CCC’s: Was Heir Locators Indictment a Hair Too Late?

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Below is a post that I wrote with a friend and former Antitrust Division colleague, Karen Sharp.  The post originally appeared in Law 360 Competition (here). I am reposting for those that don’t have access to the article.

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Was Heir Locators Indictment a Hair Too Late?

by Robert Connolly and Karen Sharp[1]

            On August 17, 2016, a Utah grand jury returned a one count Sherman Act indictment against Kemp & Associates, Inc. and Daniel J. Mannix,[2] a Kemp corporate officer.  According to the indictment, the conspiracy was an agreement to “allocate customers of Heir Location Services sold in the United States” that began as early as September 1999 and continued as late as January 29, 2014.

Heir location service companies identify heirs to estates of intestate decedents and, in exchange for a contingency fee, develop evidence and prove heirs’ claims to an inheritance in probate court.  The indictment charged that there was an allocation scheme whereby the defendants agreed with a competing heir location service company that the first company to contact an heir would be allocated certain remaining heirs to the estate and, in return, would pay the other company a portion of the collusive contingency fees collected from the heirs.

In pretrial orders issued last August, U.S. District Court Judge David Sam, 1) dismissed the indictment as time barred by the five-year statute of limitations; and 2) held that if there were a trial, the agreement would not be considered per se, but instead judged by the jury under the Rule of Reason.  The Antitrust Division is challenging both rulings on appeal in the Tenth Circuit.  In this article we discuss the court’s ruling that the indictment was time barred by the statute of limitations.

A full exposition of the facts can be found in the indictment,[3] Judge Sam’s Memorandum Decision and Order[4], the government’s opening brief in the Tenth Circuit,[5] and the defendants’ response.[6]  But in short, the relevant facts are these:

  • There was a written allocation agreement between competing heir location service companies to divide certain customers.
  • On July 30, 2008, defendant Mannix wrote to Kemp & Associates colleagues in an email: “The ‘formal’ agreement that we have had with [Blake & Blake] for the last decade is over.”
  • There were in fact no other heirs allocated after July 30, 2008.
  • Payments made by previously allocated customers, however, occurred within the Sherman Act five-year statute of limitations period preceding the indictment.

The government argues on appeal that the conspiracy did not end on July 30, 2008 when the agreement was abandoned but continued based on the “payments theory.” The payments theory is straightforward: conspirators rig bids, fix prices and/or allocate customers to reap the higher prices that come from eliminating/restraining competition.  As long as a conspirator is being paid as a result of the illegal agreement, the conspiracy continues.

The government has the weight of authority and specifically, Tenth Circuit precedent, on its side.  The government argues on appeal that Judge Sam “mistakenly concluded that the alleged conspiracy ended after the last customers were allocated, rather than continuing as long as the conspirators collected and distributed payments from the contracts with the allocated customers.”  The indictment specifically alleged that as part of the customer allocation conspiracy, the defendants “accepted payment for Heir Location Services sold to heirs in the United States at collusive and noncompetitive contingency fee rates.”  The indictment alleges that the conspiracy continued at least as late as January 29, 2014, which is the date when, according to the defendants’ motion to dismiss the indictment, “a large team of law enforcement agents and prosecutors served subpoenas on, and sought to interview, many of the Company’s employees.”

The payments theory is well accepted, including in the Tenth Circuit.  United States v. Evans & Associates Construction Co.[7] was a bid-rigging case where the contract was rigged outside the statute of limitations, but the defendant received payments for the work done on the contract within the statute period.  The Tenth Circuit in Evans concluded that “the statute did not begin to run until after the successful contractor accepted the last payment on the contract.”[8] According to the court, “the Sherman Act violation was ‘accomplished both by the submission of noncompetitive bids and by the request for and receipt of payments at anti-competitive levels.’”[9] Similarly, in the more recent case of United States v. Morgan, the Tenth Circuit held that “the distribution of the proceeds of a conspiracy is an act occurring during the pendency of the conspiracy.”[10]

Judge Sam did not agree that the indictment before him alleged a conspiracy that would properly invoke the payments theory.  He concluded that the primary purpose of the anticompetitive agreement was the allocation of customers.  According to Judge Sam, “[i]t then follows that any conspiratorial agreement ceased to exist once the allocation of customers through the [agreed-upon] Guidelines ceased.”  Judge Sam distinguished the heir locators’ agreement from the bid-rigging agreement in Evans, stating, “[T]he evidence in Evans and Morgan shows that the central purpose of the conspiracy was to obtain wrongful proceeds or money.  While the Indictment here mentions the payment of proceeds, Ind. ¶¶ 11 (h), (i), the central purpose of the conspiracy charged was not ‘economic enrichment.’” Judge Sam found, without even a hearing or trial, that the “central purpose” of the heir locators’ allocation agreement was not “economic enrichment.”  The statute of limitations, therefore, expired on July 30, 2013, five years after defendant Mannix sent an internal Kemp & Associates email abandoning the allocation agreement.

In our opinion the judge was grasping at straws to distinguish (and extinguish) this case from Evans to avoid application of the payments theory.  Payments by allocated heir locator customers seem like payments made on rigged contracts.  Since the judge also found this to be a Rule of Reason case, he apparently felt that the agreement on balance was procompetitive–and not designed to generate supra competitive profits.  The court’s logic seems to be a real-life application of the “bad facts make bad law” principle.  But, there was simply no record on which to base a finding that the payments made and accepted by defendants and their co-conspirators within the statute were merely administrative tasks that “bore no relation to customer allocation.”

