ARCHER DANIELS MIDLAND: PRICE-FIXER TO THE WORLD (Fourth Edition) by John M. Connor Staff Paper 00-11 December 2000
Dept. of Agricultural Economics Purdue University
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ARCHER DANIELS MIDLAND: PRICE FIXER TO THE WORLD by John M. Connor Dept. of Agricultural Economics, Purdue University West Lafayette, Indiana 47907-1145
[email protected] Staff Paper # 00-11 December 2000
Abstract Both market structure and corporate practices of Archer Daniels Midland fostered the implementation of the largest price-fixing conspiracies seen in modern times. The overcharges imposed on U.S. buyers of lysine and citric acid during 1994-1995 by ADM and its co-conspirators amounted to at least $250 million, and the total amount of public penalties, private damages, and legal costs exceeds $666 million. Perpetrators of price-fixing now face monetary exposures that are five times the amount of the harm caused to buyers. These events have spurred renewed attention by U.S. antitrust authorities in prosecuting international cartels.
Keywords:
Price fixing, lysine, citric acid, sweeteners, wet-corn milling, starch industry, Archer Daniels Midland, market structure, monopoly overcharge, antitrust law, legal damages, U.S. Department of Justice.
Copyright 8 by John M. Connor. All right reserved. Readers may make verbatim copies of this document for noncommercial purposes by any means, provided that this copyright notice appears on all such copies. The views expressed in this paper are the author=s own; they do not necessarily correspond to the views of any party to or counsel involved in the law cases described herein.
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Outline Introduction ................................................................................................................................... 1 The Markets................................................................................................................................... 3 Lysine ................................................................................................................................ 3 Citric Acid ......................................................................................................................... 5 Corn Sweeteners................................................................................................................ 6 Bulk Vitamins ................................................................................................................... 8 Profile of Archer Daniels Midland Co. ....................................................................................... 10 Economic Conditions Facilitating Price-Fixing.......................................................................... 12 Price-Fixing: Chronology & Mechanics ..................................................................................... 17 The Lysine Conspiracy.................................................................................................... 17 The U.S. Lysine Investigation ......................................................................................... 41 Citric Acid ....................................................................................................................... 46 Corn Sweeteners.............................................................................................................. 52 Vitamins .......................................................................................................................... 52 Other Products................................................................................................................. 57 Measuring the Injuries................................................................................................................. 59 Economic Theory and the Law........................................................................................ 60 Empirical Estimation Issues ............................................................................................ 64 Public Penalties and Private Awards............................................................................... 67 Conclusions ................................................................................................................................. 74 References ................................................................................................................................... 83
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ARCHER DANIELS MIDLAND: PRICE-FIXER TO THE WORLD by John M. Connor Introduction The purpose of this paper is to describe the operation of several large price-fixing conspiracies involving wet-corn milling products and to analyze a number of legal and economic issues raised by these events. The paper begins with a brief description of the markets for and market structures of lysine, citric acid, corn sweeteners, and vitamins. A short profile of Archer Daniels Midland (ADM) indicates a company with a leadership and corporate culture well suited to reckless collusive behavior and well positioned in markets that had nearly all the features necessary to carry out such a scheme. The next section chronicles the operation of the three conspiracies as far as that is possible from the public records. The final section of this paper examines the legal and economic issues surrounding the proper estimation of antitrust damages. The importance of these topics is demonstrated by the paper=s six major conclusions: C
ADM was at the center of at least two international price-fixing conspiracies involving wet-corn-milling products, circa 1992-1995: lysine, citric acid, and allegedly corn sweeteners. Buyers in the U.S. were overcharged $220 to $345 million for the first two products alone.
C
Collusion began in the market for bulk vitamins in late 1999 and spread through the Hoffmann-La Roche and ADM companies to citric acid and lysine in 1991 and 1992, respectively. By the time that collusion ceased in early 1999, nearly $40 billion in global commerce had been affected.
C
In terms of the monetary damages paid, these are by far the largest price-fixes in antitrust history. The huge fines paid by ADM and its co-conspirators were unprecedented; future fines and damages could reach more than five times the overcharges generated by a conspiracy.
C
The events have spurred the Department of Justice (DOJ) into investigating more than 30 international commodity cartels for criminal price fixing. Since the ADM cases, four more cartels have been uncovered and prosecuted.
C
ADM management practices have been called into question; ADM=s board of directors changed over night; the AAndreas= Era@ at ADM may be over; and three ADM managers were found guilty of criminal price-fixing.
C
These events demonstrate that import competition is no longer sufficient condition for good domestic competition and that companies with vastly different corporate cultures and globally dispersed operations can easily learn to conspire. The extraterritorial reach of the antitrust laws is more needed than ever.
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Why do companies conspire to raise prices, divide markets, or restrain production? The answer is that all such actions boost profits to levels significantly higher than those that would be generated in the absence of collusive behavior. The impact on profits from even a modest increase in price (assuming costs remain the same) is quite large. Aristotle, perhaps the world=s first economic thinker, recognized that small changes in price or output levels would have large impacts on corporate income.1 For example, if a conspiracy causes prices to rise a modest ten percent, the percentage increase in net income will be enormously larger. The average pre-tax profits of semiprocessed food ingredients have historically been about 3 percent of sales. In the organic chemicals industry the comparable return was 6 percent of sales. Thus, a 10 percent price elevation translates into an increase of 167 percent to 333 percent increase in average profits for firms in those industries. Why individuals conspire to fix prices, often in the face of legal or corporate proscriptions, is more complicated. Senior managers may receive bonuses that depend on their profit-center=s financial performance, so personal greed may well play a role. More commonly, price fixers are trying to fix looming financial problems. The prospects of slow market growth, declining market share, or squeezed profits can be magically reversed by an effective price-fixing arrangement. Perhaps the sheer thrill of participating in a secret, dangerous activity motivates some. Merely moving markets, a power allegedly reserved for the Chairman of the Federal Reserve System and few other mortals, may be reason enough. The various conspiracies in food-and-feed ingredients discovered as of late 2000 account for a substantial share of sales of all such ingredients. The total size of these varied markets is not easy to identify, but let us take a stab at it. The food ingredients component corresponds roughly to what are called semi-processed foodstuffs or producer goods made by the food-manufacturing sector. Producer goods are manufactured and sold as inputs for further processing, and these goods accounted for 27 percent of total U.S. domestic supply of manufactured foods (Connor and Schieck 1997:61). In 1995, this segment of food-manufacturing shipments amounted to about $116 billion. Calculating the value of the relevant Afeed ingredients@ is more difficult. It is misleading to count the total value of all prepared feeds because the greatest proportion is made up of rough grains and soybean meal. The rough grains (corn, milo, sorghum, and the like) are not manufactured in any sense of the term, and their value cannot be calculated with precision because many feed grains are stored on farms, fed to animals, and never sold as grains. The most relevant concept of feed ingredients are oil seed meals, by-products of vegetable oil production, and the constituents of the Aconcentrates@ or Apre-mixes@ added to the grain-meal mix. In 1995, domestic sales of soybean and cottonseed meal amounted to $8 billion. The manufacturers= value of shipments of feed-grade vitamins, minerals, proteins, amino acids, and pharmaceuticals was estimated by BCC, Inc. to be $6.0 billion in the U.S. market. Thus, the total U.S. food-and-feed ingredients markets had sales of $128 billion in 1995. 1
Two thousand five hundred years ago, Aristotle wrote in his Politics about a Sicilian iron merchant in Sicily who cornered the supply of iron and as a result doubled his profits (Barker 1962:31).
