Why is a Price-Fixing/Collusion Lawsuit Against the Biggest Names in Private Equity Getting Only Cursory Notice?

It’s troubling that some stinging charges against the very biggest names in private equity are getting only passing attention in the financial media.

The New York Times last week managed to get some court filings unsealed last week in a class action lawsuit, Dahl v. Bain Capital Partners. This revelation came after the parties tried to satisfy the NY’s motion with a heavily redacted filing, which the judge nixed. This short post by yours truly in the New Republic gives an overview; due to space constraints, I had to stay pretty high level:

One of the salutary side effects of the Mitt Romney presidential bid is that it has shed light on one of the most secretive yet influential parts of the financial services industry: the major buyout firms. Thanks to motions filed by the New York Times, a federal judge in Boston released court filings this week that had previously been under seal in a class action, anti-trust lawsuit — Dahl v. Bain Capital Partners — against the eleven biggest and most blue-chip names in the private-equity industry, including Blackstone, Carlyle, Goldman, and TPG. The plaintiffs contend that they lost billions as shareholders in companies that were sold at lower prices than they would have otherwise fetched in the 2003 to 2007 period due to buyer collusion through a system they called “club deals.”

No wonder the defendants had been keen to keep the case under wraps. The 221-page complaint goes through 27 transactions, and with each, presents not only persuasive economic analysis, but more important, damning e-mails showing how the heads of each of the firms were involved in submitting sham bids, sharing information about their offers, working with management of the target companies to restrict the sales process, enforcing elaborate systems of quid pro quos (for instance, not submitting a bid with the expectation of being cut in on that deal or future deals), and other forms of market manipulation. The messages make clear that the intent was to reduce competition and buy the companies on the cheap. For instance, on the sale of Toys R’ Us,

KKR representatives admitted that KKR decided to partner with Bain and Vornado due in part to its “desire to effectively eliminate a competitor from the auction process.”…. Richard Friedman, head of merchant banking and PIA at Goldman Sachs, acknowledged in an email the belief that “the competing bidders ha[d] colluded and ganged up.”

It’s obvious that reducing the number of bidders and containing the competition among them would lower prices. I ran a mergers and acquisitions department in the 1980s, shortly after auctions became the preferred way for selling companies. The rule of thumb was that getting an additional bidder increased the sales price by 10 percent. The complaint includes economic analyses that show that these mega funds got better prices on average on these deals than on the ones where they duked it out.

Now after ordinary consumers have been on the wrong end of bank bailouts, foreclosure fraud, credit card tricks and traps, and debt collectors from hell, this scheme might seem like a fight between different types of investors and hence of limited real world import. That view could not be more wrong. Private equity firms concentrate enormous financial power in comparatively few hands. Their $2 trillion of assets under management, which they augment with a typical $3 of borrowed money for every $1 of their investors’ money that they put down, translates into $8 trillion of buying power. Compare that to the roughly $16 trillion value of the U.S. stock markets at year end 2011. More people in the U.S. work for companies owned by PE funds than belong to unions. More than half the corporate debt in the U.S. is rated junk, and the high leverage used by PE firms in their deals is far and away the biggest culprit. It’s a virtual certainty you are supporting the private equity industry. Public pension funds, whose monies come from state and local tax dollars, are one of the biggest investors in LBO funds, particularly the mega funds like KKR and Blackstone.

LBO firms fetishize secrecy and use their power to maintain it. Given that governments, both public pension funds and sovereign wealth funds, are important investors in these vehicles, their contracts with these firms are of public interest. Yet PE firm threats to turn away government investors in states where their agreements might be exposed through state Freedom of Information Act requests have led to extreme measures such as the passage of state laws to keep executed private equity from being classified as public records, unlike every other contract for goods and services. This double standard pervades the funds’ dealings with their investors. For instance, the extensive communications among private equity firms presented in Dahl v. Bain look to a layperson like clear-cut anti-trust violations. Yet the PE firms try to cow their investors by claiming that communicating with each other could violate anti-trust laws!

It’s time to pull the veil off this industry. Public interest requires much greater transparency. Congress should call hearings and require that the heads of these private equity firms testify under oath. And any settlement in this case should be a matter of public record.

I wish there had been more space in the TNR post to provide extracts from e-mails, which are typically among either the heads of the mega buyout firms, or other managing directors. They show a clear understanding of what they were up to. These players were engaged in an effort to collude, by submitting sham bids, not bidding in the auction but being invited in as a co-investor on that deal later or getting a slice of a future deal, all clearly intended to buy the target companies at more favorable prices. You really need to skim the filing. If you thought the quotes from the Libor traders in the FSA’s letter to Barclays were damning, they pale in comparison to this (the juicy stuff starts on page 26 of the pdf, which is numbered page 22):

A Lawsuit Against Private Equity

And the riveting quotes are only half of it. The filing also discusses, as asides, how investemnt banks would steer deals to private equity buyers (“financial buyers” in the parlance) rather than corporations (“strategic buyers”) because they’d rack up far more fees. And in case the pleased quotes from the PE overlords about the success of their efforts aren’t enough to persuade you, the filing also includes extensive deal by deal analysis.