A Better Way to Judge The Validity of Using a Payments Theory To Extend the Statute

  1. The Judicial Concern with Prosecutorial Delay

            Judge Sam was clearly troubled by the fact that the defendants were indicted in August 2016, several years after the five-year statute of limitations would have appeared to have run on an agreement that was abandoned in July 2008.  Moreover, since there was no fixed time when an estate distribution would be finalized, there was no telling when the statute of limitations would begin to run in this type of case. The court noted:

“Additionally, the government has identified 269 allegedly affected estates, the administration of which consisted of a series of ordinary, non-criminal events that could last many years. In contrast, Evans involved the bid for one contract which was bid, granted, completed and fully paid within the two years. [citation omitted] . . .. This arbitrariness is not consistent with the very reasons limitations periods exist in criminal cases.”

In bid-rigging cases, the outer limits of the statute of limitations is at least defined by the length of the contract.  But here, as the court noted, the payments theory could extend the statute of limitations for an unknown, and possibly very long time.

2.    The “Payments Theory” as a Due Process Violation

A more direct and fair method to address the concern that Judge Sam and other courts may have with an indefinite extension of a statute of limitations is to consider the application of the payments theory as a possible violation of due process.  Does extending the statute of limitations for an indefinite and arbitrary period deprive the defendants of due process?

The Supreme Court has recognized that prosecutorial delay may constitute a due process violation but has set an extremely high bar for a would-be successful defendant.  In United States v. Marion,[11] the Court held that in order for the Due Process Clause of the Fifth Amendment to require dismissal of an indictment the defendant must show that the pre-indictment delay:

1)         caused substantial prejudice to the defendant’s rights to a fair trial; and

2)         that the delay was an intentional device to gain tactical advantage over the accused.[12]

There is a critical difference, however, between the facts in Marion and the heir location services case.  In Marion there was a three-year delay between the commission of the crime and the charged case.  The defendants alleged this delay was a prejudicial due process violation.  But, the case was still brought within the statute of limitations.  However, where, as here, the application of a payments theory leads to an arbitrary and indefinite extension of the statutorily set limitations period, Marion can be distinguished.  We suggest it would be appropriate to apply a different/lesser test in this case.  The near-impossible-to-meet prong of showing that the prosecution intentionally engaged in delay tactics to gain an advantage should be dropped.  Instead, the defendants should be required to make the Marion showing of substantial prejudice suffered by the application of the payments theory. A showing of substantial prejudice would require for example a witness’ death or illness, loss of physical evidence, or a witness who was once available is now not available; i.e., something more than a general allegation that memories fade with time.

Another aspect of due process that can arise in payments theory cases, and may be what really troubles courts, is that an individual who is the subject or target of a criminal antitrust investigation is often without a job and can find it difficult to get one while possible legal charges hang over his or her head.  A company may also suffer negative financial consequences while a “cloud of suspicion” from a grand jury investigation lingers.  Being a subject/target of an antitrust criminal investigation is an incredibly stressful and expensive ordeal.  If this status is going to continue, perhaps indefinitely, past the traditional statute of limitations, there should be a very good reason.  Depending on the circumstance, a judge, like Judge Sam, may find that the delay in bringing a case was a due process violation of the defendants’ property rights—the right to earn a living.

We also suggest, however, that if the defendant can make a showing of substantial prejudice, the government should have the opportunity to explain why there was a need to resort to a payments theory. Was the crime or industry investigated very complex?  Did the subjects themselves stonewall the investigation and cause delays?  Did the defendants successfully conceal the conspiracy until very near the typical running of the statute?  If the government has a satisfactory explanation of why it has resorted to the payments theory, and especially if the defendant’s conduct during the investigation contributed to the delay, then the court should find no due process violation.

The due process analysis we are suggesting is, of course, a deviation from the two-step test the Supreme Court established in Marion, but it is based on a valid distinction from Marion—but for the payments theory, the heir locators’ indictment is barred.  A balancing of the prejudice to the defendant versus the government’s need to use the payments theory, is a more appropriate way for a court to decide whether a case is time-barred than by finding that the ultimate goal of a customer allocation scheme was not economic enrichment.

Some Thoughts on the Case as Former Prosecutors

            Another benefit of a due process analysis is that it would help explain why the government brought a case that is facially so far out of the statute of limitations.  One might conclude, and perhaps Judge Sam did, that the government was simply negligent, and the defendants should not bear the cost of that negligence. After all, the allocation agreement itself was in the form of written “Guidelines,” and the directive ending the “formal” agreement was in a July 2008 email.  The defendants further allege that two disgruntled former Kemp & Associates employees (and potential witnesses) first approached the Antitrust Division in 2008 or 2009.  By all appearances, this seems like a relatively easy conspiracy to “uncover” and prove, so why did the Antitrust Division wait until it had to rely on a payments theory to bring an indictment?