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These are large industries in the United States, and very likely amount to somewhere between $400 and $500 billion globally. These products are sold to tens of thousands of industrial customers. The large size of these markets, their oligopolistic structures, and the dispersed nature of demand make them tempting targets for would-be price fixers. The Markets This section describes briefly the markets for four food-and-feed ingredients: lysine, citric acid, high fructose corn syrup, and bulk vitamins. In each case, the nature and uses for the product are outlined. Then, the evolution, major producers, and structure of the industry are sketched. Understanding the degree of seller sales concentration, product heterogeneity, technology of production, and the ease of entry into an industry is desirable because it is these structural characteristics that permit or encourage the formation and operation of cartels. The four industries highlighted in this paper fall into the category of homogeneous-product oligopolies with substantial barriers to entry for new suppliers. Except for some of the vitamins, these products are made with relatively high-tech biotechnologies that require large investments in R&D and production facilities. The buyers in these markets tend to be relatively small companies or large in number. Thus, there is a structural asymmetry between the two sides of these markets: a few powerful sellers facing a large number of competitive buyers in the food, feed, or pharmaceutical manufacturing industries. The four cartels in this paper are merely illustrative of a large number of global price-fixing conspiracies discovered and prosecuted in the late 1990s (Connor 2001). Other global cartels have been prosecuted in the markets for monosodium glutamate, sodium gluconate, sorbates, sodium erythorbate, maltol, and methionine. However, the four cartels examined herein are probably the best documented of the global food-and-feed-ingredient cartels of the 1990s. Lysine Lysine is an essential amino acid that stimulates growth and lean muscle development in hogs, poultry, and fish; a small portion of production is used for human nutrition (Appendix B). It has no substitutes, but soybean meal also contains lysine in small amounts. For hogs, lysine and corn are reported to be a perfect nutritional substitute for soybean meal: 100 lb. Meal = 97 lb. corn + 3 lb. Lysine. Some sources say poultry feeds need lysine and soymeal is not a substitute. Optimal feed efficiency ratios in 1990s were 3.5 to 3.8 lb. for hogs, 1.8 for broilers, and 2.7 for turkeys at usual slaughter weights. Significant declines have occurred since the mid 1980s, somewhat reducing the demand for lysine. Improved genetic types of hogs and poultry now can absorb about 3 lb. of lysine/ton of feed, but traditional breeds only 1-2 lbs./ton of feed. For hogs, 50% were Aimproved@ (high-lysine-absorbing) types in 1985 across the U.S., up to about 80% in 1995. Most poultry breeds in current use already absorb high-lysine feeds. Thus, with efficiency ratios declining and genetic substitution almost over, the prospects were for lysine growth slowing after late 1990s. Around 1956 a Japanese scientist doing cancer research accidentally discovered a bacterial fermentation process that converted dextrose into lysine (Connor 1998a). By the late 1950s, Ajinomoto was marketing pharmaceutical-grade lysine and by 1960 it was selling feed-grade lysine in Japan. Kyowa Hakko, using a slightly different technology, was neck-and-neck with Ajinomoto. Lysine exports from Japan began as early as 1970. By the 1980s, they were importing large quantities 3
of dextrose from ADM and other U.S. wet corn millers and exporting high-priced lysine back to the USA. In 1989, when ADM made its decision to build its first lysine plant in Decatur, Illinois, there were three significant producers of lysine in the world. The largest producer with about 50 percent of world sales was Ajinomoto of Japan; together with its joint-venture partner Orsan SA of France, Ajinomoto operated the largest U.S. lysine plant (12,000 metric tonnes capacity) in Eddyville, Iowa (Connor 1998a). The other Japanese firm, with about one-fifth of the world=s lysine market, was Kyowa Hakko; Kyowa=s U.S. subsidiary, BioKyowa, operated a smaller (7,500 tonnes) factory in Cape Giradeau, Missouri. The third big manufacturer was Miwon, a South Korean concern with one plant in Korea that made about 15 percent of the world=s lysine. In 1989, the U.S. imported almost 60 percent of its 40,000 tonnes of feed-grade lysine consumed in a year. Miwon was the major source of U.S. imports, with smaller portions of U.S. imports from Ajinomoto in Japan and a Kyowa plant in Mexico. Lysine prices of about $1.65 per pound made both small scale U.S. production and exports from Asia quite profitable. In response to the rapidly growing U.S. lysine market and perhaps in anticipation of ADM=s new plant, Ajinomoto and Kyowa scaled up their U.S. plants to 20,000 and 13,000 tonnes by 1991. However, ADM=s plant had a relatively small capacity when the first stage was completed in February 1991. Production accelerated quickly in 1991 (Appendix Table A2). By July 1991, ADM was operating its plant at about 20,000 tonnes per year; by December, it reached 45,000 tonnes, which was equal to total U.S. lysine consumption in 1991 (48,000 tonnes). ADM eventually exported well over half of its production to Europe, Asia, and Latin America. The Decatur plant was quickly expanded to 70,000 tonnes capacity in early 1992 and 113,000 tonnes in mid 1992, scales that ADM=s rivals thought to be impossible. By 1992, ADM=s single plant could make slightly more than one-third of the world=s lysine (Appendix Table A5). In 1990, global consumption of lysine had reached more than 90% of the industry=s ability to produce it. North American capacity doubled between 1988 and 1990, and ADM=s entry tripled it by the end of 1991 (Connor 1998). Combined with other plant expansions, ADM=s entry caused capacity utilization to drop to 87% at the end of 1990 and to a low 67% in 1991. Utilization rates remained in the 63% to 68% range during 1993-1995 (Appendix Table A7). ADM became the third U.S. manufacturer of lysine in February 1991 and quickly gained about 50 percent of the U.S. market. Real growth of U.S. lysine consumption in the 1990s was 11% p.a.; global growth was closer to 12% p.a. The U.S. market reached $330 million in 1995; the world market was about $600 million. Industry experts place ADM=s 1995 cost of production at below $0.85/lb.; a 1996 affidavit says the break-even point is $0.66/lb. Whitacre says that in 1992-1993, there were large losses when the price reached $0.60/lb., thus, a marginal cost of lysine production by ADM of $0.66/lb. to $0.85/lb. is not unreasonable when the Decatur plant was operating at optimal capacity. The Asian companies= plants probably operated at higher cost levels. (Costs of production are further discussed below). All sides writing about the U.S. lysine market during 1992-1995 agree that it has a highly concentrated oligopoly trading in a homogeneous product.2 During 1994, ADM supplied 40 percent 2
The pharmaceutical grade lysine sold over the counter in most drug stores is outside the scope of this report. Most lysine is sold in a 100%-active dry granulated form, but both ADM and 4
of the U.S. market, Ajinomoto 24 to 28 percent, Kyowa 20 to 22 percent, and Sewon Group 5 to 10 percent. The Herfindahl-Hirshman Index of concentration was between 2600 and 3000 in those years. In addition, technical barriers to entry for a fifth supplier were also quite high. Building a new plant would take two or three years and involve a large sum of sunken capital investment. There were many animal feeds manufacturers buying lysine; some dated estimates of regional concentration show four-firm concentration (CR4) was 60 to 70 percent, but national concentration was much lower. Imports accounted for 9 to 17 percent of the U.S. market in 1991-1995, but all imports came from the four Asian members of the price conspiracy. Details about trading conditions and buying methods used in the lysine market are not known, and there are no public or trade sources of transaction prices on a regular basis. Private treaty negotiations appear to be the major method of pricing. Most large buyers purchased under contracts that specified annual volumes and had 30-day price-protection clauses. The largest buyers got discounts of 2 or 3 cents per pound off of the list price, which was a delivered price. Most lysine was sold directly to large buyers from the manufacturers= sales offices. Brokers were used for some sales, particularly on the West Coast and abroad. Small buyers purchased lysine from the manufacturers on a spot basis at close to full list price or from distributors at above-list prices. Spot prices of lysine have been reported for most months since 1989 by the Journal of Commerce. Citric Acid Citric acid is an acidulent, a class of food additives that sterilizes, fixes flavors, and enhances flavors (Connor 1998b). About two-thirds of all citric acid is used in foods and beverages and the remainder in detergents. Citric acid accounts for more than 80 percent of the market for food-grade acidulents. It is sold in liquid, anhydrous, and salts forms. World capacity in 1991 was about 1.1 billion pounds (excluding the former Soviet Union, which may have no capacity and in any case does not trade internationally). Capacity grew by about 7 percent per year, reaching 1.4 billion pounds in 1995. The U.S. share of global consumption was 32 to 33 percent in the early 1990s. U.S. plants exported about 8 percent of their production (mostly to Canada) and imported about 25 percent of U.S. consumption, mostly from Western Europe and minor shares from China, Israel, and Turkey. During 1990-1995, there were only three U.S. manufacturers of citric acid. Haarmann & Reimer Corp., a subsidiary of the Swiss chemical company Bayer AG, sold citric acid made in two Midwestern plants operated by Miles Laboratories, another U.S. subsidiary of Bayer. Haarmann & Reimer/Bayer held a 42 percent capacity share of U.S. and Canadian consumption in 1991which declined to about 32 percent by 1995. ADM entered the world and U.S. market by buying two plants from Pfizer in December 1990 along with the technical expertise to operate the plants. ADM=s capacity share of the U.S.-Canadian market was initially about 49 percent, but declined to about 37
Ajinomoto sold lysine in an aqueous solution to a few large feed manufacturers that were specially equipped to handle bulk tanker-truck shipments. 5
