A class-action lawsuit accusing 11 major private equity firms of collusion will move forward, albeit on a much narrower basis, a federal judge ruled yesterday.
U.S. District Judge Edward Harrington in Boston said the sprawling, messy lawsuit alleging that private equity firms worked together to drive down deal prices "nearly warranted" dismissal, and chided the plaintiffs, including a Detroit pension fund, for refusing to cut back on the scope of their claims. But he said that there was too much evidence of improper behavior on individual deals to grant the firms' motion to dismiss.
Harrington cited one Goldman executive's statement that "club etiquette" bars outbidding a winning group.
"The term 'club etiquette' denotes an accepted code of conduct between the defendants," Harrington wrote. "The court holds that this evidence tends to exclude the possibility of independent action."
The judge cited two deals in particular, for Freescale Semiconductor and hospital chain HCA, in which the plaintiffs produced some damning e-mails. On the former, Blackstone Group President Hamilton James, one of the sharpest critics of the lawsuit, e-mailed colleagues to tell them that "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." Harrington also expressed concern that Kohlberg Kravis Roberts asked rivals to "step down on HCA."
But the judge threw out all but one of the plaintiffs' claims, ruling that there is no evidence of an overarching conspiracy.
"Even where the evidence suggests misconduct related to a single transaction, there is largely no indication that all the transactions were, in turn, connected to a market-wide agreement," Harrington wrote. "Rather, the evidence shows a kaleidoscope of interactions among an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market."
Harrington also dismissed all claims against one defendant, JPMorgan Chase, ruling that the evidence presented failed to show that the bank was even in the private-equity business.
Both sides claimed victory, though they seemed to disagree on exactly what Harrington ruled.
"We are pleased the court has decided that there is no evidence of the overarching conspiracy plaintiffs have pursued for five years," KKR spokeswoman Kristi Huller said. "We believe the remaining claim is without merit, and we will continue to contest it."
“The plaintiffs are very gratified that the court has found that there is clear evidence of the overarching conspiracy to rig the going-private transactions the plaintiffs have identified,” K. Craig Wildfang, a lawyer for the plaintiffs, said. “We look forward to putting this evidence to a jury.”
The case now moves to class certification, which will determine how large any potential damages would be. The plaintiffs, former shareholders of the companies acquired by the private equity firms, are asking for billions of dollars.