Tag Archives: cartel capers

CCC’s: Kenneth Davidson: Enforcing Antitrust– Leniency, Consumer Redress, and Disgorgement

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With his permission, I am gladly reposting a very interesting commentary written by Kenneth M. Davidson, a Senior Fellow at the American Antitrust Institute on September 1, 2015

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Over the past 25 years “leniency” policies pioneered by the Antitrust Division of the US Department of Justice have been enormously successful in identifying and prosecuting unlawful cartel behavior.  That success has been replicated by competition agencies in the European Union and elsewhere.  The key to its success has been to offer immunity to the first cartel member that provides the competition agency with evidence that the cartel exists.  The leniency program has led to billions of dollars in fines and imprisonment in the United States of executives of corporations that participated in the cartel.  Notwithstanding these impressive results, I think the effectiveness of competition law needs to be enhanced by a general adoption of policies that require antitrust violators to disgorge all ill-gotten gains earned from anticompetitive actions.

The need for disgorgement is indicated by some perplexing results that have followed the implementation of leniency program.  Greater enforcement of the laws against cartels and other anticompetitive practices ought, in theory, result in the formation of fewer cartels.  Yet enforcement statistics indicate that the number of cartels identified appears to be rising and, even more surprisingly, cartels that have been successfully prosecuted appear to be reforming at an increasing rate.  Professor John Connor, my colleague at the American Antitrust Institute, probably the leading expert on cartel enforcement, published a study in 2010, Recidivism Revealed, which provides data indicating that the rate at which prosecuted violators recreate cartels has continued to rise.

Connor and another AAI colleague, Professor Robert Lande, who have together tracked antitrust penalties and recoveries from private antitrust actions, have suggested the answer to this seeming anomaly is that fines, imprisonment, and private recoveries are not high enough to deter the formation or reformation of cartels.  Their article, Cartels as Rational Business Strategy: Crime Pays, concludes that the formation of illegal cartels will be deterred only if the penalties exceed the anticompetitive profits times the chances of getting caught.  This “optimal deterrence” theory requires that if a company earns a million dollars in unlawful profits and calculates that it has a fifty percent chance of being caught the fine ought to be two million dollars.  Lande and Connor estimate that the total recoveries from public and private antitrust actions is less than 21 percent of the amount needed to deter violations.

I have argued in past Commentaries on the AAI website that I doubt that cartel members can or do make these kinds of calculations when secretly setting up their cartels.  More important, my reading of the history of law enforcement is that punishment alone is unlikely to suppress crime.  Even drastic actions like cutting off the hands of pickpockets do not appear to have been successful.  Even if higher civil and criminal penalties were more effective, they do nothing to compensate those who have suffered from antitrust violations.

A study published this summer by Professor Andreas Stephan, Public Attitudes to Price Fixing, surveyed attitudes about cartels in the US, UK, Germany and Italy indicates that public support for antitrust enforcement is less than optimal, at least in the US.  Price fixing between supposed competitors was an ideal object for this study.  A majority of those surveyed understood that the cartel agreement is likely to lead to higher prices than the individual companies would charge.  A substantial majority of the public in all four countries believed that price fixing is harmful to consumers on the grounds that it secretly raises prices to consumers, is dishonest and unethical.  Curiously, the majority view that price fixing is harmful was substantially higher in the three European countries than it was in the US.  Even stranger, was the finding that a majority of the public in Europe believed that price fixing is illegal whereas only forty percent of the American public believes that price fixing is unlawful.

Given that antitrust was invented in the US, the billions collected in fines by the Antitrust Division, and the imprisonment of corporate executives by US courts, it is hard to believe that only a minority of Americans believe that price fixing – the most blatant antitrust violation – is unlawful. How might this disparity be explained? One might guess that the higher rates of belief in Europe that antitrust law exists and outlaws price fixing is a fluke based on timing of high profile cases brought by the EU.  I suggest a different reason.  US antitrust law has become so complicated and so infused with law and economics jargon that it is more difficult for the American public to understand what the courts prohibit under a tangled web of laws that are written in arcane language.  The EU treaty adopts American antitrust principles but states them in shorter clearer language.

Two other factors may help explain why there seems to be greater awareness of competition law in Europe.  The first is that EU competition law is seen as a way for Europe to defend its industries from anticompetitive practices by American companies.  The second is that since 2010, the EU has passed a series of regulations that are designed to compensate individuals for anticompetitive overcharges and for losses of profits due to anticompetitive practices.  These regulations have been widely covered in the media.  The EU regulations are intended to make it easier for individuals and companies to prove they have been harmed by antitrust violations and to collect for the damages they have suffered. A person or group need not present separate proof of a violation of EU competition law if the EU or a national competition agency has found the company to have violated the law.  Injured parties need only show their harm.  Furthermore consumers can sue a manufacturing cartel even if they bought from retailers who charged higher prices because the manufactures sold to retailers at fixed higher prices.  In addition, injured parties are entitled to full payment for their losses plus interest on the amounts they were overcharged.