percent in 1995. (Capacity shares may overstate sales shares if the plants operate at low utilization rates). The main reason that Haarmann & Reimer=s and ADM=s shares slipped is Cargill entered the industry by building a new plant in Iowa during 1988-1990 and significantly expanding that plant in 1991, 1993, and 1995. Cargill=s capacity share of the U.S.- Canada market was 16 percent in 1990, 18 percent in 1992, 28 percent in 1994, and 33 percent in 1995. Thus, in 1995, adjusting for imports, the three U.S. producers controlled about 90 percent of the U.S. market with almost equal market shares. Because they were vertically integrated into wet-corn milling, ADM and Cargill may have had lower costs of production. The two largest importers into the U.S. market were Jungbunzlauer of Austria and HoffmannLa Roche of Switzerland. Jungbunzlauer=s three plants in Austria, France, and Germany gave it a 17 to 19 percent world share, almost double that of the three U.S. manufacturers. Hoffmann-La Roche=s Belgian plant accounted for 15 percent of world capacity in 1991, down to 11 percent in 1995. These two companies were the largest and most consistent importers to the U.S. market. A group of government owned Chinese producers aggressively entered the market in the early 1990s, with lowpriced acid, but threats of trade reprisals (reportedly instigated by ADM or Cargill) caused them to pull back a bit. Smaller, more sporadic importers were located in Italy, Israel, Turkey, and Indonesia. The top five manufacturers controlled 65 to 70 percent of the world market in the early 1990s. In 1988, list prices of citric acid delivered east of the Rocky Mountains were $0.81 per pound anhydrous equivalent. With Cargill=s impending and actual entry, prices fell dramatically to the $0.63 to $0.73 range during 1990 (CMR). In 1991, a series of price increases were initiated by Cargill, which were followed by a spiral of similar announcements by ADM, Cargill, and Haarmann & Reimer through 1993. From late 1993 to the end of 1995, list prices remained stuck at $0.85 despite what CMR called Aample supplies.@ Information on actual transaction prices is more spotty. Importers= prices run about 2 to 4 cents lower, with Chinese imports closer to 6 cents lower than list prices. During periods of normal supply, U.S. transactions prices are reported to be about 5 to 8 cents lower than list prices, with the gap closing to as little as 1 cent at times. In a 1994 government report, domestic sales prices were reported to be $0.804 for citric acid and its salts, or 5 percent less than list prices in that year. In the first six months of 1996 after the cartel was exposed, importers= prices fell from about $0.83 to $0.73. Corn Sweeteners ADM is a manufacturer of all three major corn sweeteners: glucose, dextrose, and fructose (Connor 1996c). Dextrose is normally sold in powder form and there is a new crystalline form of high fructose corn syrup (HFCS), but glucose and HFCS are sold in syrup forms. The leading sweetener is sucrose made from cane or beets. Three minor naturally occurring sugars are maltose, lactose, and zylitol. All six of these nutritive sweeteners have some unique uses in food processing, but for other uses they can be complementary. HFCS is commercially produced in three sweetness levels, all of which are sweeter than dextrose; glucose syrups (ordinary Acorn syrup@) come in ten commercial forms, all of which are less sweet and more bulky than dextrose. Altogether there are 18 standard forms of starch-based sweeteners (made from corn in the United States but from wheat, potatoes, or other starches in other countries). 6
The U.S. market for cornstarch sweeteners is very large, about 14.9 million metric tonnes in 1995. U.S. consumption of dextrose amounted to almost 700,000 tonnes but has grown only very slowly (25 percent from 1970 to 1995). Glucose (Acorn@) syrups account for 25 percent of corn sweetener tonnage, with production up 150 percent since 1970. HFCS is now by far the largest segment (68 percent by volume), all of its growth occurring since 1970. The total value of the U.S. corn sweetener market in 1992 was $2.9 billion (at f.o.b. manufacturers= prices), of which 82 percent was HFCS. Volume growth of HFCS was spectacular up to about 1987 when a marked slow down occurred. Growth during 1990-1995 averaged only 3.8 percent per year. Growth of glucose syrups during the early 1990s averaged 4.3 percent, and dextrose grew at 2.8 percent per annum. The HFCS segment became a mature market around 1990, just as dextrose and glucose had been for years before. HFCS grew fastest when sucrose substitution was large (particularly in the soft drink industry). With that substitution phase at an end, corn sweeteners cannot grow much faster than the real growth of all the food processing industries (about 2 or 3 percent per year). In 1992, there were 28 companies in the wet-corn milling industry, but 9 of them operated 23 plants that accounted for nearly all U.S. production. The top four companies operated 16 plants in North America that accounted for 86 percent of HFCS capacity in 1991; the four-firm concentration ratio (CR4) for all wet-corn milling was 73 percent in 1992. (Concentration within each of the corn products markets such as starch, corn oil, amino acids, and the like is higher than for all products taken together). ADM is the leading producer of HFCS with about one-third of industry capacity, A.E. Staley (owned by Tate & Lyle) about one-fourth, Cargill about 20 percent, and CPC International 10 to 15 percent. International trade, except small imports from Canada, is negligible. Sales figures are more difficult to obtain than physical output. Estimates from Census data show that glucose syrups had shipments= value of $735 million in 1992, up 60 percent since 1982 or 1987; the U.S. market for dextrose is small, only $284 million in 1992, up 25 percent since 1982. Finally, HFCS sales reached $1,892 million in 1992, up 110 percent since 1982. Wholesale list prices are quoted monthly for dextrose and glucose syrup, but not for HFCS. List prices of dextrose used to change nearly every month, but that stopped in early 1981. Then a pattern emerged of constant prices for many months (e.g., $27.17 per cwt. For 15 months in 1981-82; $26.36 for 16 months in 1983-84, and $24.50 for four years 1989-94!). Census data seem to show that transactions prices were 21 percent lower than the posted list prices. List prices of glucose syrups were far more variable since the mid 1970s than dextrose. Intraannual prices rose as high as 83 percent and fell as much as 32 percent. Prices in 1994-1995 (the probable conspiracy period) were 14 percent higher than in 1993, but did not increase above average 1990-1992 levels. HFCS prices averaged about $10.50 per cwt. in 1992, about the same as selling prices in the 1980s. HFCS with more than 50 percent fructose levels sold at a 5 percent premium in 1992, but that premium is down from 15 percent in 1982. Little else can be found about HFCS prices from public sources. However, it is known that CPC paid $7 million to HFCS buyers as civil damages in 7
September 1996. As the first company to settle with plaintiffs, CPC probably paid less than single damages. If all sellers overcharged at the same rate, the total damages were about $62 million overcharges were at least $70 million, but these estimates are conservative and speculative. Bulk Vitamins Proper amounts of more than a dozen vitamins are required for the health and development of human beings and animals. While a few are created in sufficient quantity by internal organs, the vast majority of vitamins must be ingested to maintain optimal growth and metabolism. Grains and grasses tend to be low in vitamins, so animals require a varied diet of fruits, vegetables, and highprotein foods or vitamin supplements. Vitamins are not substitutable; each stimulates a unique metabolic function. There are roughly 15 commercially important vitamins made by pharmaceutical companies. Most of them were first introduced to markets in the high-income areas of the world in the 1930s (Connor 2001:Chapter 10). As methods of synthetic chemistry improved, prices declined precipitously up to the 1960s or so, leading to a rapid growth in demand for vitamins in all parts of the world. By the late 1980s, the bulk vitamins markets had become slow-growing, mature markets. Patents for synthetic production methods had long expired, but many companies were exploring biotechnologies that would yield natural vitamins at significantly reduced production costs. By the mid 1990s, a significant portion of the supply of vitamins E, C, B2, B5, D3, and biotin were being manufactured by biosynthesis. Initially, synthetic vitamins were sold to consumers as dietary supplements, often by prescription since many are toxic when ingested in large quantities. Fortification of milk, flour, and other products began in the early 1940s. However, as prices began to fall further, bulk vitamins began to be added to supplement the feeds of certain farm animals. By the mid 1990s, on average about 55 percent of global sales of bulk vitamins are purchased by farmers or feed manufacturers. Of the remainder, about one-third is purchased by food manufactures for fortification purposes and twothirds by pharmaceutical companies for human vitamin supplements. In fact, of the 15 major commercial vitamins, only vitamin C is not purchased principally for animal feeding purposes.3 Bulk vitamins for human uses have to meet somewhat higher standards or purity but are otherwise identical to the bulk vitamins mixed into animal feeds or pet foods. The giant Swiss pharmaceutical firm F. Hoffmann-La Roche was an early producer of several synthetic vitamins. By the late 1980s, Roche still made and sold a wider assortment of vitamins (at least 11) than any other manufacturer, and its share of global supply was at least 33 percent. The next two largest manufactures were also European: BASF of Germany and Rhône-Poulenc of France (now part of Aventis SA). Around 1995, these top three suppliers accounted for about 60 percent of world production value. As patent protections expired for many vitamin manufacturing methods after World War II, more chemical companies entered production of bulk vitamins.4 A few of these 3
Caroteen, a precursor of vitamin A, is also an exception, but vitamin A itself is heavily used for animal feeds. 4 In the 1930s and 1940s, several major U.S. pharmaceutical manufactures were early producers of several vitamins. However, by the 1980s all of these U.S. firms had withdrawn from 8
