Editor’s note: This article is the second in a two-part series. Part 1 can be found at http://goo.gl/ibTCE.
Criminal prosecutions took to the superhighway during the 1980s with road construction bid-rigging indictments. Road contractors nationwide had been regularly rigging bids to state highway departments. The schemes were similar: Contractors met in state capitals such as Harrisburg the night before bids were due; agreements were reached on who the winning bidder would be, what the losing bidders would submit, and what the losers would get in return — usually the “right” to rig future jobs.
The first road construction case was not brought by the Philadelphia Field Office (PFO) of the Antitrust Division, U.S. Department of Justice, but one conspiracy led to another, and all the Antitrust Division offices eventually brought cases. The conspiracies were generally long-standing, some originating shortly after World War II. Typically, when a road construction company president was asked how a conspiracy got started, he would reply, “I don’t know — it was going on before my time.” The PFO did its part in sweeping the roads clean, filing, in total, 46 criminal cases, most with corporate and individual defendants.
The sheer number of road cases provided PFO attorneys plenty of opportunities to hone their skills. But, these cases were also important in other respects. The road cases were the first investigations where the PFO worked extensively with the FBI and federal agents from other agencies, such as the Department of Transportation. These partnerships played key roles in many later Antitrust Division cases. Search warrants and consensual monitoring became more common and were used whenever circumstances warranted. Also during this time, the PFO began to add fraud charges to Sherman Act indictments. Defendants were typically respectable businessmen who often weren’t sentenced to prison by judges who still saw antitrust violations as victimless crimes. Prosecutors responded by adding fraud charges to many indictments based upon mailings of rigged bids or payments on rigged contracts. PFO prosecutors emphasized that bid rigging was nothing more than theft by “well-dressed thieves.” This emphasis on money fraudulently stolen from taxpayers helped propel the steady climb to today’s multiyear prison sentences.
In the 1980s, the PFO uncovered another widespread bid-rigging scheme. Like the road building industry, the auction business was plagued by widespread, long-standing collusion. Auction collusion had even developed its own language. Dealers formed “rings” before every auction (of at least antiques, commercial equipment, jewelry and real estate). One ring member was selected to win and the others agreed not to bid at the public auction. This collusion depressed prices paid to the seller. Immediately after the public auction, a second private auction, the “knockout,” was held. In private, the ring members competed and prices typically went much higher. The illegal gain was divided among the members of the ring by the “bookkeeper” in payoffs known as “splits.”
By the time of the auction cases, the PFO was commonly working with the FBI and using search warrants. During one search, a “bookkeeper” asked if he could make a copy of his ledger before the agent seized it. He took the ledger over to his copier, turned his back and started erasing furiously. His ledger then included an obstruction of justice conviction and six months in prison. Many auction cases were brought, including the largest indictment in PFO history, United States v. Seville Industrial Machinery, 696 F. Supp. 986 (D.NJ. 1988). In this case, 19 corporations and 17 individuals were charged with bid rigging and conspiracy to defraud the United States at a bankruptcy sale of used commercial equipment. Following the voluntary dismissal of one individual, all other defendants were convicted or pled guilty. Ironically, the defendants raised “selective prosecution” as a defense to this massive indictment. U.S. District Judge H. Lee Sarokin of the District of New Jersey rejected this argument, but noted the widespread corruption in the auction industry: “If the evidence presented in this case is indicative of the ethics of this or any segment of the business community, then we should weep for its existence and fear for its future.”
One of the most interesting cases in PFO history involved a scheme to rig bids for medical supplies purchased by the Defense Department at the Defense Personnel Support Center in South Philadelphia. An astute buyer for the military became suspicious over certain bidding patterns for contracts she handled. Her tip to the PFO led to the exposure of a long-running bid-rigging scheme. The first defendant to be charged pled guilty, but a co-conspirator elected to go to trial. The indictment was a multicount indictment charging both bid rigging and fraud. After the jury convicted the defendant, Colin Offenhartz, he was sentenced to five years in prison — a record-breaking sentence at the time. Another defendant was an Israeli national who was indicted under seal. This defendant, Amir Porat, was arrested at the Canadian border as he entered the United States. He was a likeable and charismatic character who acted as his own defense lawyer. Part of the government’s case was a $200,000 payoff check that Porat had allegedly deposited in his Swiss bank account. (How the PFO obtained records from a Swiss bank is a story that can’t be told here.) Porat claimed that anyone could have opened a Swiss bank account in his name, and to prove his point, he opened an account in the name of the co-lead prosecutor, Antonia Hill. Unfortunately for Hill, there was no money in the account, but fortunately for her, Porat was convicted. While the case was on appeal, the Supreme Court overruled established precedent that materiality was an issue for the court, as had been the case in this trial, and held that materiality of an allegedly false statement was an issue for the jury. The conviction was vacated. The PFO and the defendant had had enough of each other and a non-jail plea agreement was reached, avoiding a retrial.
A truly special moment for the PFO came in 1998 when the Historical Society of the U.S. District Court for the Eastern District of Pennsylvania hosted “A Celebration of 50 Years of Antitrust Enforcement” by the PFO. Distinguished speakers from the bench of the Eastern District of Pennsylvania, as well as attorneys from the PFO and private bar, reminisced over the past 50 years of historic antitrust developments and fond personal relationships.
The International Years
At the time of the Historical Society celebration, the PFO was just embarking on its final chapter. The “international years” began in earnest for the Antitrust Division in the 1990s. The PFO’s first prosecution of an international cartel was in 1996 in a case against Mexican companies that imported tampico fibers. These fibers are used in many household brushes and brooms. This was a rare case where the defendants were charged with both a horizontal price-fixing conspiracy in which they fixed tampico prices, and also a vertical price-fixing conspiracy in which they fixed the prices charged by distributors in the United States. An interesting note in the case was the discovery during a search warrant of a note written during the investigation from an executive of one tampico company to an executive at the competing tampico company asking him to consult with the former’s lawyer, “but talk fast; he charges $500 an hour.”
