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Understanding, Detecting & Reporting Antitrust Violations

Understanding, Detecting & Reporting Antitrust Violations. State of Nevada April 2009. Lara M. Kroop & Chris Wheeler U.S. Department of Justice Antitrust Division San Francisco Field Office (415) 436-6660 Lara.Kroop@usdoj.gov Christina.Wheeler@usdoj.gov.

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Understanding, Detecting & Reporting Antitrust Violations

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  1. Understanding, Detecting & Reporting Antitrust Violations State of Nevada April 2009 Lara M. Kroop & Chris Wheeler U.S. Department of Justice Antitrust Division San Francisco Field Office (415) 436-6660 Lara.Kroop@usdoj.gov Christina.Wheeler@usdoj.gov

  2. U.S. DOJ Criminal Enforcement & Investigative Offices

  3. Antitrust Division Offices New York Philadelphia Washington, D.C. Cleveland Chicago Atlanta Dallas

  4. Antitrust Division Should Be On Your Radar Screen • Agencies who receive Recovery Act Funds must identify and prevent wasteful spending and minimize waste, fraud, and abuse. • Competitive bidding creates opportunities for fraud.

  5. Why The Antitrust Division? • Resources • Investigative Expertise • Investigative Tools • Prosecutorial Expertise

  6. Antitrust Enforcement • Criminal enforcement • Bid rigging • Price fixing • Market allocation • Merger review • Monopolies and other civil violations

  7. Penalties Are Significant • Corporation • Up to $100 million • Individual • $1,000,000; and/or • 10 years incarceration • Corporation or Individual • Twice gain to defendant; or • Twice loss to victim

  8. Criminal Penalties Obtained Largest Single Fine – $500 Million Largest Single Case – $1.6 Billion Recent jail sentences – 4 years

  9. Top Targeted Domestic Industries (1979 – 1992) (1983 – 1989) (1990s) (1993 – present) (1982 – 1989) (2000 – present)

  10. Basics of Antitrust Law

  11. Sherman Antitrust Act – § 1 • “Every contract, combination in the form of trust or • otherwise, or conspiracy, in restraint of trade or • commerce among the several States, or with foreign • nations, is declared to be illegal. . . .” • Prohibits agreements among competitors in • restraint of trade or commerce. • Price fixing, market allocation and bid rigging are all • criminal violations.

  12. Elements of a Sherman Act § 1 Violation • Agreement • Unreasonable restraint of trade • Interstate commerce

  13. Agreement • Meeting of the minds/understanding • Two or more unrelated persons • Does not have to be expressed or written

  14. Unreasonable Restraints • Bid Rigging • Price Fixing • Market Allocation

  15. Interstate Commerce • Flow • Affects

  16. Conditions Conducive to Collusion • Few sellers or bidders in the industry, or a small group of major vendors controls a large percentage of the market. • The product is standardized (commodity) and other competitive factors, such as design, quality, or service are not prevalent. • The product has no readily available substitute.

  17. Conditions Conducive to Collusion • Vendors repeatedly sell to the same buyers. • Competitors in the industry frequently interact through social conventions, trade association meetings, shifting employment, or when conducting legitimate business. • Bidders personally submit bids at the same physical location.

  18. Detecting Bid Rigging

  19. What is Bid Rigging? • Bid Rotation • Competitors agree to take turns being the low (winning) bidder • Bid Suppression • Competitor agrees not to bid • Complementary Bid • Competitor agrees to bid high

  20. Bid Rotation

  21. Aircraft Parts Case “Price war is over between Smith & Smith and Jay-Em.” – Presidents of Jay-Em and Smith & Smith, 1986 Prices increased significantly – 60% jump between ’85 and ’86. No economic explanation to support such a significant price increase.

  22. Traffic Signals Case No significant cost advantage due to geographic location. Bid pattern continued even when more projects offered in one area over other areas.

  23. Complementary Bid Bidder #1 awards subcontract, or pays kickback to Bidder #2.

  24. Typhoon Repair Projects - Guam Minimum of three bids required. Companies either with no interest in project, or in existence only on paper, submit high bids so friend will get the project.

  25. Eisenhower Tunnel Case $150,000 Kickbacks $35,000 Flatiron Paving Corn Construction Peter Kiewitt $65,000 Asphalt Paving Bid prices significantly over engineer’s estimate. Competing bidder given subcontract on project.

  26. Bid Suppression Bidder #2 expressed interest in obtaining project. Had capability and resources to do the project.

  27. Concrete Case Bidders submit identical prices so both can share in the project. Identical pricing not experienced on previous projects. Bid prices significantly higher than pricing offered in adjacent county.