later entrants were headquartered in Europe, but the majority were Japan-based. By 1995, three Japanese chemical manufacturers (Takeda Chemical, Eisai, and Daiichi) would comprise the fourththrough-sixth largest vitamin markers with about 10 percent of world production. Thus, the Big Six accounted for 70 percent of global sales of bulk vitamins. Because most vitamin makers tended to specialize in just a few vitamins, the degree of sales concentration in each vitamin market was very high. For example, Rhône-Poulenc, the third-ranking producer, had most of its sales in vitamins A and E and only minor sales of two other vitamins (B2 and B12). The second-largest Japanese manufacturer, Eisai, produced only vitamin E. As a result of specialization of production, at most three or four companies dominated production of the world’s vitamin industries. Indeed, the Big Six vitamin makers themselves dominated all but two commercial vitamin markets.5 For example, in the market for vitamin A, the third largest vitamin market in terms of sales, Roche, BASF, and Rhône-Poulenc accounted for 95 percent of global sales. Similarly, in the huge market for vitamins E, Roche, BASF, Rhône-Poulenc, and Eisai accounted for 87 percent of global output in the 1990s. The Big Six exercised a high degree of control over the supply of vitamins B1, B2, B5, B12, D, and carotenoids. A different group of leading producers dominated the sales of vitamins B3 (niacin) and B4 (choline chloride). Only three vitamin markets showed signs of more moderate concentration levels: vitamin C, B6, and folic acid; in these markets, production by numerous small producers located in China was becoming increasingly important in the 1990s. Some vitamins were available in several varieties. For example, vitamin A is sold either as a liquid oil or as a dry powder. Some of the B-complex vitamins were sold in liquid solutions or in a dry powders. Most vitamins could be purchased in various strength levels that were intended to vary by application. In the 1990s, Roche and BASF were offering vitamin premixes to their customers, each premix tailored to a particular consumption need. Despite a large variety of vitamin products, within each grade and type the vitamins were quite homogeneous. For pricing purposes, one major variety of a vitamin was conventionally identified by the industry as the standard against which all other varieties were priced. Although most patents relating to vitamin production had expired in the early post-World War II period, in most vitamin industries the synthetic chemistry technology required for manufacturing was either secret, difficult to purchase, or required intermediate inputs that were made only by the established vitamin companies. For the vitamins being made by biotechnologies, the most efficient microbes and other essential technical features were still largely proprietary. In some vitamin industries, making pharmaceutical-grade vitamins required sophisticated centrifuges or other equipment that was not widely available. Thus, with few exceptions, technology created a barrier to entry for the chemical makers in China, India, and other newly industrializing areas of the world. The major exception was vitamin C, but a few of the B vitamins also showed signs of growth outside of Europe, North America, and Japan. In summary, the structures of most of the vitamin markets displayed all the features associated with an oligopoly. Production was highly concentrated, purchasers were fragmented, the this industry. 5 The production of vitamin B3 was in the hands of four companies that did not include the Big Six. Vitamin B4 (choline chloride) was made by five other companies plus BASF. 9
product was homogeneous, and barriers to new entry were high. Formation of cartels in these markets was feasible. Moreover, the size of the markets made them tempting targets for collusion. Vitamin E alone had 1995 global sales of more than $1 billion per year. Vitamins C and A added another $1.4 billion annually, and four more vitamin markets each had sales above $100 million per year. All told, the market for pure bulk vitamins at manufactures’ prices amounted to $3.7 billion in 1995. Volume growth was modest, somewhere between 2 and 3 percent annually. Profile of Archer Daniels Midland Co. ADM is the largest U.S. processor of agricultural commodities. In fiscal year 1995, ADM had consolidated net sales of $12.7 billion (ADM). However, gross sales, which includes the total sales of merchandised grain and oilseeds, totaled $15.9 billion in 1995. Finally, total sales including those of unconsolidated affiliates were approximately $20 billion. For the three fiscal years ending 1993 to 1995, after-tax earnings averaged 5.5% of net sales and 11.7% of stockholders= equity (Appendix Table A-1). Over the last nine years, ADM=s net sales increased by 10.1% per year. From fiscal 1986 to fiscal 1990, net earnings rose from $230 million to $484 million (or by 20% per year), but from 1990 to 1994 ADM=s net earnings stalled at $500 million per year. In 1995, net earnings jumped to $796 million, or 60% above the 1990-1994 average. From 1971 to this 1995 peak, net income had grown at a compound rate of 8.0 percent per year. ADM has four major product divisions: oilseed products, corn starch products, dry milled grains, and other; in 1995 the four divisions contributed 60%, 20%, 11%, and 9% of net sales respectively. The oilseeds division sells corn, peanut, palm, cottonseed, soybean, canola, and sunflower oils and their byproducts. Specialty products include lecithin, vitamin E, monoglycerides, soy protein concentrate, and soy isolate. Several other vitamins were under development at ADM in the 1990s. The cornstarch division produces corn syrups, crystalline corn sweeteners, corn starch, alcohols, malt, and a host of biotechnology products (monosodium glutamate, citric acid, lactic acid, sorbitol, xanthan gum, lysine, methionine, trytophan, threonine, ascorbic acid, astaxanthan, and biotin). Dry milled products include flours and pastas. Miscellaneous sales consists of aquiculture fish, hydroponic vegetables, grain merchandising, and numerous joint ventures with farmers= cooperatives. Within the corn products division, HFCS and ethanol are mature or maturing industries with slow growth and narrowing margins; however, the other bioproducts from corn generate much higher margins and represent ADM=s hope for the future. For a company of its size and diversity, ADM is managed by a remarkably small number of managers. Dwayne Andreas and three or four other top officers made all major decisions from 1970 to 1997. Until late 1996, the ADM Board contained a large majority of current and former company officers, relatives of Andreas, long standing close friends of Andreas (e.g., AHappy@ Rockefeller, Ray Goldberg), or officers of companies that supply goods and services to ADM (agricultural cooperatives or legal services). Strictly speaking, at most two of the Board=s 17 members were independent of ADM or Andreas. Members of the press or stock analysts almost never had open contact with ADM officers except D. Andreas himself. An October 1995 profile of Dwayne Andreas and ADM by the Wall Street Journal emphasized the CEO=s extraordinary grip on the company. Although he personally owns less than 5% of ADM=s stock A…Andreas has gained near total control with the help of family members, loyal 10
executives and directors whose combined stakes is nearly 15%... He collaborates with his biggest competitors, spends prodigiously to influence the media and public opinion, and spreads large sums among politicians of all stripes.@ (p.A1). As an example of Andreas= drive to dominate, at ADM=s October 1997 annual meeting he cut off a critic=s microphone and said AI=m chairman. I=ll make the rules as I go along.@ Such rough tactics were tolerated because he presided over a period of great financial and stock performance for ADM. Unusual among agribusiness companies, ADM has many collaborative arrangements with parties that normally would be considered rivals. Andreas often says AKeep your friends close and your enemies closer.@ So, in 1992, ADM built a 3.5 mile pipeline from its Decatur plant to A.E. Staley=s plant to reduce risk as well as to help break a threatened labor strike. ADM owns significant shares in Staley=s parent, Tate & Lyle, and has a fructose joint venture with Staley in Mexico. ADM also has alliances of various kinds with grain cooperatives like Growmark and GoldKist. Andreas cultivated the image of an international statesman primarily concerned with world hunger and national food security. His official biography gives him undue credit as one of the major forces behind the PL 480 Program (Kahn). He is identified as Armand Hammer=s successor as the U.S. capitalist with the closest relationship with Kremlin and other Eastern Bloc leaders. Andreas has built a legendary network of powerful business and government contacts since the 1960s. He was close friends with and contributor to a wide array of farm-state Congressmen and Senators, especially Hubert Humphrey and Robert Dole. Since 1979, Andreas and ADM have contributed more than $7 million to candidates for national office or their parties. ADM has benefited greatly from the U.S. sugar program and from federal ethanol subsidies and usage requirements (Bovard). Lobbying by ADM through its trade associations on these and other government favors is intense and well documented. ADM maintains a palatial suite of rooms in a Washington hotel for the frequent use of Andreas and other officers. Andreas often appears on Forbes magazine=s list of the 400 richest people in the United States. AAndreas, his family, and ADM are by far the largest political contributors in the country@ (Hollis). These contributions have resulted in adverse publicity for Andreas at least four times. He wrote a $25,000 check that was given to B.L. Barker, one of the convicted AWatergate Burglars,@ and a bundle of $100,000 in cash given by Andreas was found in Richard Nixon=s White House safe; Andreas avoided testifying about these gifts. Later, Andreas was prosecuted but not convicted for an illegal $100,000 corporate contribution to Hubert Humphrey. In 1993, Andreas and his wife were fined $8,000 by the Federal Election Commission for making excess political contributions. ADM underwrites the TV broadcasts of the premier political-discussion programs on four television networks: ABC, CBS, NBC, and PBS. During 1994 and January-April 1995, ADM spent at least $16 million supporting the four programs; its support accounts for nearly 27% of the budget of the influential Jim Lehrer News Hour on PBS. ADM owned 10% of the newspaper chain that owns the Chicago Sun Times. In 1998, ADM created a great deal of discussion among journalists when it hired retired ABC anchor David Brinkley to produce Infomercials@ for ADM. ABC eventually decided not to accept these paid commercials which were to have appeared during Mr. Brinkley=s former news program. Some commentators have sensed little or weak coverage of ADM=s legal problems in these ADM-related news media.
