BlackRock, Vanguard and State Street’s failure to stop a controversial antitrust lawsuit brought by Republican state attorneys general has opened the door for litigation driven by a long-dormant economic theory challenging the core business model of companies managing trillions of dollars in assets.
BlackRock, Vanguard and State Street’s failure to stop a controversial antitrust lawsuit brought by Republican state attorneys general has opened the door for litigation driven by a long-dormant economic theory challenging the core business model of companies managing trillions of dollars in assets.Last week, US Department of Justice Antitrust Division head Gail Slater and Federal Trade Commission Chairman Andrew Ferguson cheered a Texas-led coalition of Republican AGs after a key court victory in a “first of its kind” suit alleging asset managers wielded their stock holdings to reduce output and drive up prices in coal markets (see here, here and here).
The case not only casts coordinated climate-change mitigation efforts by powerful finance industry actors as animating an anticompetitive conspiracy, but also raises broader, untested legal questions about whether a spectrum of both passive and active investment activities harm competition.
When US District Judge Jeremy Kernodle, an appointee of the first Trump administration, issued an order earlier this month denying the defendants’ bid to dismiss the case, he rejected arguments that partial stock acquisitions by institutional investors fall outside the scope of the Clayton Act and that the asset managers are otherwise immune from liability.
Kernodle’s decision came after DOJ Antitrust Division veteran David Lawrence, a longtime advisor to senior agency officials, argued in court that the need to protect consumers from harmful asset management strategies made it “critically necessary” to avoid expanding the Clayton Act’s passive investor antitrust exemption (see here).
“This is a close call,” the judge wrote before also allowing Sherman Act claims over alleged information-sharing and output-reduction agreements, founded entirely on circumstantial evidence, to move forward.
One “plus factor” supporting the inference of a plausible anticompetitive agreement, according to the judge, is a shared motive to conspire based on the defendants’ “moral” compulsion to fight increasing global temperatures that are wreaking havoc across the planet.
In a statement to MLex, State Street said “despite the plaintiffs’ efforts to advance a new and dangerous antitrust theory, this lawsuit remains baseless and without merit.”
“It poses unnecessary risk to investors and energy markets. There is no collusion here, and we remain confident that the facts and legal substance are on our side,” the firm said.
Vanguard responded to MLex by stating that it “looked forward to the opportunity to vigorously defend against plaintiffs’ claims” and it “will continue to give investors the best chance for investment success.”
In a statement to MLex, BlackRock spokesperson Christopher Van Es said the litigation’s goal of “forced divestment” of coal company shares will lead to higher energy prices, job losses and decreased access to capital.
“This case is based on an absurd theory that coal companies conspired with their shareholders to reduce coal production,” Van Es said. “This case is not supported by the facts, and we will demonstrate that.”
He also provided MLex with a six-page document outlining what he described as “more than two dozen bipartisan policy, industry, and legal experts that have spoken out about the many problems with this case over the past several months.”
— Politicized enforcement —
Along with exacerbating tensions in the US between competition policy and the environmental exigencies compelled by the laws of physics, Kernodle's order puts a marker down for future antitrust enforcers with concerns that early pushes for more affordable and accessible investment portfolio diversification options have led to a system of private, centralized control over the US economy.
Many early responses to the suit framed it as meritless lawfare from Republicans who seek to intimidate political opponents, protect their fossil fuel industry benefactors and coerce corporations into implementing conservative policy preferences.
More charitably viewed, it is an example of public law enforcers exercising their prosecutorial discretion to pursue a case that, irrespective of the specific facts, taps into a legitimate and widespread problem across the US economy.
“Both views are correct,” Florian Ederer, an economist and scholar who has researched how anticompetitive effects can arise when industry competitors share the same major shareholders, told MLex. “In some ways, the common ownership theory here has been used to get some political leverage.”
The suit complements broader law enforcement efforts by Republicans at the state and federal levels to crack down on corporate governance and investment frameworks based on Environmental, Social and Governance principles, commonly known as ESG.
Fights over ESG parallel similar efforts from conservatives to go after diversity, equity and inclusion, or DEI, initiatives — which provide both culture war fodder and opportunities to advance discrete economic, political and policy agendas.
But Ederer emphasized that the Republicans' ESG antitrust case is the first real test run for economic theories, developed by himself and others, that are based on a growing body of empirical academic literature showing anticompetitive effects from common ownership across prices, quantities, markups, managerial incentives, profitability and other dimensions of competition.
“We do not know at all what influence these asset managers have, and maybe this is now the right way to find out whether they do indeed lessen product market competition in a way that's harmful for consumers,” he said.
— ESG —
The theory behind the attorneys general's coal suit is relatively simple: as part of efforts to help reduce greenhouse gas emissions and stabilize the global climate, asset managers harmed competition when they joined and committed to climate initiatives.
Agreeing to join those initiatives caused a de facto increase in financing costs for major US coal producers, the suit alleges. That led to reduced coal output and ultimately higher energy prices, according to the states.
