The Philadelphia Field Office (PFO) of the Antitrust Division, U.S. Department of Justice, was established in 1948 and until its demise in 2013 was one of the premiere and most innovative criminal prosecution offices in the Antitrust Division. The history of the office in many ways tells the history of the development of criminal antitrust enforcement. I was proud to serve with the men and women of that office who took enforcement of the antitrust laws seriously, and had a heck of a good time doing it. The Philadelphia Field Office (PFO) of the Antitrust Division, U.S. Department of Justice, was established in 1948 and shortly thereafter supervised by legendary trustbuster Assistant U.S. Attorney General Thurman Arnold. With such an auspicious beginning, it was not surprising that the PFO was destined for great things. The PFO’s first indictment, brought in 1948, charged “shoe finders” with price-fixing. Convictions resulted in total fines of $11,000. When the office closed 65 years later, its largest single fine obtained was $134 million in an international cartel case. During its lifetime, PFO cases helped establish the Philadelphia bar as leading attorneys in the field of antitrust. The plaintiffs’ class-action antitrust lawsuit was pioneered in Philadelphia on the heels of one of the PFO’s most famous cases. Finally, cases brought by the PFO, and the cases brought by the private bar, often climbed to appeal. These cases helped make the U.S. Court of Appeals for the Third Circuit a leading authority in many areas of antitrust, whose cutting-edge analysis has often been adopted by the U.S. Supreme Court. The lights went out for the PFO on January 30 after a successful run of often groundbreaking criminal antitrust enforcement. The passing of the PFO should not go without an “obituary” noting some of the outstanding work done by the dedicated public servants who shaped the PFO’s, and to a small degree, antitrust history.
The Early (Misdemeanor) Years When the PFO first brought criminal antitrust prosecutions, corporate executives had little to fear from engaging in collusion against their customers. The Sherman Act, passed in 1890, was a misdemeanor with meager fines ($5,000) and incarceration, though authorized for up to six months, was unheard of. One early case brought by the PFO was United States v. Gimbel Brothers (1950). In this price-fixing case, five Philadelphia department stores and nine individuals were charged with agreeing to sell all merchandise at prices ending in 98 cents, an increase from 95 cents. The prosecution resulted in nolo contendere pleas from the corporate defendants. The cases against the individuals were dismissed. At this time, search warrants for a gentleman’s offense such as price-fixing were unheard of. Rather, prosecutors subpoenaed files, or simply requested to review trade association minutes. Price-fixing agreements were often reduced to writing. Price-fixers were apparently more concerned that a competitor would cheat on the agreement than they were of the feds. (Decades later, foreign executives who didn’t realize the antitrustlaws of the United States could reach them were also known to take explicit notes of price-fixing meetings and agreements and were utterly surprised when these smoking guns found their way to the United States.)
Another early slap-on-the-wrist case was the indictment against the Erie County Malt Beverage Distributors Association. Two trade associations, one corporation and six individuals were convicted of fixing the retail sale of beer. Total fines imposed in the case were $19,250. The antitrust landscape took a dramatic turn in 1960, however, when the PFO brought the first indictment of what would become known as the famous Heavy Electrical Equipment cases. The grand jury investigation uncovered a conspiracy among electrical equipment giants such as GE and Westinghouse to rig bids to public utilities. In the end, 29 corporations and 44 individuals entered guilty or nolo contendere pleas to criminal antitrust charges. The conspiracy was simple: Senior executives of these companies met secretly and established the amount of the winning bid. Complementary (losing) bid levels were also established. The winning bidder was determined based on a rotating system that coincided with the phases of the moon — one of the more memorable allocation schemes in antitrust history. Secret meetings were recorded as “choir practice” in conspirator notes and the roster of conspirators was coded as the “Christmas card list.” The corporate pleas led to almost $2 million in fines, led by GE paying fines totaling $437,500. Seven individual jail sentences of 30 to 60 days were imposed, along with 24 suspended jail sentences. During imposition of sentence, U.S. District Chief Judge James Cullen Ganey of the Eastern District of Pennsylvania called the conspiracy “a shocking indictment of a vast section of our economy, for what is really at stake here is the survival of the kind of economy under which this country has grown great, the free-enterprise system,” according to “The Incredible Electrical Conspiracy, Part I” by Richard Austin Smith, published in Fortune in April 1961.
