United States v. Morgan

The United States (plaintiff) civilly sued 17 investment-banking firms (the firms) (defendants) for conspiring to restrain and monopolize the securities business in violation of the Sherman Antitrust Act. The complaint alleged that the firms agreed to use underwriting syndicates to stabilize the business by fixing and controlling the prices, terms, and conditions of new issues and secondary offerings. Trial evidence established that the syndicate system originated in the late 1800s and evolved as illustrated by the development of Goldman, Sachs & Co. (GS) and Lehman Brothers (Lehman). GS’s founders bought small merchants’ promissory notes and sold them to investors. As family businesses grew and needed capital, GS had them incorporate and sell securities to the public. In 1906, GS recruited Lehman to help underwrite a financing; over the next 10 years, the two firms co-underwrote financings of many small companies that grew into large enterprises. There was no nationwide securities-dealer network, and distribution took several months. A firm typically purchased an issue and sub-underwrote its risk by selling the securities to a larger purchase syndicate at a higher price. As companies’ capital needs increased, purchase syndicates sold securities to larger banking syndicates at additional price increases. Originating bankers served as managers; syndicate members agreed to buy and sell the securities and maintain a fixed price during distribution. After 1923, industrial expansion, increased use of the corporate form, and surging demand for capital led to three selling-syndicate types in which members acted as principals. The syndicate agreements specified the public-offering price; managers traded in the market during the distribution period to prevent securities from coming back onto the market and depressing the offering price; and repurchase penalties were imposed for securities that appeared in the market. After the enactment in the 1930s of banking and securities laws regulating the amount of capital that could be used for underwriting and making underwriters liable for misrepresentations or omissions in registration statements, underwriters stopped purchasing issues jointly and completed transactions pursuant to issuer-underwriter agreements and agreements among underwriters. Investment bankers competed for business. The selected banker structured the issue and organized the syndicate and distribution plan. The issuer and banker negotiated the public-offering price; the gross spread, including compensation for distribution participants; and the price to be paid the issuer. Approximately 1,300 syndicate agreements were introduced at trial, containing provisions relating to, among other things, price maintenance and stabilization. The agreements had similarities fundamental to the syndicate system but lacked uniformity.