Fixing Prices and Rigging Bids

Fraud examiners and auditors should familiarize themselves with the types of cases that can violate U.S. antitrust regulations. 

For several years, John, the purchasing manager at Buyer Inc., has bought different types sprockets from three or four companies for varying prices. John honestly obtained the best deals by aggressively shopping around prices he received; sprocket sales reps often would lower prices to meet or beat other companies' offers.

John recently received notices of price increases from the major sprocket sellers. Those companies raise prices by comparable amounts at the same time so that all sprockets now cost about the same, give or take a dollar or two.

John calls the usual list of sprocket companies for better prices but he's told that the prices are firm and straight off the price sheet.

Meanwhile, inside one of the sprocket companies - Rocket Sprocket Corp. - sales reps have been complaining. They like the higher prices but are concerned that they can no longer offer discounts to their customers to get business. Since they work on commissions, they worry about losing money if they can't offer lower prices - especially to certain customers.

Rocket Sprocket's sales manager has scolded the maverick sales reps for offering discounts and told them to adhere to the price list. The sales manager revealed that someone from a competing sprocket firm - Lockit Sprocket - told her that Lockit's sales reps weren't following the price sheets. Apparently, Buyer Inc. had sent a copy of a Lockit sales rep's bids to the person at Lockit and then faxed it to the Rocket Corp. sales manager as proof of the lower price.

Rumors have been circulating that the Rocket Corp. sales manager is talking on the telephone to her counterparts at other sprocket companies, and sending and receiving faxes of pricing information.
Rocket Corp.'s fraud examiner interviews employees in the sales department and confirms the rumors. He then reviews the phone messages, and the telephone and expense records and finds that the sales manager is communicating and faxing information among competitors shortly before prices increases are announced. 

This fictitious case represents a common price-fixing problem, that along with bid rigging and other offenses, is prohibited by United States antitrust laws. Fraud examiners and auditors should familiarize themselves with types of cases that can violate U.S. antitrust regulations.

Some people believe that an antitrust violation can only be identified after a sophisticated economic analysis involving expert testimony and complex predictions on the likely effect of an agreement or business practice on competition. This isn't true. Many antitrust violations - probably the majority of those that occur - are straightforward, covert, intentional conspiracies among competitors to harm consumers - both government and private alike - by fixing prices or rigging bids. The anti-competitive effects of such conspiracies are considered by courts to be per se unreasonable and harmful, and proof of such an agreement itself establishes a criminal antitrust violation.

Antitrust offenses can have devastating economic effects. They rob purchasers, contribute to inflation, destroy public confidence in the economy, and undermine our system of free enterprise. Vigorous prosecution of price fixing and bid rigging is the first priority of the Antitrust Division of the United States Department of Justice, for which I work.

The U.S. antitrust laws were enacted more than 100 years ago to protect consumers and America's competitive economy. They declare unlawful agreements between two or more persons who unreasonably restrain competition, as well as proscribing conduct that constitutes monopolization or attempted monopolization.

The principal federal antitrust law is the Sherman Antitrust Act. Section 1 of the Sherman Act (15 U.S.C.§1) prohibits any agreement among competitors, which unreasonably limits competition. The operative language of Section 1 reads as follows:

"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…"

The Sherman Act itself declares violations to be felonies punishable by up to three years imprisonment or a fine of up to $350,000 (or both) for an individual, and a fine of up to $10 million for corporations. Pursuant to 18 U.S.C.§3571(d), an alternative fine can be determined by using twice the pecuniary loss or gain resulting from a violation.
Many recent fines have far exceeded the $10 million statutory maximum using the alternative fine calculation, such as the recent $500 million fine paid by a Swiss pharmaceutical giant, F. Hoffman - La Roche LTD, for price fixing and bid rigging in the vitamin industry. Consequently, there's current discussion both within the division and American Bar Association to raise the Sherman Act maximum fine amount for corporations to $100 million.

Enforcement of the Sherman Act is the responsibility of the Antitrust Division, which maintains offices in Washington, D.C., and seven other cities throughout the U.S.

I am based out of the Dallas field office, which is charged with investigating violations in Texas and the four neighboring states, Louisiana, Arkansas, Oklahoma, and New Mexico. Although the Dallas office is assigned a region of the Southwest U.S., it has nationwide and international investigations based in our jurisdiction; the most prominent example is the investigation and prosecution in the worldwide vitamin cartel. The other field offices are located in Atlanta, Chicago, Cleveland, Philadelphia, New York City, and San Francisco. In fiscal year 1999, the Antitrust Division recovered nearly $1 billion in criminal fines.

