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Equity Firms Like Bain Are Depicted as Colluding

Eric Lichtblau and Peter Lattman|The New York Times
Wednesday, 12 Sep 2012 | 10:01 AM ET

WASHINGTON — In court documents that lawyers for Bain Capital sought to keep secret, the company and other leading private equity firms are depicted as unofficial partners in a bid-rigging conspiracy aimed at holding down the prices of businesses they were seeking to buy.

Bain Capital headquarters, Bostonb Mass.
Boston Globe | Getty Images
Bain Capital headquarters, Bostonb Mass.

In Bain’s biggest acquisition, the $32.1 billion purchase of the hospital giant HCA in 2006, competitors agreed privately to “stand down” and not bid on the company as part of an understanding with Bain to divvy up companies targeted for leveraged buyouts, according to internal e-mails.

The documents have become part of a lawsuit in Federal District Court in Boston brought against Bain and other firms by shareholders who say the firms’ bid-rigging artificially deflated the sales price of more than two dozen companies and cost them billions of dollars.

Bain, founded by the Republican presidential nominee Mitt Romney, is a defendant in the lawsuit, which also names Goldman Sachs’s private equity arm and the Blackstone Group, the firm run by the investor Stephen A. Schwarzman.

The New York Times brought a motion last month to make public the most recent allegations in the case, which were filed under court seal. In response, lawyers for Bain and the other defendants filed a heavily blacked-out version of a 217-page complaint that details evidence compiled to date in the case.

The corporate takeovers at issue in the lawsuit include the acquisition of prominent companies like Neiman Marcus, Toys “R” Us, Michaels Stores, Univision and the Loews and AMC movie chains, and they date from 2003 to 2007. The class-action shareholders’ lawsuit, which was first filed in 2007, has grown since then after a series of court rulings.

Mr. Romney is not mentioned in the publicly released portion of the documents, and lawyers for Bain said in opposing The Times’s motion to unseal the entire filing that he “could not have been involved in the deals at issue here” because he had already left Bain by the time the first deal was finalized.

Lawyers for Bain and the other equity firms said in their court filing opposing The Times’s motion that the documents include confidential company information that would inevitably become “washed into the spin of the campaign news cycle” because of Mr. Romney’s presidential run.

“This case has nothing to do with Mitt Romney or the presidential election,” the lawyers wrote in arguing to keep some of the records private. “The election should not serve as an excuse to allow the press to get at confidential documents and upend competitive sensitivities.”

Michele Davis, a spokeswoman for the Romney campaign, said on Tuesday that the accusations regarding the takeovers are “not related” to Mr. Romney. “All of these things are long after he left Bain,” she said.

Mr. Romney and his advisers say that he has played no “active role” in the company since 1999, when he took a leave from the firm to run the Winter Olympics in Salt Lake City.

But he did not complete a retirement deal with Bain until 2001, and his name appeared on dozens of corporate documents in that time period. Moreover, he has continued to receive profits from the firm as a retired partner and has maintained holdings in some of its investment funds.

Bain Capital has become a central focus of the campaign for both Mr. Romney and President Obama. Mr. Romney has frequently cited his success at the firm in presenting himself as a proven businessman who can turn around the lagging economy. But Mr. Obama has attacked Bain for its takeovers of companies that then laid off workers, sent jobs overseas or declared bankruptcy after they were acquired.

Documents filed in the lawsuit this week show that many of Bain’s takeovers last decade did exceedingly well for the company — a result, the lawsuit charges, of buying the businesses at deflated prices because of collusion with other equity firms. Plaintiffs in the case are former shareholders of the acquired companies.

The case centers on the “club deals” that became popular during the leveraged buyout boom of 2003 to 2007, a period that the complaint calls the “Conspiratorial Era.” It claims there was a complex web of collusive arrangements involving 11 of the world’s largest buyout firms on 19 deals.

In the buyout of HCA, for instance, Bain, K.K.R. and Merrill Lynch bought the company in 2006 for $32.1 billion, then a record. Documents produced by the defendants and filed this week showed e-mails and meetings indicating that other equity firms had agreed to “stand down” and avoid bidding with the understanding that they would be brought into future deals.

E-mails cited in the lawsuit indicate that another private equity firm, TPG, said it had discussed the HCA acquisition with executives for Bain and K.K.R. and had decided not to bid on the company because “our relationship with them, K.K.R. and Bain, was more important.”

In another deal, according to the plaintiffs, K.K.R. and Silver Lake Partners brought Bain into its $9.4 billion acquisition of Philips’s semiconductor unit, despite Philips’s insistence that Bain bid separately for the business.

“Disregarding Phillips’ demand that they remain competitors, Bain and K.K.R. and Silver Lake continued to collude and before final bids were to be submitted,” said the lawsuit, “cemented a secret deal whereby Bain would permit K.K.R. and Silver Lake to submit the winning bid and then invite Bain into its deal on equal terms.”

The plaintiffs also claim that the Blackstone Group, for instance, declined to compete against TPG and Apollo Global Management in the sale of Harrah’s Entertainment and instead made a small co-investment in the deal, according to the suit.

“Blackstone’s quid pro quo relationships with TPG and Apollo prevented it from submitting a competing bid,” the complaint said.

“I think you can tell, even though there are substantial redactions, there is enough to show that there was very active collusion going on between the leading private equity firms, including Bain,” said K. Craig Wildfang, a lawyer for the plaintiffs.

Lawyers representing the private equity firms have rejected the allegations. In an earlier filing in the case, they said that the lawsuit merely described routine dealmaking tactics and labels them anticompetitive.

And while the firms’ lawyers acknowledge there are some embarrassing e-mails still under seal, they say their clients want to keep the court filings private mostly to avoid disclosing confidential competitive information. Private equity executives also deny that they colluded to drive down the prices of their acquisitions, saying that companies were bought at record high premiums during the buyout boom.

“These shareholders should be grateful that we purchased their companies when we did, right before the financial crisis hit,” said a senior buyout executive who spoke on the condition of anonymity because of the litigation.

Peter Lattman reported from New York.

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