It’s pretty much a given that the underlying conduct smells to high heaven when the top legal fixers in America can’t get seriously rich men out of trouble. In this case, the rich men are the private equity alpha players: KKR, Blackstone, and TPG, who have agreed to shell out $325 million among them to settle claims of collusion on bidding for potential acquisitions. Note that this settlement needs to be approved by the judge to become final. Three other funds, Bain, Goldman, and Silver Lake, already settled with the plaintiffs.
This case was even more of a David versus Goliath than the usual suit against private equity general partners, since the lead plaintiff was the lowly Police and Fire Retirement System of the City of Detroit. Mind you, it’s hard to find any law firm of reasonable stature to go against private equity firms, since they throw around so much legal business that pretty much every blue chip law firm either works for them or wants to get on their meal ticket.
The basis of the dispute was that, in the runup to the crisis, the biggest private equity players would team up to submit joint bids on large takeover candidates. In and of itself, that could be defensible conduct, since one could claim that these so-called club deals allowed the firms to buy even large companies than they could easily (or permissibly, given restrictions in their limited partnership agreements on the maximum percentage of the fund permitted for a single investment) digest. But what was obviously not kosher was arm-twisting other big funds to stand aside. The plaintiffs, who owned shares in the companies that were purchased by these consortia, argued that they were damaged by the price-suppressing effects of these strategies. I have no idea what the rules of thumb are now, but back when I was in the M&A business, having an additional bidder in an auction was generally reckoned to increase the price by 10%.
This private equity troika was eager to cut a deal before September 4, when the judge was to make an initial ruling as to whether to give class action certification to the plaintiffs. If they prevailed, that would greatly increase their bargaining leverage.
Here is the overview of the case from Pensions & Investment Age:
The complaint, filed in December 2007, listed 19 LBOs and eight related transactions in which the private equity firms were accused of shortchanging shareholders in target companies out of billions of dollars by agreeing to suppress takeover bids. The defendants deny the accusations.
The prices were held down when the private equity firms formed groups to take companies private, according to the complaint. The firms were accused of agreeing not to compete for exclusive deals and allocating transactions among themselves.
The firms argued at a December 2012 hearing that the plaintiffs hadn’t provided evidence of an overarching conspiracy to rig bids. The deals represented legitimate practices of the mergers-and-acquisitions business, they said. A judge in March 2013 refused to dismiss the case.
What is remarkable, as the Financial Times account makes clear, is how brazen the conduct was. The reason to use expensive lawyers is above all to keep you out of trouble. But apparently these Masters of the Universe were so convinced of their privileged status that they couldn’t be bothered to be careful. By contrast, ADM and other chemical companies who fixed prices in lysine and citric acid were careful to conduct these meetings in person and offshore to reduce the odds of getting caught.*
Get a load of how clear the major actors were about the pact among them as well as the need for quid pro quos. And many of these conversations took place at the top level of these firms. From the Financial Times:
“It is better to pay a few millions than to risk billions,” said one private equity executive directly involved in the proceedings, alluding to the uncertainty in bringing a case before a jury…
“They can’t go to trial,” said one industry lawyer. “It’s too ugly. The emails may not prove what they are supposed to prove but they are just too embarrassing.”…
Many of the most damaging emails revolve around Bain, KKR and Merrill Lynch’s 2006 $33bn purchase of HCA, alongside the hospital company’s management – then, the largest buyout ever. At the time, most of the big private equity groups were also looking at Freescale, the technology group, and at NXP, the semiconductor arm of Philips.
None of the rivals to the HCA winning group submitted a competing bid, but an internal email at Blackstone stated: “It is a shame we let KKR get away with highway robbery.”
Carlyle’s Jim Attwood emailed Alex Navab of KKR to assure him, “we will not in any way interfere with your deal”.
Jonathan Coslet, a senior executive at TPG, noted in an email: “All we can do is do [u]nto others as we want them to do unto us. It will pay off in the long run even though it feels bad in the short run.”
David Rubenstein, one of Carlyle’s founders, rejected competing with KKR for the sake of the relationship, saying: “I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals.”
Lawyers for the private equity groups argue that considerations such as the right of the winning buyout consortium to match any rival bid, the support of HCA’s management, and various other deal protections meant that it was highly unlikely a rival bid team would have succeeded.
But when KKR prepared a preliminary offer for Freescale, forcing a group including Blackstone and Carlyle to raise their offer by $800m, Dan Akerson, co-head of US buyouts at Carlyle, sent an internal email, marvelling that “KKR asked the industry to step down on HCA!”
KKR then withdrew, prompting Tony James of Blackstone to send an internal email that he had just received a call from Henry Kravis to say “they were standing down because they would not jump a signed deal of ours”.
Mr James then sent an email to KKR’s Mr Roberts: “Together, we can be unstoppable but, in opposition, we can cost each other a lot of money.”
Predictably, the New York Times presented the private equity general partners as victims before getting to the damning e-mails:
The firms, accumulating piles of legal bills, have put up a vigorous defense and succeeded last year in convincing a judge to narrow the case’s scope.
But a trial looms in November, and nearly all of the firms have now opted to pay eight- and nine-figure sums to make the lawsuit go away.
The fact that these firms managed to drag the case out of seven years suggests they were hoping to win a war of attrition, but the plaintiffs got such good dirt in discovery that that strategy was no longer viable.
A wild card is that one of the defendants, Carlyle Group, has refused to settle. The Grey lady, clearly running PR for the private equity firms, claims the settlement is in jeopardy if the judge rules against the plaintiffs on the class action status. Informed reader input is welcome:
While the plaintiffs have now coaxed $475.5 million from the buyout firms, much depends on a hearing in September, when a judge will consider whether to approve the settlements and — crucially — whether the plaintiffs can be considered a class for legal purposes. A decision that the plaintiffs are not a class would threaten the existing settlements.
Personally, I’d love to see Carlyle executives on the stand, particularly if the stake were high by virtue of refusing to come to terms with the plaintiffs and facing much higher potential damages by virtue of them getting a class action certification. But litigation is a crapshoot, so stay tuned for the September ruling.
* The ring was exposed due to the cooperation of ADM executive Mark Whitacre, who helped the FBI tape critical meetings.