February 20, 2008

Class Action Lawsuit Filed re: Private Equity Bid Rigging

Kevin Miller of Alston & Bird notes: Last Thursday, a class action complaint was filed in the US District Court for the District of Massachusetts against 16 private equity funds. The complaint alleges violations of the Sherman Act and the Clayton Act – in particular, a conspiracy amongst the defendant 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 in LBOs.

The complaint further alleges that Clayton, Dubilier & Rice and various other persons not named as defendants, including investment banks, have participated as co-conspirators and aided and abetted the conspiracy. Specifically, the complaint alleges that the defendant private equity firms and their investment bank co-conspirators conspired to rig the purchase prices in at least seven LBOs.

The following quotes from the complaint illustrate the ways that investment banks are alleged to have played a critical role in the conspiracy:

– “Investment banks steer their clients to private equity firms rather than corporate/strategic buyers because LBOs produce much larger advisory and future debt underwriting fees – and often a cut of the deal for the investment banks’ private equity affiliates.”

– “When a bidding club is formed, the bidding club will try to tie up numerous investment banks and potential sources of capital to create an additional barrier to entry for other potential buyers.”

– “Private equity firms exert control over the investment capital markets by aligning with particular investment banks and executing exclusivity deals which tie up these banks and prevent them from financing other potential bidding companies.”

– “The investment banks also participate in the scheme to earn substantial fees post acquisition…for underwriting secondary bond placements …[and advising on the divestiture of assets]”

– “Certain investment banks, including Merrill, Goldman, Credit Suisse, Citigroup, and Morgan, also have private equity arms that participate directly in parts of bidding clubs. This crates a situation ripe for the sharing of competitive information and self-dealing. One hand washes the other, as the investment bank lines up capital and debt financing for its fraternal private equity firm who in turn pays the bank substantial fees along each step in the deal.”

– “The line between investment bank and private equity firms is further blurred, if not erased, by bank investments with funds managed by private equity firms.”

– “Because the investment banks play both sides of the table, information regarding pending and future deals flows freely between investment banks and private equity firms.”