, and those of other District
Courts in any future proceedings, in advance of a concrete dispute
concerning the admissibility or discoverability of particular tapes,
and without briefing and argument by future adverse parties.
This proposed provision is inconsistent with and fundamentally
contradicts the intended complementary roles of private and public
antitrust enforcement discussed at 24-25, supra. Furthermore, this
proposed provision creates a significant risk that defendants will
resist the production of any future andiotapes whatsoever, using the
argument that they were created in compliance with, and are therefore
insulated by, the Consent Decree. Certainly, it is unrealistic to
assume that audiotaping under the consent decree will not be comingled
with the audiotaping done in the ordinary course of defendants'
business.
Plaintiffs therefore request that the Court reject this provision,
or clarify that, by entering the Consent Decree, the Court does not
bind any non-party to the Consent Decree (including the Multidistrict
plaintiffs or proposed Class) by the above language. If the Court
believes that any future Court might be influenced in matters of
discoverability or admissibility by defendants' self-serving effort to
conceal raw evidence, then the Court should require the parties to
modify the Consent Decree.
[[Page 59909]]
Dated: August 28, 1996
Arthur M. Kaplan, Esquire (AR 6357),
Melinda L. deLisle, Esquire,
Fine, Kaplan and Black,
1845 Walnut Street, 23rd Floor, Philadelphia, PA 19103
Christopher Lovell, Esquire (CL 2595)
Lovell & Skirnick, L.L.P.,
63 Wall Street, New York, NY 10005-2818
Leonard B. Simon, Esquire (LS 2068),
Dennis Stewart, Esquire,
Sharon T. Maier, Esquire,
Milberg, Weiss, Bershad, Hynes & Lerach
600 West Broadway, 1800 One America Plaza, San Diego, CA 92101-5050
and
Patricia M. Hynes, Esquire, Milberg, Weiss, Bershad, Hynes & Lerach,
One Pennsylvania Plaza, New York, NY 10019-0165
Robert A. Skirnick, Esquire (RS 2636),
Lovell & Skirnick, L.L.P.,
63 Wall Street, New York, NY 10005-2818
Co-Lead Counsel for Plaintiffs in the In re: NASDAQ Market-Makers
Antitrust Litigation, MDL 1023 (RWS)
Stanley M. Grossman, Esquire,
Pomerantz Haudek Block & Grossman,
100 Park Avenue, New York, New York 10017-5516
Bruce E. Gerstein, Esquire,
Jerald M. Stein, Esquire, Garwin, Bronzaft, Gerstein & Fisher
1501 Broadway, Suite 1416, New York, New York 10036
Briefing Co-Chairs for Plaintiffs in the In re: Nasdaq Market-Makers
Antitrust Litigation, MDL 1023 (RWS)
* * * * *
Reply Memorandum in Support of Motion of Plaintiffs in The in RE:
NASDAQ Market-Makers Antitrust Litigation to Intervene or to Appear as
Amicus Curiae
Arthur M. Kaplan, Esq. (AK 6357),
Fine, Kaplan and Black,
23rd Floor, 1845 Walnut Street, Philadelphia, PA 19103, (215) 567-6565
Christopher Lovell, Esq. (CL 2595),
Robert A. Skirnick, Esq. (RS 2636),
Lovell & Skirnick, L.L.P.,
63 Wall Street, New York, NY 10005, (212) 608-1900
Leonard B. Simon, Esq. (LS 2068), Milberg Weiss Bershad Hynes & Lerach,
600 West Broadway, 1800 One America Plaza, San Diego, CA 92101-5050,
(619) 231-1058
Co-Lead Counsel for Plaintiffs in the In Re: Nasdaq Market-Makers
Antitrust Litigation MDL 1023 (RWS)
Preliminary Statement
The Tunney Act is a ``sunshine'' act that was intended to allow
significant participation by interested persons in a district court's
consideration of proposed consent decrees and prevent ``judicial rubber
stamping'' of proposed decrees. The principal disclosure provision
under the Tunney Act, 15 U.S.C. Sec. 16(b), is mandatory.
The Department of Justice and the defendants seek to prevent the
``sunshine'' that the Act envisions. They oppose all participation by
multidistrict plaintiffs--who are the victims of the antitrust
violations being addressed by the proposed consent decree. This Court
should follow both the letter and the spirit of the Tunney Act by
allowing the multidistrict plaintiffs to intervene in the government
action to protect their interests.