None of this is available under US law.  Moreover, US courts have created numerous procedural hurdles over the past 30 years that make it considerable more difficult for individuals and groups of consumers to collect for damages they have suffered from antitrust violations.  The only significant recent US legislation designed to help those injured by antitrust violations is ACPERA.  This 2004 law helps plaintiffs prove their antitrust claims if the government has already established the violation.  The help to plaintiffs that are entitled to from violators who have obtained leniency comes at a cost to plaintiffs.  They must forgo their right to treble damages if the already proven violator cooperates with the plaintiffs in providing evidence of the violation.  So far this law has not provided much help to plaintiffs. As a result of procedural obstacles created by courts, there are a declining number of cases where US businesses, groups or individuals are able to collect when they are victims of antitrust violations.

The differences in recovery of damages for anticompetitive practices in the US and the EU should not be overstated.  Professors Lande and Connor estimate that, despite procedural hurdles, Americans recover more compensation through private actions than the government obtains from civil and criminal penalties.  Although European law that encourages member states to allow class actions, it does not require their member states to allow lawsuits that combine the claims of all persons harmed by anticompetitive practices.  Nor does European law allow lawyers to be paid contingency fees.  The effect of these two provisions severely undercuts the viability of lawsuits to compensate individuals who have been harmed by competitive violations.  American experience demonstrates that the large expenses of antitrust lawsuits are generally financed by American lawyers who expect to recover those expenses and be compensated by payment of a portion of the recovery of a successful lawsuit.  However due to court created barriers American consumer redress actions have ceased to be a formidable enforcement and consumer protection avenue.   Thus it seems that the European public has more grounds for optimism than do Americans.  The new rights to compensation for antitrust injuries promised by the EU provide hope that, despite clear flaws, their implementation will become effective in contrast to claims in American courts where decisions seem to promise only more difficulties in obtaining redress for those harmed by anticompetitive actions.

The procedural problems in the US and EU with recovery for damages through individual or class actions could be solved by aggressive implementation of disgorgement remedies.  Disgorgement is a long-established doctrine that empowers US courts to require violators of federal law, including the antitrust laws, to pay out all of the ill-gotten gains obtained from their violations.  Disgorgement focuses on the total amount of unlawful gains rather than proof by plaintiffs demonstrating their individual harms. Stripping the violators of their ill-gotten gains would be a substantial improvement in deterrence.  As noted above, Professors Connor and Lande’s extensive research indicates that under current US law the total of antitrust fines, imprisonment and private recovery is far less than the total antitrust harm created by violators whose actions have been shown to be anticompetitive.

After disgorgement, the funds can be distributed to those who can be identified as having been harmed by the violation.  This would alter the focus of public and private antitrust actions from theoretical mathematical models of “allocative efficiency” to putting money in the hands of those who have been harmed by antitrust violations.  Such payments, large and small, would make consumers and businesses aware of how much they have been harmed by anticompetitive behavior and provide the public with understandable reasons to support more vigorous antitrust enforcement.

Where the disgorgement fund exceeds the amounts that are claimed as damages, where the identities of the entities and individuals harmed cannot be fully ascertained, where the costs of distribution of damages exceeds the amounts to be distributed, disgorgement law provides a variety of ways to distribute the excess.  Under the Cy Pres doctrine the court may distribute the funds to non-profit organizations like the AAI or law school antitrust advocacy programs.  Or if it finds no suitable non-profit recipient, remaining funds can be turned over to the federal treasury.

In his law review article Disgorgement As An Antitrust Remedy, Professor Einer Elhauge asks “is it time for disgorgement to assume center stage as an antitrust remedy?”  He has a series of reasons why he believes in disgorgement.  His influential article led to broader acceptance of disgorgement remedies by the FTC in its 2012 statement on disgorgement and by the EU in its 2014 directive on Antitrust Damages.  I believe that it is time for further action to implement disgorgement in both public and private actions and to eliminate the rules that currently deny recovery for antitrust damages.  Routine recovery of full disgorgement can address much of the relative weakness of American public support for antitrust law and strengthen the EU system for compensating those damaged by antitrust violations.  Disgorgement will not eliminate the need for civil and criminal penalties for violations of antitrust law or the need for injunctions to remedy anticompetitive practices, but it will allow enforcement agencies to disentangle the questions of fairness to consumers from the kinds of penalties needed to deter antitrust violations.