11
There are several ADM management practices that bear the Andreas stamp and that could have made ADM prone to price fixing. ADM made quick and aggressive investment decisions. To enter the citric acid business, ADM paid top dollar for some aging Pfizer plants (two of which were closed soon after) primarily to obtain the production technology. In both lysine and citric acid, very large capital expenditures were incurred to expand plants to the largest feasible scales. When production problems occurred with lysine, ADM hired engineers from their primary competitor, Ajinomoto. Although much of what he says must be treated with skepticism, Whitacre claims that Astealing technology@ was common practice at ADM. Specifically, Whitacre asserted that ADM hired Asian engineers to build and run its Decatur lysine plant and that it stole technology and trade secrets from other companies to begin production of vitamins and medicinal products from corn. Whitacre himself was hired away from the German firm Degussa, the world leader in amino-acid research and production. Ajinomoto sued ADM in late 1996 for patent infringement on production methods for lysine and threonine, and ADM was found guilty in the latter case. Moreover, Whitacre relates that a culture that fostered or permitted price fixing permeated ADM, at least within the corn-producing division. It is clear that Dwayne Andreas has no respect for free markets, an idea he considers to be a figment of politicians= imaginations (Bovard). Whitacre claims that taped price-fixing discussions within ADM involved the Chairman (D. Andreas), Vice Chairman (M. Andreas), President (J. Randall), and at least three VPs of operating divisions; he stated that the counsel and assistant counsel of ADM were aware of the activity as well. ADM=s own guilty pleas submitted to two federal courts are consistent with some of Whitacre=s charges. Finally, Whitacre asserts that ADM routinely rewarded mangers at his level very large bonuses that were paid tax-free into foreign bank accounts by means of phony invoicing schemes. Whitacre himself and other employees he supervised were convicted of such fraud, but how pervasive the practice was in ADM is now much in doubt. Whitacre embezzled more than $9 million from 1991 to 1995; in 1998 he was sentenced to 9 years in prison for his theft. Economic Conditions Facilitating Price-Fixing Standard industrial-organization textbooks like Scherer and Ross provide check lists of market conditions that are known from economic theory or industrial experience to encourage overt cartel behavior (price fixing, quantity-setting, or territorial shares). A typical list of facilitating factors is given in Table 1.6 The first group of factors refers to market sales concentration in its broadest sense. The number of significant sellers of the three relevant wet-corn-milling products is very small. For the three corn sweeteners, the number of sellers ranged from 3 to 8. Sales concentration is extremely high by any standard, though the HHI for corn fructose is lower than that of lysine or citric acid. Buyer concentration” is generally low. The lysine cartel consisted of four or five companies, and these companies were the only significant world producers of lysine from corn dextrose. The U.S. cartel in citric acid was comprised of four or five companies (the status of Cargill is unclear). In addition, there were one or more Chinese chemical companies consistently exporting citric acid to the United States; two other companies were sporadic or negligible exporters. In any case, U.S. imports were small, only 5 to 7 6
The market structure of the vitamins industries is discussed above. 12
percent of U.S. consumption. Finally, little is known about the conspiracy (if any), but the five dominant producers are all located in the U.S. Midwest, and imports were nil (the only significant imports are from a CPC plant in Ontario, Canada). For each corn product, at least one facilitating concentration condition is not met. Similarity of business cultures and geographic closeness are absent in the lysine and citric acid cases. Two lysine producers were from Japan and one from South Korea: In citric acid, two producers were Swiss companies (one operating an U.S. subsidiary) and one was Austrian. In the case of corn fructose, all the producers were located in three contiguous Midwestern states of the USA. the missing factor is low buyer concentration: Coca Cola and Pepsico buy 73 percent of all U.S. fructose. Product heterogeneity is never a problem for these products, but if prices become high enough, some feasible substitutes appear. Soybean meal can substitute for lysine and corn, but during 1991-1995 price relationships made this possible in only a couple of months. Malic and phosphoric acids can be substituted for citric acid in some food or nonfood uses if citric acid prices rise high enough. The most complex substitution patterns appear among the three corn sweeteners (dextrose, glucose, and fructose) and ordinary sucrose. In some uses, they are substitutes and in other uses they are complementary with each other.
13
Table 1. Conditions Facilitating Price Fixing in three U.S. Corn Refining Markets, Circa 1992-1994. Market Lysine Citric Three Corn Conditions Acid Sweeteners World market sales size U.S. market size Concentration: Small numbers of suppliers High U.S. sales concentration Low buyer concentration Cartel culturally & geographically close
$0.6 bil. $0.2 bil.
$1.1 bil. $0.4 bil.
4 or 5 CR4=100% HHI=2800 CR4fixing an international price= is alright.@ (ibid.). Further evidence of the cartel=s consciousness of the antitrust illegality of their activities comes from a memorandum of its Hawaii meeting in March 1994 (Tr. Ex. 137-T). The Asian firms were reluctant to audit the sales data being sent monthly to Mimoto at the end of the year, claiming that replacing their regular auditors with a large international auditing firm might be illegal. Wilson demurred, saying that A... price negotiation is illegal, not the volume auditing.@ ADM==s Charm Campaign ADM tried to reassure its future partners in crime of its good will by displaying remarkable candor about many aspects of its technology of production, information that is normally treated as a trade secret by manufacturers. ADM twice gave complete tours of its Decatur plant, first to Sewon in June 1992 and second to Ajinomoto in April 1993. During the first tour, ADM revealed its lysine production capacity, its costs of manufacturing,7 the employment size of the Bioproducts Division (120 persons), daily production capacities of six ADM products (dry corn, soybeans, sorbitol, dextrose, alcohol, and carbon dioxide), the name of the company supplying its MSG technology, the identity of its enzyme supplier, and future products in pilot production. Very few, if any, of these facts were publicly known (Tr. Ex. 140-T). ADM also admitted that two former Ajinomoto employees had provided lots of technical information about Heartland=s lysine operations. At another general meeting of the cartel just three weeks before an agreement on volume allocation was reached, ADM again revealed a substantial amount of proprietary information about its Biotechnology Division to its Asian co-conspirators (Tr. Ex. 135-T). Partly this presentation was designed to boast about its size and prowess, but partly it was a demonstration of ADM=s intention to be an open, candid, and reliable business partner in the price-fixing venture. ADM told the others of the location of its three domestic (Decatur, St. Louis, Atlanta) and six overseas sales offices (UK, Singapore, Sidney, Tokyo, Mexico, and Miami for South America). The group was told of the Division=s present and future product portfolio.8 Whitacre revealed technical details on its imminent 7
Whitacre claimed that it was less than 60 cents, but the lowest previous monthly total cost was in fact 62 cents (Tr. Ex. 60). Variable costs of manufacturing had dipped to 49 cents per pound in May 1992. 8
ADM was making at least two feed additives, the amino acids lysine and threonine, and had immediate plans for tryptophan (1994) and methionine (Rhône-Poulenc joint venture in West Virginia). ADM would shortly enter production of riboflavin (vitamin B2). Food additives included citric and lactic acids now and MSG and Xanthan gum in late 1993. 31
entry into vitamin B2 production.9 Specific information was shared on recent capital equipment purchased, such as the size of its largest fermenters (31 million liters per year). In general, ADM=s reports of monthly dry lysine sales volumes were accurate. For example, at the 1992 Mexico City meeting, ADM reported that two recent month=s sales were 5,000 and 5,700 tonnes (Tr. Ex. 4-T). A cross-check with ADM=s own internal manufacturing records shows that these figures were exactly correct (Tr. Ex. 61). Continuing Cartel Contentiousness It was not easy for the five lysine producers to arrive at a consensus on prices and volume shares. Distrust and disagreements of many kinds permeated the discussions among the five from the beginning of their contacts in early 1992 until their last meetings in early 1995. The greatest number of complaints were directed by the four Asian companies against ADM, but complaints by both Japanese companies and ADM against the Korean companies were not far behind. There were relatively few criticisms made about Ajinomoto and Kyowa, who acted as buffers and liaisons between the two more assertive wings of the cartel. In models of oligopoly, cooperative relationships characterized by a willingness to compromise are not absolutely necessary. Relatively trustful relations are required for cartels to operate effectively, but oligopolies can function successfully through various Anon-cooperative@ modes of behavior. However, even non-cooperative behavior (also called Atacit@ cooperation) require that leading firms be able to form fairly reliable expectations about the reactions of rivals to changes in the market, such as changes in prices, output levels, or product designs. Forming such expectations usually requires observations of rivals= actual market behaviors over several production periods. Economists call these conjectures. If conjectures free of uncertainty cannot be formed, then the likelihood of collusive behavior trumping a tacit oligopoly increases. Evidence of mistrust, misperceptions about facts, international obfuscation, guile, and so forth make overt conspiracies more likely to be formed in concentrated industries. The cultural gap between ADM and the other companies was significant at the beginning of this story. It narrowed over time, but never closed completely. ADM=s two plant tours helped reduce Asian companies= skepticism about ADM=s capacity, but even here Whitacre exaggerated how low ADM=s costs of production were (Tr. Ex. 140-T). In late 1991, ADM claimed to have 113Kt capacity, but this was really the plant=s planned capacity that would not be reached for about a year (Table A5). It=s Asian rivals were disbelieving, even in 1993 when the Decatur plant was fully built. Nevertheless, all the technical data ADM shared with its rivals must have raised the level of trust. At 9
ADM purchased the proprietary production technology from Zeagan, the biotechnology division of Coors Corp. Further, ADM would lease the Zeagan factory to make B2 until early 1995 when production would be shifted to Decatur. Entry into vitamins was a major strategic move by ADM.
