Who really pays private equity’s ‘conspiracy’ settlement?

Jun 12, 2014

And then there were five.

Bain Capital and Goldman Sachs (gs) yesterday agreed to pay a combined $121 million ($54m and $67m, respectively) to settle their portions of a giant private equity bid-rigging lawsuit that is slated to head to trial this November.

This is the so-called Dahl case, first filed six years ago, which originally accused 10 firms of conspiring to fix prices on 19 leveraged buyouts that occurred prior to the financial crisis. Three of the original defendants – J.P. Morgan Chase (jpm), Apollo Global Management and TH Lee Partners – previously had been let out by judicial rulings.

The case has progressively narrowed over the years, and now boils down to whether or not the remaining defendants agreed not to “jump” each other’s bids on eight transactions. Evidence includes emails like this one from Blackstone Group (bx) president Tony James, after Kohlberg Kravis Roberts & Co. (kkr) bailed out of the Freescale process: “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours.”

In addition to Blackstone and KKR, remaining defendants include The Carlyle Group (cg), Silver Lake and TPG Capital.

Each of the firms has said that they vigorously dispute the charges, but none will comment on whether or not they are in current settlement talks. A jury trial in Boston is scheduled to begin November 3, a very close date given how rarely such types of cases actually go to trial (and the massive liabilities involved).

Some notes on this situation:

1. Limited Partners in relevant Bain Capital and Goldman Sachs funds will be paying a portion of these settlements. Limited partnership agreements basically consider this sort of settlement to be a fund expense, or perhaps related to indemnification clauses. Either way, LPs are on the hook for their pro rata share (minus whatever percentage insurance pays out). And they’d even likely be on the hook were a Boston jury to have found Bain and Goldman liable, since civil liability and criminal liability are different flavors of illegality.

What I can’t decide, however, is if I’m angrier this morning as a Bain/GS limited partner or as an LP in the remaining defendants’ funds. In one case, I either want my GP to fight to clear their name, or cover the costs because they feel unable to do so (thus de facto admitting the wrongdoing that they officially are not admitting). In the latter case, I’m thinking: “If Bain and GS don’t think they can win this case, why are my GPs taking an even larger risk that I’ll need to bear if they’re wrong?” The worst part, of course, is that many LPs are in funds on both sides of that equation.

2. It’s also worth noting that this case already is believed to have cost more than $100 million in aggregate legal fees for the original defendants. All of that is considered fund expenses paid, in part, by limited partners.

3. Even if each of the remaining defendants stipulate to the underlying facts as presented by the plaintiffs, it remains unclear that the private equity firms actually violated anti-trust statutes. These particular private equity firms are not obligated to up-bid one another, nor are they the only universe of potential buyers for an asset (strategics, other financials, wealthy individuals, etc.). And, of course, boards needn’t ultimately choose to sell to anyone if the price isn’t right. It’s notable that this civil case is not running parallel to any sort of Department of Justice or SEC action.

4. Finally: Imagine if this wasn’t an outside class-action suit. Imagine it was a regulatory action, such as the SEC fining firms for violating fee-sharing arrangements with their LPs. Seems to me that, in many cases, LPs would actually be responsible for paying part of any such penalties (and, possibly, even restitution).

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