Last week I spent a few days at a Consero Corporate and Ethics Forum in San Jose, California. It was a very informative conference that brought together senior compliance executives in an intimate format to discuss many aspects of compliance such as “Internal Investigations: Soup to Nuts.” This was the third major compliance program I have attended since I retired from the Antitrust Division.  Earlier this year I was a speaker at the annual conferences for the Society of Corporate Compliance and Ethics (SCCE) and Ethics Compliance Officer Association. These conferences have their own personality and I enjoyed each. I have learned an enormous amount about the far-ranging responsibilities compliance attorneys and officers shoulder, often with limited resources. And, having been on the side of the prosecutor (regulator) for so long, I think I have been able to add some ideas to the discussion. Thus, the title of this post “Nobody like to see a competitor in trouble, but….”

The “but” is that when a competitor is in trouble it may be the best time to focus compliance resources on a particular area. Being able to go to management and say, “Company X is embroiled in this investigation and I think it may be something we need to focus on” can be a more persuasive than saying, “We need more resources.” One example may be if a competitor has an issue with a third-party vendor in an emerging market. That would be an ideal time to move any compliance efforts in that location to the top of the heap. In the antitrust area it is very common for investigations to start fairly localized and then spread.  A prime and recent example is the record-breaking auto parts cartel investigation. What started as an investigation in the United States of one auto part has spread to prosecutions involving virtually every auto part except the air freshener hanging from the front view mirror. This quote is from the most recent press release from the DOJ relating to another guilty plea in the auto parts investigation:  “Including today’s charges, 48 individuals have been charged in the department’s ongoing investigation into price-fixing and bid rigging in the auto parts industry.  Additionally, 32 companies have pledged guilty or agreed to plead guilty and have agreed to pay more than $2.4 billion in fines.” (here)  The auto parts investigation not only spread from one product to another, but also from the United States to competition authorities around the world including the EU, China, Japan, and Korea.   The auto parts investigation is an unusually large investigation, but industry “way of life” cartels are fairly common.

The expansion of the auto part investigation did not happen by accident. From my time in the Antitrust Division I know that prosecutors have an instinct that if corruption is happening in one area of a company or industry, it may well be happening elsewhere. Or, at a minimum, it is worth a look. And prosecutors employ many effective tools to broaden investigations. The Antitrust Division gives credit in plea agreements to companies and individuals who can “expand” the investigation. That credit includes a more favorable plea deal in the product currently under investigation and the possibility of complete non-prosecution for any areas in which cooperators can expand the investigation. This policy is called “Amenity Plus.” In short, there are tremendous incentives for a company in any kind of trouble to ferret out all of its troubles and cooperate with the government. In the world of cartels, that means implicating new products and new competitors. And the irony is, the more cartels a company has been involved with, often the better deal it can make for itself and its executives.

So, given the way government enforcers operate, it is imperative to keep informed of developments in your industry. The conferences/organizations I mentioned, and the resultant networking, are one way to do this. And if the bombshells are landing anywhere near your “space,” it is a good time to boost compliance defenses in that area. There are many tools that company counsel and compliance officers know of but don’t always have the resources to implement. It would be a good time to conduct a focused audit if a competitor is dealing with an antitrust compliance issue. Pricing audits may be too expensive and inconclusive, even when a red flag is raised, but other types of audits may make sense, for example:

a)      Expense Accounts:  A review of expense accounts of individuals operating in the at risk area                           may reveal meetings with competitors or unexplained travel that raises red flags.

b)      Trade associations:  Many price-fixing cartel schemes are launched, and/or carried out in connection with trade association meetings. Executives sometimes set up completely bogus trade associations just to create an opportunity to meet and collude with competitors. A complete check of every trade association to which key executives belong is a very good idea.

c)      Interviews

Pricing personnel:  One thing that is helpful about an antitrust compliance investigation is that there is a smaller subset of executives who can usually get the company in trouble. These are executives with pricing authority. Interviews with these executives may help ferret out wrongdoing. Especially if the interview is done after the audit of expense reports and trade associations and there are pointed questions to be asked. An experienced investigator who can educate employees on the benefits of coming clean quickly can often identify problem activity in a hurry.

