Legal Briefs: Where’s The Conspiracy?

It’s time to talk about club deals again.

Seven shareholders in formerly public companies have united to file a class-action suit alleging that LBO firms conspired, via deals in which several firms bid jointly for the same targets, to dampen competition and thus pay lower prices for those same companies. News of this class-action suit, which is actually an amended version of a suit originally filed in May in federal court in Boston, was reported by Private Equity Insider.

These kinds of lawsuits are not new, especially after LBO shops, starting in 2005, teamed up for some mammoth deals; the trend reached its zenith with the every-mega-firm-but-the-kitchen-sink $17.6 billion deal for Freescale Semiconductor. (Led by The Blackstone Group, the buying consortium included Carlyle Group, Permira and TPG.)

In most of these cases the plaintiffs allege violations of anti-trust laws, drawing their inspiration from a Department of Justice investigation into club deals that has so far not generated any findings that have been made public. The feeling among many observers is that no private, class-action case will go far until the DOJ makes some public move. Indeed, none of the lawsuits has made it as far as the discovery phase, which would give the plaintiffs access to confidential information by the buyout firms.

Still, it’s worth noting that this most recent suit presents a new front in the anti-trust war. This is because the plaintiffs allege that the Private Equity Council, the industry trade group formed to lobby Congress and to spread a positive message about the asset class, has served as a kind of hub for anti-trust, club-based activity. The suit contends that the PE Council, “cloaked as a public relations organization,” in fact provided “means and opportunity to initiate, monitor and/or advance the conspiracies,” according to PE Insider’s report.

This, to put it bluntly, is a stretch and should undermine any legitimacy the class-action petitioners hope to achieve with the rest of the suit. A handful of large buyout firms created the PE Council in late 2006, at about the same time the big club deals were coming to an end and when, perhaps not coincidentally, the DOJ launched its investigation. For the first half of 2007 the group was barely more than an idea and a single lobbyist who had previously lobbied on behalf of video game makers. This is not the stuff of conspiracy.

Let’s also look at what’s happened since the group formed. In 2006, nearly 60 percent of take-privates were sponsored by two or more firms, according to an analysis by law firm Weil, Gotshal & Manges; in 2007, that percentage dropped to 39 percent. Activity in 2008 suggests that will fall further. If fostering conspiracies has been its real goal, the Private Equity Council has failed miserably for its members.