[Federal Register Volume 61, Number 228 (Monday, November 25, 1996)]
[Notices]
[Pages 59895-59912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29965]


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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: <9608012114.AA06382@justice2.>
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'').
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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