Support personnel:  Who knows what is really going on with the boss? Administrative assistants and support personnel. They may know for example, that Mr. Smith from Competitor A always calls before a price increase.

Former employees:  When I was with the Antitrust Division, we always tried to find former employees to interview. You should too. They no longer work for the company so they can “spill the beans” without implicating colleagues or worrying about retaliation.  And, they may have a resentment about their former place of employment and make willing witnesses.

You probably already do some of these things some of the time, but what I’ve learned from company counsel and other compliance professionals is that risks have to be prioritized.  Few if any companies have the resources to hit every compliance metric they would like. After all, while your company wants to be compliant, the objective still is to make a profit. But, if you see a competitor in difficulty, it may be time to hit the Bat Signal and focus on the area that has just leapt to the top of your risk assessment chart.

PS.  It probably is not true that “Nobody likes to see a competitor get in trouble, but….” Thanks for reading!

I can’t help but get excited and announce when one of my former colleagues has a big victory. Kimberly Justice, was in the Philadelphia Field Office when I was Chief, but left when the Division announced it was closing four field offices, including ours. Kim went to Kessler Topaz Meltzer & Check, LLP where she handles plaintiff’s antitrust and securities class actions.

Last week, Kim tried a securities class action and the jury found the defendant, Derek Palaschuk, the former CFO of Longtop Financial Technologies Limited, a Chinese company listed on the NY Stock Exchange liable to plaintiffs and the class. The jury found that defendant Palaschuk was reckless in making untrue statements and omitting facts in the release of the Chinese technology company’s financial results. Ms. Justice’s victory was a rare trial verdict among securities class actions, which are almost always dismissed or settled.

Longtop had a $1.08 billion market value when the New York Stock Exchange halted trading in the company in May 2011. That is when outside auditors disclosed that the company the company’s financial reports were fraudulent. Evidence introduced at trial also showed that Longtop’s CEO confessed that the company had been a fraud since 2004. The stock ultimately was delisted and is now essentially worthless.

Ms. Justice represented a New York pension fund and others in this class action. The jury adopted the per share damages analysis presented at trial by plaintiffs’ expert. Total damages are expected to run higher than $500 million. The jury was asked to apportion liability amongst the CEO, the company and defendant Palaschuk and found 50%, 49% and 1% respectively. A Reuters article on the case can be found here.

Congratulations Kim.

The Seventh Circuit issued its opinion in Motorola Mobility on November 26.   Motorola Mobility LLC v. AU Optronics Corp., 14-8003. In the opinion, written by Judge Posner, the Seventh Circuit panel ruled that the Foreign Trade Antitrust Improvements Act, (FTAIA) barred Motorola’s lawsuit because the harm was incurred by its foreign subsidiaries and not the parent company itself. The most critical fact in the case was this: “Motorola says that it “purchased over $5 billion worth of LCD panels from cartel members [i.e., the defendants] for use in its mobile devices.” That’s a critical misstatement. All but 1 percent of the purchases were made by Motorola’s foreign subsidiaries.” This key fact led to Motorola’s downfall:

What trips up Motorola’s suit is the statutory requirement that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action. 15 U.S.C. § 6a(2). The conduct increased the cost to Motorola of the cellphones that it bought from its foreign subsidiaries, but the cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.

Judge Posner added: “Motorola’s foreign subsidiaries were injured in foreign commerce — in dealings with other foreign companies.” Noting F. Hoffmann‐La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) the court noted: “To give Motorola rights to take the place of its foreign companies and sue on their behalf under U.S. antitrust law would be an unjustified interference with the right of foreign nations to regulate their own economies.”  The bottom line:

Having submitted to foreign law, the subsidiaries must seek relief for restraints of trade under the law either of the countries in which they are incorporated or do business or the countries in which their victimizers are incorporated or do business. The parent has no right to seek relief on their behalf in the United States.

