1. 1 Understanding, Detecting & Reporting Antitrust Violations Lara M. Kroop & Chris Wheeler U.S. Department of Justice Antitrust Division San Francisco Field Office (415) 436-6660 Lara.Kroop@usdoj.gov Christina.Wheeler@usdoj.gov State of Nevada April 2009

2. 2 U.S. DOJ Criminal Enforcement & Investigative Offices

3. 3 Antitrust Division Offices Dallas Chicago Cleveland Atlanta New York Philadelphia Washington, D.C.

4. 4 Antitrust Division Should Be On Your Radar Screen  Agencies who receive Recovery Act Funds must identify and prevent wasteful spending and minimize waste, fraud, and abuse.  Competitive bidding creates opportunities for fraud.

5. 5 Why The Antitrust Division?  Resources  Investigative Expertise  Investigative Tools  Prosecutorial Expertise

6. 6 Antitrust Enforcement  Criminal enforcement Bid rigging Price fixing Market allocation  Merger review  Monopolies and other civil violations

7. 7 Penalties Are Significant  Corporation Up to $100 million  Individual $1,000,000; and/or 10 years incarceration  Corporation or Individual Twice gain to defendant; or Twice loss to victim

8. Criminal Penalties Obtained  Largest Single Fine – $500 Million  Largest Single Case – $1.6 Billion  Recent jail sentences – 4 years

9. (1979 – 1992) (1993 – present) (1982 – 1989) (2000 – present) (1990s) (1983 – 1989) Top Targeted Domestic Industries

10. Basics of Antitrust Law

11. 11 Sherman Antitrust Act – § 1 “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal....” Prohibits agreements among competitors in restraint of trade or commerce. Price fixing, market allocation and bid rigging are all criminal violations.

12. 12 Elements of a Sherman Act § 1 Violation  Agreement  Unreasonable restraint of trade  Interstate commerce

13. 13 Agreement  Meeting of the minds/understanding  Two or more unrelated persons  Does not have to be expressed or written

14. 14 Unreasonable Restraints  Bid Rigging  Price Fixing  Market Allocation

15. 15 Interstate Commerce  Flow  Affects

16. 16 Conditions Conducive to Collusion  Few sellers or bidders in the industry, or a small group of major vendors controls a large percentage of the market.  The product is standardized (commodity) and other competitive factors, such as design, quality, or service are not prevalent.  The product has no readily available substitute.

17. 17 Conditions Conducive to Collusion  Vendors repeatedly sell to the same buyers.  Competitors in the industry frequently interact through social conventions, trade association meetings, shifting employment, or when conducting legitimate business.  Bidders personally submit bids at the same physical location.

18. 18 Detecting Bid Rigging

19. 19 What is Bid Rigging?  Bid Rotation Competitors agree to take turns being the low (winning) bidder  Bid Suppression Competitor agrees not to bid  Complementary Bid Competitor agrees to bid high

20. 20 Bid Rotation Year “A”Year “B” Bidder #1LowHigh Bidder #2HighLow Item “A”Item “B” Bidder #1LowHigh Bidder #2HighLow Area “A”Area “B” Bidder #1LowHigh Bidder #2HighLow

21. 21 Aircraft Parts Case T-37 Nose WheelF-5 Main Wheel 1985Smith & Smith$275Jay-Em$1000 1986Jay-Em$455Smith & Smith$1390 1987Smith & Smith$465Jay-Em$1416 “Price war is over between Smith & Smith and Jay-Em.” – Presidents of Jay-Em and Smith & Smith, 1986 Prices increased significantly – 60% jump between ’85 and ’86. No economic explanation to support such a significant price increase.

22. 22 Traffic Signals Case No significant cost advantage due to geographic location. Bid pattern continued even when more projects offered in one area over other areas.

23. 23 Complementary Bid Bidder #1Low Bidder #2High Bidder #1 awards subcontract, or pays kickback to Bidder #2.

24. 24 Typhoon Repair Projects - Guam PASEO LIGHT TOWER Deok Shin Corporation$134,000 Young Lae Corporation$145,850 BW Corporation$148,350 WETTENGEL FOOTBALL FIELD Cho Iron Works$126,000 Deok Shin Corporation$134,800 C.Y. Development Co.$138,300 YPAO BEACH PAVILLION AND CABANAS BW Corporation$145,000 QL International Development$155,280 New Development Corp.$158,280 Minimum of three bids required. Companies either with no interest in project, or in existence only on paper, submit high bids so friend will get the project.