The Heavy Electrical Equipment cases were famous nationwide. The scope of price-fixing by senior executives of companies with household names was shocking. Media coverage was extensive, including coverage in Time and Fortune magazines. Books, including The Gentleman Conspirators by John G. Fuller, detailed the inner workings of one of the nation’s early “white-collar” crime scandals. Philadelphia became the hotbed of antitrust action. Philadelphia lawyers developed and became nationally known for the plaintiffs class-action suit — particularly after an electrical-equipment civil trial where the plaintiffs were awarded an unprecedented $29 million verdict. The era of the “private attorney general” was proudly born in Philadelphia. On the defense side, the demand for antitrust compliance programs fueled the explosive growth of the antitrust bar.
Two antitrust lawyers who gained note during the electrical-equipment case and went on to have noteworthy careers deserve special mention. John Hughes was a key member of the PFO staff that brought these prosecutions. Hughes joined the PFO in 1956 as a trial attorney. He was named chief of the PFO in October 1971, a position he held until his retirement in 1994. The profile of the PFO was elevated nationally by Hughes’ reputation for toughness, yet uncommon civility, trustworthiness and fairness. Hughes helped train a cadre of talented antitrust lawyers, and passed on his dedication and values. Hughes won many accolades and awards as chief, including the Distinguished Executive Award from President Ronald Reagan. Harold Kohn was the plaintiffs’ attorney who became nationally known (and feared) with the return of a $29 million verdict against Westinghouse, General Electric and two-dozen other companies. Kohn, the undisputed dean of the class action bar, helped draft complex class-action litigation rules. He and his firms, starting at Dilworth Paxson and later his own firm, filed class action suits alleging price-fixing in many industries, including the copper tubing industry following an indictment filed by the PFO. By the time his storied career had ended, the $29 million verdict in the electrical equipment case looked like pocket change compared to the $2 billion verdict a jury later awarded his clients in a class action against the timber industry. Kohn passed away in 1999, but his influence in the world of antitrust litigation continues.
As the electrical-equipment case receded from the national press, the PFO continued on with less dramatic cases. In 1962, the PFO returned an indictment for price-fixing in the bread industry. Six companies and seven individuals were charged — including the first woman charged with price-fixing by the division. The defendant pled nolo contendere and was fined $500. The Third Circuit expanded the scope of interstate commerce element of an antitrust offense in a 1963 case involving Pennsylvania trash haulers. The PFO indicted, and a jury convicted, the Pennsylvania Refuse Removal Association and many of its members for price-fixing. The defendants argued on appeal that they hadn’t committed a federal crime because all of the companies and trash pickup was in Pennsylvania. The Third Circuit upheld the jury verdict ruling that the interstate commerce element of the Sherman Act was satisfied because the trash was hauled across state lines and dumped in New Jersey. This activity was “within the flow of interstate commerce.” Another price-fixing conviction that resulted in a leading Third Circuit decision was United States v. Gillen, 599 F.2d 541, 547 (3d Cir. 1979). Thomas Gillen was indicted and convicted for fixing the price of anthracite coal. Gillen wasthe president of the company and did not attend price-fixing meetings. Conveniently for Gillen, his sales manager attended the meetings and reached agreements with competitors. Gillen was kept aware of the price-fixing and did nothing to stop it (and the resulting profits). Though Gillen did not speak with competitors or fix prices, his conviction was upheld. The Third Circuit, in an opinion written by Judge A. Leon Higginbotham, wrote, “When a company president has knowledge that his company is involved in a price-fixing conspiracy and takes no action to stop it, he may not insulate himself from liability by leaving actual execution of the scheme to his subordinates.” The Supreme Court has since adopted this principle.
The Felony Years In 1974, the Sherman Act was elevated from a misdemeanor to a felony and the nature of criminal antitrust investigations and prosecutions changed with the law. The maximum corporate fine was increased to $1 million and sentences for individuals were increased to three years’ imprisonment and a $100,000 fine. Even these penalties seem small by today’s standards, but elevating a Sherman Act violation to a felony transformed the practice of criminal antitrust investigations. Investigations and trials became high-stakes affairs. The PFO played an active role in developing many of the aggressive investigative tactics common today in criminal antitrust investigations such as the use of consensual monitoring, search warrants, unannounced raids from the FBI, multi-count indictments and international investigations.
