In Re Short Sale Antitrust Litig. ( 2009 )

  •      08-0420-cv
         In re Short Sale Antitrust Litig.
     1                       UNITED STATES COURT OF APPEALS
     3                           FOR THE SECOND CIRCUIT
     5                               August Term, 2009
     8   (Argued: September 30, 2009            Decided: December 3, 2009)
    10                            Docket No. 08-0420-cv
    12   - - - - - - - - - - - - - - - - - - - -x
    15   behalf of itself and all others
    16   similarly situated,
    18                     Plaintiff-Appellant,
    20               - v.-
    37                     Defendants-Appellees,
    41   NEW YORK, J.P. MORGAN CHASE & CO., J.P.
    43   BROTHERS INC.,
    1                   Defendants.
    3    - - - - - - - - - - - - - - - - - - - -x
    5        Before:        JACOBS, Chief Judge, SACK and LYNCH,
    6                       Circuit Judges.
    8        Plaintiff-appellant Electronic Trading Group, LLC
    9    appeals from a judgment of the United States District Court
    10   for the Southern District of New York (Marrero, J.)
    11   dismissing a Sherman Act claim with prejudice and dismissing
    12   three state law claims without prejudice to refiling in
    13   state court.   The district court evaluated the four
    14   considerations recently articulated by the United States
    15   Supreme Court in Credit Suisse Securities (USA) LLC v.
    16   Billing, 
    551 U.S. 264
     (2007), and found implied preclusion
    17   from antitrust liability.    We affirm.
    18                                ANDREW J. ENTWISTLE, VINCENT R.
    19                                CAPPUCCI, HAROLD F. McGUIRE,
    20                                JR., ARTHUR V. NEALON, and
    21                                STEPHEN D. OESTREICH, Entwistle
    22                                & Cappucci LLP, New York, New
    23                                York, for Appellant Electronic
    24                                Trading Group, LLC.
    26                                ROBERT F. WISE, JR., and WILLIAM
    27                                J. FENRICH, Davis Polk &
    28                                Wardwell LLP, New York, New
    29                                York, for Appellees Morgan
    30                                Stanley & Co. Incorporated and
    31                                Morgan Stanley DW Inc.
     2   C. PEPPERMAN, II, Sullivan &
     3   Cromwell LLP, New York, New
     4   York, for Appellees Goldman,
     5   Sachs & Co., Goldman Sachs
     6   Execution & Clearing, L.P., and
     7   The Goldman Sachs Group, Inc.
    10   FRISCHER, Proskauer Rose LLP,
    11   New York, New York, for Appellee
    12   Bear Stearns Companies, Inc.
    14   JAY B. KASNER and SHEPARD
    15   GOLDFEIN, Skadden, Arps, Slate,
    16   Meagher & Flom LLP, New York,
    17   New York, for Appellee Merrill
    18   Lynch, Pierce, Fenner & Smith
    19   Incorporated.
    23   SUSAN E. ENGEL, and ELEANOR R.
    24   BARRETT, Kirkland & Ellis LLP,
    25   New York, New York and
    26   Washington, D.C., for Appellee
    27   UBS Financial Services, Inc.
    30   HUNTER, JR., and ALI M.
    31   STOEPPELWERTH, Wilmer Cutler
    32   Pickering Hale and Dorr LLP, New
    33   York, New York and Washington,
    34   D.C., for Appellees Citigroup
    35   Inc., Citigroup Global Markets,
    36   Inc., Credit Suisse (USA) Inc.,
    37   and Credit Suisse Securities
    38   (USA) LLC.
