Credit Suisse First Boston, Goldman Sachs Group, Merrill Lynch, and other investment banks must defend a lawsuit claiming they participated in an industry wide scheme to rig initial public offerings, an appeals court said.

The 2nd U.S. Court of Appeals in New York yesterday reinstated a case that a lower court judge dismissed in November 2003.The lower court judge said the banks were immune from federal antitrust claims because the Securities and Exchange Commission regulates the IPO process. The appeals court disagreed.

“Congress knows how to immunize regulated conduct from antitrust laws,” the appeals court said in a 68-page opinion, written by U.S. Circuit Court Judge Richard Wesley. “To date, it has not done so here either expressedly or impliedly.”

The ruling is a setback for banks including Citigroup’s Salomon Smith Barney securities firm unit. Under federal antitrust law, plaintiffs may seek to recover three times the damages they sustained. Other defendants include Lehman Brothers Holdings, Morgan Stanley, Bank of America’s BancBoston Robertson Stephens unit, JPMorgan Chase, and units of Fidelity Investments.

The suit was filed on behalf of investors who traded shares in some 800 Internet companies after they went public. The investors say the alleged conspiracy inflated the price of the shares.

The antitrust case is separate from a pending lawsuit against CSFB, Goldman Sachs, and dozens of other banks. In that case, also in New York federal court, the banks are accused of violating federal securities fraud laws.

In the antitrust case, investors who are suing the banks claim banks violated federal antitrust laws by requiring clients who wanted IPO shares to pay kickbacks and buy more stock after shares were sold to the public.

“Plaintiffs allege an epic Wall Street conspiracy,” the appeals court said. “They charge that the nation’s leading underwriting firms entered into illegal contracts with purchasers of securities distributed in initial public offerings.”

Hundreds of Internet start-ups were rushed to market during the IPO frenzy of the late 1990s and 2000. First-day gains from IPOs averaged 87% in 1999 and 71% in 2000, according to IPO researcher CommScan LLC, and underwriters pocketed billions of dollars in fees and commissions.

VA Linux Systems’s shares soared sevenfold on the first day of trading after an IPO led by Credit Suisse in December 1999. Today, the shares of that company, now known as VA Software, trade at about $1.40, down from $242.88 just after the IPO.

A key claim in both the antitrust and securities fraud lawsuits is that investors seeking IPO shares in companies such as Equinix and Firepond were required to buy more stock, at a higher price,later on.This alleged practice inflated share prices and boosted bank profits, the suit claims. The antitrust case alleges the banks conspired in such practices.

Before the lower court judge dismissed the case in November 2003, the SEC and the Justice Department submitted legal briefs and offered differing views to the judge over whether the investors’ lawsuit should go forward.

The SEC urged U.S. District Judge William Pauley to dismiss the case, asserting that it has authority over IPOs. The Justice Department argued that the case shouldn’t be dismissed because the banks have no immunity from civil suits.

The appeals court said that the banks were not “immune” from an antitrust lawsuit. “The doctrine of implied antitrust immunity does not shield the alleged misconduct,” the court said.

Merrill shares rose 67 cents to $60.07 in composite trading on the New York Stock Exchange today. JPMorgan shares rose 4 cents to $33.92. Goldman shares rose 43 cents to $120.10.Morgan Stanley shares rose 34 cents to $52.71. Bank of America shares fell 32 cents to $41.60.

An CSFB spokeswoman, Victoria Harmon, declined to comment. Representatives of Citigroup and Goldman Sachs weren’t immediately available to comment. A Merrill spokesman, Mark Herr, said the firm declined to comment. A Lehman spokeswoman, Hannah Burns, said no one was immediately available to comment. A spokeswoman for Bank of America, Shirley Norton, didn’t immediately return a call seeking comment. A Morgan Stanley spokesman, James Badenhausen, didn’t immediately return a call seeking comment.

A telephone call to a lawyer for the investors who are suing the banks, Christopher Lovell, wasn’t immediately returned.