The asset managers’ argument that their membership in the Net Zero Asset Managers and Climate Action 100 initiatives was permissible because of its similarity to a trade association was unpersuasive given the commitments NZAM and CA100 membership required, Kernodle ruled.
With two exceptions, BlackRock, Vanguard and State Street own roughly 24-34 percent of nine major publicly traded US coal companies, and those shares “plausibly" provide them with the ability to influence those companies, the judge said.
The states must now prove facts to back up their claims. But the judge signed off on the plausibility of an antitrust theory that claimed joining climate initiatives, making public statements, proxy voting and “otherwise” engaging with coal companies, meant the asset managers “used their stock in a way that is reasonably likely to reduce coal output.”
That “otherwise” in the Clayton Act’s statutory language covers a much broader range of conduct involving stock “use” than something "drastic” like BlackRock CEO Larry Fink calling up a portfolio company and demanding board representation or threatening a hostile takeover, according to the judge’s order.
“[I]t covers any use [of stock] that brings about, or attempts to bring about, the substantial lessening of competition,” Kernodle wrote.
Depending on which timeline one looks at, it’s also possible that overall price increases and output reductions in coal markets from 2019-2022 reflect actual, not potential harms to competition, the judge said. While preliminarily siding with the plaintiff’s position that a 2019 starting baseline reflects a “well-functioning” market, Kernodle noted that this is a factual dispute to be resolved later.
In December 2024, MLex wrote that if the states’ claims managed to gain traction, actors like the nine nondefendant coal companies implicated in the states’ claims should expect to face follow-on consumer class action antitrust litigation pushing the same cause of action.
The DOJ’s Lawrence, however, told the judge that the agency considered it possible for asset managers to violate the Sherman Act by entering into an agreement that lessens competition among coal companies without “actually implicating the coal companies.”
Kernodle’s order did not address the coal companies’ possible role or liability.
— Incentives, collusion —
Ederer told MLex that the bulk of academic research into common ownership focuses not on direct collusion between asset management firms with shared investments or the companies they invest in, but rather on harms to competition that arise from unilateral actions taken by companies with structural incentives to pull punches in the marketplace.
But Ederer also pointed to a 2021 paper by a former student turned litigation consultant, Nathan Shekita, that draws from the public record to identify 30 cases of “common ownership interventions” involving asset manager interactions with top executives at drug companies, oil and gas firms and consumer goods producers.
A 2016 Bloomberg article flagged by Shekita described a March conference room meeting at a Boston hotel where Fidelity, T. Rowe Price and Wellington Management Co. pushed biotech firm representatives and pharma industry lobbyists to defend industry business strategies in response to political pressure about high drug prices.
If the world’s largest drugmakers don’t “step up” by delivering binding commitments to comply with a list of demanded drug price reduction measures by the end of this September, US President Donald Trump’s administration will “deploy every tool in our arsenal to protect American families from continued abusive drug pricing practices,” Trump said in one letter among many sent to 17 of the world’s major drug manufacturers (see here).
Perhaps the most notable example of institutional investor market interventions highlighted by Shekita’s paper involved interactions between some of those same drugmakers and major asset managers in response to a global public health crisis.
“Common owners openly directed pharmaceutical firms to collaborate with rivals, drop patent enforcement, and put qualms about competition aside in response to the COVID-19 crisis,” the paper said.
“Stewardship reports from institutional investors supplement this evidence,” Shekita wrote, noting that BlackRock reported “substantive dialogue” with major pharmaceutical firms like Pfizer, Johnson & Johnson, Allergan, Bristol-Myers Squibb and others.
BlackRock, Fidelity, T. Rowe Price and Wellington did not respond to requests for comment on Shekita’s paper.
— Proxies —
In the ESG case, the states allege BlackRock “announced that it would discipline management that failed to satisfy its demands, both when voting on shareholder proposals and by voting to remove management.”
Institutional Shareholder Services and Glass Lewis & Co., two advisory firms that help orchestrate a major form of shareholder democracy known as proxy voting, have become a “duopoly” acting as “unsupervised referees for every major corporate decision in America,” the top Republican on a US House antitrust subcommittee said last month (see here).
ISS and Glass Lewis did not respond to a request for comment.
The “importance of voting” remains an area of continuing disagreement between the parties in the ESG case, Lawrence told Kernodle after the DOJ intervened in support of the suit.
While many Democrats in Congress and in law enforcement positions have criticized the Republican states’ ESG case and antitrust scrutiny of proxy advisors, other Democrats have not been shy about looking into antitrust problems that may benefit investors but harm consumers.
Meta Platforms, Apple and top US egg producers are just some firms that have had their profits scrutinized based on the idea that excessive shareholder paydays could signal competitive dysfunction in markets (see here).
In 2024, the Biden FTC disclosed a controversial merger settlement which floated allegations that Pioneer Resources Chief Executive Scott Sheffield had helped orchestrate a global price-fixing conspiracy with the world’s most powerful cartel of oil-producing states.