    41   J. DOWD, O’Melveny & Myers LLP,
    42   New York, New York, for Appellee
    43   Banc of America Securities LLC.
     1                                  GREGORY A. MARKEL and MARTIN L.
     2                                  SEIDEL, Cadwalader, Wickersham &
     3                                  Taft LLP, New York, New York,
     4                                  for Appellee Deutsche Bank
     5                                  Securities, Inc.
     7                                  DANIEL B. RAPPORT, KATHERINE L.
     8                                  PRINGLE, and LISA S. GETSON,
     9                                  Friedman Kaplan Seiler & Adelman
    10                                  LLP, New York, New York, for
    11                                  Appellee Van Der Moolen
    12                                  Specialists USA, LLC.
    14                                  JONATHAN D. POLKES, ROBERT F.
    15                                  CARANGELO, and DEBRA J.
    16                                  PEARLSTEIN, Weil, Gotshal &
    17                                  Manges LLP, New York, New York,
    18                                  for Appellee CIBC World Markets
    19                                  Corp.
    21   DENNIS JACOBS, Chief Judge:
    23       In this putative class action, plaintiff-appellant
    24   Electronic Trading Group, LLC (“ETG”), a short seller, sues
    25   certain financial institutions that serve as “prime brokers”
    26   in short sale transactions.1    It is alleged that the prime
    27   brokers arbitrarily designated certain securities as hard-
                The defendants-appellees are Banc of America
         Securities LLC; Bear Stearns Companies, Inc.; Citigroup
         Inc.; Credit Suisse (USA) Inc.; Deutsche Bank Securities,
         Inc.; Goldman, Sachs & Co.; Merrill Lynch, Pierce, Fenner &
         Smith Incorporated; Morgan Stanley & Co., Incorporated; UBS
         Financial Services, Inc.; CIBC World Markets Corp.;
         Citigroup Global Markets, Inc.; Credit Suisse Securities
         (USA) LLC; Goldman Sachs Execution & Clearing, L.P.; The
         Goldman Sachs Group, Inc.; Van Der Moolen Specialists USA,
         LLC; and Morgan Stanley DW Inc.
    1    to-borrow and then fixed the price for borrowing them, in
    2    violation of Section 1 of the Sherman Act, 15 U.S.C. § 1
    3    (the “antitrust claim”).2   Three state law claims are also
    4    pleaded: breach of fiduciary duty, aiding and abetting
    5    breach of fiduciary duty, and unjust enrichment
    6    (collectively, the “state law claims”).3
    7        ETG appeals from a judgment of the United States
    8    District Court for the Southern District of New York
    9    (Marrero, J.), dismissing the antitrust claim with prejudice
    10   on the ground of implied preclusion of the antitrust law by
    11   the securities law, and dismissing the state law claims
                “A complaint pleading a violation of section 1 must
         allege a contract, combination or conspiracy that
         unreasonably restrains trade.” Elecs. Commc’ns Corp. v.
         Toshiba Am. Consumer Prods., Inc., 
    129 F.3d 240
    , 243 (2d
         Cir. 1997).
                ETG brought the breach of fiduciary duty claim
         against Morgan Stanley DW Inc.; Bear Stearns Companies,
         Inc.; Goldman Sachs Execution & Clearing, L.P.; Goldman,
         Sachs & Co.; UBS Financial Services, Inc.; Merrill Lynch,
         Pierce, Fenner & Smith Incorporated; Citigroup Global
         Markets, Inc.; Credit Suisse Securities (USA) LLC; Deutsche
         Bank Securities, Inc.; Banc of America Securities LLC; Van
         Der Moolen Specialists USA, LLC; and CIBC World Markets
              ETG brought the aiding and abetting breach of fiduciary
         duty claim against the parent corporations of some of the
         prime brokers named in the breach of fiduciary duty claim--
         Morgan Stanley & Co., Incorporated; The Goldman Sachs Group,
         Inc.; Citigroup Inc.; and Credit Suisse (USA) Inc.
    1    without prejudice to refiling in state court.   We affirm.
    2        The preclusion analysis turns on four considerations
    3    identified in Credit Suisse Securities (USA) LLC v. Billing,
    551 U.S. 264
    , 285 (2007): whether the “area of conduct [is]
    5    squarely within the heartland of securities regulations”;
    6    whether the Securities and Exchange Commission (“SEC”) has
    7    “clear and adequate [] authority to regulate”; whether there
    8    is “active and ongoing agency regulation”; and whether “a
    9    serious conflict” arises between antitrust law and
    10   securities regulations.
    11       Much depends on the level of particularity or
    12   generality at which each Billing consideration is evaluated.
    13   Obviously, if the inquiry is whether the SEC actively
    14   regulates the pricing of borrowed shares, the plaintiff wins
    15   the point.   By the same token, if the inquiry is whether
    16   short selling is within the heartland of securities
    17   regulations, the defendants win the point.