CCC’s: If Everyone Else Jumped Off A Bridge, Would You Do That Too?

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The “Everybody Was Doing It” defense didn’t work when I was a kid and it didn’t work for Tom Hayes as his defense in the first Libor rate rigging trial.  But, the most I got upon conviction (summary–without trial) was 14 days grounded.  Mr. Hayes got 14 years in prison.  Ouch!

After a nine-week trial in London and seven days of deliberations, Hayes, a 35-year-old former UBS and Citigroup trader, was found guilty on eight counts of conspiracy to defraud. He was immediately sentenced to 14 years in prison.  Hayes was the first Libor rate rigging individual to face trial (here).

Hayes was charged in the UK with being the “ringleader” of the Libor rate rigging scheme.  Hayes claimed that the rate rigging was industry wide. He also claimed he was “confused about everything,” including what rules may have been broken. He added: “As far as I was concerned, any rules I’d broke were retrospectively being applied. And I wasn’t sure … Libor wasn’t a regulated product. We had no compliance training. No rules were outlined to us.” Hayes didn’t deny he knew he was engaging in “dodgy” activity but pleaded “I knew I was operating in a grey area.  I knew that I probably shouldn’t do it but like I said I was participating in an industry wide practice at UBS that pre-dated my arrival and post-dated my departure.  A full story is here in The Telegraph.

Hayes initially agreed to plead guilty and cooperate in return for a lighter sentence. He gave a full confession to Britain’s Serious Fraud Office.  During 82 hours of interviews with SFO investigators in the months following his arrest in December 2012, Hayes admitted the conduct he was charged with. But he told the court he had only confessed because he was desperate to be charged in Britain to avoid extradition to the United States, where he also faces fraud-related charges. [Hayes was charged in the United States on December 12, 2012 with fraud and antitrust counts (here)].  Hayes subsequently withdrew from a cooperation agreement with the SFO and pleaded not guilty in December 2013.

At trial, Hayes appealed to the jury arguing that: a) he was being singled out for an industry wide practice; and b) he had no training on the rules.

“The practice was tried and tested, it was so endemic within the bank (UBS), I just thought … this can’t be a big issue because everybody knows about it … (it was) such an open secret.”  “Senior management were keen to use Libor to effectively lie about their cost of borrowing by 50 to 100 [basis] points and portray a sense of strength,” Mr Hayes told investigators after his arrest in 2012. (here).

Going to trial was the last in a string of poor decisions made by Mr. Hayes–the jury convicted him on 8 counts of fraud and the 14 year sentence immediately followed.

I have to confess, I feel sorry for Mr. Hayes.  A sentence of 14 years seems excessive–although to many I’m sure it seems appropriate for such a widespread financial scandal.  The sentencing poses a dilemma for a Judge and I am glad I am not one.  From my perspective, it seems unfair for one guy to be punished so harshly for an industry wide practice.   Maybe five years would have been sufficient.  I don’t think anyone disputed Hayes characterization that the Libor rigging practice preceded his participation and continued after he left.  But, Hayes wrote everything down  [“(I was) either the stupidest fraudster ever because I wrote everything down, or there was an element of me that genuinely didn’t think about it,” Hayes has said in documents shown to the court.].  And there were tapes–lots of tapes.

There have been other Libor defendants charged so Hayes likely will not be the only individual convicted.  But, it is unlikely any superiors who were aware of the practice will ever be charged.  I don’t have any inside knowledge of this case, but as a general rule there is often little evidence other than the testimony of a subordinate that superiors knew of and approved of the conduct.  But, a subordinate testifying against a superior is subject to legitimate attack on credibility grounds that the defendant would implicate anyone to try to save their own skin.  Those that actively engage in the illegal conduct, like Hayes, often leave a paper (or electronic) trail of evidence.  An assertion that a boss knew of the illegal conduct is generally a one on one credibility test, and a compromised witness is rarely enough to provide proof beyond a reasonable doubt.

A judge, of course can only sentence the individual defendant that has been convicted.  In some ways, the fact that so few involved in the crime may eventually be convicted argues for a higher sentence–like that imposed by the Court here.  If the chance of conviction is small, for sufficient deterrence, the penalty must be high.

Even as a prosecutor, I was saddened by how much an otherwise industrious and law-abiding person could screw up their lives–and adversely affect their families–by not thinking through the consequences of what they were doing.  There are many “bottom-line” reasons why companies ought to have serious ethics and compliance programs, but to me there is no more compelling reason than it is something every company owes their employees.  Yes, work hard and make money for the shareholders–but don’t sacrifice yourself and family in the process.   It ain’t worth it and you’re not going to get a medal if you get caught.  You may get 14 years.

