Accused of collusion

Christopher Witkowsky explains why 14 private equity firms may have to defend themselves in a Massachusetts court.

A lawsuit filed in federal district court in Massachusetts accusing 14 private equity firms driving down the price of deals looks to be heading for trial after a judge refused to dismiss the case in December.

Not only will the case cost both sides plenty in legal fees, but the plaintiff shareholders who brought the suit are probably much better off having received cash for their shares than if they had remained shareholders.

For instance, one deal cited in the lawsuit is the $5.1 billion acquisition of The Neiman Marcus Group by TPG and Warburg Pincus, which valued the company’s shares at $100 each. Does anyone truly believe that shares of Neiman Marcus would be trading at $100 today?

The firms named in the suit include Bain Capital, GS Capital Partners, The Blackstone Group, The Carlyle Group, Permira Advisors, Kohlberg Kravis Roberts, JPMorgan Partners, Merrill Lynch Global Partners, Providence Equity Partners, Silver Lake Partners, TPG, Thomas H. Lee Partners and Warburg Pincus. Clayton Dubilier & Rice is named as a co-conspirator.

The suit was filed in December 2007 by several individual shareholders in companies acquired in private equity deals, along with Detroit’s Police and Fire Retirement System and the New Profit Sharing Trust.

The plaintiffs allege that the private equity firms, along with a few investment banks,  conspired to rig bids, drive down prices and eliminate competition by forming “bidding clubs”, restricting the supply of private equity financing, fixing transaction prices and dividing up “the market for private equity services for leveraged buyouts”.

“Defendants collusive behavior in setting prices and terms in these LBOs have enabled them to reap supracompetitive, inflated and monopolistic returns on their invested capital, typically 20 percent to 30 percent per year, and sometimes more than 100 percent per year,” according to the lawsuit, filed in federal court in the District of Massachusetts.

Craig Wildfang, a lead attorney for the plaintiffs, said the case is moving into the discovery phase now that the judge has denied the dismissal motion. Discovery is where both sides get to request relevant information to see what kind of evidence will be presented in the case.

The plaintiffs are trying to get the case certified as a class action, and Wildfang said he expects resolution of class action status to talk at least a year.

Wildfang said the plaintiffs are not attacking the use of investment groups in acquisitions; he said the specific deals cited in the lawsuit – nine in all from 2002 to 2008 – contained elements of misbehaviour.

Plaintiffs have not yet determined exactly how much they are seeking in damages, but Wildfang said the amount will be “a big number that will require discovery and economic analysis. The damages are the depressed stock prices, the stock price offered to shareholders would have been higher without the limited bidding”.

The money spent in this case would be better used on driving deals, which in turn could help restart America's stalled economy. Lawsuits that attack the very purpose of private equity firms are counter-productive at a time when the economy needs all the deal flow it can get.