(CN) - Internal emails from Bain Capital, Goldman Sachs and other titans of finance may support claims that they conspired to rig the market for leveraged buyouts, a federal judge ruled.
U.S. District Judge Edward Harrington denied 12 motions for summary judgment filed by defendants in a massive class action against Apollo Global Management, Bain Capital Partners, The Blackstone Group, The Carlyle Group, Goldman Sachs Group, Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake Technology Management, TPG Capital, Thomas H. Lee Partners, and JP Morgan Chase and Co.
The plaintiffs are shareholders of companies subjected to leveraged buyouts between 2003 and 2007, including Neiman Marcus, Toys R Us, Clear Channel and Warner Music.
They say the 10 private equity firms and their advisers at JPMorgan conspired to "rig bids, restrict the supply of private equity financing, fix transaction prices and divide up the market for private equity services for leveraged buyouts."
Each firm allegedly followed so-called "club etiquette," and formed bidding consortiums to ensure that they all got a "piece of the action."
The shareholders also accused the firms of conspiring not to "jump" or compete for each other's deals during the "go shop" period, so that each defendant could negotiate without risk that another might make a competing bid.
In the leveraged buyout of HCA, a health care company, numerous equity firms initially expressed interest in making a bid, but they abruptly withdrew interest in the face of a joint bid from Bain and Kohlberg Kravis Roberts (KKR), according to the complaint.
KKR's $1.2 billion investment in HCA nearly doubled in value in four years, but shareholders were paid at $51 per share because no other firm submitted a competing bid.
In turn, KKR allegedly withdrew its bid on Freescale, leading the Freescale board of directors to accept a bid by a Blackstone-led consortium.
Though he shot down most motions for summary judgment, Harrington cast a skeptical eye on the plaintiffs' evidence of conspiracy.
"The evidence of each specific transaction, including defendants' communications with each other, for the most part, fails to connect to a 'larger picture' of an overarching conspiracy," he wrote. "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. 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."
The email correspondence, however, "suggests that, when KKR 'stepped down' on the Freescale transaction, it was adhering to some code agreed to by the defendants not to 'jump' announced deals," according to the ruling. "The court holds that this evidence tends to exclude the possibility of independent action."
Statements by top executives of Carlyle showed their surprise when KKR initially pursued Freescale "indicat[ing] that KKR's decision was a breach of its agreement not to pursue Freescale," Harrington wrote.
Similarly, when KKR ultimately stepped away from the Freescale deal, a Blackstone executive sent an email saying, "Henry Kravis [of KKR] 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," according to the judgment.
"This statement suggests there was a previous agreement not to 'jump' Freescale and that KKR had decided to adhere to that agreement," Harrington wrote. "Furthermore, in combination with the rest of the evidence, the statement provides an inference that the decision by the Remaining HCA Defendants to 'step down' on HCA was in exchange for KKR not competing for Freescale.
"These statements tend to exclude the possibility that the remaining HCA Defendants' uniform conduct was the result of independent actions."
The judge granted JP Morgan's individual motion for summary judgment because it did not bid on the target companies and merely provided equity for some of the deals.
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