32
the cartel=s first major meeting, ADM attempted to create trust by giving its best estimates of lysine capacities (Tr. Ex. 4-T). Ikeda=s notes of that meeting found ADM=s figures for Ajinomoto so close that he speculated that ADM had a spy at Heartland Lysine. At a May 1993 Asummit@ meeting of the three largest Asian companies, Ajinomoto and Kyowa took the candid position that AEach company is lacking reliability ... There is no measure against a contract violation@ (Tr. Ex. 130-T). That is, the Japanese thought that the cartel had a problem of disciplining deviants from price or volume agreements. In June 1993, near the end of several months of dissension within the cartel, at a meeting of the four Asian producers in Tokyo Cheil raised concerns about ADM=s misuse of the proposed lysine association. Paraphrasing the remarks by Cheil=s representative J. M. Suh, minutes of the meeting say: AADM=s attitude is not clear: Are they not [going to] use this to get information and one day they betray?@ (Tr. Ex. 131). Five months later at the cartel=s second Paris conclave, on the whole a friendly and businesslike meeting, lubricated by a dinner at one of Paris= temples of gastronomy, ADM and Kyowa clashed openly about one of the main episodes that led to a decline in the group=s consensus in the spring of 1993 (Tr. Ex. 135-T). The dispute concerned ADM=s aggressive drive into Latin American lysine markets, which Kyowa viewed as a threat to its perceived franchise in the area by virtue of its ownership of Latin America=s only lysine plant in Mexico. ALatin American C This is the area over which the Japanese (especially Kyowa) and ADM disputed each other most strongly@ notes Sewon=s representative (ibid). Specific transactions in four major Latin American market were held up as breaches of the price agreement. Acrimony over ADM=s perceived aggressiveness practically disappeared at the cartel=s meetings once the late-1995 volume-allocation agreement was successfully implemented. So long as members of the cartel made progress toward keeping to their global market shares, arguments over sales in particular regions became moot.10 The reporting system on monthly regional volumes greatly reduced concerns about price cutting by their former rivals. Price cutting, if excessive (transaction prices were almost always a few cents below the target or list prices), became self-destructive because it lowered short-run profit margins and might require costly compensation of other cartel members at the end of the year. By far, the great majority of accusations of bad faith were aimed by ADM and the Japanese companies toward the two Korean firms. Both Sewon and Cheil Jedang were committed to an export-driven, high-growth global strategy. Even though Sewon seems to have cooperated somewhat more consistently with cartel demands for discipline, Sewon=s larger capacity made it a more frequent object of criticism than the guiltier party, Cheil. At Sewon=s first contact with ADM (the June 1992 plant tour), Sewon=s top officials had already been briefed about ADM=s offer to fix prices by its Japanese rivals. Sewon expressed its unqualified desire to develop a fully cooperative understanding with ADM about soft competition in 10
After the second Paris meeting in October 1993, conspirators held at least ten more meetings (Appendix Table A3). The only time ADM was accused of serious bad faith was in reference to an ADM-Kyowa price war in China at the Atlanta meeting (Tr. Ex. 17-T). However, memorandums of only six of those ten meetings are part of the public record. 33
the lysine market (Tr. Ex. 140-T). At the same time, Sewon warned ADM that it was Aan old company@ in the industry and was committed to remaining an important player. Sewon had begun production of lysine in 1980 (Connor 1998a). Sewon was not invited to the cartel=s first overtly collusive meeting in Mexico City a week later (Tr. Ex. 4-T). Ajinomoto and Kyowa agreed to bring the bad news of ADM=s initial demand that all four Asian manufacturers would have to accept cuts in production to accommodate ADM. Sewon hosted two meetings with Ajinomoto and Kyowa in Seoul in June and August 1992 to try to hammer out a response to ADM=s demand. Significantly, Cheil was not invited, probably because it was viewed as the least likely to cooperate in any plan that restrained its sales. At these meetings Sewon was interested in a price agreement but highly skeptical that a volume-allocation agreement could be reached, implemented, or monitored (Tr. Ex. 125-T). If surveillance of such an agreement involved export statistics A... our company will be the most disadvantaged@ said a Sewon internal memorandum. At the second Seoul meeting, a volume agreement was again discussed at length, but A... no one agreed. Especially we/our company cannot,@ said a Sewon document. Sewon was often accused by the other lysine producers of aggressive sales increases. At a top-level meeting of the big three Asian producers in Tokyo a year later (May 1993), Sewon was accused by Kyowa of being primarily responsible for the on-going U.S. spring 1993 price declines. Kyowa=s Managing Director Akita was blunt: A... it is Japan=s view that the price drop this time was due to [Sewon]. Definitely it is because of [Sewon]@ (Tr. Ex. 130-T). Sewon retorted that the Japanese dropped their export prices first. Neither could the three companies agree on how to coordinate any joint decisions reached. At the otherwise harmonious second meeting in Paris in October 1993, Sewon was accused of aggressively increasing exports to both the United States and Europe (Tr. Ex. 135-T). In its own memorandum of the meeting Sewon admits that export volumes did increase 18% and 25%, respectively, from the previous year. Shortly after the Irvine meeting that resulted in an ADM-Kyowa-Ajinomoto volume agreement, Sewon came under intense pressure from Ajinomoto to accept a 34,000-tonne allotment for 1994. An angry telex from Ajinomoto in mid-November shows that Sewon was trying to maneuver for a 37,000-tonne share (Tr. Ex. 28), after having previously agreed to the lower figure. The minutes of the December 1993 Tokyo meeting show that Sewon was eventually forced to accept the lower volume allocation (Tr. Ex. 142-T). In its internal assessment of the volume agreement, Sewon notes that the benefit of higher prices is traded-off by the cost of losing loyal customers, outside of Asia at least. One part of the volume plan Sewon could not stomach was the idea of faithfully reporting honest volume data to one of the big five international accounting firms (Tr. Ex. 136-T). In fact, during part of 1994, Sewon stopped sending its monthly volumes of sales to Mimoto, an action that threatened the unraveling of the cartel=s consensus (Tr. Ex. 17-T). Somehow, later in 1994, Sewon wrangled a 3,000 tonne supplemental increase in its share. At the 1995 Atlanta meeting, Sewon began agitating for a 46,000-tonne allocation for 1995, an extraordinary 25% increase at a time when general market growth was one-fourth that rate. It had to settle for a 39,000tonne allocation in the end, but in its own minutes of the Atlanta meeting, Sewon noted that Aas in the previous case, all the competitors except for our company said they agree with the allocated volumes.@ Sewon=s attitude presaged continuing friction with its cartel partners throughout 1995.
34
Cheil Jedang was close to being a maverick throughout the cartel=s existence. The other four sellers consistently underestimated its production capacity and its stubborn desire to grab disproportional increases in market share. Cheil was the firm least likely to attend conspiracy meetings and the most likely to play hard-ball tactics to get sales increases. It rarely shared information with the others about its capacity and sales plans. Cheil=s Indonesian plant opened in 1991 with a modest capacity of 9,000 tonnes, but expanded to at least 30,000 tonnes by 1995 (Connor 1998a) Cheil=s case was frequently discussed at the May 1993 meeting of the three other Asian manufacturers in Tokyo (Tr. Ex. 130-T). The Japanese were blunt: A[Cheil] is no less a trouble maker than ADM.@ Kyowa=s Yamamoto said that A... the big worry is the attitude of Cheil Jedang.@ On the other hand, Cheil was viewed as the weakest and least important participant by the Japanese firms: ACheil Jedang: It is nothing because of its small capacity. There is no big problem.@(ibid). Moreover, having only two years of lysine production experience, Cheil was believed to be experiencing technical or financial problems. Cheil finally sent a representative to a conspiracy meeting in Tokyo in June 1993 (Tr. Ex. 131-T). It expressed its concern about sharing proprietary sales information with ADM, but it did engage in sharing information with its three Asian competitors. That same month at the Vancouver meeting, Cheil was the only one of the five companies to refuse to join the proposed lysine association (Tr. Ex. 134-T). It had boycotted part of this meeting in order to extract a higher volume share than had been proposed earlier. At the Paris meeting of October 1993, Cheil claimed that its 1993 sales volume would reach 22,000 tonnes, which was a lot higher than the 14,000 tonnes it had claimed it sold in 1992 (Tr. Ex. 135-T). The other lysine companies were evidently incredulous at the large size of these purported sales volumes. Cheil boycotted the next meeting in Tokyo (December 1993) to demonstrate its unhappiness at the low volume share being offered to it (14,000 tonnes) (Tr. Ex. 142-T), which was 6,000 tonnes less than it demanded. There was more discussion about Cheil at the Hawaii meetings in March 1994 (Tr. Ex. 137-T). The consensus was that Cheil=s 1993 sales were about 17,000 tonnes and that 18,000 tonnes was a reasonable counter-offer to Cheil for its 1994 quota. Cheil apparently agreed to accept the offer, though its 1994 sales turned out to be slightly higher (about 1,200 tonnes or 7%) than its agreement (Tr. Ex. 17-T and 138-T). In early 1995, Cheil apparently acceded to a quota that represented a slight decrease from actual 1994 sales volume. It had taken a long time for the maverick to be broken. In general, it was Ajinomoto and Kyowa that acted as the glue that held the cartel together. They often had a moderating influence in the negotiations at several points. Although clearly concerned about their impending loss of industry leadership, eventually they came to a position of almost fatalistic acceptance regarding ADM=s drive to become Ajinomoto=s peer. At other times they bargained hard with Sewon and Cheil to get these two companies on board. In the end, it was the Japanese companies= acceptance of virtually no growth in the volume of sales that made the historic compromise in Irvine, California possible (see Table A6). ADM and Cheil were, in market share terms, the biggest winners. At the high-level meeting in Tokyo in May 1993, Ajinomoto and Kyowa presented a united front in order to win over Sewon to a volume agreement. They helped convince Sewon that ADM was fully capable of soon getting one-third of the world market. The Japanese firms argued that 35
ADM had set up a plant much larger than necessary, would use its excess capacity to drive down prices, and was generally A... ruthless in terms of marketing@ (Tr. Ex. 130-T). Although apparently agreeing to this view, Sewon still had the feeling that the volume agreement was a device to favor Ajinomoto: AAJI is trying to take the leadership position.@ Sewon detected a slight break in the Japanese united front when Kyowa took the position that: AFrankly speaking, ... the lysine price has dropped suddenly because of the AJI/ADM fight over leadership...@. However, these 1993 remarks aside, the record of the meetings provides few criticisms of Ajinomoto or Kyowa by the other companies, perhaps because the Korean firms had historically deferred to their leadership. More importantly, the others must have recognized that the two oldest firms in the industry were sacrificing some of the growth they could have had without an explicit agreement. Cartel Effects on Lysine Market Whitacre has written that the conspiracy lasted until late 1995 (Whitacre). Prices fell during the first nine months of 1995, probably in response to the corn-soybean ceiling price, which fell from mid 1995. In late 1995, lysine prices rose briefly, just as the ceiling price did. Why this occurred (and continued for five months in 1996) is puzzling. Perhaps it indicates that the industry was entering a new period of tacit price cooperation.11 Or perhaps there was an unexpected surge in demand for lysine outside the United States. Annual U.S. exports reached a plateau at about $100 million during 1992-1995 (Figure 3). After the conspiracy ended, exports more than doubled, which would be consistent with monopolistic output reduction by the members of the lysine cartel through 1995. It is possible that the effects of the conspiracy on prices persisted for several months after June 1995; if so, this would increase the size of the cartel=s civil liabilities. The dimensions of the global conspiracy are illustrated in Table 2. In 1991, ADM=s first year of production, Ajinomoto held 36 percent of world capacity, ADM 22 percent, and Kyowa and Sewon 15 percent each. In 1992, ADM=s Decatur plant reached the size at which it was to remain for several years. Ajinomoto=s global capacity share was to remain close to one-third throughout 199296 and Kyowa=s at 20 percent or less. ADM=s share slid from 30 percent in 1992 to 23 percent in 1996, while Sewon=s increased somewhat during the period. The four members of the lysine cartel (with Cheil joining in 1994 or 1995) controlled at least 90 percent of world lysine capacity throughout the 1990-1996 period. However, the lysine cartel chose to restrain world production, not capacity, in order to make it easier to raise prices. Prior to the cartel=s initiation in 1993 or 1994, production shares were similar to capacity shares. At the October 1993 meeting of the cartel, 1994-1995 production shares were set equal to actual 1993 shares (33, 26, 18-13, and 7 percent, respectively). Shares in 1996 were much the same as before even in the absence of an overt agreement. At the global level, concentration measures are very similar whether calculated with capacity or with production figures, except in 1991 when ADM=s new plant was scaling up to full production.