The PFO brought the first major nationwide price-fixing cases after the Sherman Act became a felony. In United States v. Continental Group, 456 F. Supp. 704 (E.D. Pa.1978), aff’d, 603 F. 2d 444 (3d Cir. 1979), the grand jury indicted five companies and seven individuals for a nationwide price-fixing conspiracy in the sale of consumer bags such as pet food bags. The charged conspiracy continued after the period when the Sherman Act had become a felony. Prior to the trial, two corporations and one individual pled guilty. A hard-fought multi-week trial followed. Many of the major law firms in Philadelphia represented the defendants. The case was tried before U.S. District Judge Louis C. Bechtle of the Eastern District of Pennsylvania. The jury returned guilty verdicts against two corporations and two individuals. Bechtle sentenced both of the individuals to four months’ imprisonment. The case reached the Third Circuit, giving the court the opportunity to rule on many issues that became critical because the Sherman Act was now a felony. On issues such as “intent” and “use of co-conspirator statements,” the Third Circuit became a leading authority in criminal antitrust jurisprudence. The case also became a cautionary tale about how not to terminate an employee who had detailed knowledge of the price-fixing scheme. The investigation started when a former executive secretary filed a discrimination suit alleging that she had been directed to assist in the price-fixing conspiracy. The disgruntled former employee, with a chip on her shoulder and purse full of documents, would later be a star witness in the government’s case at trial. One can only guess how many antitrust violations have never come to light because such employment disputes are settled less publicly.
Criminal prosecutions took to the superhighway during the 1980s with road construction bid-rigging indictments. Road contractors nationwide had been regularly rigging bids to state highway departments. The schemes were similar: Contractors met in state capitals such as Harrisburg the night before bids were due; agreements were reached on who the winning bidder would be, what the losing bidders would submit, and what the losers would get in return — usually the “right” to rig future jobs. The first road construction case was not brought by the Philadelphia Field Office (PFO) of the Antitrust Division, U.S. Department of Justice, but one conspiracy led to another, and all the Antitrust Division offices eventually brought cases. The conspiracies were generally long-standing, some originating shortly after World War II. Typically, when a road construction company president was asked how a conspiracy got started, he would reply, “I don’t know — it was going on before my time.” The PFO did its part in sweeping the roads clean, filing, in total, 46 criminal cases, most with corporate and individual defendants. The sheer number of road cases provided PFO attorneys plenty of opportunities to hone their skills. But, these cases were also important in other respects. The road cases were the first investigations where the PFO worked extensively with the FBI and federal agents from other agencies, such as the Department of Transportation. These partnerships played key roles in many later Antitrust Division cases. Search warrants and consensual monitoring became more common and were used whenever circumstances warranted. Also during this time, the PFO began to add fraud charges to Sherman Act indictments. Defendants were typically respectable businessmen who often weren’t sentenced to prison by judges who still saw antitrust violations as victimless crimes. Prosecutors responded by adding fraud charges to many indictments based upon mailings of rigged bids or payments on rigged contracts. PFO prosecutors emphasized that bid rigging was nothing more than theft by “well-dressed thieves.” This emphasis on money fraudulently stolen from taxpayers helped propel the steady climb to today’s multiyear prison sentences. In the 1980s, the PFO uncovered another widespread bid-rigging scheme.
Like the road building industry, the auction business was plagued by widespread, long-standing collusion. Auction collusion had even developed its ownlanguage. Dealers formed “rings” before every auction (of at least antiques, commercial equipment, jewelry and real estate). One ring member was selected to win and the others agreed not to bid at the public auction. This collusion depressed prices paid to the seller. Immediately after the public auction, a second private auction, the “knockout,” was held. In private, the ring members competed and prices typically went much higher. The illegal gain was divided among the members of the ring by the “bookkeeper” in payoffs known as “splits.” By the time of the auction cases, the PFO was commonly working with the FBI and using search warrants. During one search, a “bookkeeper” asked if he could make a copy of his ledger before the agent seized it. He took the ledger over to his copier, turned his back and started erasing furiously. His ledger then included an obstruction of justice conviction and six months in prison. Many auction cases were brought, including the largest indictment in PFO history, United States v. Seville Industrial Machinery, 696 F. Supp. 986 (D.NJ. 1988). In this case, 19 corporations and 17 individuals were charged with bid rigging and conspiracy to defraud the United States at a bankruptcy sale of used commercial equipment. Following the voluntary dismissal of one individual, all other defendants were convicted or pled guilty. Ironically, the defendants raised “selective prosecution” as a defense to this massive indictment. U.S. District Judge H. Lee Sarokin of the District of New Jersey rejected this argument, but noted the widespread corruption in the auction industry: “If the evidence presented in this case is indicative of the ethics of this or any segment of the business community, then we should weep for its existence and fear for its future.”
