Private-equity firms have a “right to work together,” a judge told lawyers for investors who claim Goldman Sachs Group Inc. (GS), Bain Capital Partners LLC and other companies conspired to rig bids on takeovers.
U.S. District Judge Edward Harrington also said at a hearing in Boston yesterday that the plaintiffs’ case would be stronger if they had testimony from an insider at the firms. After presiding over a two-day hearing on motions by the financial companies to dismiss the shareholders’ antitrust lawsuit, he said he would rule within 60 days.
The defendants, which also include Blackstone Group LP (BX), Carlyle Group, KKR & Co., Apollo Global Management LLC (APO) and JPMorgan Chase & Co. (JPM), argued that the investors provided no evidence of an “overarching conspiracy” among private-equity firms and their bankers to rig bids. They also said the transactions represented legitimate business practices.
“What’s bothering me is they have a right to work together and there’s no requirement that they have to compete,” Harrington told a plaintiffs’ lawyer. “It’s difficult to get a conspiracy case without some insider testifying. You have to admit it makes your case tougher.”
Individuals and pension funds that held shares in companies including Freescale Semiconductor Ltd., Neiman Marcus Group Inc. and HCA Holdings Inc. (HCA) sued in 2007 and 2008, claiming “a conspiracy among private-equity firms to rig bids, restrict the supply of private-equity financing, fix transaction prices and divide up the market for private-equity services for leveraged buyouts.” They are seeking a jury trial and money damages. The deals amounted to $250 billion, according to court testimony.
“The glue that keeps those deals together is the stand- down agreement to not go above the bid,” Patrick Coughlin, an attorney for the plaintiffs at Robbins Geller Rudman & Dowd LLP, told the judge. “We think we’ve presented enough evidence that we should get to the jury on all of the deals.”
Lawyers for the private-equity firms and banks argued that there was no pattern of winning and losing bids that would indicate collusion.
“Such a sprawling conspiracy claimed in the complaint is not possible,” Joseph Tringali, an attorney at Simpson Thacher & Bartlett LLP, argued for the defendants. “We don’t control the process. The target company in a bid situation often decides who they are going to allow to bid.”
In October, an amended complaint was unsealed, disclosing e-mails between private-equity executives about potential buyouts. In an e-mail referring to a Freescale deal, Blackstone Group President Tony James told KKR co-founder George Roberts, “Together we can be unstoppable but in opposition we can cost each other a lot of money.”
James later told reporters the lawsuit was a “complete fabrication.”
Plaintiff Kirk Dahl said he and others in the proposed class of investors owned shares in Freescale in 2006 when the chipmaker announced a buyout by firms including Carlyle and Blackstone for $17.5 billion. HCA was purchased by companies including KKR and Bain for $32.1 billion. The judge indicated yesterday that the HCA deal might be a stronger case for the plaintiffs than other deals.
Buyout prices were at least 10 percent lower than they could have been without collusion, Coughlin said in an interview. “All the major pension funds were impacted, as well as thousands of individual shareholders.”
The firms allegedly formed “bidding clubs” that rigged bids, limited competitive offers and depressed prices, according to the complaint. Firms that weren’t part of the winning club would get minority stakes in the acquired companies or fees as advisers, the investors said.
In court papers, the firms called such joint bidding “central to the proper functioning of a well-regulated capital markets system.”
The plaintiffs claim that managers of the targeted companies were offered incentives including new equity to limit the number of bids.
After a company was acquired, the new owners would often sell bonds to fund a dividend for themselves, allowing the private-equity firms to recoup as much as 35 percent of their investment quickly and the banks to reap fees for the debt sales, according to the plaintiffs. Later, the firms would sell the companies in public stock offerings, reaping more returns and fees, the plaintiffs allege.
2003 to 2007
The deals in question occurred from 2003 to 2007. Two lawsuits were consolidated by the judge, who denied a request by the defendants to move the case to federal court in New York.
The original complaint listed seven leveraged buyouts: Freescale, Aramark, Neiman Marcus, PanAmSat Corp., SunGard Data Systems Inc., Kinder Morgan Inc. and HCA. The judge in 2010 allowed a second phase of fact-gathering for eight additional transactions, involving Loews Corp. (L), NXP Semiconductor NV (NXPI), Vivendi SA (VIV), Community Health Systems Inc. (CYH), Nalco Holding Co., Cablecom Holdings, Susquehanna Media and Warner Music Group Corp. The lawsuit now seeks damages on 17 leveraged buyouts and eight related transactions.
About a dozen financial companies filed motions on July 23 for summary judgment, seeking a ruling from the judge instead of a trial. The companies also include Providence Equity Partners Inc., Thomas H. Lee Partners LP, Silver Lake Technology Management and TPG Capital.
Lawyers for the banks Goldman Sachs and JPMorgan argued in court that they shouldn’t be part of this lawsuit.
“Goldman’s economic incentives are contrary to any conspiracy to suppress the price of LBOs,” Richard Pepperman, a lawyer for Sullivan & Cromwell LLP, told the judge.
JPMorgan’s lawyer said it’s not a private-equity firm.
“They’re not in the private equity business and it’s as nonsensical as this overarching theory is in general,” James Carroll, a lawyer with Skadden, Arps, Slate, Meagher & Flom LLP, said in court.
The plaintiffs, who also include the police and fire department pension funds of Detroit and Omaha, Nebraska, said they will file a motion for class certification, depending on the outcome of the summary judgment motions.
The judge called the case “overwhelming” and said he would “reconsider everything” before making a ruling.
“The plaintiffs have to realize that if this case were to go to trial it would be a circus,” Harrington said. “It’s almost too gigantic to get your arms around.”
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