11
Over the six years 1990-1995, there is a price pattern consistent with a seasonal price cycle, with a trough in August and a peak around November (except in 1995). Six years of data is insufficient to confirm such a pattern statistically (see Table A2). 36
Table 3 illustrates the structure of production within the U.S. market. The left side of Table 3 contains the calculations of the lysine supply, the sum of North American plant capacity and imports from Europe and Asia. The right side of the table displays data on sales taken from legal documents provided by the original four members of the lysine cartel. Import volumes of Sewon and Cheil are converted to sales using average U.S. sales prices of the four companies. In the case of this national market, capacity and production shares are quite different, in 1991, but become quite similar during the cartel phase of 1993-1995. Before ADM=s entry, the 1990 U.S. lysine market of about $90 million was supplied by Ajinomoto and Kyowa (35 to 40 percent shares each) and Sewon (20 to 25 percent share). By late 1992, ADM had grabbed half of the $120 million U.S. market. Moreover, ADM began aggressive export sales that accounted for about 30 percent of the global market outside the United States. (The non-U.S. market at the end of 1992 was about 135,000 metric tonnes, or about $100 to $130 million in sales value).
37
Figure 3. Lysine Exports and Imports, 1990-1995
Source: STAT-USA on-line data service of U.S. Dept. of Commerce. HTS Code No. 292241000. Data for 1997 projected from January - August data.
38
125
128
128
128
156
36
33
33
31
29
1992
1993
1994
1995
1996
1991
1992
1993
1994
1995
26
28
29
30
22
113
113
113
113
113
60
ADM
17
20
18
16
15
70
75
80
72
62
41
Kyowa
18
12
13
11
15
80
80
50
50
40
40
Sewon
Capacitya Other
Ajinomoto
6
6
5
5
4
30
25
25
20
20
10
3
3
2
2
3
Percent
44
1
1
8
8
8
32
33
33
33
26
26
26
28
8
85E
99E
48
71
67
89
84
63
60
70E 79
14
ADM
81E
Thousand metric tonnes
Cheil
18
18
18
16
18
50E
49
46
43
33E
30E
Kyowa
13
13
13
14
18
40E
36
34
32
30E
30E
Sewon
Productionb
7
7
7
6
5
20E
18
17
16
12E
8E
Cheil
4
4
3
3
4
16E
12
10
7
7
7
Other
E
39
1996 32 23 14 16 6 9 32 27 16 13 6 5 = Estimated a From Tables 6 and 7 of Connor (1998a). b From known production allocations of the lysine cartel during 1993-95 (Eichenwald). Another source confirms that the world lysine market shares for the five cartel members in 1995 were: Ajinomoto 34.0%, ADM 26.4%, Kyowa 18.1%, Sewon 14.2%, and Cheil 6.3% according to the Department of Justice (WSJ 7/9/98: B10).
98
Ajinomoto
1991
Year
Table 2. Global Feed-Grade Lysine Production and Capacity, 1991-1996.
40
40
40
40
60
17
26
21
20
20
27
1992
1993
1994
1995
1996
1991
1992
1993
1994
1995
1996
Sewon
51
57
57
60
52
56
113
113
113
113
80
60
18
20
20
14
18
20
Percent
40
40
40
27
27
22
3
3
4
4
5
7
7
5
7
7
7
8
1
0
0
0
0
0
3
1
0
0
0
0
Cheil
100
100
100
100
100
100
223
199
200
187
154
108
Total
18
20
20
18
23
32
41.0
36.5
38.5
26.7
27.2
35.0
Ajinomoto
33.6
57
57
56
57
44
19
15
16
16
15
23
32
29.8
31.5
21.8
27.2
35.0
E
13.0
Sewon
8
6
8
9
11
17
Percent
17.3
10.5
16.5
13.1
12.6
19.1
4
1
0
0
0
0
8.1
1.9
0.7
0.7
0
0
Cheil
Million dollars
Kyowa
106.2
109.4
82.9
52.0
21.0
ADM
U.S. Domestic Salesb
100
100
100
100
100
100
230.0
E
184.9
196.6
145.2
118.9
110.0
Total
31c
27c
26c
30c
32c
6c
71.4
49.2
51.4
43.7
37.7
6.2
All Companies
U.S. Exports
40
Source: Connor (1998a) and Appendix Table A6. E = Estimated. a Tables 6 and 17 of Connor (1998a). Includes Mexico, Sewon and Cheil from U.S. import data. b From antitrust litigation documents on ADM=s volume and sales (monthly), four Asettling defendants=@ monthly sales and prices, and imports valued at domestic prices. c Exports as a proportion of total domestic sales.
18
Kyowa
Thousand metric tonnes
ADM
North American Capacity and Importsa
Ajinomoto
1991
Year
Table 3. U.S. Feed-Grade Dry Lysine Sales and Capacity, 1991-1996.