International cases became a focus for the Antitrust Division after the successful prosecution of senior executives of the Archer Daniels Midland Co. for a worldwide conspiracy to fix the price of lysine. The case drew international attention because of the high-profile defendants and because the government had extensive videotape of the actual price-fixing meetings. Shortly after the ADM case, the PFO uncovered the international graphite electrodes conspiracy. Graphite electrodes are a key and expensive component used in blast furnaces for steel-making. The investigation started after a graphite electrode salesperson made a telling remark to a steel buyer. The graphite electrode cartel was extremely successful. In an unusual gathering, conspirators from around the world met for a celebratory send-off when one of the founding cartel members retired. The investigation went on for several years and netted over $437 million in fines, as well as seven corporate and three individual convictions.
The highlight and conclusion of the graphite electrodes investigation was the first trial of an international defendant: Mitsubishi Corp. It was a high-profile case, and one of the first where the defendant was charged as an aider and abettor. Of course, in 65 years, PFO lawyers sometimes made mistakes, and this trial featured a whopper. During the investigation, one of the cooperating Japanese executives was in the United States to be interviewed. He asked if he could have his picture taken with the prosecutors. The prosecutors, being polite (and naïve), obliged. The defense had a copy of the picture that it blew up into billboard size for the jury and remarked, “When you rob a bank, you get your picture plastered in the post office. When you join an international price-fixing cartel, you get your picture taken with the prosecutors!” Fortunately, the jury believed that the prosecutors were inadvisably in a photo, but not in bed, with the witness. A verdict of guilty was returned. The court fined the company $134 million and the trial team received the Department of Justice’s highest award — the John Marshall Award — for a truly outstanding performance in litigation.
The PFO had many firsts and at least one high-profile first did not work out well for the government. During an investigation of an international ocean-shipping cartel, the Antitrust Division gave corporate leniency (immunity) to one company and its executives in return for their cooperation in the investigation. The Antitrust Division, however, subsequently revoked the leniency, after the PFO investigation led to the belief that the company and its executives had not been honest in their disclosure and, therefore, did not qualify for leniency. This led to years of heated litigation on many issues. The leniency company filed a motion to enjoin the government from seeking an indictment of the company. This motion was granted by the district court, but later overturned by the U.S. Court of Appeals for the Third Circuit in United States v. Stolt-Nielsen, 442 F. 3d 177 (3d Cir. 2006), on the grounds that separation of powers required that a defense to an indictment must be raised post-indictment. Ultimately, the company and two of its executives were indicted, but the defendants again raised the leniency agreement as a bar to prosecution. The defendants prevailed and the indictment was dismissed. U.S. District Judge Bruce Kauffman of the Eastern District of Pennsylvania ruled in United States v. Stolt-Nielsen, 524 F. Supp. 2d 609 (E.D. Pa. 2007), that the government failed to prove that the company breached its agreement, and, therefore, the immunity provided by the leniency contract could not be revoked.
The last major international prosecution by the PFO ended on a more successful note. The graphite electrodes investigation had led to numerous spinoffs, and one was an indictment of Ian Norris, the former chief executive officer of Morgan Crucible, a U.K. company that produced graphite and carbon products. Norris was indicted on four counts — one of price-fixing and three of obstruction of justice. In a final “first” for the office, after a seven-year battle, the U.K. government permitted Norris’ extradition to face the obstruction (but not price-fixing) charges. Norris was convicted by a jury in a trial before U.S. District Judge Eduardo C. Robreno of the Eastern District of Pennsylvania. Robreno had been an attorney in the PFO in the early 1980s. Norris was sentenced to 18 months in prison. He appealed his conviction all the way to the U.S. Supreme Court, but the conviction was upheld.
With the stakes so high, cross-examination of witnesses was sometimes very tense (and sometimes humorous), as it was when one Dutch witness in the Norris trial was being vigorously cross-examined about a “dawn raid” by the European authorities. Trying to be careful to say nothing inaccurate, the witness replied: “To be completely truthful, counsel, they shouldn’t be called dawn raids. We don’t begin anything in Europe before 9 a.m.”
A Great Run
Fittingly, the very last prosecution brought by the PFO was a record-breaker for the office. The purchasing manager at a chain of nursing homes who rigged bids in exchange for kickbacks was sentenced to 63 months in prison.
Every staff member who worked in the PFO understood that it was a privilege to work in the Antitrust Division and represent the United States. And, it was exciting to go up against the finest lawyers — from Philadelphia, the nation, and, even sometimes, from around the globe. The final treat was practicing in the Third Circuit where the bench has an appreciation of the history and importance of the Sherman Act. Third Circuit Judge Dolores Sloviter expressed this sentiment when she wrote in LePage’s v. 3M, 324 F. 3d 141, 169 (3d Cir. 2003), that the antitrust laws were “the equivalent in our economic sphere of the guarantees of free and unhampered elections in the political sphere. Just as democracy can thrive only in a free political system unhindered by outside forces, so also can market capitalism survive only if those with market power are kept in check.”
The office closed in January after 65 years of doing its part to shape the history of the Sherman Act. It was a great run. •
Robert E. Connolly is of counsel with DLA Piper in its Philadelphia office, where he concentrates his practice on antitrust and unfair competition matters. He was an attorney with the Philadelphia Field Office of the U.S. Department of Justice’s Antitrust Division from 1980 and chief from 1994 until its closing in January 2013. He can be reached at 215-656-3318 or firstname.lastname@example.org.