    18       For the reasons set forth in this opinion, the fourth
    19   consideration--detection of a serious conflict--is evaluated
    20   at the level of the alleged anticompetitive conduct.    Each
    21   of the three remaining considerations is evaluated at the
    22   level most useful to the court in achieving the overarching
    1    goal of avoiding conflict between the securities and
    2    antitrust regimes.
    4                               BACKGROUND
    5    A.   Short Selling
    6         A short sale transaction proceeds in the following
    7    sequence.     The short seller identifies securities she
    8    believes will drop in market price, borrows these securities
    9    from a broker (prime brokers have the greatest market
    10   share), sells the borrowed securities on the open market,
    11   purchases replacement securities on the open market, and
    12   returns them to the broker--thereby closing the short
    13   seller’s position.     The short seller’s profit (if any) is
    14   the difference between the market price at which she sold
    15   the borrowed securities and the market price at which she
    16   purchased the replacement securities, less borrowing fees,
    17   brokerage fees, interest, and any other charges levied by
    18   the broker.
    20   B.   The Role of the Prime Brokers
    22        In the context of short selling, a prime broker locates
    23   the short seller’s requested securities, lends those
    1    securities to the short seller for a fee, and delivers those
    2    securities to the short seller’s purchaser.
    3        A short seller seeking to borrow securities contacts
    4    the broker’s securities loan desk.    Pursuant to SEC
    5    regulations, the securities loan desk must locate the
    6    requested securities before it can accept the short seller’s
    7    order.    See 17 C.F.R. § 242.203(b)(1)(i)-(iii).   The
    8    securities loan desk may locate the securities in its own
    9    proprietary accounts, or in the hands of other brokers or
    10   institutional investors with significant long positions.
    11   Alternatively, the securities loan desk may locate the
    12   securities through a third party who assists the broker in
    13   exchange for a locate fee.
    14       The broker charges the short seller a borrowing fee
    15   affected by supply and demand: the harder the security is to
    16   find and borrow, the higher the fee.    The broker may develop
    17   an easy-to-borrow list of securities that are in abundant
    18   supply and a hard-to-borrow list of securities that are
    19   scarce.   See Short Sales, Exchange Act Release No. 34-50103,
    20   83 SEC Docket 1278 (July 28, 2004).
    21       A short seller who has sold the borrowed securities on
    22   the open market must deliver those securities to the
    1    purchaser within three days of the transaction date.   If the
    2    short seller’s broker does not deliver in time, a failure-
    3    to-deliver (“FTD”) occurs.
    5    C.   The Borrowing Fees Conspiracy
    7         It is alleged that from April 12, 2000 to the present,
    8    the prime brokers charged “artificially inflated” borrowing
    9    fees by agreeing on which securities to designate
    10   arbitrarily as hard-to-borrow, and setting minimum borrowing
    11   fees for these securities.   (There are other allegations,
    12   set out in the margin, which we do not reach.4 )
                ETG’s Amended Class Action Complaint (the
         “complaint”) also alleges that the prime brokers (i) failed
         to enforce the delivery of securities, thereby enabling the
         prime brokers to charge borrowing fees for securities that
         were never actually borrowed and giving rise to intentional
         FTDs; and (ii) charged improper locate fees when the
         securities were never found and/or borrowed. On appeal, ETG
         argues that the complaint’s “references to failures to
         deliver” and “improper and unjustified locate fees” were
         “pleaded [only] as an adjunct to [ETG’s] price-fixing
         claim.” Appellant’s Reply Br. 17 & 17 n.12. The prime
         brokers argue that ETG improperly seeks to amend the
         complaint on appeal by recharacterizing these allegations
         from integral components of the conspiracy to ancillary
         means of expanding the conspiracy’s scope. Appellees’ Opp’n
         Br. 24-25. We do not reach this issue, because dismissal
         remains appropriate even if we adopt ETG’s appellate
    1    D.   Procedural History
    2         On March 15, 2007, the prime brokers moved to dismiss
    3    the antitrust claim pursuant to Federal Rules of Civil
    4    Procedure 12(b)(6) and 9(b).    On June 18, 2007, the United
    5    States Supreme Court decided Billing.    On December 20, 2007,
    6    the district court applied Billing, granted the prime
    7    brokers’ motion to dismiss the antitrust claim under Rule
    8    12(b)(6), and declined to exercise supplemental jurisdiction
    9    over the state law claims.5    ETG timely appealed the
    10   district court’s decision, arguing principally that the
    11   district court misapplied Billing.