Thanks for reading.

CCC’s: An Update On the Airlines Price Fixing Civil Suits

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A while back I posted “They Said What?:  Some Compliance Thoughts on the Airline Price Fixing Investigation.”  The post examined how some loose talk by airline executives had led to a federal price-fixing investigation–followed immediately by an avalanche of civil treble damage price-fixing suits.  At a recent trade association meeting, multiple airline executives spoke publicly about their plans to be “disciplined” in their approach to pricing and adding extra flights on popular routes.  Cue up an Antitrust Division investigation, followed in nano seconds by a torrent of private class action treble damage price-fixing cases.  The airline executives may have gotten by unnoticed with their ill-advised comments, except they spoke at a time when the flying public was less than enchanted with the flying experience, including ticket prices that seemed sky-high while the price of fuel was nose diving.  My sense was that it was this environment–a disgruntled public and therefore unhappy Congress folks rather than any hard evidence of price-fixing–that caused the Antitrust Division to decide it was a good idea to at least open an investigation.

I’ve been reading the public news about this investigation and the civil cases and a couple of things caught my eye.  First, a recent report stated that 75 civil suits have now been filed against American, Delta, Southwest and United since July.  The suits tend to be copy cat suits filed by different law firms seeking a good seat (with extra leg room for a fee) at the litigation table when the suits are consolidated.  In the first suit “Plaintiffs allege that defendants illegally signaled to each other how quickly they would add new flights, routes, and extra seats. To keep prices high on fares, it was undesirable for the defendants to increase capacity.”  Other suits are similar.

This avalanche of civil suits doesn’t speak highly of our current class action system.  The airlines have not been convicted of anything, nor have they even been charged by the Antitrust Division.  It is not illegal for a company to try to boost profits by restricting capacity.  Or raising prices.  The key question is whether the action was taken unilaterally (legal) or in collusion with competitors (illegal).  Parallel prices alone are not enough to prove an agreement.  There has to be more.  See  “Getting the Judge to Budge from Conceivable to Plausible Under Twombly.”  But, even if a company is exonerated, the litigation is very expensive; much more so than a good antitrust education/compliance program.

Another interesting fact just out is that airline ticket prices last month saw the largest monthly decline on 20 years.   “Airline fares recorded their steepest monthly decline in 20 years, falling 5.6 percent last month, according to the Bureau of Labor Statistics.”  Does this mean the airlines can can get out from under all the civil suits?  Not likely.  The plaintiffs may spin this as the inevitable collapse of a cartel that couldn’t prop up prices forever in the face of sharply decreased costs.  The airlines will point out that capacity increases that led to the lower prices were in the works for months–at the very time the plaintiffs allege there was collusion.  Both sides will have experts armed with other arguments, analysis and data to support their side.  Whatever the experts say, it won’t come cheaply.  But, right now airfares may, so time to book a flight.

Thanks for reading.

CCC’s: DOJ to Hire Compliance Expert

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Here’s a link to a Reuters story by Karen Freifeld reporting that United States Department of Justice is hiring a Compliance Expert. The compliance expert will help evaluate whether to charge corporations that fail to detect and prevent wrongdoing by employees. The DOJ compliance expert will advise whether he believes the company had a robust compliance program or one that was window dressing–or something in between.

A candidate has been reportedly offered the position and is undergoing the background check process. The position is in the Criminal Division of DOJ, which has responsibility for health care, securities and FCPA violations, among others. This development will not directly affect the Antitrust Division, which sometimes has policies different from the Criminal Division. But, the Antitrust Division recently, for the fist time ever, gave credit to a company in a plea agreement for a compliance program. I wrote about this in a previous Cartel Capers post: Senior Antitrust Division Official Comments on Credit for Compliance Programs.  This new compliance position within the DOJ is another important step forward in the recognition by the DOJ of the valuable role played by compliance programs.

Thanks for reading.

CCC’s: Some Thoughts On Two Recent Cases

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There are two recent cases that got me thinking a bit, and for what its worth, I’ll pass along those thoughts.