The principal interests of multidistrict plaintiffs are two-fold.
Multidistrict plaintiffs seek: (1) to hold the government to its
mandatory disclosure obligations under the Tunney Act, particularly in
regard to determinative documents; and (2) to prevent approval of
section IV(C)(6) of the proposed decree, which is a protective order
provision purporting to limit the discoverability and admissibility of
future tape recordings in the multidistrict litigation.
Section IV(C)(6) of the proposed decree is an impermissible
arrogation of power by the parties. As the Ninth Circuit stated in
Olympic Refining Company v. Carter, 332 F.2d 260, 265 (9th Cir.), cert.
denied, 379 U.S. 900 (1964), ``neither in the express nor implied terms
of the statutes or rules is there any indication that a consenting
defendant could gain the additional benefit of holding under seal, or
stricture of nondisclosure, for an indefinite time, information which
would otherwise be available to the public or at least to other
litigants who had need of it.''
Regardless of whether formal intervention is granted, the Court can
and should require that the Compilation of Evidence be disclosed to the
multidistrict plaintiffs.\1\ That result would best serve the interests
of justice by obiviating the need for extensive duplicative discovery
in the multidistrict litigation, including the retaking of over 225
depositions. Such an outcome specifically was endorsed in both the
House and Senate Reports on the Tunney Act.
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\1\ Defendants and the government have chosen to designate the
Compilation of Evidence presented to defendants as ``the Settlement
Memorandum,'' which reflects (indeed emphasizes) its determinative
role in settlement negotiation. It is class plaintiffs'
understanding that this ``Settlement Memorandum'' consisted of
several loose-leaf notebooks of raw evidence. Thus, class plaintiffs
believe that it is accurate to use the terminology ``Compilation of
Evidence'' and `'Settlement Memorandum'' interchangeably.
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I. Multidistrict Plaintiffs Should Be Granted Intervenor Status in
the Government Enforcement Action
The defendants and the Department of Justice (``DOJ'') erroneously
argue that multidistrict plaintiffs fail to meet the standards for
intervention of right, and they further argue that the court should use
its discretion to deny permissive intervention, or even amicus status.
This Court should reject those arguments. Multidistrict plaintiffs meet
all of the requirements for intervention of right. If the Court
disagrees, it should nevertheless exercise its discretion and allow
permissive intervention or amicus participation.
A. Multidistrict Plaintiffs Meet the Standards for Intervention of
Right
The government argues that multidistrict plaintiffs do not meet the
requirements for intervention of right because they have not
demonstrated an ``interest'' that will be impaired by entry of the
consent decree. Private plaintiffs have two important interests that
are not represented by any party. First multidistrict plaintiffs have a
crystal clear interest in challenging Section IV(C)(6) of the proposed
consent decree, which prohibits the discoverability and admissibility
of evidence in plaintiffs' own separate civil aciton. Second,
multidistrict statutory disclosure obligations under the Tunney Act, so
that they can comment meaningfully on the proposed consent decree and
so that important evidence already gathered by the government can be
impounded and utilized. The multidistrict plaintiffs' interest in these
matters is diametrically opposed to positions taken by the parties to
the consent decree, and the intervention of right therefore should be
granted to multidistrict plaintiffs to protect their own interests.\2\
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\2\ This case, therefore, is diametrically different from Cook
v. Pan American World Airways, Inc., 636 F. Supp. 693 (S.D.N.Y.
1986) (Sweet, J.), where this Court found that intervention by
certain union members in an age discrimination suit was not
appropriate because the defendant union would adequately represent
union members' interests. The Court held that ``the movants'
interest in preserving the present system is adequately represented
by existing defendants'' and ``movants' interests and defendants'
interests are identical''. 636 F. Supp. at 697.
United States v. Simmonds Precision Products, Inc., 319 F. Supp.
620 (S.D.N.Y. 1970) is closer to the situation at hand. In that
case, the court permitted a union to intervene in government
antitrust consent decree proceedings because its interest was
opposed to the position taken by the parties. 319 F. Supp. at 621.