I was quite surprised and happy that Judge Posner quoted from two articles I had written on the FTAIA and the Motorola Mobility case:

A recent article about Motorola’s suit notes the problems with private antitrust suits of this kind. It points out that ‘virtually every product sold in the United States has some foreign‐made component,’ implying an enormous potential for suits of this character should Motorola prevail, and noting too that “the U.S. government has reason to weigh comity and sovereignty concerns when bringing international component cartel case[s],” but “private plaintiffs do not.” Robert Connolly, “Motorola Mobility and the FTAIA,” Cartel Capers (Sept. 30, 2014), http://cartel capers.com/blog/motorola‐mobility‐ftaia.

Judge Posner continued:

Connolly amplifies his analysis in another recent article, “Repeal the FTAIA! (Or at Least Consider It as Coextensive with Hartford Fire),” CPI Antitrust Chronicle (Sept. 2014), www.competitionpolicyinternational.com/repeal‐the‐ftaia‐ or‐at‐least‐consider‐it‐as‐coextensive‐with‐hartford‐fire/. As is apparent from the title, the article ranges far beyond the issues in our case. But the article does discuss the case at some length, offering (at pp. 3–7) a number of pertinent observations, particularly concerning the differences between a private damages suit and a government suit seeking criminal or injunctive remedies: ….

I won’t cite the entire quote, but it comports with the panel’s view that “you can’t have it both ways”, i.e, set up a foreign subsidiary for tax, environment, labor and other purposes, but seek to stand in the shoes of the foreign subsidiary to sue in the United States for an antitrust violation because the remedies here are more favorable.

By deciding the case on the second prong of the FTAIA, that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action, the Court did not reach the question of whether the conduct had a “direct, substantial and reasonably foreseeable” effect on US commerce.  The Antitrust Division was pleased that its ability to reach foreign cartels was not curtailed. Needless to say, as an antitrust lawyer it was a special thrill to be cited by Judge Posner.

Thanks for reading.

I have written in several venues advocating for reform of the antitrust sentencing guidelines.  Last week I posted an article on the ABA Section of Antitrust Law’s website–Antitrust Connect.  I signed on to Antitrust Connect when it was first rolled out, but frankly had not been taking advantage of it.  A friend suggested that I check it out and post from time to time.  I explored the site and realized it had a great deal of useful information about a full range of antitrust issues. I recommend it to others if you are a member of the ABA Antitrust Section.  But, in case you did not see it on Antitrust Connect and are interested, below is a repost (with minor edits):

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I have written before to express my opinion that the federal sentencing guidelines for antitrust violations do not fairly measure culpability.  These guidelines should be revised.  Several news items I’ve read recently have refocused me on this issue.

First, on November 10, 2014, the American Bar Association Criminal Justice Task Force on the Reform of Federal Sentencing for Economic Crimes released its final report on The Reform of Federal Sentencing for Economic Crimes.  The proposed reforms shift sentencing away from a mere mechanical calculation of loss and incorporate more relevant views of culpability.  The heart of the reform is to place less emphasis on the amount of the loss by reducing the number of loss brackets and reducing the amount the offense level would be increased in each bracket. The proposed guideline would add important new features such as:

• A “Culpability” table ranging from lowest to highest which could decrease or increase the offense level from “-10” to “+10.”
• A “Victim Impact” table of “Minimal to None” to “High” which could result in a range of “no increase” to “+6.”
• An offense level cap of 10 for non-serious offenses by first offenders.

For those really interested in the subject, you can read the recently released “Fraud, Bribery and Money Laundering Offences-Definitive Guidelines” issued by the Sentencing Council for England and Wales.  These guidelines were issued in May and perhaps influenced the ABA Task Force guidelines because they also focus on “culpability” and “harm.”