7th Circuit Affirms Downward Departure to Sentence of Probation

The first case is a sentencing case in the Seventh Circuit, U.S. v Warner, No. 14-1330 (7th Cir. July 10, 2015). Warner, the billionaire creator of Beanie Babies, evaded $5.6 million in U.S. taxes by hiding assets in a Swiss bank account. He pled guilty to one count of tax evasion, made full restitution, and paid a $53.6 million civil penalty. Warner had a plea agreement with an agreed upon level of 23 with a range of 46-57 months.   Each side was free to argue for an appropriate sentence. The government sought incarceration in excess of a year and a day. But the district court judge gave Warner a more lenient sentence: two years’ probation with community service, plus a fine. The district court found, among other findings, that “Mr. Warner’s private acts of kindness, generosity and benevolence are overwhelming.” Moreover, many of them took place long before Warner knew he was under investigation; the court found they were “motivated by the purest of intentions” and “without a view toward using [them] at sentencing.” The government appealed, arguing the sentence was unreasonable because there was no term of incarceration to reflect the seriousness of the offense and to avoid sentencing disparity.

The Court of Appeals upheld the sentence imposed by the district court finding that the District Court followed the appropriate sentencing procedure and made the required findings. The other question was whether the district court findings were reasonable and supported by the evidence. The Seventh Circuit noted that the advisory guidelines range is but a starting point. The appellate decision is lengthy, discussing at length the requirements of 18 USC Section § 3553(a) factors to be weighed in determining a sentence that is “sufficient but not greater than necessary.” The Court concluded: “District courts enjoy broad discretion to fashion an appropriate, individualized sentence in light of the factors in 18 U.S.C. § 3553(a). The court here did not abuse its discretion. Rather, it fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case. We therefore affirm Warner’s sentence.”

District courts are often receptive to argument for departure from draconian, mechanical guidelines sentences that take no account of the individuals characteristics of the defendant. I wold file this decision and use as an excellent roadmap to follow for any defense lawyer seeking a below guideline range, particularly if it is a significant departure requesting no incarceration.

The Spiderman Case Discussion of Antitrust Precedent

In Kimble v. Marvel Entertainment the sole question presented was whether the Supreme Court should overrule a patent/royalty precedent. “Adhering to principles of stare decisis, we decline to do so.”  The Court noted that stare decisis would have received less deference had the issue been application of the Sherman Act, noting that Congress “intended [the Sherman Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” As a result, the Court has “felt relatively free to revise our legal analysis as economic understanding evolves.” The dissent agreed, saying, “we have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions.” My fellow blogger, Steve Cernak, wrote an article, “Three Antitrust Precedents Ripe for Overturning,” identifying three antitrust precedents that may no longer merit deference: 1) baseball’s antitrust exemption; 2) the per serule as applied to tying cases; and 3) Philadelphia National Bank’s holding that merger is presumptively anticompetitive if it results in an undue share of the market and significant increase in concentration.  Steve has written an interesting article (but subscription required).

The Supreme Court spoke more at length about the antitrust precedent and the per se rule in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), where the Court overturned 100 years of precedent in ruling that vertical price-fixing was to be judged under the rule of reason instead of being condemned as per se illegal. In Leeginthe Court said:

Stare decisis is not as significant in this case, however, because the issue before us is the scope of the Sherman Act. Khan, supra, at 20 (“[T]he general presumption that legislative changes should be left to Congress has less force with respect to the Sherman Act”). From the beginning the Court has treated the Sherman Act as a common-law statute. See National Soc. of Professional Engineers v. United States, 435 U. S. 679, 688 (1978); see also Northwest Airlines, Inc. v. Transport Workers, 451 U. S. 77, 98, n. 42 (1981) (“In antitrust, the federal courts . . . act more as common-law courts than in other areas governed by federal statute”). Just as the common law adapts to modern understanding and greater experience, so too does the Sherman Act’s prohibition on “restraints] of trade” evolve to meet the dynamics of present economic conditions.

How does this relate to cartels?  I’d add one other antitrust precedent that maybe due for a tweaking: the per se rule in criminal antitrust cases. Recently I wrote an article that was published in ANTITRUST magazine titled: Per Se “Plus:” A Proposal to Revise the Per Se Rule in Criminal Antitrust Cases.  (ABA subscription required). The basic theme of the article is that the penalties for a criminal violation of the Sherman Act have escalated so dramatically that the per se rule is no longer a fair standard of culpability. When the per se rule was first articulated inUnited States v. Socony Vacuum, the most severe penalty imposed on any of the individual defendants was a fine of $1,000. The Sherman Act was a misdemeanor (up to 6 months) but until modern times, jail was merely a theoretical possibility. Today, individual defendants are subject to up to ten years in prison (and the Antitrust Division has strongly argued for this sentence in several cases.) Also, indicted foreign defendants are placed on Red Notices and subject to arrest, detention and possible extradition anywhere in the world. There are also severe immigration consequences that limit an international business executives’ ability to remain employed. Despite the severe sanctions, juries are still charged that “good intentions” and even “good results” are irrelevant if the jury finds an agreement to fix prices was reached. Further, ignorance of the law is no defense. In the article I argue that the per se rule should be modified in a criminal case so that the government must prove beyond a reasonable doubt that the defendants in someway deceived or misled customers into believing there was competition when in fact there was an agreement to fix prices. This deception proves a “bad” intent. What makes price-fixing an unreasonable restraint of trade is not the price level, but an agreement that deceives customers (or sellers) into believing market forces set prices, when in fact secret collusion was at work. Price is the “central nervous system” of the economy, and when buyers do not know that the price was set by collusion, the free market is restrained.   (Where buyers know of the restraint i.e. an open joint venture, the agreement may restrain competition, but the agreement is judged under a rule of reason standard.)