The FTC under Trump 2.0 has walked back that move, but it hasn’t stopped former Democratic Commissioner Alvaro Bedoya from publicly criticizing what he described as “open corruption” while drawing flak from Sheffield’s lawyer for publicly stating that the shale oil industry elder statesman was “openly colluding” with the Organization of the Petroleum Exporting Countries (see here and here).
Sheffield wasn’t colluding, he wrote in an open letter after Biden’s FTC took the unusual step of publicly disclosing its criminal referral to the US Department of Justice (see here and here).
One of Sheffield’s first priorities after being reappointed Pioneer CEO in 2019, he said, was traveling across the country to speak with “three dozen of Pioneer’s largest shareholders (comprising more than one-third of the outstanding shares at the time), including major investment managers like Fidelity, TIAA/Nuveen, Capital World Investors, and Blackrock.”
“The decision to return more free cash flow to shareholders was undertaken to provide shareholders the level of returns that they expected regardless of oil prices, not to impact oil prices or output,” Sheffield said.
His prior public statement that “all the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies,” was not a “threat,” the letter said, but “nothing more than an observation about what shareholders might do based on a multitude of public statements by the investment community.”
Sheffield declined to comment for this article.
When senior executives at one of the most valuable companies in the world, Google, grew concerned about getting “punished pretty badly in the markets” for not meeting Wall Street expectations (see here), they called for a “Code Yellow,” US District Judge Amit Mehta noted in a landmark monopolization trial win last year for the DOJ (see here).
The tech giant presented “no evidence that any rival constrains Google’s pricing decisions” in text advertising markets, Mehta said, but the search giant did tweak its powerful algorithmic “pricing knobs” when it needed to achieve periodic revenue targets.
There is an ironic aspect to Republican states' recent consumer protection social media litigation against Big Tech and antitrust litigation brought against the so-called Big Three asset managers.
Red state law enforcers now appear to be fighting against the use of a Big Tobacco-style public relations and lobbying playbook that previous generations of conservatives helped hone and deploy on behalf of Big Oil, Big Ag and other powerful corporate entities who have faced research threatening their bottom lines (see here, here and here).
— Common ownership —
A staple of antitrust litigation is breathless rhetoric from parties about the potentially monumental and wide-ranging adverse economic consequences should a court agree with the position of one side or another.
But the lengths that financial industry titans like BlackRock and its allies have gone to while trying to challenge common ownership theories outside the courtroom offers a sense for how high the stakes are on this issue.
Martin Schmalz, a leading common ownership scholar and sometimes collaborator with Ederer, told MLex that theories he helped popularize in recent years stretch back to a paper by Julio Rotemberg in the 1980s.
After Schmalz and other colleagues made a splash around 2016 with a paper finding that airline ticket prices were 3 to 11 percent higher due to common ownership, he said he sought an explanation from Rotemberg on why the theory hadn’t gained traction sooner.
“He was told that it seemed theoretically obvious and probably empirically irrelevant,” Schmalz said. Back in the 1980s, “the problem wasn't exactly that you had $10-trillion-heavy asset managers that consolidated voting strategies across all the different funds and centralized corporate control,” he said.
But after Harvard Law professor Einer Elhauge cited the airlines study in a 2019 paper arguing that antitrust enforcers should have considered blocking BlackRock’s roughly $15 billion acquisition of Barclay’s Global Investors a decade earlier — solely because of the likely anticompetitive effects from consolidated horizontal shareholding among institutional investors — “all hell broke loose,” Schmalz recalled.
BlackRock publicly declared common ownership research and policy discussions a threat to their business, and board members of the leading trade association for regulated investment funds began sponsoring academic studies attacking the airlines paper, he said.
After a Wall Street Journal op-ed mischaracterized his work, Schmalz told MLex, congratulatory e-mails started coming in from colleagues in academia suggesting he might be on to something big.
In the field of industrial organization economics, which has long been the primary source for expert witnesses in antitrust litigation, “almost every one of the top researchers has done some sort of consulting that conflicts them in one way or another,” he said. “That used to not be true in finance.”
But increased demand for research on common ownership, Schmalz added, has brought a big wave of “consulting opportunities” into these academic circles. “And that’s a bit new.”
Van Es, the BlackRock spokesperson, flagged to MLex a recent Harvard study examining the link between common ownership and industry-level prices across 52 industries over a 24-year period. “Our results comprehensively show no evidence that common ownership has an anticompetitve impact on prices,” the study said.
Last week, Ederer’s most recent common ownership research was accepted for publication by the Review of Economic Studies, “one of the five leading journals in economics,” he told MLex.
“We estimate that in 2021 common ownership raises aggregate profits by $1.133 trillion ... but lowers consumer surplus by $2.399 trillion,” the study concluded. The “welfare losses” of common ownership, the paper continued, “fall entirely on consumers.”
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