  28. Judy Green E-Rate Case • West Fresno Elementary School District Technology Project • Green Hired As Consultant to District • Green Creates Request for Proposal (RFP) • RFP calls for bids on four (4) items • Cabling • Data (switches and routers) • Servers • PBX/video

  29. Green Orchestrates Bid Rig • TERMS OF BID RIG AGREEMENT • Only vendor H will bid on project • Vendor I subcontract for data and pbx • Vendor P subcontract for servers • Vendor V subcontract for video • Vendor S subcontract for data cabling • Vendors will provide kickback to Green • Green will disqualify non-conspirators

  30. Detecting Price Fixing

  31. What is “Price Fixing”? • Agreement to raise, lower or maintain prices • Agreement not to negotiate on price • Agreement to limit discounts, rebates or promotions • Agreement on price formulas or guidelines

  32. Lysine • Lysine is a feed additive used by farmers around the world – $600M/year. • The world’s major producers secretly met at trade association meetings to agree on the exact tonnage for each and a price that was fixed to the penny. • With the assistance of an informer, the FBI was able to record some of the meetings!

  33. Lysine Video Clips Tape Segment One: January 18, 1995 Cartel Meeting in Atlanta, Georgia – The Lysine Cartel Members Show Disdain For Customers And Antitrust Enforcement Tape Segment Two: March 10, 1994 Cartel Meeting In Maui, Hawaii – Cartel members Use Trade Association As A Cover For Conspiracy Meetings

  34. Detecting Allocation Schemes

  35. What are “Allocation Schemes” Any agreement not to compete for specific: * Territories * Customers * Products

  36. Dust Control Case Pre-conspiracy Conspiracy Wyoming Wyoming Co. A Co. A Co. B Co. B Colorado Colorado Prior to agreement, A&B competed for work in both states. After agreement, each limited quotes to customers in allocated territory.

  37. Commercial Garbage Cases New Customers Existing Customers Company A Company B Company C Company either refused to quote or quoted high drop-box price. Company was servicing customers in same area at lower prices.

  38. Sources of Antitrust Cases • Employees • Current or former • Customers/Purchasing Agents • Suspicious patterns/incriminating remarks • Competitors • Invited into conspiracy • Corporate Amnesty Program

  39. Other Criminal Violations Fraud Obstruction

  40. Mail & Wire Fraud A B C D Customer Customer

  41. False Statement A B C D “I did not discuss anything related to bidding on this project with any other potential bidder.” Customer

  42. Suspicious Bid Patterns • The same suppliers, with similar capabilities, submit bids and each company seems to take a turn being the successful bidder (bid rotation). • The same company always wins a particular procurement and there are other companies with similar capabilities, but either don’t bid or consistently submit higher bids (bid suppression). • Some bids are much higher than published price lists, previous bids by the same firms or engineering cost estimates.

  43. Suspicious Bid Patterns • Fewer than normal competitors submit bids and there is no economic explanation for the reduction in competitors, i.e. full workload, bankruptcy, etc. • A company appears to be bidding substantially higher on some bids than on other bids; with no apparent cost differences to account for the difference. • A successful bidder subcontracts work to competitors that submitted unsuccessful bids on the same project. • A company withdraws its successful bid and subsequently is subcontracted work by the new winning contractor.

  44. Possible Price-Fixing Patterns • Identical prices when: • Prices stay identical for long periods of time • In the past, prices were consistently different • Price increases do not appear to be supported by increased costs. • Prices are increased simultaneously and increased, either the same amount, or the same percentage, without any of the vendors involved giving prior notice to customers.

  45. Possible Price-Fixing Patterns • Discounts are eliminated, especially in a market where discounts historically were given. • Vendors charge the same prices to customers located locally as to those for the same goods that must be shipped long distances and freight charges are not added on. No economic explanation for similarity in such prices. • Vendors are charging higher prices to local customers than to distant customers. No economic explanation for those price differences.

  46. Allocation Scheme Patterns • Companies that have consistently sold in the territory (or to a customer) suddenly stop selling in that territory (to that customer) and there is no economic explanation for doing so. • Company that consistently competed on price, begins quoting unreasonably high prices, or refuses to quote a price and/or refers customer to that company’s competitor.

  47. Conduct That Indicates Possible Collusion • Indications that one competitor may have prepared bid or pricing documents for other competitors: • Identical calculation, syntax or spelling errors • Identical handwriting, typeface or stationery in the bid proposals or price announcements submitted by competing vendors • Identical postmarks, return addresses, fax telephone numbers or e-mail addresses – for electronic bids, also consider reviewing the metadata (hidden data)

  48. Conduct That Indicates Possible Collusion • Bid or price documents contain white-outs or other notations indicating last minute price changes. • A bidder requests a bid package for himself and a competitor or submits both his and another’s bids. • A company submits a bid when it is incapable of successfully performing the contract. This is likely a complementary bid. • A company brings multiple bids to a bid opening and submits its bid only after determining (or trying to determine) who else is bidding.

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