It may well be that the per se rule against price-fixing, even in a criminal case, will be the one per se rule endures for as long as the Sherman Act does. But, I think the issue is worth considering. If you don’t subscribe to ANTITRUST and would like a copy of the article, please email me at[email protected], or give me a call at (215) 219-4418. This is an area of continued interest to me and I would greatly appreciate any feedback or other comments.

Thanks for reading.

 

Competition Commission of India fines GSK and Sanofi for Bid Rigging

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Today’s guest post is by Avinash Amarnath ([email protected]) of Vinod Dhall and TT&A.

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CCI fines GSK and Sanofi for bid rigging

It has been quite a while since I posted an India update on Cartel Capers. This was partly due to the fact that the CCI has been relatively quiet on the cartel front for the last few months and partly because I have also been relatively busy with merger control work (which to many often comes across as quite drab compared to a juicy cartel case!).

However, breaking this prolonged silence, the CCI recently published a decision imposing fines on GSK and Sanofi, two major global pharma players as they were found to have rigged bids in a government tender for procurement of meningitis vaccines. Each year, in around May/June, the Government of India floats a tender for the purchase of QMMV (an anti-meningitis vaccine) for the purpose of vaccinating Indian pilgrims visiting Mecca on the ‘Hajj’ pilgrimage. There are only 3 major players supplying QMMV vaccines in India – GSK, Sanofi and Bio-Med (an Indian company). GSK is the largest supplier of this vaccine in the country.

The investigation of the CCI was based on a complaint by Bio-Med and related specifically to the tender floated in 2011 where Bio-Med had not been eligible to participate due to a minimum turnover requirement of the Government of India. In sum, the CCI found that the fact that GSK and Sanofi had each quoted to supply only roughly half of the tender quantity at roughly similar prices (which were significantly higher than the prices in the previous tender) constituted suspicious parallel behaviour for which the parties were unable to offer a rational explanation. The Government had raised the tender for roughly 180,000 doses of the vaccine and GSK had quoted to supply 100,000 doses at a price of INR 3000 per 10 dose vial and Sanofi had quoted to supply 90,000 doses at a price of INR 2899 per 10 dose vial. One common explanation offered by both parties was that the parties had not been able to quote for the entire tender quantity due to the extremely tight delivery schedule set by the Government. The CCI found that this tender being an annual one which was floated by the Government roughly around the same time each year, the parties would be easily able to estimate the delivery timelines in advance. Further, the CCI found that GSK had in fact, been able to supply much larger quantities of the vaccine in relatively short timeframes in previous tenders.

The CCI found that this suspicious parallel behaviour was corroborated by several factors such as the market conditions being conducive to collusion (limited suppliers who are repetitive bidders, homogenous product and fixed demand), no significant increase in cost of production to justify the sudden increase in the quoted price and representatives of both GSK and Sanofi having visited the Government department’s office on the same date.

The CCI imposed a penalty of 3% of the average turnover which resulted in a penalty of USD 9.4 million (approx.) on GSK and USD 0.4 million (approx.) on Sanofi.

I have kept this post purely factual without giving my views as my firm (including me for a very brief period) acted for Sanofi in this case. However, I will raise a couple of questions which come to mind and may be some food for thought:

  1. Can the fact situation described above amount to parallel behaviour at all?
  2. In the absence of any direct evidence, can the CCI simply prove parallel behaviour and shift the burden on the parties to provide a rational explanation, failing which a finding of collusion is to necessarily flow?
  3. What is the strength of the corroborative evidence relied upon by the CCI in this case?

The full order of the CCI is available athttp://www.cci.gov.in/May2011/OrderOfCommission/27/262013.pdf

CCC’s: Supreme Court Declines to Take up FTAIA Appeals

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The Supreme Court has declined to hear the appeal from the Ninth Circuit decision affirming the convictions of AU Optronics and its executives in the TFT-LCD price-fixing cartel.  The Court also declined to review the Seventh Circuit case of Motorola Mobility where the Seventh Circuit dismissed civil damages claims for price-fixing purchases made by Motorola’s foreign subsidiaries from the same cartel.   Reuters story here.