As former prosecutors we can speculate—and it is just speculation– as to why the case was brought using a payments theory to extend the statute.  One possibility that comes to mind is that the government believes that the conspiracy was not abandoned in July 2008.  Perhaps the government has evidence that additional customers were allocated after July 2008 and that the conspiracy in fact continued until the date the defendants received the subpoenas.  Was the Mannix email withdrawing from the conspiracy just a cover and the allocation actually continued “underground?” The government may simply have found it expedient to go with the payments theory rather than disprove the withdrawal email beyond a reasonable doubt.  This, of course, is just speculation–there may be other valid reasons why a payments theory was necessary.  But, often the public facts do not tell the entire story. The Antitrust Division brought a case that appeared to be a straightforward per se customer allocation agreement and used the well accepted payments theory to bring the case within the statute of limitations.  Without a trial or a record of any sort, there is no way to tell whether this was a sound exercise of prosecutorial discretion or not.[13]

The Tenth Circuit may reverse Judge Sam on the statute of limitations issue, in which case the rule of reason versus per se issue will take center stage. Or the appeals court may agree with Judge Sam and limit the payments theory to situations, like Evans, where there is a fixed contract performance time that limits the payments theory extension of the statute of limitations.  But, even in this situation, contracts typically have delays, so the idea of a “fixed contract time” may be somewhat illusory.  While it is not the law currently, our suggestion is that rather than have courts chip away at the legally sound payments theory based on dubious distinctions, defendants should challenge, and courts should assess the fairness of, the government’s use of the payments theory on the basis of due process; i.e., balancing the harm to the defendants against the justification offered by the government for relying on this theory to extend the statute.

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[1] Bob Connolly is a partner with GeyerGorey LLP.  He is the former chief of the Antitrust Division’s Philadelphia Field Office and served for 34 years in the Antitrust Division. He publishes a blog, Cartel Capers.

Karen Sharp is a former trial attorney with the DOJ Antitrust Division, where she investigated and prosecuted national and international antitrust matters for 25 years. She also served as a special assistant United States attorney in the Eastern District of California. Most recently she was counsel for Wilson Sonsini Goodrich & Rosati in San Francisco.  Ms. Sharp can be reached at Sharpkj100@gmail.com.

[2] United States v. Kemp & Associates, Inc., et al., No. 2:16-cr-00403 (D. Utah Aug. 17, 2016) (David Sam J.)16-

[3]   The indictment can be found on the Antitrust Division’s website at https://www.justice.gov/atr/file/887761/download.

[4]  Judge Sam’s memorandum opinion is linked at Law 360, Aug. 29, 2017, Antitrust Charges Against Heir-Tracker Co. Dismissed, available at https://www.law360.com/articles/958574/doj-antitrust-charges-against-heir-tracker-co-dismissed. It can also be found here JudgeSamSOLOrderandMemorandum.

[5]   Opening Brief for the United States, (corrected) (filed January 3, 2018), available at https://www.justice.gov/atr/case-document/file/1020466/download.

[6]  The defendants’ brief is linked at Law 360, February 5, 2018, Heir-Tracking Firm Urges 10th Circ. to Refuse Antitrust Case, available at https://www.law360.com/competition/articles/1009042/heir-tracking-co-urges-10th-circ-to-refuse-antitrust-case.  It can also be found here defendants’ kemp-brief.

[7]   United States v. Evans & Associates Construction Co., 839 F.2d 656 (10th Cir. 1988).

[8]   Id. at 661.

[9]   Id. (quoting United States v. Northern Improvement Co., 814 F.2d 540 (8th Cir. 1987)).

[10]  United States v. Morgan, 748 F.3d 1024, 1036-37 (10th Cir. 2014).

[11]  United States v. Marion, 404 U.S. 307 (1971).

[12]  Id. at 324.

[13] The Antitrust Division already had a significant setback on the “payments theory” in United States v. Grimm, 738 F.3d 498 (2d Cir. 2013), a case where the jury returned guilty verdicts for fixing of municipal bonds.  The last bond fixed was outside the five-year statute of limitations, but payments on the fixed bonds could extend over the life of the bonds—up to thirty years.  The Second Circuit could not accept this extreme extension of the statute of limitations and reversed the convictions ruling that a “[criminal] conspiracy ends notwithstanding the [later] receipt of anticipated profits where the payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions.” Id. at 502 (quotation marks, ellipses, and brackets omitted).

Spring cleaning

Over the last few weeks the rhetoric regarding the global trade environment has increased dramatically. Less than a month after he declared to the World Economic Forum that India was open for business, Prime Minister Narendra Modi has raised import duties to their highest in three decades, setting the stage for a protracted trade war. The U.S. administration announced it would look at reciprocal tax treatment.
The administration has also announced a 25% duty on steel and aluminum products to counteract what are considered unfair trade practices affecting those industries. This has caused allied trading partners to look at various U.S. made products for retaliation.
The renegotiation of the trilateral North American Free Trade Agreement continues and the Administration is taking another look at the Trans-Pacific Partnership agreement and discussing a possible model free trade agreement with an unnamed country in Africa.
The stage was set at the State of the Union address, when President Trump reiterated his position on trade. He stated “we expect trading relationships to be fair and to be reciprocal. We will work to fix bad trade deals and negotiate new ones. And we will protect American workers and American intellectual property, through strong enforcement of our trade rules.”
The pendulum is swinging sharply toward enforcement. Customs is using terms like intelligent enforcement and consequence delivery in order to effect deterrence.
With increased enforcement just around the corner, a good spring cleaning may be needed. Now is a good time to reorganize, clean up, and ensure that all systems are in good working order.
The compliance team should be asking the following questions:
Are corporate compliance manuals up to date?
Have all training materials been refreshed and have new employees been trained?
Have all employees been trained on any compliance changes within the company?
When was the last time the company did an internal audit to check that compliance procedures are working effectively?
Are vendors and suppliers knowledgeable about the importers compliance requirements?
When was the last time corporate internal controls were reviewed and updated?
When was the last time we talked with our broker about changes in sourcing, use of trade preference programs, and the introduction of new product lines?
Clearing out the compliance cobwebs now will undoubtedly pay off in the long run.