FBI agents are detailed to some of the field offices, including Dallas, to assist with investigations. At other times, our office works with various inspectors general agents in various parts of the federal government including the Department of Agriculture, and the Veterans' Administration. Our attorneys are heavily involved in the cases from the investigative and grand jury stages through the trial and sentencing phases, conducting witness interviews, reviewing documents obtained through search warrants and subpoenas, examining witnesses before the grand jury, and trying the cases.

I've been involved in investigations of bid rigging in the wholesale groceries industry; and price-fixing in the wholesale plumbing supplies industry, metal building insulation suppliers, and transportation of drilling rigs and oversized cargo by heavy-lift, semi-submersible ocean carriers.
The heavy-lift carrier investigation resulted in $16 million in criminal fines, $4 million in damages paid to the U.S. Navy by a Belgian company, and the convictions of two top foreign executives. This represents one of the most significant recent developments in the division - the current and continuing trend of investigating international price fixing and market allocation cartels that harm U.S. consumers. (In addition to prosecuting antitrust offenses, we also investigate and prosecute Title 18 offenses such as mail and wire fraud, false statements, perjury, and obstruction of justice.)

Price-Fixing

Price fixing is an agreement among competitors to raise, fix, or otherwise maintain the price at which their products or services are sold. Competitors can agree to adhere to published list prices but it's not necessary, however, that they agree to charge exactly the same price for a given product. An agreement to raise prices by a certain increment or to maintain a certain profit margin would also violate the law. Other examples of price-fixing agreements include:

• establishing or adhering to uniform price discounts;
• eliminating discounts;
• agreeing to minimum/floor pricing;
• adopting a standard formula for the computation of selling prices;
• not reducing prices without prior notification to others' and
• fixing credit terms.

Usually, price-fixing conspiracies include mechanisms for policing or enforcing adherence to the prices fixed. When one of the competitors "cheats" on the arrangement by lowering a price, the others may respond by calling the competitor to get them back in line with the agreement.

In the early 1990s, five of the wholesale plumbing suppliers in the greater Houston metropolitan area agreed to raise prices on a variety of their biggest selling products. With the assistance of the FBI in Houston, a cooperating witness agreed to tape record one of the conspiracy meetings at a restaurant. A grand jury investigation resulted in multiple corporate and individual felony convictions.

Bid Rigging

Bid rigging is the way conspiring competitors effectively raise prices when purchasers - often federal, state, or local governments - acquire goods or services by soliciting competing bids or quotes. Essentially, competitors agree in advance that one bid of many will be the winning one on a contract that a public or private entity wants to let through competitive bidding.

Bid rigging takes many forms, but bid-rigging conspiracies generally fall into one or more of the following categories:

• bid suppression: agreeing to refrain from bidding;
• complimentary bidding: agreeing to submit a similar but higher bid; and
• bid rotation: agreeing to take turns at being bid winner.

Hypothetical Bid Rigging Case

Contractor Inc. has won a major government contract to build a large project. The project requires many specialized parts and services, and Contractor Inc.'s buyer is in charge of obtaining bids for subcontracts for the various parts and services.

An audit of the awarded subcontracts reveals that on a series of bids for a particular product, 90 percent of the total dollar amount was awarded to three vendors. Closer study shows that these three vendors were awarded more than 75 percent of the subcontracts for fabrication and assembly of the product. In addition, there was a wide percentage difference - from 20 percent to 150 percent - in the quotes between the winning vendor and losing vendor bids. Finally, the auditor finds that each of the companies won the subcontract in turn.

With the above indicators of a possible bid rotation scheme, auditors review all submitted bids and contracts for each of the vendors (not only the ones on this particular product) to see if the pattern existed elsewhere. A review indicates that the vendors in question were much less successful in getting contracts in which other vendors submitted bids. Furthermore, a pricing analysis showed a lower percentage difference between the winning bidder and the losers than on the contracts in question. Before interviewing the buyers at Contractor Inc., the auditors consult with in-house legal staff about what to do.

Market Allocation

Market allocation schemes are agreements among competitors to divide the market among themselves. For example, competing firms may agree to allocate certain customers or territories so that only one competitor will be allowed to sell, buy from, or bid on contracts let by those customers or in that territory.

Finding Antitrust Culprits

In a free-market, capitalistic nation, companies will always try to circumvent federal antitrust regulations. Fraud examiners and auditors should know how to spot the basic price fixing and bid rigging schemes. The economies of not only corporations but also the United States depend on anti-fraud professionals to keep big business honest.

Mark R. Rosman, J.D., is a trial attorney with the Department of Justice, Antitrust Division, in the Dallas, Texas, Field Office.