Feds face a steady stream of pricing conspiracies despite attempts to use the real drama behind The Informant! to shape corporate behavior
With their furtive meetings, coded communication, and globe-spanning criminal conduct, price-fixing schemes are sometimes described by journalists as having "all the makings of a Hollywood thriller." Even when the price that's being fixed is for an unsexy product that's invisible to consumers. In fact, one such scheme that unfolded in the 1990s involving grain-processing giant Archer Daniels Midland (ADM) did capture the attention of movie makers. Director Steven Soderbergh bases his latest film, The Informant!, on the ADM story. Starring Matt Damon, it's likely now showing at a multiplex near you.
Long before Damon grew his mustache for the role of ADM executive-turned-whistleblower Mark Whitacre (aka "the informant"), a much different and more selective audience had been treated to footage showing how ADM conspired at meetings with its competitors to rig the market for lysine, a livestock-feed additive that racked up worldwide sales of $600 million a year in the '90s. The real Whitacre had teamed up with the FBI to secretly tape hours of those meetings. Since ADM pleaded guilty to price fixing in 1996, lawyers have frequently used those tapes (available to the public upon request to the U.S. Justice Dept.) to train corporate clients on the legal consequences of price fixing, which can be severe. ADM paid $100 million in fines, and two top executives ended up in prison.
(The FBI eventually discovered that, even as Whitacre was ratting out ADM, he was embezzling $9 million from the company. That landed him in prison for 8 years. Released in 2006, he is now chief operating officer of Cypress Systems, a Fresno (Calif.) company that markets nutritional supplements.)
From Paraffin to Computer Chips
But for all the splashy headlines, stiff sanctions, and caught-on-tape teaching moments generated by the ADM case, price fixing appears to be as pervasive as ever. "We played those videos in antitrust compliance programs for years," says Kent A. Gardiner, a onetime government antitrust prosecutor who is now chairman of the law firm Crowell & Moring in Washington, D.C. "I guess it didn't entirely work."
Recent cases involve everything from paraffin wax to computer chips to air cargo fees. Just this month, the Web site for the European Commission trumpeted an investigation into cement companies, and in August, Epson Imaging Devices (6724.T) pleaded guilty to fixing prices of liquid-crystal displays used in Motorola (MOT) Razr cell phones. "New ones keep popping up all the time," says John M. Connor, a professor at Purdue University who has done extensive research on cartels.
In a June 2006 speech, Thomas O. Barnett, then Assistant Attorney General for Antitrust, called cartels "the supreme evil of antitrust." During Barnett's five years at the Justice Dept.—he returned in January to private practice at Covington & Burling in Washington—his department meted out $1.8 billion in fines against 50 corporations and threw dozens of executives into prison.
From Drama to Comedy
Still, Barnett said in his speech, price fixing persists "perhaps because the anticompetitive [profits] available through cartel behavior can be so large." Connor says cartels typically push prices up at least 20%, and sometimes much more. The European Commission has estimated that cartels impose excess costs of €4 billion to €5 billion annually on companies in Europe alone, and from 2004 to July 2009 the commission imposed €10 billion in penalties.
Price fixing, in short, imposes serious costs and, if antitrust cops catch on, can result in serious penalties. So how is it that the makers of The Informant! decided the film should be a comedy?
Well, if you take a look at some of the actual surveillance video of ADM executives meeting with their competitors, you'll see how even they found what they were doing to be pretty funny. (Rather than sending away for the tapes from the Justice Dept., you can view one from January 1995, courtesy of Marginal Revolution, a blog run by a pair of economics professors at George Mason University.)
Truth Is Stranger Than Fiction
Staggering their arrival at that 1995 meeting to avoid raising suspicion, the executives joke that some of the empty seats in the Atlanta hotel conference room are for the FBI or for poultry processor Tyson Foods (TSN), one of their largest customers—and victims. All this is recorded by a camera hidden in the room. But Whitacre, the FBI mole, was initially missing a second means of surveillance that he was supposed to have. At the end of this tape you can hear a knock at the door and one of the executives in the room says "FTC," joking that it is someone from the Federal Trade Commission, which, like the Justice Department, enforces the anticompetition law. In fact, according to Justice antitrust prosecutor Scott D. Hammond, the person at the door was an FBI agent disguised as a hotel employee. He was there to hand Whitacre a briefcase with a hidden audio recorder that he had forgotten in the hotel restaurant.
Hollywood couldn't make this stuff up.