One of the most interesting cases in PFO history involved a scheme to rig bids for medical supplies purchased by the Defense Department at the Defense Personnel Support Center in South Philadelphia. An astute buyer for the military became suspicious over certain bidding patterns for contracts she handled. Her tip to the PFO led to the exposure of a long-running bid-rigging scheme. The first defendant to be charged pled guilty, but a co-conspirator elected to go to trial. The indictment was a multi-count indictment charging both bid rigging and fraud. After the jury convicted the defendant, Colin Offenhartz, he was sentenced to five years in prison — a record-breaking sentence at the time. Another defendant was an Israeli national who was indicted under seal. This defendant, Amir Porat, was arrested at the Canadian border as he entered the United States. He was a likeable and charismatic character who acted as his own defense lawyer. Part of the government’s case was a $200,000 payoff check that Porat had allegedly deposited in his Swiss bank account. (How the PFO obtained records from a Swiss bank is a story that can’t be told here.) Porat claimed that anyone could have opened a Swiss bank account in his name, and to prove his point, he opened an account in the name of the co-lead prosecutor, Antonia Hill. Unfortunately for Hill, there was no money in the account, but fortunately for her, Porat was convicted. While the case was on appeal, the Supreme Court overruled established precedent that materiality was an issue for the court, as had been the case in this trial, and held that materiality of an allegedly false statement was an issue for the jury. The conviction was vacated. The PFO and the defendant had had enough of each other and a non-jail plea agreement was reached, avoiding a retrial.
A truly special moment for the PFO came in 1998 when the Historical Society of the U.S. District Court for the Eastern District of Pennsylvania hosted “A Celebration of 50 Years of Antitrust Enforcement” by the PFO. Distinguished speakers from the bench of the Eastern District of Pennsylvania, as well as attorneys from the PFO and private bar, reminisced over the past 50 years of historic antitrust developments and fond personal relationships.
The International Years At the time of the Historical Society celebration, the PFO was just embarking on its final chapter. The “international years” began in earnest for the Antitrust Division in the 1990s. The PFO’s first prosecution of an international cartel was in 1996 in a case against Mexican companies that imported tampico fibers. These fibers are used in many household brushes and brooms. This was a rare case where the defendants were charged with both a horizontal price-fixing conspiracy in which they fixed tampico prices, and also a vertical price-fixing conspiracy in which they fixed the prices charged by distributors in the United States. An interesting note in the case was the discovery during a search warrant of a note written during the investigation from an executive of one tampico company to an executive at the competing tampico company asking him to consult with the former’s lawyer, “but talk fast; he charges $500 an hour.”
International cases became a focus for the Antitrust Division after the successful prosecution of senior executives of the Archer Daniels Midland Co. for a worldwide conspiracy to fix the price of lysine. The case drew international attention because of the high-profile defendants and because the government had extensive videotape of the actual price-fixing meetings. Shortly after the ADM case, the PFO uncovered the international graphite electrodes conspiracy. Graphite electrodes are a key and expensive component used in blast furnaces for steel making. The investigation started after a graphite electrode salesperson made a telling remark to a steel buyer. The graphite electrode cartel was extremely successful. In an unusual gathering, conspirators from around the world met for a celebratory send-off when one of the founding cartel members retired. The investigation went on for several years and netted over $437 million in fines, as well as seven corporate and three individual convictions. The highlight and conclusion of the graphite electrodes investigation was the first trial of an international defendant: Mitsubishi Corp. It was a high-profile case, and one of the first where the defendant was charged as an aider and abettor. Of course, in 65 years, PFO lawyers sometimes made mistakes, and this trial featured a whopper. During the investigation, one of the cooperating Japanese executives was in the United States to be interviewed. He asked if he could have his picture taken with the prosecutors. The prosecutors, being polite (and naïve), obliged. The defense had a copy of the picture that it blew up into billboard size for the jury and remarked, “When you rob a bank, you get your picture plastered in the post office. When you join an international price-fixing cartel, you get your picture taken with the prosecutors!” Fortunately, the jury believed that the prosecutors were inadvisably in a photo, but not in bed, with the witness. A verdict of guilty was returned. The court fined the company $134 million and the trial team received the Department of Justice’s highest award — the John Marshall Award — for a truly outstanding performance in litigation.