    13                             DISCUSSION
    14        “We review the district court’s grant of a Rule
    15   12(b)(6) motion de novo, drawing all reasonable inferences
    16   in plaintiff[’s] favor, and accepting as true all the
    17   factual allegations in the complaint.”    In re Elevator
    18   Antitrust Litig., 
    502 F.3d 47
    , 50 (2d Cir. 2007) (per
    19   curiam) (internal quotation marks, citations, and brackets
                The district court did not reach the alternative Rule
         9(b) ground for dismissal of the antitrust claim. We do not
         reach this ground because we affirm the district court’s
         Rule 12(b)(6) dismissal.
    1    omitted).
    2        Credit Suisse Securities (USA) LLC v. Billing, 
    551 U.S. 3
        264 (2007), was an antitrust action against underwriting
    4    firms that marketed and distributed shares in initial public
    5    offerings (“IPO”).   The plaintiffs alleged “that the
    6    underwriters unlawfully agreed with one another that they
    7    would not sell shares of a popular new issue to a buyer
    8    unless that buyer committed (1) to buy additional shares of
    9    that security later at escalating prices (a practice called
    10   ‘laddering’), (2) to pay unusually high commissions on
    11   subsequent security purchases from the underwriters, or (3)
    12   to purchase from the underwriters other less desirable
    13   securities (a practice called ‘tying’).”    Id. at 267.
    14       The Supreme Court ruled that federal securities law
    15   implicitly precluded application of the antitrust law to the
    16   underwriters’ alleged anticompetitive conduct.   The Court
    17   articulated four considerations that bear upon whether “the
    18   securities laws are ‘clearly incompatible’ with the
    19   application of the antitrust laws” in a particular context:
    20   (A) location within the heartland of securities regulations;
    21   (B) SEC authority to regulate; (C) ongoing SEC regulation;
    22   and (D) conflict between the two regimes.    Id. at 285.   In
    1    selecting the level of particularity at which to address
    2    each consideration, we draw guidance from the specifics of
    3    the Supreme Court’s analysis in Billing, without suggesting,
    4    however, that the level of particularity applied to each
    5    consideration in this case is prescriptive in every context.
    7    A.   Heartland
    8         To ascertain whether “the possible conflict” between
    9    securities law and antitrust law affects “practices that lie
    10   squarely within an area of financial market activity that
    11   the securities law seeks to regulate,” the Supreme Court
    12   looked to the broad underlying market activity.     Billing,
    13   551 U.S. at 276.   In deciding that the antitrust allegations
    14   “concern practices that lie at the very heart of the
    15   securities marketing enterprise,” the Court considered “the
    16   activities in question,” which were found to consist of “the
    17   underwriters’ efforts jointly to promote and to sell newly
    18   issued securities.”   Id.   Accordingly, the Court focused on
    19   whether “[t]he IPO process” (the underlying market activity
    20   in Billing) was within the heartland (and ruled that it
    21   was); it did not focus on the laddering and tying
    22   arrangements (the alleged anticompetitive conduct in
    1    Billing).     Id.    This analysis suggests that the first
    2    consideration is properly evaluated at the level of the
    3    underlying market activity.
    4         Accordingly, in this case, we consider whether short
    5    selling is within the heartland of the securities business.
    6    The district court found that “the liquidity and pricing
    7    benefits created by the short sales place these transactions
    8    ‘within the heartland’ of federal securities regulation and
    9    are ‘central to the proper functioning of well-regulated
    10   capital markets.’”       In re Short Sale Antitrust Litig., 527
    11 F. Supp. 2d 253
    , 259 (S.D.N.Y. 2007) (quoting Billing, 551
    12   U.S. at 276).       ETG itself recognizes that “short selling is
    13   market activity regulated by the securities law.”
    14   Appellant’s Reply Br. 3.
    15        Short selling--the underlying market activity in this
    16   case--is “an area of conduct squarely within the heartland
    17   of securities regulations.”       Billing, 551 U.S. at 285.   The
    18   first consideration thus weighs in favor of implied
    19   preclusion.
