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MICRO-ECONOMICS LITERACY TEST
The World Gets Tough on Price Fixers
By STEPHEN LABATON
New York Times On-Line, June 3, 2001
WASHINGTON -- Meeting clandestinely at an airport hotel outside London, top executives from the leading makers of a crucial raw material for forging steel reached an agreement to set up a global cartel.
The material was graphite electrodes, rods used for heating scrap metal into steel. The industry producing the rods had recently consolidated, reducing supplies and removing a handful of smaller competitors.
By the time the meeting nine years ago was over, the executives — from France, Germany, Japan and the United States — had agreed on four things: that prices had to rise promptly, that smaller companies would quickly follow patterns of the leaders, that discounts would not be offered and that market shares would remain unchallenged.
Over the next five years, in a series of meetings and conference calls, the executives and lower-level managers put the plan in place. Using code names like BMW, Pinot and Wave, they exchanged secret agreements to carve up the market, driving up the price of graphite electrodes by more than 60 percent by 1997.
But the cartel began to unravel that year, after a steel maker complained to federal investigators about the lack of competition and after one company, taking advantage of a controversial amnesty program started by the government in 1993, provided important leads in exchange for a commitment not to be prosecuted.
When the Mitsubishi Corporation was convicted last month of participating in a global price-fixing conspiracy, the case became the second largest involving price-fixing in Justice Department history, after one involving a vitamin cartel. Equally important, it typifies a push to uncover and prosecute price-fixing and global cartels that was begun early in the Clinton administration and that is expected to remain a high priority in the Bush administration even while other areas of antitrust policy undergo rethinking.
The antitrust division, once a small and sleepy backwater of the Justice Department, has become a power center against white-collar crime. It has filed some of the government's biggest criminal cases and shaken up a diverse range of industries as it reveals a seamy side of globalization — international cartels.
Although criminal defense lawyers have questioned the fairness of the amnesty program, no one doubts that the global price-fixing collusions already exposed have affected every American consumer. They have raised prices for gasoline, vitamins and soft drinks. They have made it more expensive for wealthy patrons and museums to buy paintings and sculptures at auctions. And they have fixed prices for the dynamite and the ammonium nitrate used in the coal and metal mining industries.
Investigators have uncovered a 17- year conspiracy among American, German and Japanese producers of sorbates, a food preservative used in products ranging from cheese to baked goods, that affected more than $1 billion in sales in the United States.
They have also exposed a cartel involving major American, Belgian and Dutch marine construction companies, which build and move the huge offshore oil and gas drilling platforms in places like the North Sea and the Gulf of Mexico. The conspirators fixed contracts in an industry with annual sales of $1 billion, and their increases ultimately contributed to higher prices at the pump.
Taking the lead from the United States, governments in Europe and Asia are beginning to take price- fixing more seriously. Britain recently adopted an amnesty program similar to the American one, which is intended to encourage companies to step forward and acknowledge their roles in such cartels. And more and more countries that historically have not been troubled by executives meeting to collude on prices and production are toughening their laws.
Last month, in the graphite electrode case, the United States government obtained the final corporate fine, $134 million from Mitsubishi. That brought total fines in the case to $437 million. During the investigation, Robert J. Koehler, chairman of SGL Carbon A.G., paid $10 million, the highest antitrust fine against an executive in American history. Two other executives, Robert Krass, chairman of UCAR International, and Robert J. Hart, the chief operating officer, pleaded guilty, paid large fines and received prison sentences.
All told, the antitrust division has won fines — corporate and individual — of more than $1.7 billion in the last four years.
In the price-fixing case involving vitamins, investigators concluded that more than $5 billion in commerce was affected. The cartel, which included industry giants like F. Hoffmann-La Roche and BASF A.G., reached agreements on prices and production levels, directly victimizing corporate giants like General Mills, Kellogg, Coca-Cola, Tyson Foods and Procter & Gamble. Prosecutors say those companies, in turn, passed on billions of dollars in inflated costs to American consumers — anyone who took a vitamin, drank a glass of milk or ate a bowl of cereal.
Over all, the roster of defendants in the United States alone reads like a criminal version of the United Nations. In recent years, executives from Belgium, Britain, Canada, France, Germany, Italy, Mexico, the Netherlands, South Korea and Switzerland have been convicted of cartel crimes. Earlier this year, a Japanese executive became the first from that country to plead guilty in the United States; he is awaiting sentencing.
The government's highest-profile case is now headed to trial in New York. Last month, a grand jury indicted A. Alfred Taubman, the former chairman of the auction house Sotheby's, and Sir Anthony Tennant, his counterpart at Christie's. Sir Anthony has vowed to remain in Britain, where he cannot be extradited, because its government does not impose criminal liability on an executive engaged in price-fixing. Mr. Taubman has said he will fight the indictment that the two men conspired to fix commission fees charged to more than 130,000 customers over six years. The trial could begin this fall.