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[[Page 59910]]
1. Multidistrict Plaintiffs Alone Have an Interest in Challenging
Section IV(C)(6) of the Proposed Consent Decree
In the proposed consent decree, the parties have agreed to a
provision that harms the multidistrict plaintiffs. Paragraph IV(C)(6)
of the proposed consent decree is a protective order prohibiting the
discoverability and admissibility of raw evidence, i.e., certain future
audiotapes, for everyone except the government and other specified
regulatory entities. As argued below in Section III, this is an illegal
arrogation of power, for which the parties seek this Court's judicial
imprimatur. Multidistrict plaintiffs are the only ones with an
interest in preventing this abuse, and they should be allowed to
intervene for that purpose.
As this Court already held in the In re Nasdaq Market-Makers
Antitrust Litigation, 164 F.R.D. 346, 351 (S.D.N.Y. 1996), ``Rule 24 is
the proper mechanism for a non-party to seek modification of a
protective order and thus to gain access to information generated
through judicial proceedings.'' See also Northern States Power Company
v. Westinghouse Electric Corp., 156 F.R.D. 168, 171 (D.Minn. 1994)
(``every circuit to address the issue has concluded that intervention
is the proper procedure for non-parties to challenge protective
orders'') (citing cases).
The future audiotapes are not, as defendants claim, of
insubstantial value to multidistrict plaintiffs. In the multidistrict
action, tape recordings of the conversations among the defendants'
market makers constitute some of the most important direct evidence of
defendants' conspiracy.
Moreover, the multidistrict plaintiffs have alleged an ongoing
conspiracy, and have sought injunctive relief. Thus, any evidence of
future discussions between market makers will provide a fertile ground
for discovery.
Additionally, one of multidistrict plaintiffs' theories for
measuring damages involves comparing defendants' profit levels after
the conspiracy ends to profit levels during the conspiracy. Of course,
a before and after calculation is meaningless (or misleadingly
conservative) unless plaintiffs can determine that the conspiracy no
longer prevails in the designated ``after'' period. Evidence of future
conversations along the market makers will be valuable in making this
determination as well.
Although the defendants and the government cite a number of cases
in which intervention has been denied to private plaintiffs challenging
a proposed consent decree, in none of those cases has the proposed
consent decree attempted to prohibit the discoverability or
admissibility of raw evidence in litigation brought by the private
plaintiffs. Multidistrict plaintiffs have a right to have questions of
discoverability and admissibility of evidence in their case decided in
their own case, not predetermined by agreement among parties in a
different action. Therefore, under this Court's prior decision In re
Nasdaq Market-Makers Antitrust Litigation, 164 F.R.D. at 351, the
multidistrict plaintiffs have a right to intervene to challenge the
protective order provision of the proposed decree.
* * * * *
B. In the Alternative, Permissive Intervention Should be Granted
The DOJ concedes, as it must, that the multidistrict action shares
questions of law and fact in common with the government action, and
thus the requirements for permissive intervention are satisfied.
However, the DOJ urges this Court to exercise its discretion and deny
intervention based on its unsupported assertion that intervention might
``unduly delay or prejudice the adjudication of the rights of the
original parties.'' No explanation has been provided by the DOJ or the
defendants of any actual prejudice or delay that would in fact result.
Multidistrict plaintiffs do not want to prolong these proceedings.
Multidistrict plaintiffs have two principal objectives: (1) compelling
the disclosure of the Compilation of Evidence (and any evidentiary
materials expressly referenced therein) pursuant to the Tunney Act (and
receiving an opportunity to participate meaningfully in the consent
decree approval process after reviewing these materials); and (2)
removing Section IV(C)(6) of the proposed consent decree. There is no
reason why these objectives cannot be accomplished without undue delay.
The parties seek a judicial rubber stamp of their decision, without
any meaningful comment from or participation by the victims of these
antitrust violations. This Court should not grant the parties' desire
to exclude injured persons from the Consent Decree approval process,
particularly since 15 U.S.C. Sec. 16(e)(2) suggests that the court
should specifically consider, in addition to the more general public
interest, the impact of the proposed decree on injured persons.
This Court plainly has discretion to permit permissive intervention
in these circumstances. E.g., United States v. American Cyanamid Co.,
719 F.2d 558, 563 (2d Cir. 1983), cert. denied, 465 U.S. 1101 (1984)
(affirming the district court's decision to permit permissive
intervention in antitrust consent decree proceedings). For example, in
United States v. American Telephone and Telegraph Co., 552 F. Supp.