25. 25

26. 26 Eisenhower Tunnel Case BiddersBid Price Percent Over $4.2 Million Estimate Flatiron Paving$4.4 million6% Corn Construction$4.5 million7% Asphalt Paving$4.6 million11% Peter Kiewit$4.6 million11% $150,000 Kickbacks $35,000 Flatiron Paving Corn Construction Peter Kiewitt Asphalt Paving $65,000 Bid prices significantly over engineer’s estimate. Competing bidder given subcontract on project.

27. 27 Bid Suppression Bidder #1Low Bidder #2No bid submitted Bidder #2 expressed interest in obtaining project. Had capability and resources to do the project.

28. 28 Concrete Case Bid ItemsCompany ACompany B 4000 psi w/plasticizer$51.00/yd. 4000 psi$47.00/yd. 3000 psi$45.00/yd. 2500 psi$44.00/yd. 8 sack grout$59.00/yd. 12 sack grout$79.00/yd. Bidders submit identical prices so both can share in the project. Identical pricing not experienced on previous projects. Bid prices significantly higher than pricing offered in adjacent county.

29. 29 Judy Green E-Rate Case  West Fresno Elementary School District Technology Project  Green Hired As Consultant to District Green Creates Request for Proposal (RFP) RFP calls for bids on four (4) items Cabling Data (switches and routers) Servers PBX/video

30. 30 Green Orchestrates Bid Rig  TERMS OF BID RIG AGREEMENT Only vendor H will bid on project Vendor I subcontract for data and pbx Vendor P subcontract for servers Vendor V subcontract for video Vendor S subcontract for data cabling Vendors will provide kickback to Green Green will disqualify non-conspirators

31. 31 Detecting Price Fixing

32. 32 What is “Price Fixing”?  Agreement to raise, lower or maintain prices  Agreement not to negotiate on price  Agreement to limit discounts, rebates or promotions  Agreement on price formulas or guidelines

33. 33 Lysine  Lysine is a feed additive used by farmers around the world – $600M/year.  The world’s major producers secretly met at trade association meetings to agree on the exact tonnage for each and a price that was fixed to the penny.  With the assistance of an informer, the FBI was able to record some of the meetings!

34. 34 Lysine Video Clips Tape Segment OneTape Segment One: January 18, 1995 Cartel Meeting in Atlanta, Georgia – The Lysine Cartel Members Show Disdain For Customers And Antitrust Enforcement Tape Segment TwoTape Segment Two: March 10, 1994 Cartel Meeting In Maui, Hawaii – Cartel members Use Trade Association As A Cover For Conspiracy Meetings

35. 35 Detecting Allocation Schemes

36. 36 What are “Allocation Schemes” Any agreement not to compete for specific: *Territories *Customers *Products

37. 37 Dust Control Case Pre-conspiracyConspiracy Wyoming Prior to agreement, A&B competed for work in both states. After agreement, each limited quotes to customers in allocated territory. Wyoming Colorado Co. A Co. B

38. 38 Commercial Garbage Cases Existing Customers New Customers Company A Company B Company C Company either refused to quote or quoted high drop-box price. Company was servicing customers in same area at lower prices.

39. 39 Sources of Antitrust Cases  Employees Current or former  Customers/Purchasing Agents Suspicious patterns/incriminating remarks  Competitors Invited into conspiracy  Corporate Amnesty Program

40. 40 Fraud Obstruction Other Criminal Violations

41. 41 Mail & Wire Fraud A CBD Customer

42. 42 False Statement ABCD Customer “I did not discuss anything related to bidding on this project with any other potential bidder.”

43. 43 Suspicious Bid Patterns  The same suppliers, with similar capabilities, submit bids and each company seems to take a turn being the successful bidder (bid rotation).  The same company always wins a particular procurement and there are other companies with similar capabilities, but either don’t bid or consistently submit higher bids (bid suppression).  Some bids are much higher than published price lists, previous bids by the same firms or engineering cost estimates.