The 3C’s: Antitrust Division to Hold Roundtable on Criminal Antitrust Compliance

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From the Press Release (here):

On April 9, the Department of Justice’s Antitrust Division will hold a public roundtable discussion to explore the issue of corporate antitrust compliance and its implications for criminal antitrust enforcement policy.

The roundtable will provide a forum for the Antitrust Division to engage with inside and outside corporate counsel, foreign antitrust enforcers, international organization representatives, and other interested parties on the topic of antitrust compliance.  Participants will discuss the role that antitrust compliance programs play in preventing and detecting antitrust violations, and ways to further promote corporate antitrust compliance.  The format of the program will be a series of panel discussions with featured speakers.  Audience participation in the discussions will be encouraged.

* * * * Click Here for the Rest of the Story* * * * 

CCC’s: Recommended Article/Book About Tom Hayes and the LIBOR Scandal

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I recommend reading an interview with author David Enrich who wrote a book “The Spider Network:  The Wild Story of a Math Genius, and a Gang of Backstabbing Bankers, And One of The Greatest Scams in Financial History.”  Below are excerpts of comments made by Mr. Enrich during the interview, “What’s Behind One of the Biggest Financial Scams in History.”  The interview appeared on February 19, 2017 in Knoweldge@Wharton.[1]

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  • “The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician who was a star trader at some of the world’s biggest banks.”
  • “[m]y iPhone buzzed with a text message from a number I didn’t recognize. And it said, “This goes much, much higher than me. Not even the Justice Department knows the full story. I’m willing to talk to you, but I need to make sure I can trust you.” It was Tom Hayes.”
  • “He felt like he was doing something that was really just false and misleading. And he took solace in the fact that the bosses knew about and generally approved of what he was doing. But as most of us learn from a very early age, just because everyone is doing something bad doesn’t mean it’s OK for you to do something bad yourself. That’s a message that was really lost on an entire generation of people in the financial industry, I think.”
  • “And prosecutors, instead of going after people at the top of the food chain — the CEOs and business leaders who are responsible for setting the culture at their institution, responsible for in many cases the practices of their institutions — instead of going after those guys, they uniformly went after a small group of relatively low-level people. Don’t get me wrong, Hayes in particular did things that were wrong, he knew they were wrong, or at least should have known they were wrong, and deserves to be punished. But what is crazy to me is that Tom Hayes is currently serving an 11-year sentence in a maximum-security prison. And as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis.”
  • “The thing is, prosecutors do not like to lose cases, so they’ve taken, in general, a very conservative approach to what cases they’re going to bring because they don’t want to gamble on losing. They’ve built up these very impressive win/loss records as prosecutors. Some of them are undefeated. And they boast about that.”
  • “To me, that’s a really unhealthy sign, because the thing that would scare some of these bank CEOs is not losing some money or losing their jobs; it’s the prospect of being perp-walked in front of TV cameras in handcuffs, or the prospect of possibly losing your liberty in front of a jury of your peers. That is a terrifying thing. To me, the great missed opportunity of the financial crisis was that prosecutors didn’t do that a single time with a CEO or a top executive of any major financial institution. They might have lost those cases, but at least it would have struck some fear in the hearts of people.”
  • “Again, I’ve developed a lot of sympathy for them [Hayes and his family] and their situation there. I do want to make clear that he is not an innocent victim here. He is someone who was participating, and he was not acting properly. He was acting illegally, and I think deserves to be punished. I just find it galling that he is alone in being punished.”
  • “My concern is that as memories of these massive penalties [fines] fade and memories of the crisis fade, the pressure is going to return for banks to amp up their profits. As that becomes the priority among shareholders, it’s going to become the priority among senior executives. At that point, the cultural stuff goes out the window, and the No. 1 priority once again becomes just making as much money as quickly as you can.”

The book, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History is available on Amazon here.

Thanks to my friend Toni Hill who forwarded the Wharton@Knowledge interview to me.  Toni and I worked together in the Philadelphia Field Office of the Antitrust Division on several high profile (and many low-profile but fascinating) cartel cases.

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[1]   The Wharton@Knowledge interview recap had this introduction:

David Enrich followed the story while he was working for The Wall Street Journal and got close to the central figure in the scandal — star derivatives trader Tom Hayes. In the book, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History, Enrich, now with The New York Times, shares the tale of this brazen scam on the Knowledge@Wharton show on Sirius XM channel 111.

CCC’s: An Antitrust Lawyer’s Guide to Machine Learning (Guest Post by Ai Deng PhD.)

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Below is a post by valued guest contributor, Ai Deng, PhD. of Bates White Economic Consulting.

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There has been growing interest in the legal community in artificial intelligence (AI), and more specifically in machine learning (ML). This recent interest in AI is at least in part driven by concerns about algorithmic collusion, i.e., the possibility that computer algorithms could ultimately collude on their own, without human facilitation.

There is no question that the antitrust community is largely playing catch-up when it comes to the technical subject matters of AI and ML. As the Acting Chair of the Federal Trade Commission Maureen K. Ohlhausen noted, “The inner workings of these tools are poorly understood by virtually everyone outside the narrow circle of technical experts that directly work in the field.”

