June 9 (Bloomberg) -- Discover Financial Services is seeking $6 billion in damages from Visa Inc. and MasterCard Inc. in an antitrust lawsuit accusing the bigger credit-card rivals of squashing competition.
The damages, which may be tripled, were included in confidential filings unsealed today in federal court in the Southern District of New York. Visa said today the amount was ``dramatically overstated'' and MasterCard called the suit ``baseless.'' Both companies fell in New York trading."The numbers on potential damages Discover is seeking are large,'' Sanjay Sakhrani, an analyst at KBW Inc. in New York, said in an interview. ``However we think a settlement for a meaningfully smaller amount still remains a likely scenario.''
Discover, the fourth-largest credit-card network, filed a lawsuit in October 2004 against Visa and MasterCard, claiming the two largest networks broke the law by barring member banks from offering rival cards. Visa agreed last year to pay $2.25 billion to American Express Co. in a settlement of a parallel suit, an amount Discover Chief Executive Officer David Nelms called ``cheap.'' MasterCard dropped $1.42 to $294.31 at 4 p.m. in New York Stock Exchange trading and Visa fell $1.51, or 1.8 percent, to $82.14. Discover fell 37 cents to $15.33. No Improvement Visa and MasterCard issued separate statements saying Discover's credit and debit businesses haven't benefited much since the ban was lifted, letting banks issue Discover cards along with Visa or MasterCard cards."Discover has not seen any increase in its overall percentage of the credit-card volume share'' after the policies were changed, Sharon Gamsin, spokeswoman for Purchase, New York- based MasterCard, said in the statement.
Visa, based in San Francisco, set aside $650 million for a possible Discover settlement from the $3 billion fund established after its record March initial public offering. The funds come from IPO proceeds of banks that owned the network, and the companies are obliged to pay for a larger Discover settlement if needed.
MasterCard didn't set up a similar system when it went public, which means shareholders may be affected by future settlements, Sakhrani said. He rates Visa and MasterCard ``outperform'' and Discover ``market perform.''
`Appropriate Settlement'
The documents had been filed under protective order since the case began. The lawsuits by Discover and American Express follow a U.S. Supreme Court ruling that Visa and MasterCard violated antitrust laws in competing against smaller companies.
I was a little surprised that AmEx settled as early or as cheap as they did,'' Nelms said in a Jan. 29 conference call with analysts. ``If we had an appropriate settlement at an appropriate time, we would consider that.''
Like New York-based American Express, Discover extends credit and runs a network that processes transactions for other lenders. Visa and MasterCard only operate networks and don't make loans to consumers.
Discover shares have declined 47 percent since the company was spun off a year ago by Morgan Stanley as the U.S. housing slump hurts consumers' ability to repay debt of all kinds. The company's market valuation is about $7.6 billion, according to Bloomberg data.
MasterCard shares have almost doubled in the past year and Visa shares have surged 84 percent since its IPO. The companies, which sidestep the rising customer defaults of lenders, capitalize on consumers' increasing preference for using credit and debit cards over cash and checks.
Visa's IPO raised $17.9 billion on March 18, the most for a U.S. company, and the tally passed $19 billion after more shares were sold to satisfy demand. It was the world's second-largest public offering after Industrial & Commercial Bank of China Ltd.'s $22 billion debut in 2006.
The case is Discover Financial Services, Inc. v. Visa U.S.A., Inc. et al, 04-CV-7844, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
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