The roots of the current wave of prosecutions here go back more than a century. In 1890, a Republican senator from Ohio, John Sherman, sponsored legislation that made any agreement in restraint of trade a crime. The law, later toughened, imposed a maximum fine of $5,000 and a prison term of one year. President Theodore Roosevelt's administration made the first aggressive use of the act in combating major monopolies, and it was under President William Howard Taft that the law was used against Standard Oil and the American Tobacco Company.
As a weapon against price-fixing, the Sherman Antitrust Act was rarely used before 1938, when Thurman Arnold, one of the great antitrust prosecutors, joined the Justice Department. Over the next five years, 220 of the 330 cases he brought under Section 1 of the Sherman Act included criminal charges.
The more recent takeoff in investigations and prosecutions is a result of both economic forces and changes in the way the Justice Department approaches such cases. Throughout the world, broad deregulation has begun to make many governments that cared little about price-fixing in the days before laissez-faire capitalism more sensitive to price and production manipulations that undermine free markets. Still, until recent years, few foreign countries imposed criminal liability on executives for price-fixing.
In the United States, though, investigations flourished because Congress gave the prosecutors a bigger stick to use against conspirators just as the prosecutors found a way to offer a fatter carrot to entice their cooperation.
In the 1970's and 1980's, Congress increased the potential penalties for executives convicted of antitrust violations. In 1974, violations once considered misdemeanors became felonies, and maximum prison terms rose to three years from one. Maximum fines grew from $50,000 in 1955 to a virtually unlimited amount by 1991. Corporate sentencing guidelines gave the Justice Department the authority to seek financial penalties as high as twice the gain from the crime or twice the amount of the victims' losses.
At the antitrust division, meanwhile, a new corporate leniency program, granting significant incentives for early cooperation, was adopted in August 1993 — one of the first initiatives of Anne K. Bingaman after President Bill Clinton appointed her to head the division. Under an older policy formulated in 1978, leniency was discretionary and not available after an investigation opened.
The new policy made amnesty automatic if the company came in before an investigation began and permitted broad amnesty afterward to the first company to offer assistance. It also covered all executives from that company who cooperated, a significant inducement because violations of the Sherman Act carry a potential prison sentence of three years for every count, in addition to virtually limitless fines.
"The amnesty program is the division's most effective generator of large cases, and it is the department's most successful leniency program," said James M. Griffin, a deputy assistant attorney general in the antitrust division who heads its criminal enforcement office and plays the pivotal role of deciding which cases will be filed.
"The program is unique," he said. "No other U.S. voluntary disclosure program offers as great an opportunity or incentive for companies to self-report and cooperate."
Almost immediately, the change could be seen in the quantity and quality of tips coming to prosecutors. Before the rule, the division reported an average of one amnesty request a year. Since the change, it is one a month.
The program works, prosecutors say, because it is often the corporate lawyers or their counterparts at law firms who, responding to a customer complaint or subpoena, discover the potential criminal problems and who understand that their clients can reap huge benefits by going to the Justice Department early.
In fact, the amnesty program has come to fruition at a time when prosecutors say it is not uncommon for executives involved in price-fixing to take heightened steps to deceive company lawyers, concealing meetings and using special codes, out of fear that the lawyers will turn in their clients.
Mr. Griffin and his predecessor, Gary R. Spratling, routinely tell lawyers the story of one company's general counsel, who, suspecting problems, insisted on accompanying an executive every minute he was meeting a foreign counterpart, even when the executive went to the bathroom. The counsel was comforted when the two men exchanged business cards and engaged in the kind of small talk that indicated they had never met before.
But it turned out that the entire incident was staged to deceive the lawyer. The two executives had known each other for years and had dined, played golf and worked together in an enormous global price-fixing conspiracy.
Aside from assisting prosecutors, the amnesty program has another benefit, officials say. It adds a level of uncertainty to any conspiracy, forcing executives engaged in price- fixing to be constantly second-guessing their partners in crime.
"If you're looking to deter cartel behavior, by increasing the fear of detection you can affect conduct," said John M. Nannes, acting head of the antitrust division. "Amnesty injects a risk into every conspiracy."
But defense lawyers say the program can skew justice, because amnesty is given not to the least culpable conspirator but rather to the first informer.
"You get a race to the courthouse, the downside of which is that companies can be so hasty that they report about things that aren't really criminal or shouldn't be treated as criminal but nonetheless prompt criminal investigations," said Alison Smith, a former deputy assistant attorney general in the antitrust division who is now a partner at Vinson & Elkins in Houston. She said she was concerned that such programs "offer inducements to testify" that can distort what executives say. "Whenever inducements are offered," she said, "it creates problems."
Prosecutors respond that the amnesty program is still the most effective way to get at price-fixing conspiracies and that jurors can evaluate the truth of testimony. Moreover, the companies that receive amnesty are still vulnerable to civil lawsuits filed by customers and other victims of the cartel.
For all its remarkable successes, the Justice Department has lost many battles in its war on cartels. While more than 90 percent of the cases wind up with plea agreements, the department has only a mixed record in cases that are tried.
Leslie W. Jacobs, a prominent defense lawyer who has beaten the Justice Department in two price-fixing cases, noted that of the antitrust indictments filed from 1992 to 1997 that went to trial, there were four convictions and 15 acquittals. Prosecutors say those numbers do not accurately reflect the division's longer-term record, which is comparable to the Justice Department's overall victory rate of about 60 percent in criminal trials of white-collar defendants.