Now admittedly, one reason for the understated media response is this is a private suit, not one by a regulator. But flip this around: where is the Department of Justice? It issued civil investigative demands to some of the firms who are defendants in this suit, including KKR, Carlyle, and Silver Lake, in October 2006. The content of these e-mails, along with the extensive and persuasive economic analysis of the transactions, raise serious question about the failure of the Department of Justice and the FTC to move forward.

This Department of Justice overview document titled “Price Fixing, Bid Rigging, and Market Allocation Schemes” is admittedly written informally, to encourage individuals to contact the Department of Justice, but it is instructive to read it against the sort of behavior presented in the Dahl v. Bain Capital Partners filing. Consider this section:

Most criminal antitrust prosecutions involve price fixing, bid rigging, or market division or allocation schemes. Each of these forms of collusion may be prosecuted criminally if they occurred, at least in part, within the past five years. Proving such a crime does not require us to show that the conspirators entered into a formal written or express agreement. Price fixing, bid rigging, and other collusive agreements can be established either by direct evidence, such as the testimony of a participant, or by circumstantial evidence, such as suspicious bid patterns, travel and expense reports, telephone records, and business diary entries.

Under the law, price-fixing and bid-rigging schemes are per se violations of the Sherman Act. This means that where such a collusive scheme has been established, it cannot be justified under the law by arguments or evidence that, for example, the agreed-upon prices were reasonable, the agreement was necessary to prevent or eliminate price cutting or ruinous competition, or the conspirators were merely trying to make sure that each got a fair share of the market.

It’s hard to read the private lawsuit and not wonder why this behavior didn’t lead to a criminal investigation by the DoJ. Might it have something to do with the importance of private equity in funding the Obama campaign? Rahm Emanuel raised lots of money from PE kingpins, and at least two of Obama’s New York City fundraisers were hosted by LBO heavyweights.

As Matt Taibbi has pointed out, bid rigging is not like what the Mafia does, it is what the Mafia does. Yet the harm here seems too remote to ordinary people, compared to, say, overpriced garbage services or municipalities blowing up thanks to toxic swaps.

If the Dahl allegations pan out, and they certainly look convincing, it provides further confirmation of the charge that these firms don’t even earn the returns they claim to (returns earned by cheating aren’t legitimate). And if their raison d’etre, that they provide better ourcomes than, say, an index of industrial firms (which we plan to address independent of the price fixing issue) is bogus, that means (ex the limited number of cases where they turn around failing companies) they are really in the business of extraction, looting, and transferring income from ordinary people to the top 0.1%. Not that many people don’t suspect that already, but there is a world of difference between instinct and proof. So no wonder the industry works so hard at secrecy, and must be delighted to have the lapdog Department of Justice by its inaction support that effort.

Print Friendly, PDF & Email


  1. Bert_S

    I hate those guys. Shearson Lehman got us on the cheap in the late 80s just by offering corporate management fat golden parachutes. Being a small cap, nobody was powerful enough to argue. IIRC we went for a PE of 8, then they turned around and issued 16% junk bonds for us to pay. ( and since we were profitable as hell, with a nearly indestructible backlog of single source defense contract components for a product line, they swore to investors that the junk bonds were a great deal)

    But if they can all partner on deals (cut risk, of course), create a financial crisis, then buy the S&P 500 at a PE of 8, wonder when the DOJ will see a problem with Sherman Anti-Trust?

  2. Dennis

    The best part about this is how not one white shoe law firm is present in this filing. Wouldnt want to endanger those fat PE fund formation fees.

    1. Savanarola

      Those are competent plaintiffs’ firms – very different animal. White shoe firms are almost exclusively defense, even though the antitrust arena is slightly different given the size, scope, and stakes of the litigation and even though more and more big firms are engaging in RFPs and other kinds of alternative fee arrangements.

      Still, the kinds of firms that take this kind of big risk for a percentage are the traditional plaintiffs’ firms. The number of them on the filing means one of two things: (1) blood in the water, or (2) huge risk that needed to be shared among multiple firms to bring the kind of money or bodies to bear that the case would need.

    2. jake chase

      Like virtually all class actions this one will probably be settled on the cheap by cashing out the lawyers’ claim tickets. I wouldn’t be putting these lawyers in your hall of fame just yet. And yes, I know all about how the settlements require court approval, and if you think the judges want to keep these things going to a just resolution you need to begin smoking something else.