While there is no point to antitrust attorneys understanding the nuts and bolts of AI and ML technology, a basic understanding is necessary to better understand and assess the implications of the AI/ML research on antitrust and related legal and economic issues. That is the motivation behind my latest article. Through a series of simple examples, I introduce some fundamental concepts in ML. Along the way, I also discuss a wide variety of ML applications in the law and economics field. I conclude with a brief discussion of the hot topic of algorithmic collusion.

You can download the paper here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3082514

As always, I appreciate your thoughts and comments. You can reach me at ai.deng@bateswhite.com or connect with me on LinkedIn [here].

Ai Deng, PhD

Principal

direct: 2022161802 | fax: 2024087838

1300 Eye Street NW, Suite 600, Washington, DC 20005

ai.deng@bateswhite.com

BATESWHITE.COM

CCC’s: Top Comments on Antitrust Whistleblower Posts

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I’ve received several comments on the idea of an Antitrust Whistleblower Statute.  Some of the top comments are:

  1.    Didn’t you retire?  No.
  2.    Well, you should have.  I sometimes think the same thing, but what could be more fun than being an antitrust lawyer?
  3.    Your website design stinks and for a nominal fee I can fix it and help you lose weight.  I’m not worried about the website design.  But, please email me with the weight loss help.  
  4.    There were concerns that, particularly with international cartels, a whistleblower award could be excessive.  We agree that some allowance should be made to address this possibility.  John Connor offered this helpful comment:  “What is an appropriate standard for the size of the award? Using a percentage the employer’s fine is likely to be excessive. What about 5 or 10 years’ of the whistle-blower’s compensation?”   
  5.  There were some questions as to whether cartel whistleblower bounty provisions exist in other countries.  That is a good question.  We are researching that and will follow up.   
  6. Several people noted that an antitrust whistleblower idea is not a new idea and has never received support in the past from the Antitrust Division or Congress.  This is true, and we may get nowhere with our proposal this time.  But, as we’ve noted, the leniency “cash cow” is slowing down and the SEC whistleblower provision has been a huge success (by most people’s estimation).   Sometimes persistence pays off and the time may have come has come for a successful antitrust whistleblower push.  And, I may humbly suggest that Kimberly Justice and I may have some insights based on our many years with the Antitrust Division that have not been considered before.  We’ll see.

P.S.

The Grassley-Leahy Criminal Antitrust Anti-Retaliation Act of 2017, was just passed unanimously in the Senate.  The legislation would make it unlawful for an employer to retaliate against an employee who reports a violation of antitrust laws or a crime connected to antitrust laws.  This is the third time this legislation has passed the Senate unanimously, but it has never even been taken up by the House.

Stay tuned….

Thanks for reading.

CCC’s: It Is Time for an Antitrust Whistleblower Statute–Part 3

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This is Part Three of a four-part series of posts by myself and colleague Kimberly Justice on “It Is Time for an Antitrust Whistleblower Statute.”  Parts 1 and 2 can be found here and here.

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Note:   If the Grassley/Leahy Anti-Retaliation Act is passed, that protection would be part of the whistleblower statute. Ms. Justice and I are advocating that an antitrust whistleblower statute should go farther and provide a reward for actionable cartel-busting information.

The SEC whistleblower statute is a very successful model to be followed for a potential antitrust whistleblower statute. There should be differences in some areas (discussed below), but the SEC program has shown to be an effective tool in preserving the integrity of the nations’ securities market while conserving the investigative resources of the SEC.  But, it took a severe financial crisis to overcome the objections to an SEC whistleblower statute.  Many of the stakeholders, such as the Chamber of Commerce that opposed allowing a whistleblower award as part of the Dodd-Frank Act are likely to oppose an antitrust whistleblower statute.  But in November 2016, then SEC chair Mary Jo White said: “The whistleblower program has had a transformative impact on enforcement and that impact will only increase in the coming years.”

The success of the SEC whistleblower statute, at least from an enforcement perspective, is one reason why we think the time has come for a similar antitrust whistleblower statute.  It works.  The SEC, which pays the whistleblower 10-30% of the sanctions collected in successful actions, has rewarded 46 whistleblowers with approximately $158 million for information that has led to successful enforcement actions.

The SEC statute, like the antitrust statute we propose, is different than a typical False Claims Act-type whistleblower claim where the relator (whistleblower) brings an action in the name of the United States alleging the government has been the victim of fraud.  The SEC statute basically provides an informant with a reward (bounty) for coming forward with actionable information where the SEC obtains monetary sanctions.  The SEC, however, is precluded from making monetary awards “to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.”

While the SEC statute provides a model, there are areas where adjustments for the nature of cartel violations may be made in an antitrust whistleblower statute.  The full SEC legislation can be found here, but below are a couple of key provisions and our suggestions about how they might be modified.

Payment of Award

The SEC whistleblower program allows for a reward, “In any covered judicial or administrative action, or related action.” 

The Antitrust Division does not have administrative actions.  An antitrust whistleblower would be eligible for an award, in our view, only based on original information that led to criminal Sherman Act convictions and the imposition of fines based on a conviction.

 Amount of Award

The SEC provides for a whistleblower award only where the penalties exceed $1 million.  In such cases the reward is an aggregate amount [if more than one whistleblower] equal to—

‘‘(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and

‘‘(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.

In our view, this may not be an appropriate award schedule for an antitrust whistleblower.  At a minimum, the $1 million threshold should be eliminated. A whistleblower statute may be particularly effective in construction-type contracts where the loss to the victim is acute.  For example, a rigged electrical contract at a local hospital that would have been $750,000 with competitive bidding but has a low fixed bid of $1 million is as worthy of a whistleblower award as an international cartel where each consumer suffers a relatively small loss, but cumulatively the loss will easily exceed $1 million.

