Davis Polk & Wardwell LLP received a favorable opinion from the Second Circuit affirming dismissal of a Sherman Act Section 1 purported class action against all of the major prime brokers, including our client Morgan Stanley. The case, which was entitled In re Short Sale Antitrust Litigation, was brought on behalf of prime brokerage customers who made short sales and alleged that the prime brokers conspired to fix the borrowing rates for "hard to borrow" securities loaned to them in connection with such sales.

Judge Victor Marrero of the Southern District dismissed the case last year on the ground that the challenged conduct was sufficiently related to regulated securities activities to be immune from antitrust attack under the reasoning of the Supreme Court's 2007 holding in Credit Suisse Securities (USA) LLC v. Billing. Plaintiffs appealed and argued that because borrowing rates were not themselves regulated under the securities laws, defendants' conduct was not immune.

As the court's opinion recites, the issue was at what "level of particularity" the tests prescribed by the Supreme Court in Billing should be applied. The opinion clarifies how the standards will be interpreted and applied in the Second Circuit in cases involving antitrust attacks on the securities industry and largely adopts the arguments made in our brief. The court agreed that the Billing tests apply at a level necessary to avoid conflict with the regulatory scheme, even if the particular challenged practice is not directly regulated. Consequently, it upheld the lower court ruling that Billing foreclosed plaintiffs' claims. In addition to representing Morgan Stanley, we acted as liaison for the defense group, oversaw the drafting of the appeal brief for respondents and argued the appeal.

The Davis Polk team included partners Robert F. Wise Jr. and William J. Fenrich and associates Melissa T. Aoyagi and Peter A. Nelson. All members of the Davis Polk team are based in the New York office.