131, 218-19 (D.D.C. 1982), aff'd sub nom. Maryland v. United States,
460 U.S. 1001 (1983), after initial denial, intervenor status later was
granted to all who moved to intervene, and the court permitted the
intervenors to file briefs, participate in proceedings and oral
argument, and appeal the entry of the consent decree. 552 F. Supp. at
218-19.\4\
* * * * *
III. Section IV(C)(6) of the Proposed Consent Decree is an Arrogation
of Power, and it Should Not Be Approved by This Court
Under the terms of the proposed consent decree, the defendants have
agreed to tape record and monitor not less than 3.5 percent of their
Nasdaq trader telephone conversations (up to a maximum of 70 hours per
week). However, Section IV(C)(6) of the consent decree contains a
protective order providing that tapes made pursuant to the decree are
neither discoverable nor admissible in private civil actions.\11\ Thus,
by agreement, the parties have purported to exempt the defendants from
the Federal Rules of Civil Procedure and the Federal Rules of Evidence
in the multidistrict litigation, by creating their own category of non-
discoverable and inadmissible documents. There is nothing that gives
either an antitrust defendant or the DOJ the power to enact such a
result. This Court should not put its imprimatur of approval on this
illegal arrogation of power.
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\11\ Under the protective order provision of the consent decree,
``The tapes made pursuant to the proposed Order area not subject to
civil process except for process issued by the Antitrust Division,
the SEC, the NASD, or any other self-regulatory organization. The
proposed Order directs that such tapes not be admissible in evidence
in civil proceedings, except in actions, proceedings,
investigations, or examinations commenced by the Antitrust Division,
the SEC, the NASD, or any other self-regulatory organization.''
Competitive Impact Statement at 43 (emphasis added).
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The only case cited in support of this unprecedented expansion of
power by either the DOJ or the defendants is In re LTV Securities
Litigation, 89 F.R.D. 595 (N.D. Tex. 1981). This case provides no
support at all. In LTV Securities the Court held that materials
generated by an attorney, functioning as a ``Special Officer''
appointed by the corporation to implement a consent decree, were
entitled to a hybrid of the attorney-
[[Page 59911]]
client privilege and the privilege afforded SEC investigations.
Although the position of the ``Special Officer'' may be loosely
analogous to that of the anticipated tape-monitors in this case, the
discoverability of the monitors' reports, of course, has nothing to do
with the underlying raw evidence--the tapes themselves. Moreover, the
reasoning in LTV Securities depended heavily on the fact that the
Special Officer was still involved in an ongoing investigation of LTV
that would be impacted adversely by the discovery requested. 89 F.R.D.
at 618-19. That too is not the case here. LTV Securities simply has no
relevance to the entry of a protective order prohibiting the discovery
and admissibility of raw evidence.
Olympic Refining Company v. Carter, 332 F.2d 260 (9th Cir.), cert.
denied, 379 U.S. 900 (1964), is far more analogous. In Olympic
Refining, documents in a government antitrust suit had been sealed
pursuant to a consent decree. A private party filed a civil action
against the defendants from the government action, and sought to
subpoena the sealed documents from the government's case (some of which
were filed with the court under seal and some of which were retained by
the government). 332 F.2d at 262-63 n.3. The district court refused to
modify the protective order to permit the private plaintiffs to examine
the documents. The Court of Appeals issued a writ of mandamus ordering
the district court to modify the protective order to permit the private
plaintiffs to have access to the previously sealed documents.
In issuing the writ of mandamus, the Court of Appeals noted that
``[p]rivate treble-damage actions are an important component of the
public interest in `vigilant enforcement of the antitrust laws.' '' 332
F.2d at 264, quoting Lawlor v. National Screen Serv. Corp., 349 U.S.
322, 329 (1955). The Court further held that, although there are
numerous benefits that a defendant can gain from entering into a
consent decree, nothing in the law permits an antitrust defendant to
gain a non-disclosure right over its evidence:
[A] consenting defendant in a Government antitrust suit gains
whatever benefit there may be in accepting the terms of the consent
decree rather than risking a more onerous decree entered after
litigation. A consenting defendant also benefits from the saving in
litigation expense which is made possible by a consent decree. But
neither in the express nor implied terms of the statutes or rules is
there any indication that a consenting defendant could gain the
additional benefit of holding under seal, or stricture of
nondisclosure, for an indefinite time, information which would
otherwise be available to the public or at least to other litigants
who had need of it.