Also, the 10 to 30 percent award range may be excessive in a large cartel case.  The impetus behind our proposed legislation is not so much to make a whistleblower a mega-lottery winner, but to provide a way to help the whistleblower pay for what could be substantial attorney fees, and to compensate the whistleblower for what may be a long period of unemployment or underemployment, regardless of anti-retaliation protection. Therefore, we would eliminate the minimum award of 10%, leave the maximum of 30% and perhaps require that in making the award the Antitrust Division consider a) the attorney fees incurred; and b) the likely or actual loss of income over a period of time, as well as the value of the information provided, the level of cooperation and the amount of the recovery.

No Recovery for One Convicted of the Violation

No SEC whistleblower award can be made to ‘‘to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section.”

             An antitrust whistleblower statute should certainly retain this provision.  It is our sense that the most likely potential antitrust whistleblowers will be lower-level employees who know about a conspiracy and take some action in furtherance of it—thus creating criminal liability for themselves.  This will give the Antitrust Division much control over who can become a whistleblower.  The Division retains the discretion whether to give non-prosecution protection, a necessary first step before an insider can become a whistleblower.  If the potential whistleblower has a level of culpability such that the Antitrust Division is not comfortable accepting as a whistleblower, the simple answer is to not grant non-prosecution protection.  Another possible scenario is that the Antitrust Division grant non-prosecution protection to a highly culpable individual (making them eligible for an award because no conviction) but write into the cooperation agreement that the cooperator waive the right to a potential “bounty.”

There may be, and hopefully will be, some whistleblowers who do not need non-prosecution protection (customers, administrative staff or others who learn of a cartel but have no role in it).  But, in practice, the Antitrust Division would have significant control over the whistleblower program because it is likely that many potential whistleblowers would have to take as a first step, negotiating non-prosecution agreements.

 Office of the Whistleblower

            A key aspect behind the success of the SEC whistleblower provision is that the SEC actively promotes the program.  The SEC established an Office of the Whistleblower.  This is an excerpt from the office’s home page:

Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission. Through their knowledge of the circumstances and individuals involved, whistleblowers can help the Commission identify possible fraud and other violations much earlier than might otherwise have been possible.

The level to which the Antitrust Division promotes a new whistleblower statute will determine its level of success.  When the Division first began the revised leniency program, it rolled it out like a new iPhone.  The Division went to great lengths to advertise the program and make the program successful in practice by working with companies to help them qualify if at all possible.  The flexibility and discretion built in to an SEC style whistleblower statute will give the Antitrust Division the ability to accentuate the features the whistleblower provisions that work best for law enforcement while mitigating any possible downside (such as very culpable people getting awards).

Miscellaneous

We’ve only touched on the most significant feature of the SEC whistleblower program that may be mimicked in an antitrust whistleblower statute.  There would be more “sausage making” into creating actual legislation.  Other features of the SEC program worth noting are the reporting requirements to Congress and the Inspector General review and report on the program.  If an antitrust whistleblower statute is nearly as effective as the SEC statute, law enforcement and consumers will be the winners.  But, if an antitrust whistleblower statute is a bad idea, it can be a short-lived bad idea.  In light of the success of the SEC program, it is prudent to give it a chance.

Thanks for reading

Robert.connolly@geyergorey.com

Kimberly A. Justice, kjustice@ktmc.com

CCC’s: It Is Time For An Antitrust Whistleblower Statute–Part 2

Objections to an Antitrust Whistleblower Statute

The idea of an antitrust whistleblower is not new, but it has never gained much traction in the past.  There have been significant objections, or at least disinterest—particularly from the Department of Justice.  The mood seemed to be “Our cup runneth over with Amnesty applications so let’s not screw this thing up.”  But, perhaps times have changed.  Our analysis is that the objections to a whistleblower statute were either superficial, or when having merit, still not enough to outweigh the benefits of a whistleblower statute.

Before considering some of the possible downside to an antitrust whistleblower statute, a little explanation of what we have in mind may be helpful.  We propose an SEC-style whistleblower statue where an informant can be awarded a level of compensation (bounty) when information of illegality leads to charges and recovery by the SEC. This is different than a False Claims Act qui tam case where a Relator brings a case in the name of the government alleging the government has been defrauded.  In fact, an antitrust whistleblower statute is needed because a qui tam case is not generally available in price-fixing matters since it is the private sector, not the government that has been harmed.

Concerns About an Antitrust Whistleblower statute

 It’s worth noting that the Criminal Antitrust Anti-Retaliation Act has been passed twice unanimously by the Senate in the last two Congresses and is up for vote again on the Senate floor.  It will no doubt pass—most likely again unanimously.  There is agreement that a person who reports criminal antitrust activity should not face retaliation in the workplace. (Despite the consensus, the House has failed to take up this bill the last two times it has passed the Senate).  There is controversy, however, about whether a whistleblower should be eligible for some type of bounty if the information leads to successful cartel prosecution and the imposition of fines.