Prosecutors and defense lawyers say there are several reasons for the government's mediocre trial record. Cases that get to trial often involve evidence that is more ambiguous than ones that are settled. Unlike other criminal cases, such as those involving narcotics or mob members, executives in price-fixing cases are often viewed as pillars of the community. Executives in most price-fixing cases are indemnified by their companies, and so can afford to hire the best criminal lawyers. And some jurors have trouble understanding why price-fixing should be a crime.
Defense lawyers also say the mixed record demonstrates that the government has overreached, a criticism rejected by leaders of the antitrust division.
The government's landmark drubbing came in 1994, when a federal judge in Columbus, Ohio, threw out the government's indictment of General Electric accusing it of conspiring with De Beers to rig the price of industrial diamonds. The prosecutors' evidence, the judge ruled, was too weak.
There have been many more recent and less heralded government setbacks. Three weeks after winning the verdict in the Mitsubishi graphite electrode case in Philadelphia — a conclusion trumpeted with great fanfare by the Justice Department — a federal court in Houston threw out the government's price-fixing case against a marine construction executive after other defendants pleaded guilty to antitrust violations.
"The government just way overreached and tried to go after somebody on the uncorroborated testimony of a guy who was trying to get out of the trouble he was in," said Robert J. Sussman, a lawyer who represented the executive, Michael H. Lam, at his trial. "Mike Lam has been made absolutely miserable for three years. The government put a great deal of resources into this prosecution."
The division has also lost antitrust trials against the Nippon Paper Industries Company, which was accused of price-fixing in the thermal fax paper market, and against executives in the dynamite and concrete- pipe construction industries.
In winning an acquittal for David True, a senior executive at the Austin Powder Company, Mr. Jacobs said he was able to take the leniency afforded other defendants-turned- witnesses and use it effectively against the government. Mr. Jacobs, a partner at Thompson Hine, a Cleveland law firm, called as a witness a former lawyer for the antitrust division who outlined to the jury the potential criminal exposure of the government's main witnesses, replete with charts showing the size of possible fines and prison terms, compared with the lenient treatment they were ultimately afforded.
"We essentially turned the division's program against them and succeeded," Mr. Jacobs recalled.
He said that the cases he won, as well as the other acquittals, demonstrated that the government had been overreaching.
"By my view the government is becoming like the old line that pigs get fat and hogs get slaughtered," he said. "They are moving from the pig to the hog category."
But prosecutors said that the acquittals in these cases were the exceptions, and that an overwhelming majority of defendants wound up being convicted. And some independent experts say occasional government losses are signs that the antitrust division is doing its job.
"From a public point of view, you'd want them to lose a certain number, because otherwise they are not taking risks," said Albert A. Foer, president of the American Antitrust Institute, a Washington research organization. "You want them to be aggressive and take risks. If they only brought the ones that they won, you'd know they were passing on the gray areas."
Judging from the relatively few words that President Bush has said in his political career about antitrust, it appears that he has little concern for anything other than price-fixing claims.
In February 2000, in the heat of the presidential primaries, Mr. Bush told a reporter from The Financial Times that he believed all antitrust law revolved around such investigations.
"My own personal view, just in general, is the application of antitrust laws needs to be applied where there are clear cases of price-fixing," he said. Asked if there is a role for antitrust enforcement in other cases — like monopolies, predatory pricing, discriminatory pricing practices and merger challenges — Mr. Bush responded with an answer that demonstrated little feeling for the field.
"Well no," he said. "Everything evolves into price-fixing over time. Price-fixing up and price-fixing down. Price-fixing down to eliminate competition; price-fixing up to accumulate profit."
The president's top appointments to the Justice Department and the Federal Trade Commission have a more expansive understanding of antitrust, but one that is significantly less aggressive in many areas than those of their predecessors in the Clinton administration.
Late last month, the Senate confirmed Timothy J. Muris to the Federal Trade Commission. Charles A. James, the administration's choice to head the Justice Department's antitrust section, has been approved by the Judiciary Committee, but his nomination has encountered some opposition from Democrats, who are now in control of the Senate.
Mr. James is expected to take a more limited view of many areas of antitrust enforcement than Ms. Bingaman or her successor, Joel I. Klein. But it was hardly surprising at his confirmation hearing that Mr. James began by discussing the role of the division in combating cartels, and experts predict that price-fixing cases, particularly those with an international scope, will continue to increase.
For one thing, there are about 50 grand juries involved in global cartel investigations. For another, while Democrats and Republicans occasionally have different views in certain areas of antitrust, like merger reviews and predatory-pricing inquiries, the prosecution of price-fixing and cartels has become as accepted as combating terrorism and narcotics.
"The one area that one can predict with 99 percent certainty that will not change is the aggressive prosecution of global cartels," said Robert E. Litan, a former Justice Department antitrust official who is now the director of economic studies at the Brookings Institution. "They will use the corporate amnesty policy because they view it as a godsend."