Nov. 15 (Bloomberg) -- Kohlberg Kravis Roberts & Co., Carlyle Group and most other major U.S. buyout firms were accused in an investor lawsuit of illegally conspiring to hold down the prices they pay when taking companies private.

The suit was filed today in Manhattan federal court by shareholders who claim they were shortchanged because the firms restrained bidding for leveraged buyouts such as the $33 billion takeover of hospital chain HCA Inc., the largest LBO ever. It alleges the firms broke antitrust laws by forming ``clubs'' to make offers, sharing information and agreeing not to outbid each other.

``Investors in the target company are deprived of the full economic value of their holdings and `squeezed out' at artificially low valuations,'' according to the suit, which seeks class-action, or group status.

Private-equity firms, which have announced a record $425 billion of LBOs this year, are already the target of a U.S. Justice Department investigation into possible antitrust behavior. They've also come under fire in Europe and the U.S. for burying the companies they buy in debt while recouping their costs with dividends.

``Private-equity firms do want to maintain a positive image, and this type of news may sour that image,'' said Sean Boland, the co-chair of the antitrust practice at Washington-based law firm Howrey LLP, who isn't involved in the case. ``But sophisticated people are going to say, `I see the smoke, where's the fire?'''

Class Action Sought

The lawsuit, which seeks unspecified damages, resembles a pending antitrust case in Manhattan federal court. That one accused 12 investment banks, including Goldman Sachs Group Inc. and Merrill Lynch & Co., of rigging initial public offerings of technology companies in the late 1990s. A federal appeals court last year ruled that the case, which claimed that the firms required investors who received IPO shares to buy additional stock in the after-market, can go forward.

``This is a class action for people who were bought out,'' said Fred Isquith, a lawyer at Wolf Haldenstein Adler Freeman & Herz in Manhattan, which brought the case.

U.S. District Judge Louis Stanton in New York will determine whether to grant the suit class-action status. The complaint seeks to represent tens of thousands of shareholders in dozens of LBOs. Since the lawsuit alleged violations of federal antitrust laws, plaintiffs would be able to recover triple damages if they win.

Others Named

The other firms named as defendants in the complaint are Clayton, Dubilier & Rice Inc., Silver Lake Partners, Blackstone Group, Bain Capital LLC, Thomas H. Lee Partners LP, Texas Pacific Group, Madison Dearborn Partners LLC, Apollo Management LP, Providence Equity Partners Inc., Merrill and Warburg Pincus LLC.

The only top-tier U.S. buyout firms missing from the suit are Cerberus Capital Management LP and Fortress Investment Group LLC. Other than Merrill, the suit doesn't include the private- equity units of the largest investment banks.

``This sets a new low for frivolous lawsuits, and we will vigorously contest it,'' Christopher Ullman, a spokesman for Carlyle Group, said in an interview.

Officials for the other defendants either declined to comment or didn't immediately return phone calls.

According to the suit, the named plaintiffs -- L.A. Murphy, Marvin Sternhell and Henoch Kaiman -- were investors in three companies: HCA, Univision Communications Inc. and Harrah's Entertainment Inc. The suit said investors would have gotten more for their shares if there had been ``free and open competition'' among the firms bidding for the companies.

`Artificially Fix'

Instead, the firms conspired to ``artificially fix, maintain or stabilize'' buyout prices.

The 20-page complaint doesn't provide any details on how the firms allegedly fixed prices.

Private-equity firms use a combination of equity and debt for takeovers and seek to cut costs, improve cash flow and invest in technology to bolster the long-term prospects of their investments before selling them after three to five years. The firms have been collaborating more frequently as deals grow larger in size.

On July 24, a group including KKR and Merrill, both based in New York, and Bain Capital of Boston agreed to buy HCA. The firms were joined by Thomas F. Frist Jr., a co-founder of the Nashville-based company. The price, equal to $51 a share, was 6.5 percent more than HCA's closing price on the previous trading day.

`A Distraction'

Univision on June 27 accepted an offer of $12.3 billion, or $36.25 a share, from a buyout group that included Chicago-based Madison Dearborn; Providence Equity of Providence, Rhode Island; Texas Pacific Group, which is based in Fort Worth, Texas; Boston- based Thomas H. Lee Partners; and billionaire investor Haim Saban.

The purchase price was lower than the $40 a share that the Los Angeles-based company had originally sought before three buyout firms dropped out of a rival bidding group led by Spanish broadcaster Grupo Televisa SA. Blackstone and KKR, both based in New York, and Washington-based Carlyle pulled out amid disagreements over how much to offer.

Harrah's Entertainment is weighing a buyout offer of $15.5 billion, or $83.50 a share, from New York-based Apollo Management and Texas Pacific Group after rejecting an earlier $81-a-share offer from the two LBO firms. The new offer is 11.5 percent higher than Harrah's share price of $74.92 at 4:20 p.m. in New York Stock Exchange composite trading.

The added scrutiny on buyout firms may slow the pace of transactions, said Michael Kelly, a managing director at Hamilton Lane Advisors, a Bala Cynwyd, Pennsylvania-based firm that oversees $48 billion in private-equity assets for investors such as the California Public Employees' Retirement System.

``It's certainly going to be a distraction,'' he said.

The case is Murphy v. Kohlberg Kravis, 06-cv-13210, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: November 15, 2006 20:15 EST