In an April 9th blog post, I had opined that the Supreme Court would not hear either of the appeals because a): each case was decided correctly, and b) there was no conflict between the Ninth and Seventh Circuits on the application of the FTAIA. (here).  On May 15th, the DOJ filed a brief opposing the cert. petitions of AU Optronics and Motorola. (here)

I have no doubt that the Supreme Court will eventually be addressing the FTAIA. But, neither of these cases were the appropriate vehicle to do so.

CCC’s: Supreme Court Declines to Take up FTAIA Appeals

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The Supreme Court has declined to hear the appeal from the Ninth Circuit decision affirming the convictions of AU Optronics and its executives in the TFT-LCD price-fixing cartel.  The Court also declined to review the Seventh Circuit case of Motorola Mobility where the Seventh Circuit dismissed civil damages claims for price-fixing purchases made by Motorola’s foreign subsidiaries from the same cartel.   Reuters story here.

In an April 9th blog post, I had opined that the Supreme Court would not hear either of the appeals because a): each case was decided correctly, and b) there was no conflict between the Ninth and Seventh Circuits on the application of the FTAIA. (here).  On May 15th, the DOJ filed a brief opposing the cert. petitions of AU Optronics and Motorola. (here)

I have no doubt that the Supreme Court will eventually be addressing the FTAIA. But, neither of these cases were the appropriate vehicle to do so.

CCC’s: Some Thoughts On Compliance and Other Issues Raised by the Forex Guilty Pleas

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It’s been almost two weeks since the Department of Justice announced its plea agreements in the Forex investigation. To recap the highlights, in his remarks announcing the case filings, Bill Baer Assistant Attorney General for the Antitrust Division said (here):

Today’s guilty pleas to criminal charges represent major developments in our investigation into collusion affecting foreign exchange markets, particularly the spot market for trading U.S. dollars and euros. The antitrust guilty pleas announced today involving four major international financial institutions – Citicorp, JPMorgan Chase, The Royal Bank of Scotland and Barclays – are without precedent. In light of the seriousness of the crimes and the unjustified benefit to the bottom lines of these banks, we demanded parent-level guilty pleas, secured record fines of more than $2.5 billion and insisted upon three years of court-supervised probation.

In addition, UBS agreed to plead guilty to a violation in the Libor market. UBS had previously received non-prosecution protection in the Libor investigation, but that protection was withdrawn in light of UBS’s participation in the Forex cartel.

Since the news of the case filings first broke, I’ve had some additional thoughts on the matter.  First, I want to give a big pat on the back to my former colleague, Joe Muoio, who signed the pleadings on behalf of the Antitrust Division. Joe and I worked together for many years in the now closed Philadelphia Field office. Joe was the Assistant Chief and transferred to the New York Field office when the Philadelphia office was closed in 2013. The Forex investigation was a team effort (a large international team, no doubt) and there could not have a better team leader than Joe.   Congratulations to Joe and the rest of the team.

The Forex plea agreements have two noteworthy departures from previous pleas in the financial sector. For the first time, the Antitrust Division acknowledged giving credit to a company for implementing an effective compliance program after the start of the investigation. Little has been revealed about what made Barclay’s compliance program effective, why the Division chose to give credit in this case, and what the value of the credit given to Barclays was?  The plea agreements states only: “The parties further agree that Recommended Sentence is sufficient, but not greater than necessary to comply with the purposes set forth in 18 U.S.C. §§ 3553(a), 3572(a), in considering, among other factors, the substantial improvements to the defendant’s compliance and remediation program to prevent recurrence of the charged offense.”  This language, while limited, is still an important first step for the Antitrust Division to acknowledge (and thereby encourage) implementation of effective antitrust compliance programs. The Antitrust Division does not make changes in policy lightly and it is likely they will have more to say about this development in future speeches.

Another noteworthy fact about the Forex plea agreements is that the Antitrust Division required pleas from the parent company. Previously, in most situations where financial institutions have been charged in Forex and Libor, the plea has come from a foreign subsidiary to avoid the collateral consequences that would flow from a conviction of a publicly traded company. Requiring the parent to plead was a relatively small step, however, as the pleas were only entered after waivers were secured from the SEC.  The banks wanted assurances from U.S. regulators that they would not be barred from certain businesses before agreeing to plead guilty to criminal charges. (here). The defendants received the desired waivers.