In 2011, the General Accounting Office Published a report on Criminal Cartel Enforcement that reported stakeholders’ views on a possible antitrust whistleblower statute (here).  This is a summary of the GAO findings:

There was no consensus among key stakeholders GAO interviewed–antitrust plaintiffs’ and defense attorneys, among others–regarding the addition of a whistleblower reward, but they widely supported adding antiretaliatory protection. Nine of 21 key stakeholders stated that adding a whistleblower reward in the form of a bounty could result in greater cartel detection and deterrence, but 11 of 21 noted that such rewards could hinder DOJ’s enforcement program. Currently, whistleblowers who report criminal antitrust violations lack a civil remedy if they experience retaliation, such as being fired, so they may be hesitant to report criminal wrongdoing, and past reported cases suggest retaliation occurs in this type of situation. All 16 key stakeholders who had a position on the issue generally supported the addition of a civil whistleblower protection though senior DOJ Antitrust Division officials stated that they neither support nor oppose the idea.

The GAO report is several years old and it may be that positions have been reevaluated.  For example, I think the Antitrust Division today would support the anti-retaliation measures in whistleblower statute.  But below is an analysis of some of the objections raised to making a bounty available to an antitrust whistleblower.

Whistleblower Credibility

 The Antitrust Division’s principal concern was that jurors may not believe a witness who stands to benefit financially from successful enforcement action against those he implicated.  GAO Report p. 39.  But, a whistleblower is highly unlikely to ever be a principle witness at a trial.  An antitrust crime typically involves many culpable actors.  A whistleblower would generally “get the ball rolling” and provide evidence that will turn other witnesses, and allow subpoenas and search warrants from target companies.  Further, a single whistleblower who might receive a financial reward seems no less credible than witnesses from an amnesty company where everyone—including the highest-ranking culpable executives—will have escaped criminal prosecution.  Also, criminal antitrust trials are relatively rare—almost all cases are resolved by pleas.  Finally, it is not logical to worry about the credibility of a witness you would otherwise not even know about absent a whistleblower statute.

A Whistleblower Reward Could Result in Claims That Do Not Lead to Criminal Prosecution: 

 There was some fear expressed in the GAO report that would-be whistleblowers would fabricate information in order to conjure up a cartel in the hopes of collecting a reward.  GAO Report p. 40.  Anything is possible, but the Antitrust Division folks are pretty savvy and have standards for opening grand jury investigations.  Moreover, the possibility of fabricated charges exists today with a company applying for leniency in the hopes of knee-capping competitors who would have to deal with a criminal cartel investigation.  The reality is a “false accusation” simply wouldn’t be corroborated by anyone else and could land the accuser in jail for making a false statement.

In a similar vane, concern was expressed that a whistleblower statute may result in a deluge of complaints to the Antitrust Division that would take additional resources to sift through.  This seems like a good problem to have.  When Ms. Justice and I were at the Division, we received a fair number of complaints that amounted to no more than oligopoly pricing.  It did not take too much time to ask: “What else ya got?”

* * * * * Click Here for the Rest of the Story * * * * *

CCC’s: Criminal Antitrust Anti-Retaliation Act of 2017 Voted Out of Committee

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The Grassley/Leahy Criminal Antitrust Anti-Retaliation Act of 2017 was unanimously voted out of the Senate Judiciary Committee this morning and will now go to the Senate floor.  The bill has passed the full Senate unanimously twice before, but has never been taken up in the House.

The bill is an important first step in creating protection for individuals who report criminal antitrust activity.  I have advocated for a stronger whistleblower statute (here) (here) that would provide a possible financial incentive for a whistleblower to help defray what could be the substantial legal bills that may accompany involvement in an antitrust investigation, as well as provide possible reward for actionable information.  But, certainly an anti-retaliation provision should be part of any whistleblower statute.  This legislation will be a good start if the House can be persuaded to join the Senate and pass the bill.

Below is the text of the statute

Criminal Antitrust Anti-Retaliation Act of 2017

This bill amends the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 to prohibit an employer from discharging, demoting, suspending, harassing, or in any other manner discriminating against an employee, contractor, subcontractor, or agent of such employer (covered individual) who: (1) provided information to the federal government or a person with supervisory authority over the covered individual (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) concerning a violation of antitrust law or of another criminal law committed in conjunction with a potential violation of antitrust law or in conjunction with an antitrust investigation by the Department of Justice; or (2) filed, testified, participated, or otherwise assisted in an investigation relating to such a violation. This protection does not extend to any covered individual who planned and initiated such a violation or an obstruction to its investigation.

A violation with respect to the antitrust laws shall not be construed to include a civil violation of any law that is not also a criminal violation.

A covered individual who alleges discharge or other discrimination by an employer in violation of such prohibition is authorized to seek relief: (1) by filing a complaint with the Department of Labor; or (2) if Labor has not issued a final decision within 180 days of such filing, by bringing an action at law or equity in the appropriate U.S. district court. A covered individual who prevails in any such action is entitled to all relief necessary to make such individual whole, including reinstatement with the same status, back pay plus interest, and compensation for special damages sustained

Thanks for reading.  robert.connolly@geyergorey.com

CCC’s: It Is Time for an Antitrust Whistleblower Statute —Part I

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Kimberly Justice and I wrote an article published in Global Competition Review arguing that it is time for an “Antitrust Whistleblower Statute.”  [The article is behind a pay firewall (here).]  Kimberly and I will be expanding on this idea in Cartel Capers blog posts over the next two weeks.  Below is the first installment.  We explain why cartels are a great pond to be fishing in for informants, but a little “whistleblower” bait is needed.

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Over the last several years, Senators Chuck Grassley and Patrick Leahy have introduced antitrust whistleblower legislation that has passed in the Senate but died in the House.  Their proposed legislation would grant job protection to antitrust whistleblowers.  The legislation that Ms. Justice and I are proposing would go further; besides retaliation protection, we would offer potential financial reward to a whistleblower who initiated a successful cartel prosecution.