332 F.2d at 265 (emphasis added).
The defendants and the DOJ argue that but for the consent
agreement, the future tape-recorded evidence in this case would not
even exist. The premise for this argument, of course, is as faulty as
its conclusion, as this Court well knows from the fact that at least
ten defendants already were taping their traders before the government
investigation even began. There is simply no way to determine how many
of the tapes made and monitored ``pursuant'' to the consent decree
would have been made (and would have been admissible evidence) even
without the decree.\12\
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\12\ It cannot logically be argued that all calls monitored
under the consent decree will be additional calls, since at least
some of the defendants were taping every call before the government
investigation began.
---------------------------------------------------------------------------
From this erroneous premise, the DOJ and defendants illogically
concluded that they have the power to do whatever they want with
``their'' evidence. This contention is without any judicial support. In
Ex parte Uppercu, 239 U.S. 435, 36 S. Ct. 140 (1915), Justice Holmes,
writing for a unanimous Court, noted that once evidence exists, it
exists for everyone.
Uppercu arose after the government brought a civil action against
Dwight Manufacturing Company. That case was settled and, with the
consent of the parties, all of the depositions and exhibits in the case
were sealed by the district court. Under the terms of the sealing
agreement, the transcripts and exhibits would be available only to the
government and the defendant in the original action. Uppercu, who was
not a party to the original suit, sought access to the sealed
depositions and exhibits in the case. The district court enforced the
sealing order and denied Uppercu access.
The Supreme Court issued a writ of mandamus ordering the district
court to enforce Uppercu's right of access to the sealed depositions
and exhibits. Justice Holmes stated:
So long as the object physically exists, anyone needing it as
evidence at a trial has a right to call for it, unless some
exception is shown to the general rule. We discover none here.
Neither the parties to the original cause nor the deponents have any
privilege, and the mere unwillingness of an unprivileged person to
have the evidence used cannot be strengthened by such a judicial
fiat as this, forbidding it, however proper and effective the
sealing may have been as against the public at large.
Uppercu, 239 U.S. at 440, 36 S. Ct. at 141 (emphasis added).
Similarly, in this case, if the parties voluntarily choose to
create evidence, it is beyond their power to limit anyone with a legal
interest in the evidence (other than themselves) in regard to how that
evidence can be used. See In re Agent Orange Product Liability
Litigation, 821 F. 2d 139, 144 (2d Cir.) (parties that obtained sealing
agreement as part of settlement of class action doubtless were aware
that their settlement agreement could not limit non-parties to the
agreement), cert. denied, 484 U.S. 953 (1987). Here, remarkably, the
parties purport to do just the opposite. They purport to limit everyone
in the world except themselves.
Section IV(C)(6) of the proposed consent decree is beyond the power
of the parties. It should not be approved the Court.
Conclusion
This Court should follow both the letter and the spirit of the
Tunney Act by granting multidistrict plaintiffs' motion to intervene in
this proceeding, and by ordering the government to disclose the
Compilation of Evidence and the evidentiary materials referenced
therein. Finally, because the protective order embodied in section
IV(C)(6) of the proposed consent decree is excessive and improper, this
Court should refuse to put its imprimatur on it.
Dated: Oct. 14, 1996.
[[Page 59912]]
Respectfully Submitted,
Arthur M. Kaplan, Esquire (AK 6357)
Melinda L. deLisle, Esquire
Glenn J. Moramarco, Esquire
Fine, Kaplan and Black
1845 Walnut Street, 23rd Floor, Philadelphia, PA 19103
Christopher Lovell, Esquire (CL 2595),
Lovell & Skirnick, L.L.P.
63 Wall Street, New York, NY 10005-2818
and
Leonard B. Simon, Esquire (LS 2068),
Dennis Stewart, Esquire,
Sharon T. Maier, Esquire,
Milberg, Weiss, Bershad, Hynes & Lerach
600 West Broadway, 1800 One America Plaza, San Diego, CA 92101-5050
and
Patricia M. Hynes, Esquire,
Milberg, Weiss, Bershad, Hynes & Lerach
One Pennsylvania Plaza, New York, NY 10019-0165
Robert A. Skirnick, Esquire (RS 2636),
Lovell & Skirnick, L.L. P.,
63 Wall Street, New York, NY 10005-2818.
Co-Lead Counsel for Plaintiffs in the In re: Nasdaq Market-
Makers Antitrust Litigation, MDL 1023 (RWS).
* * * * *
[FR Doc. 96-29965 Filed 11-22-96; 8:45 am]
BILLING CODE 4410-11-M
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.