Public Reaction

The historic pleas have not been without some public criticism. An example is an editorial in the New York Times titled: “Banks as Felons, Or Criminality Lite”

Besides the criminal label, however, nothing much has changed for the banks. And that means nothing much has changed for the public. There is no meaningful accountability in the plea deals and, by extension, no meaningful deterrence from future wrongdoing.”

SEC Commission, Kara M. Stein, was harsh in her dissent from the grant of waivers to the recidivist banks.

Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored. It is not sufficient to look at each waiver request in a vacuum.

And, in an article in USA Today (here), four leading antitrust commentators who are not usually found to be in agreement (Judge Douglas Ginsburg, FTC Commission Josh Wright and Albert Foer and Professor Robert H. Lande of the American Antitrust Institute) called for harsher penalties against individuals convicted of antitrust offenses.

Some thoughts on Compliance

As already noted, the Antitrust Division took a big step forward in encouraging the implementation of effective compliance programs. Hopefully, more details will be forthcoming about why now? What was it about Barclays’ program that was considered effective? And what was the monetary benefit for the compliance program.

The Division’s encouragement of an effective compliance program should be bolstered by the sheer magnitude of the fines and other consequences of these guilty pleas. In the compliance world, FCPA is “Top Dog” in terms of compliance resources and attention. No doubt issues like vetting third-party vendors worldwide rightfully account for this attention. But the consequences of an antitrust offense call out for an equally keen focus on antitrust compliance. I’ve written about this before (here), but the combination of huge fines, jails sentences for individuals, investigation by multiple U.S. agencies, and competition agencies around the world, and the significant damages paid out in civil class action lawsuits make a compelling case for robust antitrust compliance efforts.

Indeed, the Antitrust Division’s plea agreements with the other banks besides Barclays call for devoting resources to compliance programs:

“The defendant shall implement and shall continue to implement a compliance program designed to prevent and detect the conduct set forth in Paragraph 4 (g)-(i) above and, absent appropriate disclosure, the conduct in Paragraph 13 below throughout its operations including those of its affiliates and subsidiaries and provide an annual report to the probation officer and the United States on its progress in implementing the program, commencing on a schedule agreed to by the parties.”

The plea agreements, however, do not call for external compliance monitors. Given that the cartel involved billions of dollars, the brazen nature of the crime (the conspirators referred to themselves in private chat rooms as the “Cartel Club” and “The Mafia,” and finally, the degree of recidivism, one wonders (OK, I wonder) why no external compliance monitors? The Division sought (and received from the court) external compliance monitors in the Apple case, (a civil violation) and in AU Optronics (a first offense).  Unless the Antitrust Division provides further guidance, it appears that the only criteria for seeking an external monitor is if a company goes to trial against the Division and loses.

The Investigation Is Ongoing

There is some validity to the charge that the corporate fines are just a cost of doing business and don’t provide sufficient deterrent. Perhaps requiring a parent to plead was one step closer towards requiring a plea and no regulatory waivers. But fears of collateral damage to innocent employees (who would lose jobs), stockholders (who could be wiped out) and the economy in general make this a hard trigger to pull.  The real deterrent comes with prosecution of individuals—i.e., the guys in The Cartel or The Mafia, as they put it.   It is extremely likely that the Antitrust Division will seek charges against individuals in this case. The hard part is not so much prosecuting the traders who operated in the chat rooms and left a trail of evidence, but in determining if knowledge of the cartel went higher up in the banks. Holding the highest-level person in an organization responsible for the crime is the highest deterrence. But, this is challenging as superiors are often shielded from direct involvement in the crime and can only be convicted on the basis of the testimony of subordinates whose credibility may be compromised by their own plea. The public often cries for higher level executives to be held accountable, but juries take seriously their obligation to convict only where the proof establishes guilt “beyond a reasonable doubt.”

There will be much more to this story so stay tuned. Thanks for reading.

CCC’s: My Antitrust Spring Meeting Interview with Capitol Forum

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During the ABA Antitrust Spring Meeting, I had the good fortune to be interviewed by David Blotner, Senior Editor of the Capitol Forum. The Capitol Forum is an in-depth news and analysis service dedicated to informing policymakers, investors, and industry stakeholders on how policy affects market competition. The Capitol Forum provides in-depth coverage of major antitrust matters such as the now abandoned Comcast-Time Warner merger. I was delighted to be asked to speak about cartel issues. David and I have known each other for years. He also was a career Antitrust Division prosecutor. And while I’m no Nostradamus, we did discuss the Forex investigation which just had big news yesterday. If you have a few minutes (around 27) here is a link to the video. And check out the Capitol Forum website, as well as their blog, for the complete coverage they offer.

Thanks for reading (or watching if you have the time).