The PFO had many firsts and at least one high profile first did not work out well for the government. During an investigation of an international ocean-shipping cartel, the Antitrust Division gave corporate leniency (immunity) to one company and its executives in return for their cooperation in the investigation. The Antitrust Division, however, subsequently revoked the leniency, after the PFO investigation led to the belief that the company and its executives had not been honest in their disclosure and, therefore, did not qualify for leniency. This led to years of heated litigation on many issues. The leniency company filed a motion to enjoin the government from seeking an indictment of the company. This motion was granted by the district court, but later overturned by the U.S. Court of Appeals for the Third Circuit in United States v. Stolt-Nielsen, 442 F. 3d 177 (3d Cir. 2006), on the grounds that separation of powers required that a defense to an indictment must be raised post-indictment. Ultimately, the company and two of its executives were indicted, but the defendants again raised the leniency agreement as a bar to prosecution. The defendants prevailed and the indictment was dismissed. U.S. District Judge Bruce Kauffman of the Eastern District of Pennsylvania ruled in United States v. Stolt-Nielsen, 524 F. Supp. 2d 609 (E.D. Pa. 2007), that the government failed to prove that the company breached its agreement, and, therefore, the immunity provided by the leniency contract could not be revoked.
The last major international prosecution by the PFO ended on a more successful note. The graphite electrodes investigation had led to numerous spinoffs, and one was an indictment of Ian Norris, the former chief executive officer of Morgan Crucible, a U.K. company that produced graphite and carbon products. Norris was indicted on four counts — one of price-fixing and three of obstruction of justice. In a final “first” for the office, after a seven-year battle, the U.K. government permitted Norris’ extradition to face the obstruction (but not price-fixing) charges. Norris was convicted by a jury in a trial before U.S. District Judge Eduardo C. Robreno of the Eastern District of Pennsylvania. Robreno had been an attorney in the PFO in the early 1980s. Norris was sentenced to 18 months in prison. He appealed his conviction all the way to the U.S. Supreme Court, but the conviction was upheld. With the stakes so high, cross-examination of witnesses was sometimes very tense (and sometimes humorous), as it was when one Dutch witness in the Norris trial was being vigorously cross-examined about a “dawn raid” by the European authorities. Trying to be careful to say nothing inaccurate, the witness replied: “To be completely truthful, counsel, they shouldn’t be called dawn raids. We don’t begin anything in Europe before 9 a.m.”
A Great Run Fittingly, the very last prosecution brought by the PFO was a record-breaker for the office. The purchasing manager at a chain of nursing homes who rigged bids in exchange for kickbacks was sentenced to 63 months in prison. Every staff member who worked in the PFO understood that it was a privilege to work in the Antitrust Division and represent the United States. And, it was exciting to go up against the finest lawyers — from Philadelphia, the nation, and, even sometimes, from around the globe. The final treat was practicing in the Third Circuit where the bench has an appreciation of the history and importance of the Sherman Act. Third Circuit Judge Dolores Sloviter expressed this sentiment when she wrote in LePage’s v. 3M, 324 F. 3d 141, 169 (3d Cir. 2003), that the antitrust laws were “the equivalent in our economic sphere of the guarantees of free and unhampered elections in the political sphere. Just as democracy can thrive only in a free political system unhindered by outside forces, so also can market capitalism survive only if those with market power are kept in check.” The office closed in January after 65 years of doing its part to shape the history of the Sherman Act. It was a great run.
Note: A version of this post ran in the Legal Intelligencer in March and April, 2013.