    21   B.   Authority to Regulate
    22        To ascertain “the existence of regulatory authority
    1    under the securities law to supervise the activities in
    2    question” in Billing, 551 U.S. at 275, the Supreme Court
    3    looked to the role of the underwriters in the IPO process as
    4    well as to the alleged laddering and tying arrangements, see
    5    id. at 276-77.   The Court determined that “the law grants
    6    the SEC authority to supervise all of the activities here in
    7    question.    Indeed, the SEC possesses considerable power to
    8    forbid, permit, encourage, discourage, tolerate, limit, and
    9    otherwise regulate virtually every aspect of the practices
    10   in which underwriters engage.”      Id. at 276.   The Court thus
    11   gauged regulation of activity that is more particular than
    12   the IPO process (the underlying market activity) and more
    13   general than the laddering and tying arrangements (the
    14   alleged anticompetitive conduct).
    15       In addition, the Court cited regulations that grant the
    16   SEC power to regulate “communications between underwriting
    17   participants and their customers, including those that occur
    18   during road shows,” which suggests that the Court also
    19   gauged regulation of the specific alleged anticompetitive
    20   conduct.    Id. at 277.
    21       Accordingly, we consider the existence of SEC authority
    22   to regulate (i) the role of the prime brokers in short
    1    selling, and (ii) the borrowing fees charged by prime
    2    brokers.    We find such authority in Section 10(a), Section
    3    6, and 15 U.S.C. §§ 78o(c)(2)(D) and 78j(b).
    4        Section 10(a) of the Securities Exchange Act of 1934
    5    provides that it is unlawful “[t]o effect a short sale . . .
    6    of any security registered on a national securities
    7    exchange, in contravention of such rules and regulations as
    8    the Commission may prescribe as necessary or appropriate in
    9    the public interest or for the protection of investors.”       15
    10   U.S.C. § 78j(a)(1).   Citing legislative history, ETG argues
    11   that Section 10(a) was intended only to regulate the
    12   manipulation of share price through short selling.     See
    13   Appellant’s Br. 20-21.   However, nothing in the wording of
    14   Section 10(a) so limits its reach; and the SEC has
    15   interpreted Section 10(a) as a grant of “plenary authority
    16   to regulate short sales of securities registered on a
    17   national securities exchange . . . .”    Short Sales, Exchange
    18   Act Release No. 34-48709, 68 Fed. Reg. 62,972 (proposed Nov.
    19   6, 2003).    The SEC thus has the authority to regulate the
    20   role of the prime brokers in short selling, as well as the
    21   borrowing fees charged by the prime brokers, pursuant to
    22   Section 10(a).
    1           Section 6 of the Securities Exchange Act of 1934
    2    provides that the SEC may “permit a national securities
    3    exchange, by rule, to impose a schedule or fix rates of
    4    commissions, allowances, discounts, or other fees to be
    5    charged by its members for effecting transactions” if such
    6    fees are “reasonable” and “do not impose any burden on
    7    competition not necessary or appropriate” to further the
    8    purposes of the securities law.     15 U.S.C. § 78f(e)(1)(B).
    9    ETG characterizes Section 6 as a grant of limited authority
    10   to permit exchanges to deviate from “the general prohibition
    11   on fixed commission rates.”    Appellant’s Br. 22.   Even
    12   accepting this characterization, the SEC thus has indirect
    13   authority to regulate the rates (including the borrowing
    14   fees) charged by the prime brokers in short selling.
    15          In Billing, the Supreme Court relied in part on 15
    16   U.S.C. §§ 78o(c)(2)(D) and 78j(b) as evidence of the SEC’s
    17   broad power to define and prevent fraudulent, deceptive, and
    18   manipulative conduct by brokers and dealers.     551 U.S. at
    19   277.    These provisions apply with equal force to the role of
    20   the prime brokers in short selling and the borrowing fees
    21   they charge.
    22          This second Billing consideration--focused as it is on
    1    whether the SEC has authority to regulate the role of the
    2    prime brokers in short selling and the borrowing fees
    3    charged by the prime brokers--thus weighs in favor of
    4    implied preclusion, even though none of the provisions
    5    discussed above explicitly references the regulation of
    6    borrowing fees.