The time is right for antitrust whistleblower legislation. In 1993, the Antitrust Division revised its Corporate Leniency policy, setting the stage for similar, successful, legislation/polices to be enacted around the world.  Amnesty/Leniency rewards an entire company and its cooperating executives with non-prosecution for coming forward and reporting cartel behavior.  But leniency applications are slowing down—at least that is the perception of many observers—as the cost of obtaining leniency in terms of corporate time and attorney fees, in an expanding universe of jurisdictions, has would-be applicants reassessing the cost/benefit analysis.  A whistleblower statute would not replace, nor in our opinion undercut, leniency policies, but would add a new tool to uncover cartels that exist, and deter new cartels from forming.

There are two features of cartels that are key to understanding why an antitrust whistleblower statute would be a potent and needed weapon in the fight against cartels:

1)         There are many potential whistleblowers in virtually every price-fixing/bid rigging conspiracy.  The culpability level of the many players ranges from Masters (top-level) to Sherpas (working group guy).  Offering a potential whistleblower reward to a single cartel member still leaves a target rich enforcement of culpable executives to focus on; but

2)         It is costly for a potential whistleblower to come forward.  Any member of a cartel, even the least culpable, faces the possibility of significant jail time.  In order for a low-level cartel participant to come forward, he needs to engage a qualified attorney and negotiate a non-prosecution agreement with the Antitrust Division.  This is an expensive, potentially life changing decision.  Long-term unemployment may well follow.  Hefty attorney fees surely will.  Even the most desirable whistleblower—one with no culpability at all, such as a secretary, or customer– will not ensnare herself in a cartel investigation without some means to cover significant attorney costs and reap some compensation for doing “the right [but very costly] thing.”

Ms. Justice and I worked on two investigations which highlight these points.  The first was an international cartel investigation involving both US and foreign companies.  Within each company there were many executives—some retired—that had enough knowledge of the cartel that had they come forward, an investigation would have been opened.  If a single whistleblower had come forward, there still would have been many culpable individuals and companies left to prosecute.

Another prosecution involved a typical bid rigging scheme on a government contract.  This type of scheme is usually initiated by the owner/senior member of the company (who would not be eligible for whistleblower status).  But, it is also typical that an estimator who knows the boss has schemed with a competitor(s) is told to bump up the prices to reflect the agreement.  The estimator is liable as a participant in the cartel, but would make an excellent whistleblower.[1]

Given almost any cartel, international or local, a lower level employee could come forward and likely receive a non-prosecution/cooperation deal under the Antitrust Division’s current Individual Leniency Policy.  But the Individual Leniency Policy is almost never used because a rational person would likely prefer to lay low and hope the crime never gets uncovered than come forward, likely lose his job and have to pay an attorney to negotiate with the Antitrust Division for immunity.  Being an Antitrust Division witness is a marriage that lasts longer than many real marriages.  Criminal antitrust investigations take years, and if it is an international matter, a whistleblower will be called on to be interviewed by many jurisdictions around the globe.  Without some incentive of a reward, an individual would almost certainly not “volunteer” to assist in a cartel investigation.   Even a non-culpable witness/whistleblower such as a customer in whom a salesperson confided or a corporate administrative assistant who saw/heard incriminating information is not likely to come forward to the Antitrust Division on his/her own.

There are many potential antitrust whistleblowers.  But the disincentives to come forward voluntarily are significant.  Some “bait” is needed to entice a whistleblower:  protection from job retaliation and a financial incentive that would cover the significant costs of cooperation and perhaps even provide an “informants’’ bounty.”  The False Claims Act, the SEC and other whistleblower statutes are successful because individuals with knowledge can engage an attorney to guide them through the process in exchange for a possible award of attorney fees and a contingency fee.  The whistleblower’s attorney can develop the potential whistleblower’s claim, negotiate with the government, and represent the potential whistleblower throughout the process, all without an upfront cost to the potential whistleblower.  A former employee, for example, maybe one who has been fired or downsized—would have a way to report illegal conduct without assuming a tremendous legal bill—and even have a financial incentive to do so.

In the next blog post we will discuss some of the objections that have been raised to an antitrust whistleblower statute and why we think none of these concerns are serious enough to kill the whistleblower idea.  But, first, we’ll wrap this segment up by noting a couple of the benefits of a whistleblower statute which may be obvious:

  • A whistleblower can start a criminal cartel investigation with an insider’s view of the agreement and who is party to it. A single whistleblower does not preclude the Antitrust Division from also offering leniency, as it is unlikely one witnesses can provide indictable evidence.  But, whistleblower evidence/assistance should lead to an efficient investigation that preserves the most culpable cartel members for prosecution.
  • Like leniency, as the whistleblower tool gets used and generates publicity, it will be effective in deterring cartels from even forming. This effect is not capable of measurement, but it is logical that if a single member of a cartel (particularly lower-level Sherpas who may not be crazy about carrying out the Master’s scheme) has a means to report the cartel and be rewarded for actionable information, cartel members will have another reason to think twice before engaging in criminal antitrust behavior.

More to come.  Thanks for reading.

robert.connolly@geyergorey.com

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[1]   Where the government is a victim of a fraud—and bid rigging is a fraud—a whistleblower case can currently be brought under the False Claims Act.  There are occasional instances of bid rigging whistleblower case.  But, it would be better to have these types of cases covered by a particular antitrust whistleblower statute and better publicized with an Antitrust Division Office Whistleblower Office.