Bain Joins Goldman to Urge Dismissal of Bid-Rigging Suit

By Don Jeffrey & David McLaughlin – Dec 18, 2012 12:01 AM ET

Goldman Sachs Group Inc. (GS) and Bain Capital Partners LLC are set to defend what they call legitimate private-equity practices against investor claims that buyout firms and their bankers colluded to rig bids on takeovers.

The defendants, who also include Blackstone Group LP (BX), Carlyle Group, KKR & Co., Apollo Global Management LLC (APO) and JPMorgan Chase & Co. (JPM), are scheduled to argue today and tomorrow before U.S. District Judge Edward Harrington in Boston that a proposed antitrust lawsuit by shareholders in the acquired companies should be dismissed.

Individuals and pension funds that held shares in companies including Freescale Semiconductor Ltd. (FSL), 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.

“If true, we have some pretty serious violations of the antitrust laws,” Darren Bush, a professor of antitrust law at the University of Houston Law Center, said in an interview. “If this conduct is really going on and it’s really problematic, it ought to have a trial.”

The defendants said in court papers that the plaintiffs don’t have the right to sue for antitrust violations that would be subject to U.S. Securities and Exchange Commission regulations. They also said the transactions represented legitimate business practices.

‘Normal Workings’

“They neither identify any direct evidence of an actual agreement among these defendants to fix the market for large LBOs nor allege circumstantial facts that support the plausibility of such a conspiracy,” the defendants said in court filings. “These transactions simply represent the normal workings of the mergers-and-acquisition business.”

In October, an amended complaint was unsealed, disclosing e-mails among private-equity firm 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.” Peter Rose, a spokesman for New York-based Blackstone, declined to comment on today’s scheduled hearing.

“The challenge for the defendants is: How on earth do I walk away from those e-mails?” Bush said. “Alternatively, it’s to say: Yeah, I said that but it’s still not a violation of antitrust law.”

Freescale Deal

Plaintiff Kirk Dahl said he and others in the proposed class of investors owned shares in Freescale Semiconductor in 2006 when the chipmaker announced a buyout by firms including Carlyle and Blackstone for $17.5 billion. HCA was bought by companies including KKR and Bain for $32.1 billion.

“You have the guys who are controlling this industry basically agreeing not to compete, and those agreements suppressed prices,” Patrick Coughlin, a lawyer for the plaintiffs at Robbins Geller Rudman & Dowd LLP, said in a phone interview. Prices were at least 10 percent lower than they could have been, he said. “All the major pension funds were impacted, as well as thousands of individual shareholders.”

The firms are accused in the investor lawsuit of forming “bidding clubs” that limited competitive offers and “artificially depressed prices.” Firms that weren’t part of the winning club would get minority stakes in the acquired companies or fees as advisers, the investors said.

“They’re claiming these guys are making an agreement on who gets to bid, and in a sense this is a cartel,” Keith Hylton, who teaches antitrust law at Boston University School of Law, said in an interview.

‘Proper Functioning’

In court papers, the firms called such joint bidding “central to the proper functioning of a well-regulated capital markets system.”

Lawyers for the private-equity firms didn’t respond to e- mails seeking comment on the lawsuit. Joseph Evangelisti, a spokesman for JPMorgan, and Andrea Raphael, a spokeswoman for Goldman Sachs, declined to comment on the case. Both companies are based in New York.

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 sale, according to the plaintiffs. Later, the firms would sell the companies in public stock offerings, reaping more returns and fees, the plaintiffs said in court filings.

Suits Consolidated

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. (KMI) 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. Later that year, the judge allowed the plaintiffs to add more deals and extended fact-gathering to April 2012. The lawsuit now lists 19 buyouts and eight related transactions.

Silver Lake, TPG

About a dozen financial companies filed motions on July 23 for summary judgment, asking the judge to decide the case without a trial. The companies also include Providence Equity Partners Inc., Thomas H. Lee Partners LP, Silver Lake Technology Management and TPG Capital.

The plaintiffs, who also include the police and fire department pension funds of Detroit and Omaha, Nebraska, will file a motion for class certification, depending on the outcome of the summary judgment motions.

“Given judicial hostility to antitrust laws, even what should seemingly be an easy case is sometimes lost,” said Houston’s Bush.

The cases are Dahl v. Bain Capital, 08-10254, and Klein v. Bain Capital, 07-12388, U.S. District Court, District of Massachusetts (Boston).

To contact the reporters on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; John Pickering at jpickering@bloomberg.net