    8    C.   Ongoing Regulation
    9         To evaluate “evidence that the responsible regulatory
    10   entities exercise [their] authority,” Billing, 551 U.S. at
    11   275, the Supreme Court looked to the role of the
    12   underwriters in the IPO process, see id. at 277.    The Court
    13   determined that “the SEC has continuously exercised its
    14   legal authority to regulate conduct of the general kind now
    15   at issue.   It has defined in detail, for example, what
    16   underwriters may and may not do and say during their road
    17   shows.”   Id.   The Court thus looked to activity more
    18   particular than the IPO process (the underlying market
    19   activity) and more general than the laddering and tying
    20   arrangements (the alleged anticompetitive conduct).
    21        In this case, we therefore consider whether there is
    22   ongoing SEC regulation of the role of the prime brokers.
    1    Ample evidence reveals that the SEC exercises its authority
    2    to regulate the role of the prime brokers in short selling.
    3    “[A]ctive and ongoing agency regulation” is evidenced by
    4    Regulation SHO and a recent SEC roundtable.   Id. at 285.
    5        Regulation SHO, adopted by the SEC in 2004, imposes a
    6    “locate” requirement on brokers involved in short selling.
    7    See 17 C.F.R. § 242.203(b)(1)(i)-(iii) (“A broker or dealer
    8    may not accept a short sale order in an equity security from
    9    another person . . . unless the broker or dealer has: (i)
    10   [b]orrowed the security, or entered into a bona-fide
    11   arrangement to borrow the security; or (ii) [r]easonable
    12   grounds to believe that the security can be borrowed so that
    13   it can be delivered on the date delivery is due. . . .”).
    14   Regulation SHO also imposes a “delivery” requirement on such
    15   brokers.   See 17 C.F.R. § 242.203(b)(3) (with certain
    16   enumerated exceptions, “[i]f a participant of a registered
    17   clearing agency has a fail to deliver position at a
    18   registered clearing agency in a threshold security for
    19   thirteen consecutive settlement days, the participant shall
    20   immediately thereafter close out the fail to deliver
    21   position by purchasing securities of like kind and
    22   quantity”).   Regulation SHO thus constitutes an exercise of
    1    the SEC’s authority to supervise the role of the prime
    2    brokers in short selling.
    3        On September 29-30, 2009 (at the time of oral argument
    4    in this appeal), the SEC hosted a roundtable “regarding
    5    securities lending and short sales.”       Securities Lending and
    6    Short Sale Roundtable, Exchange Act Release No. 34-60643,
    2009 WL 2915632
    , at *1 (Sept. 10, 2009) (announcing the
    8    roundtable).    The roundtable intended to focus on “a range
    9    of securities lending topics, such as current lending
    10   practices and participants, compensation arrangements and
    11   conflicts, the benefits and risks of securities lending,
    12   risks related to cash collateral reinvestment, improvements
    13   to transparency, and consideration of whether the securities
    14   lending regulatory regime can be improved for the benefit of
    15   investors.”    Id.   The roundtable also intended to focus on
    16   “short sale disclosure topics” and addressed “the potential
    17   impact of imposing a pre-borrow or enhanced ‘locate’
    18   requirement on short sellers . . . as a way to curtail
    19   abusive ‘naked’ short selling.”      Id.   This roundtable
    20   indicates active SEC monitoring of the role of the prime
    21   brokers in short selling.
    22       ETG’s complaint implicitly confirms active regulation.
    1    The complaint affirmatively alleges, presumably to flesh out
    2    claims of wrongdoing, that certain prime brokers “have been
    3    fined for not borrowing securities or failing to enter into
    4    agreements to borrow securities that are sold in short sale
    5    transactions and/or having reasonable grounds to believe
    6    that the securities could be borrowed so that they could be
    7    delivered on the delivery due date,” Compl. ¶ 91, and that
    8    “federal prosecutors and the [New York Stock Exchange] have
    9    launched a joint investigation into [certain prime brokers’]
    10   alleged price gouging . . . by artificially inflating
    11   borrowing fees and by charging fees for which no services
    12   were rendered,” id. ¶ 92.   A fair inference from these
    13   allegations is that the SEC and securities self-regulating
    14   organizations actively exercise regulatory authority over
    15   the role of the prime brokers in short selling.