  3. Norman

    Well, from sitting back all the years I have watched this what ever you want to call it, the simple answer lies in the whole damn enforcement in this country is corrupt to the bone. It will continue until either the Military has had enough, which is questionable, or the guillotines are used. Sitting back critiquing while nothing is done, only allows the rot to expand, the same way cancer consumes when left untreated. What is it going to take for this country to stamp out this rot?

    Perhaps, . . . . . . . . . . well, I don’t have too many years left, so I may not see the end, but it sure would be nice to see someoe with the balls, to clean up the problem.

    1. citalopram

      What it’s going to take is people going hungry. The more crises we have as a result of our corporatistt government, the more likely Americans will react.

  4. LeeAnne

    Norman, be careful what you pray for: “someone with the balls, to clean up the problem

    That savior can’t be too far away.

  5. alex

    Yves Smith: It’s hard to read the private lawsuit and not wonder why this behavior didn’t lead to a criminal investigation by the DoJ. Might it have something to do with the importance of private equity in funding the Obama campaign? Rahm Emanuel raised lots of money from PE kingpins, and at least two of Obama’s New York City fundraisers were hosted by LBO heavyweights.

    Every time I read something like this, it reminds me that any proposals for various reforms are moot until we have real campaign finance reform (e.g. public financing like the People’s Republic of Arizona). Of course with the Supreme Court going ever further with the argument that money is speech (hence bribery is speech) there’s not much hope now. Funny, when I went to school they didn’t teach us that bribery is one of the five freedoms guaranteed by the first amendment.

  6. synopticist

    ” hard to read the private lawsuit and not wonder why this behavior didn’t lead to a criminal investigation by the DoJ. Might it have something to do with the importance of private equity in funding the Obama campaign? ”

    Whereas by contrast, I can’t think of a single link between the republicans and the Romney campaign with the LBO complex.

    So it turns out that the PE guys weren’t the Randian super-competitive heroes they claimed to be. There was nothing free-market abut what they were doing, it was a rigged, rip-off system, where the 0.01% were using ineffiecient markets to screw the rest of the wider capitalist world.

    How incredibly obvious that seems in retrospect.

    1. ArkansasAngie

      Fruad is fraud
      We don’t have a regulation problem we have an enforcement problem.
      Thus all you who say that Obama is the lesser of two evils are wrong.
      Throw out the stupid wedge issues that the crooks hide behind and you have the true situation. Criminals are running the show

      Give me a law and order candidate and I don’t care what their stance on any of the social issues are.

      No more wedgies.

  7. Susan the other

    Jesus, I’m sick. Thank you for making me sick once again, Yves. It’s better than parading down the street flagellating myself. But not much. I react thusly: Re the lawsuit for collusion by Dahl v Bain: Yes let’s pull the veil away from private equity, or “private” equity. Because, in Yves words: “PUBLIC INTEREST REQUIRES MUCH GREATER TRANSPARENCY.” Oh, my: file these transactions in the public record? What is left of the fuckin public record?

    Well, one of my synapses just fired; Let’s trace the Mittster’s fees (reported as capital gains) back to the corresponding buy-out deals and extrapolate a number of irregularities, OK? Oh, wait, he won’t release his taxes. OK, well then nevermind.

    I guess there is always the app from Roth and Shapley which will soon serve to match a buyer and a seller, an offer and a bid, and no need for further legalistic supervision. I mean, isn’t it all about “economic engineering” now. Who cares who gets rich and who is impoverished – that’s the old free market.

    I’m almost too pissed to type.

    I can only say at this point that pump and dump is not a social safety net.

    But here’s a caveat for the unconvinced, in spite of the current omissions of the Obama administration: Unless the Mittster really is as stupid as a child – which he and Ryan do appear to be – it would clearly be a conflict of interest, CONFLICT OF INTEREST – for Mitt Romney to be President. Pubiic record? What’s that? Well, for one thing it’s taxes: Let’s look at Mitt’s taxes. Let’s trace his “fees” (reported as capital gains) back to the buy-out deals and extrapolate a variety of irregularities. Ah! Pure profit taking contrary to the law. At taxpayer expense? And Obama’s DOJ doesn’t give a shit. Oh well. The entire system is a goner. Fuck the whole damn thing.

    Oh, look! Our new commander in chief (the snotty assed kid who avoided the draft while promoting the war, you know the type). The Mittster – gag me with a silver spoon. You can borrow one from Carlyle.

    Sorry. I’m going to go vomit.

  8. Doug Terpstra

    Why did libor-fixing crimes receive scant attention? Or the J.P. Morgan whale trades? Or foreclosure fraud?

    Clearly it’s all related. The rule of law has broken down, yielding to the divine right of plutocrats.