44. 44 Suspicious Bid Patterns  Fewer than normal competitors submit bids and there is no economic explanation for the reduction in competitors, i.e. full workload, bankruptcy, etc.  A company appears to be bidding substantially higher on some bids than on other bids; with no apparent cost differences to account for the difference.  A successful bidder subcontracts work to competitors that submitted unsuccessful bids on the same project.  A company withdraws its successful bid and subsequently is subcontracted work by the new winning contractor.

45. 45 Possible Price-Fixing Patterns  Identical prices when: Prices stay identical for long periods of time In the past, prices were consistently different Price increases do not appear to be supported by increased costs.  Prices are increased simultaneously and increased, either the same amount, or the same percentage, without any of the vendors involved giving prior notice to customers.

46. 46 Possible Price-Fixing Patterns  Discounts are eliminated, especially in a market where discounts historically were given.  Vendors charge the same prices to customers located locally as to those for the same goods that must be shipped long distances and freight charges are not added on. No economic explanation for similarity in such prices.  Vendors are charging higher prices to local customers than to distant customers. No economic explanation for those price differences.

47. 47 Allocation Scheme Patterns  Companies that have consistently sold in the territory (or to a customer) suddenly stop selling in that territory (to that customer) and there is no economic explanation for doing so.  Company that consistently competed on price, begins quoting unreasonably high prices, or refuses to quote a price and/or refers customer to that company’s competitor.

48. 48 Conduct That Indicates Possible Collusion  Indications that one competitor may have prepared bid or pricing documents for other competitors: Identical calculation, syntax or spelling errors Identical handwriting, typeface or stationery in the bid proposals or price announcements submitted by competing vendors Identical postmarks, return addresses, fax telephone numbers or e-mail addresses – for electronic bids, also consider reviewing the metadata (hidden data)

49. 49 Conduct That Indicates Possible Collusion  Bid or price documents contain white-outs or other notations indicating last minute price changes.  A bidder requests a bid package for himself and a competitor or submits both his and another’s bids.  A company submits a bid when it is incapable of successfully performing the contract. This is likely a complementary bid.  A company brings multiple bids to a bid opening and submits its bid only after determining (or trying to determine) who else is bidding.

50. 50

51. 51 Metadata Can Be Revealing:

52. 52 Suspicious Statements That Indicate Possible Collusion  Any reference to industry-wide or association price schedules.  Advance (non-public) knowledge of competitor’s pricing.  Statement that a particular customer, territory or contract “belongs” to a certain vendor: “It was our turn to win.” “We were supposed to be the low bidder.”  Statements that a bid was a “courtesy,” “complementary,” “token,” or “cover” bid.

53. 53 Suspicious Statements That Indicate Possible Collusion  Use of the word “we” with reference to the industry: we decided to raise prices, we decided company X would be the low bidder.  Statements related to a cessation of price competition: “The price war is over, prices will go up.”  Any statement indicating vendors have discussed prices among themselves or even that they have had non-public meetings or communications.

54. 54 What You Can Do To Discourage and Detect Collusion  Expand bidders list – solicit as many reliable sources as economically possible and keep track of possible bidders who express interest in the project.  Require the submission of sealed bids to be delivered by a specified time and to a specified location and date and time stamp the bids when they are received.  Set the public bid opening at least one day after specified due date.  Require a certification of independent price determination to be submitted with all bids. Avoid abstract words such as “competitor,” “collude,” or “sham” in certification.

55. 55 What You Can Do To Discourage and Detect Collusion  Retain all bids, envelopes, facsimile transmittal sheets or e- mail transmittal messages, that the bids or quotes were in or which accompanied the bids.  Ensure that all purchasing department employees are familiar with the indicators of bid rigging, price fixing and market allocation.  If the prices or bids submitted don’t make sense, press your vendors to explain and justify their prices.  Become familiar with the market in which you make your purchases.

56. 56  www.usdoj.gov/atr/public/criminal/ economic_recovery.htm USDOJ Antitrust Division ARRA Initiative Website

57. Questions? Lara M. Kroop Chris Wheeler USDOJ, Antitrust Division (415) 436-6660 Lara.Kroop@usdoj.gov Christina.Wheeler@usdoj.gov