    16        Regulation SHO and the recent roundtable do not focus
    17   on the regulation of borrowing fees (the particular conduct
    18   alleged to be anticompetitive); but it is enough for this
    19   purpose that the SEC’s ongoing regulation is focused on the
    20   role of the prime brokers in short selling.   The third
    21   consideration thus weighs in favor of implied preclusion.
    1    D.   Conflict
    2         To ascertain the “risk that the securities and
    3    antitrust laws, if both applicable, would produce
    4    conflicting guidance, requirements, duties, privileges, or
    5    standards of conduct,”     Billing, 551 U.S. at 275-76, the
    6    Supreme Court considered whether allowing antitrust
    7    liability for the conduct alleged to have the
    8    anticompetitive effect would inhibit permissible (and even
    9    beneficial) market behavior.    See id. at 282 (“And the
    10   threat of antitrust mistakes, i.e., results that stray
    11   outside the narrow bounds that plaintiffs seek to set, means
    12   that underwriters must act in ways that will avoid not
    13   simply conduct that the securities law forbids (and will
    14   likely continue to forbid), but also a wide range of joint
    15   conduct that the securities law permits or encourages (but
    16   which they fear could lead to an antitrust lawsuit and the
    17   risk of treble damages).”).     In evaluating conflict,
    18   therefore, the proper focus is on the alleged
    19   anticompetitive conduct:
    20        [W]e do not read the complaints as attacking the
    21        bare existence of IPO underwriting syndicates or
    22        any of the joint activity that the SEC considers a
    23        necessary component of the IPO-related syndicate
    24        activity. . . . Nor do we understand the complaints
    25        as questioning underwriter agreements to fix the
    1        levels of their commissions, whether or not the
    2        resulting price is “excessive.” We . . . read the
    3        complaints as attacking the manner in which the
    4        underwriters jointly seek to collect “excessive”
    5        commissions. The complaints attack underwriter
    6        efforts to collect commissions through certain
    7        practices (i.e., laddering, tying, collecting
    8        excessive commissions in the form of later sales of
    9        the issued shares) . . . .
    10   Id. at 278 (citations omitted).
    11       In this case, therefore, we consider the impact that
    12   antitrust liability may have on arrangements for borrowing
    13   fees.   ETG argues (i) that “there should be little
    14   difficulty in distinguishing collusive fee-fixing agreements
    15   from routine communications concerning stock availability
    16   and market pricing permissible under Regulation SHO”; and
    17   (ii) that “there is no actual or potential conflict that
    18   necessitates immunity” because neither the securities law
    19   nor the antitrust law permit the collusive fixing of
    20   borrowing fees.    Appellant’s Br. 32-33.   The district court
    21   found otherwise.   See In re Short Sale Antitrust Litig., 527
    22   F. Supp. 2d at 260.
    23       We conclude that antitrust liability would create
    24   actual and potential conflicts with the securities regime.
    25   An actual conflict arises because antitrust liability would
    26   inhibit the prime brokers (and other brokers) from engaging
    1    in other conduct that the SEC currently permits and that
    2    benefits the efficient functioning of the short selling
    3    market.   There is a potential conflict because the SEC in
    4    the future may decide to regulate the borrowing fees charged
    5    by brokers.
    6        1.    Actual Conflict
    7        Antitrust liability would inhibit conduct that the SEC
    8    permits and that assists the efficient functioning of the
    9    short selling market.   The thrust of ETG’s case is that the
    10   prime brokers communicated with one another to designate
    11   hard-to-borrow securities and to fix inflated borrowing fees
    12   for those securities.   However, it is permissible for
    13   brokers to communicate about the availability and price of
    14   securities.   As the district court observed, “such exchanges
    15   are implicitly permitted by the SEC’s Regulation SHO.”     In
    16   re Short Sale Antitrust Litig., 527 F. Supp. 2d at 260
    17   (citing 17 C.F.R. § 242.203(b)(1) (requiring that a broker
    18   borrow the securities or have reasonable grounds to believe
    19   that the securities can be borrowed before accepting an
    20   order from a short seller)).   It is a lot to expect a broker
    21   “to distinguish what is forbidden from what is allowed,” so
    22   that the broker collects just so much information as
    1    required to satisfy the locate requirement and for the
    2    efficient functioning of the short selling market--but not
    3    an iota more--or suffer treble damages.    Billing, 
    551 U.S. 4
        at 280.