Antitrust offenses are economic crimes.  The antitrust sentencing guidelines are equally in need of reform to reduce the over weighted impact of volume of commerce (the proxy for loss).  Antitrust guideline reform should also add offense characteristics that measure culpability and impact.  And, I agree wholeheartedly with the Task Force report: “First, we feel more strongly about the structure of the proposal than we do the specific offense levels we have assigned.”   I have made proposals to the Sentencing Commission to reform the antitrust guidelines.  I have no doubt the proposals I made can be improved with input from the Antitrust Division, defense bar, judiciary and Sentencing Commission.  My suggestions focus on three primary areas for reform:

• The 10-year Sherman Act maximum should be reserved for the most egregious situations such as recidivism or economic coercion.  It is unjust that a low-level executive in an international cartel can reach the 10 year maximum based on the large volume of commerce.
• Volume of commerce should continue to be a relevant characteristic, but with a reduced impact.  It should not be the overriding measure of culpability that it currently is.
• Presently, a CEO and Sales Manager are tagged with the same level of commerce (assuming similar time period in the conspiracy.)  The volume of commerce adjustment should be applied only to defendants who had the authority to commit their company to the cartel.

[Read more…]

This post below is from guest contributor Avinash Amarnath.   Avinash practices in New Delhi, India and advises clients across various sectors such as automobiles, financial services, pharmaceuticals, steel, private equity, petrochemicals and electronic lab equipment on Indian competition law.

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Hello to all readers! Trade associations seem to be the flavor of the day for the CCI these days. Less than 4 days after passing an order fining the Chemists and Druggists Association, Goa, the Competition Commission of India (the “CCI”) has imposed penalties on the Indian Jute Mills Association (“IJMA”), the Gunny Trade Association (“GTA”) and the individuals responsible for their running for indulging in:

a) price fixing of jute packaging material through circulation of daily price bulletins amongst themselves; and

b) limiting and controlling the supply of jute packaging material.

The complaint was brought by the Indian Sugar Mills Association (“ISMA”) against IJMA, GTA and the textiles ministry of the Government of India. In order to encourage the use of jute and support the jute industry in India, the Government of India enacted a statute in 1987 mandating that certain commodities such as sugar must be mandatorily packed using jute materials. ISMA alleged that as a result of this statutory restriction, they were entirely dependent on jute material suppliers for packaging material and that the jute suppliers were fixing prices and exploiting them. The CCI found that the GTA (which was an association of wholesalers) published and circulated daily price bulletins, which were admittedly followed by the members of the IJMA in setting prices for the sale of jute packaging material. The fact that the bulletin prices were followed by the members of the IJMA was evidenced by correspondence between the GTA and the members of the IJMA where the members complained that the price levels set by the GTA were unsatisfactory. The CCI found that these bulletins were decided by mutual consent and were not based on any market factors such as prices prevalent on the previous day. Further, on an assessment of demand and supply conditions, the CCI found that the production of jute packaging material had consistently declined despite there being sufficient capacity available and demand and prices having gone up over the past few years. From this and other circumstantial evidence, the CCI inferred that the IJMA and GTA had deliberately limited the production of jute packaging material. While the CCI exonerated the concerned government ministry as it did not qualify as an ‘enterprise’, the CCI did note that statutory restrictions imposed by the government on sugar producers to use only jute packaging material were against the principles of competition and observed that the Government of India could consider re-examining the current market situation to remove the market distortions arising out of the above policy. The full order of the CCI can be accessed here.

A few observations. First, it is quite strange that while the infringements identified by the CCI seem to have been committed in equal measure (if not more) by the individual jute mills and wholesalers themselves (as members of the respective trade associations), only the trade associations have been penalized. Second, while there was sufficient evidence in this case to establish that the price bulletins were in fact followed by the members of the IJMA, the question arises as to whether mere information exchange in the form of price discussions and the publication of such price bulletins would have also amounted to an infringement of the (Indian) Competition Act. The CCI is yet to deal with a case of pure information exchange and it would be interesting to see what approach the CCI adopts in such cases. Finally, the CCI seems to be increasingly using its powers to fine individuals who are in-charge of running the infringing enterprises. In fact, this seems to be becoming the norm rather than the exception.

In other news (although this is quite old and not exactly cartel related), the Director General’s (DG) office (investigative wing of the CCI) conducted its first ‘dawn raid’ at the offices of British machinery maker, JCB in relation to on an ongoing investigation on abuse of dominance. At present in India, the CCI or the DG requires a warrant from a court magistrate for conducting a dawn raid. However, a proposed amendment to the Competition Act seeks to vest the power of approving a dawn raid with the Chairperson of the CCI.