    1. Yves Smith Post author

      Libor got a huge amount of attention, particularly in the UK press. It was important enough that I had a daily “Liborfest” feature in Links for over a week. The CEO and Chairman both of Barclays were forced to resign, remember?

  9. Eureka Springs

    It’s amazing how so many public pension holders are so willing and eager to fund their own demise.

  10. Gil Gamesh

    “….the business of extraction, looting, and transferring income from ordinary people to the top 0.1%.”
    The American Way, pithily put. And it goes on and on everyday, more or less in plain view, by and with the support of a suborned political class, and the acquiescence of those few hundred thousand Americans paying attention.

    What a system. What a country. The crookedest place on Earth.

  11. diane

    Seems to me that the powers that be have quite a few reasons not to bring to light the Private Equity industry (they don’t want those previously unknown cross references made), from Bain, to the Gore brothers, to Dickie Blum, Senator Dianne Feinstein’s Hub, who occasionally lectors at the Milken Institute, and, among other stunning but near thoroughly silenced powers he exercises behind the scenes, owns Blum Capital , which owns CB Richard Ellis (which is auctioning off our post offices).

    Speaking of which, I’ve been horrified for quite some time now, about that silence regarding his quite silenced tentacles, a few linkies, for anyone interested (and we should all be interested in our Senators familial actions):

    Re: Behind the scenes with Dick Blum: http://theava.com/special-projects
    (see, mid page: Will Parrish & Darwin Bond-Graham’s 5-part series on financier and UC regent Richard Blum:

    Part 1: Richard Blum, The Man Behind California’s ‘Developing Economy’

    Part 2: Disaster Capitalist University

    Part 3: A Lesson From California’s Students: WE Make the Crisis

    Part 4: Richard Blum, Godzilla Regent

    Part 5: Richard (Blum) Ellis’ North Coast Pension Booze )

    Re CB Ellis Richard Group, which the power has been given to: both auction off our Public Post Offices; and determine which ones should be auctioned off:

    August 22, 2012: Hollywood Producer Joel Silver Moving Into Venice Post Office http://venice.patch.com/articles/hollywood-producer-joel-silver-moving-into-venice-post-office

    Seward lamented the loss of public space in Venice and throughout the country due to unfair financial constraints that she said were placed on the U.S. Postal Service. She said there was a lack of congressional oversight and referenced media reports noting that California U.S. Sen. Dianne Feinstein’s husband is the chairman of CB Richard Ellis, which has the contract to sell post offices and recommends which ones should be put on the market.

    July 29, 2012: Post office sale is a surrender to corporate interests http://www.dailycal.org/2012/07/29/post-office-sale-is-a-surrender-to-corporate-interests/

    July 20, 2011: USPS Awards CB Ellis Richard Group contract to serve as exclusive real estate provider http://www.postalreporternews.net/2011/07/20/usps-awards-cb-ellis-richard-group-contract-to-serve-as-exclusive-real-estate-provider/

    Re the UC (California) System: http://cloudminder.blogspot.com/p/richard-blum.html

  12. steelhead23

    Why, oh why isn’t our corporate media interested in the malfeasance of its owners? Hmm. Might it have a little to do with – money, power, career?

    I have an even better question: Why isn’t our political class interested in attacking corporate criminals? Might it have a little to do with – campaign contributions and winning elections? Do you see the connection? Our economy is crumbling, our wealth disparity is soaring, massive criminality rules Wall Street, and while our politicians occasionally get up on their hind legs and make a bit of noise, there has been no real concerted effort to “make them pay.” And, I sadly note that not one of our political parties, including Libertarians, Greens, and Constitution parties has laid out an aggressive plan to fix this. Our democracy is in severe decline. My answer to that question would be a dissertation, but it primarily revolves around Bernaise, Goebbels and others’ view that propaganda works. We have been trained to worry about Iran, gay marriage, abortion, etc. while the real criminals cart off our national wealth and our children’s future. I suspect that propaganda’s spell will one day wear off and these crimes will be well known and the people will be roused. Hopefully that will not be the day after we are all shackled.

  13. Thomas

    I guess this shows that everyone who thought that Private Equity *only* created profits through leverage now has to admit they are wrong.

  14. SomethingSomethingComplete

    It’s nice when NC shares stories like the above, rather than posting Galbraith’s over-the-top rants.

    This is a legitimate and focused issue.

    Oligopolistic behavior like this is usually value-destroying (even the most ardent neoclassical economists would likely struggle to show that such behavior is socially optimal) and its resolution may have many interesting implications not just for the PE industry but for the entire financial sector.

    It also speaks to the “concentration of control” issue that several researchers in network topology have brought up in the past 3/4 years.

    The idea is that because a handful of individuals are actively involved in the ownership and control of many firms (including PE firms), their “private collusion” through informal, social networks may have very damaging effects on the markets.

    Let’s see what comes of it.

Comments are closed.