    5        Conflict is a risk unless there is a “practical way to
    6    confine antitrust suits so that they challenge only activity
    7    of the kind the [plaintiffs] seek to target” without
    8    inhibiting other conduct that is permitted or encouraged
    9    under the securities law.   Id. at 282.   The drawing of such
    10   intricate lines demands “securities-related expertise.”    Id.
    11   Moreover, it is likely that the very communications in which
    12   short sellers do what the securities law allows would by
    13   “reasonable but contradictory inferences” serve as evidence
    14   of conduct forbidden by the antitrust law.    Id.   Reliance on
    15   a jury therefore gives rise to a serious “risk of
    16   inconsistent court results.”   Id.
    17       Antitrust liability, with the prospect of treble
    18   damages, would be an incentive for the prime brokers to curb
    19   their permissible exchange of information and thereby harm
    20   the efficient functioning of the short selling market.     This
    21   inhibiting effect weighs in favor of implied preclusion.
    22       2.    Potential Conflict
    1        In addition to the actual conflict described above, a
    2    potential conflict exists based on the possibility that the
    3    SEC will act upon its authority to regulate the borrowing
    4    fees set by prime brokers.    As the Supreme Court
    5    acknowledged in Billing, a potential conflict of this kind
    6    may exist even if there is no conflict that is actual and
    7    immediate.   See Billing, 551 U.S. at 273 (describing the
    8    “upshot” of Gordon v. N.Y. Stock Exch., Inc., 
    422 U.S. 659
    9    690-91 (1975), as “in light of potential future conflict,
    10   the Court found that the securities law precluded antitrust
    11   liability even in respect to a practice that both antitrust
    12   law and securities law might forbid”).     In the context of an
    13   implied repeal case, this Court observed that “the proper
    14   focus is not on the Commission’s current regulatory position
    15   but rather on the Commission’s authority to permit conduct
    16   that the antitrust laws would prohibit.”      In re Stock
    17   Exchs. Options Trading Antitrust Litig., 
    317 F.3d 134
    , 149
    18   (2d Cir. 2003).
    19       It is therefore not decisive that neither securities
    20   law nor antitrust law allows--or encourages--the collusive
    21   fixing of borrowing fees.    The present securities regime
    22   expressly allows prime brokers to rely on easy-to-borrow
    1    lists as reasonable grounds “to believe that the security
    2    sold short is available for borrowing without directly
    3    contacting the source of the borrowed securities.”      Short
    4    Sales, Exchange Act Release No. 34-50103, 83 SEC Docket 1278
    5    (July 28, 2004).    The SEC has taken note that hard-to-borrow
    6    lists “are not widely used by broker-dealers” and that,
    7    therefore, “the fact that a security is not on a hard to
    8    borrow list cannot satisfy the ‘reasonable grounds’ test”
    9    described above.    Id.    But if and when such hard-to-borrow
    10   lists come into broader use, it is easy to see how they
    11   could increase the efficiency of the short selling market,
    12   in which event the SEC could move quickly to regulate the
    13   borrowing fees charged by brokers for securities appearing
    14   on such lists.     This potential conflict weighs in favor of
    15   implied preclusion.
    17                                CONCLUSION
    18       All four Billing considerations weigh in favor of
    19   implied preclusion.6      We therefore affirm the district
                Because all four of the Billing considerations point
         in the direction of implied preclusion, we need not address
         the weight to be accorded these considerations when they
         point in different directions.
    1   court’s Rule 12(b)(6) dismissal of ETG’s antitrust claim
    2   with prejudice.   Moreover, we affirm the dismissal of ETG’s
    3   state law claims without prejudice because we find no abuse
    4   of discretion in the district court’s decision to decline to
    5   exercise supplemental jurisdiction over these claims.   See
    6   Kolari v. N.Y.-Presbyterian Hosp., 
    455 F.3d 118
    , 122 (2d
    7   Cir. 2006).