The U.S. Lysine Investigation Whitacre was recruited as a secret agent (Aa mole@) in November 1992. He was guaranteed immunity from prosecution for price fixing from November 1992 to late 1995. Up until June 1995 he provided hundreds of audio tapes of many price-fixing meetings concerning lysine, citric acid, and HFCS. The FBI made additional video tapes of the Alysine association meetings. Statements made by participants clearly indicate that they knew the association was a convenient cover-up for price fixing. A federal grand jury was formed in early June in Chicago and obtained subpoenas for all information on price fixing by ADM and its co-conspirators. Criminal Prosecution The lysine case is fairly typical from the point of view of the evidence that supported the allegation of price fixing. The DOJ relies on six sources of evidence to help decide whether Aprobable cause@ exists (Daniel et al. 1997). First, an allegation by an insider informant, such as Whitacre, is the most common source. Most informers are participants in the price fixing seeking reduced sentences; they often make unreliable witnesses. Second, prosecutors get information from their own investigators, the FBI in this case. Third, evidence from parallel legal or regulatory investigations may come to light. The lysine investigation yielded information about citric acid collusion. Fourth, customers or suppliers may register complaints. Fifth, non-insiders may alert prosecutors to possible price fixing for monetary rewards. Finally, DOJ experts will be asked to evaluate industry characteristics for the likely feasibility of price-fixing behavior; industry screening programs may be initiated. None of the last three applies to the lysine case. Armed with subpoenas and search warrants, about 70 FBI agents raided ADM=s corporate offices on the night of June 28th; almost all ADM officers were interviewed in their homes that night as well. Offices of other possible co-conspirators were also raided. Seized documents show 19921995 Asales targets@ and Aactual sales@ by all members of the lysine association. In July 1995, Kyowa Hakko stated that it was Acoerced@ into colluding by Ajinomoto. Documents were subpoenaed from many other firms by the DOJ during July-October and the U.S. offices of the Asian firms were searched. ADM=s stock price fell 24% ($2.4 billion dollars of market value) in the days following the raid (from $17 to $13 per share); 27 million shares were traded in one day, more than ten times normal volume. Prosecution of ADM and its co-conspirators was given an unusually high priority by the DOJ. Initially, investigation and prosecution was handled by the chiefs of the Antitrust Division=s regional offices in Chicago (for lysine), San Francisco (citric acid), and Atlanta (HFCS). Grand juries were empanelled in each city. However, sometime in late 1995, the number 2 official in the Justice Department, Deputy Attorney General Jamie Gorelick, had assumed overall direction of the several prosecutions. When Whitacre=s alleged embezzlement came to light, Gorelick assigned a highly experienced assistant U.S. District Attorney (Scott Lassar) to help prosecute the lysine case. By the spring of 1996, Joel Klein was transferred from the White House to work with Gorelick, a move that may have signaled the highly sensitive political dimensions that the ADM cases were assuming. In October 1996, Klein replaced Anne Bingaman as Assistant Attorney General for Antitrust. While the size of the resources devoted to the cases by DOJ is not known, the involvement of so many high
41
DOJ officials in one case may be unprecedented. ADM, its officers, and its Board were likewise represented by major law firms and their leading partners. In the spring of 1996, the DOJ=s case was beginning to falter. The DOJ was targeting Michael Andreas (Executive V.P.) and Terrance Wilson for criminal charges, but not a single ADM officer would offer to corroborate the evidence. Moreover, Whitacre=s credibility is tarnished by his own admission that he received almost $10 million in Abonuses@ while an FBI mole on which he did not pay taxes. Whitacre was fired in August 1995 and was eventually sued by both the government and ADM for fraud. (Perhaps in desperation, the DOJ announced that Dwayne Andreas was no longer a target of its investigation; this is a rare action by the DOJ). Whitacre=s duplicity hurt the government=s case in two ways. First, the tape recordings themselves, though quite graphic and convincing, would be regarded as potentially tainted. Whitacre had the opportunity to turn in selectively damaging tapes while withholding exonerating tapes. Second, the government absolutely needed one participant to testify as to the authenticity of the taped evidence (Daniel et al. 1997). Without Whitacre or one of the other participants prepared to testify that the conspirators knew what the purpose was, the defendants could claim that the video tapes showed play-acting or some such innocent activity. Civil Litigation By February 1996, ADM had a total of at least 85 private suits filed against it, 14 of them by lysine buyers and many others by stockholders claiming mismanagement and failure to divulge material information. At ADM=s October 1995 stockholders= meeting, Dwayne Andreas imperiously quashed discussion of the price-fixing charges. ADM=s legal costs reached $6 million during September-December 1995 and were to rise higher during 1996-1997. Many of the antitrust suits also named other members of the cartel. In April 1996, ADM, Ajinomoto, and Kyowa offered to pay Atreble damages@ of $45 million for buyers of lysine during 1994-1995. Technically, the three companies were not admitting that they were guilty of price fixing. The negotiations were carried out by a Philadelphia law firm that made the lowest bid in an almost unprecedented auction held by U.S. 7th District Court Judge Shadur. The judge refused to consider bids based on traditional percentage contingency fees of 10 to 30 percent. Instead, the Philadelphia firm agreed to cap its fees at $3.5 million. Buyers must decide by July 15th whether to take a certain portion of the $45 million settlement immediately or to Aoptout@ of the agreement and sue privately for might be a larger settlement. Based on overcharge estimates that are 10 to 12 times higher, many large feed companies do in fact opt out (see Appendix B). The judge is criticized for rushing to judgment civil penalties that normally follow the completion of the criminal case by public prosecutors. Auctions for fixed fees appear to introduce perverse incentives for the winning law firm: the less resources the firm spends, the greater its profits, and its profits are unrelated to the damages sought for its clients. I estimate that lysine class-action plaintiffs will eventually receive about $80 million. This recovery amount is nearly 200 times the amount paid by antitrust class-action defendants historically (Elzinga and Wood). It is about 40 times the average recovery in Anaked cartel@ cases like lysine.
42
The Conspirators Plead Guilty In a shocking setback for ADM, in August 1996 the three other lysine co-defendants Acop a plea.@ In return for leniency, the three Asian companies filed guilty pleas, and three executives also admitted personal guilt and agreed to cooperate with prosecutors and testify against ADM. This is the beginning of the end for ADM. On October 14, 1996, ADM also agreed to plead guilty to criminal price fixing, to pay a $70 million fine for its lysine activities, and to fully cooperate in helping the DOJ prosecute M. Andreas and T. Wilson. Numerous changes in ADM=s Board of Directors take place; M. Andreas is given a 15 percent raise and placed on Aadministrative leave@; T. Wilson resigns; and D. Andreas is relieved of his duties as Chairman (though he keeps his title). The stock market reacts favorably to the apparent resolution of ADM=s legal problems; ADM=s stock price rises by about 20 percent. The $70 million fine is five times larger than the previous highest fine for price-fixing. It is based on new (1991) federal sentencing guidelines for felonies that permit fines that are double the illegal profits from price fixing. (The treble damages to private parties still stand in addition). Thus, the penalties for price fixing have dramatically escalated since 1991, to an amount up to five times the overcharges to buyers. As large as they were, DOJ lawyers opine that they did not sufficiently hurt ADM; some commentators believe that the fines are a Abargain@ for ADM. I estimate below that the total fines and civil actions have cost the guilty parties at least $175 million in the case of lysine alone as of May 1997. Legal defense and offense costs are around $164 million for all three commodities, and shareholders= suits were settled for $38 million by ADM. The total for all related price fixing, mismanagement, and fraud cases is $740 million and rising. The $70 million fine paid by ADM for lysine is an implicit admission by the DOJ that 199495 overcharges were at least $70 million for all four guilty conspirators; it is probably a Adiscounted@ fine because of ADM=s agreement to help prosecutors. Overcharges of $70 million would imply treble damages of at least $210 million, which is 4.7 times the class-action settlement for lysine in July 1996 and about 50% of the estimate shown below. Other Legal Actions In January, 1997, the USDA announced that ADM=s guilty plea does not prevent the company from participating in federal food contracts. However, the Commodity Futures Trading Commission does place restrictions on ADM. No ADM employee connected with the price fixing can trade contracts. In February 1997, the Mexican Competition Law Commission began investigating ADM for lysine price fixing. In June 1997, the European Union=s competition directorate did likewise. About 25 percent of ADM=s lysine sales are in Europe. In June 2000, the European Commission assessed the five members of the lysine cartel 110 million euros (about $105 million) in fines for price fixing, one of the largest EU penalties. ADM, which appealed the decision to the European Court of Justice, is slated to pay 47 million euros. Because of its failure to cooperate with the EU, ADM received the smallest discount (10%) from the maximum EU penalties. 43
In April 1997, the $30 million settlement in the shareholders= suit against ADM was approved by a federal judge. Two months later, ADM proposed a $8 million settlement in the case of 17 shareholders= suits alleging board of directors mismanagement. Both of these settlements are being appealed by some large stockholders as insufficient. The DOJ=s criminal indictment of Michael Andreas, Terrance Wilson, Mark Whitacre, and Kazutoshi Yamada was filed in U.S. District Court in Chicago on December 3, 1996 and their two month trial ended in September. By that time, the DOJ had had 18 months to study the detailed records of the lysine conspiracy that had been obtained through searches of the manufacturers= headquarters. In the indictment, ADM=s global sales of lysine from June 1992 to June 1995, the alleged conspiracy period, were $454 million, and its U.S. sales were $197 million. From this information, it can be calculated that U.S. sales of all producers were $359 million during the same three year-period (corresponding to ADM=s fiscal years 1993 to 1995). However, the conspiracy period does not necessarily correspond to the period during which the price fixing was effective. The effective period could have been as long as 43 months or as short as 24 months.12 ADM=s U.S. sales of lysine during the price-fixing-effects period therefore ranged from $140 to $249 million, and the cartel=s total U.S. sales ranged from $245 to $450 million (Table 4). Andreas et al. were indicted solely for their roles in the lysine conspiracy. The defendants were sentenced in July 1999. Mark Whitacre received a 30-month prison sentence (10 of them concurrent), surprisingly harsh for a cooperating witness. After appeals all the way to the Supreme Court, Andreas and Wilson were given 36-month and 30-month prison sentences and each fined the statutory maximum of $350,000. The Asian defendants might have been hoping that the evidence of meetings held outside U.S. territory would become inadmissible. But a March 18, 1997 ruling by a federal appeals court in Boston makes price fixing by foreign companies abroad illegal if it affects U.S. trade or commerce (Wilke). Post-Cartel Developments In July 1997, rival Cargill announced that it will build a new Nebraska plant that will give Cargill one-third of world lysine production (165 million pounds) at a cost of about $100 million. ADM has half of world production and production costs of about $0.60 per pound. Cargill=s action comes shortly after ADM=s announcement of a new Iowa plant to manufacture lysine (100 million pounds) by the fall of 1998. Moreover, lysine output at Decatur will be expanded to 350 million pounds at a cost of $80 million.
12
The long period begins the month of the first price agreement and assumes that the effects the conspiracy (ended June 1995) lingered for six months. The short price fixing period was the one favored by ADM=s economists. 44
Table 4. Global and U.S. Sales of Lysine, Five Cartel Members, 1992-1995. Company Area: Period
ADM
Ajinomoto
Kyowa
Sewon
Total
Million dollars World: June 1992-June 1993
131
142
89
67
429
June 1993-June 1994
157
197
108
116
578
June 1994-June 1995
166
208
115
122
611
July 1995-Dec. 1995
109
108
49
51
342
563
655
361
356
1,960
323
405
222
238
1,189
June 1992-June 1993
57
23
22
11
114
June 1993-June 1994
68
24
19
10
119
June 1994-June 1995
72
25
20
8
126
July 1995-Dec. 1995
52
18
15
5
91
249
90
76
34
450
140
49
39
18
245
Long price effects: (June 1992-Dec. 1995) Short price effects: (June 1993-June 1995)
USA:
Long price effects: (June 1992-Dec. 1995) Short price effects: (June 1993-June 1995)
Sources: Table 3, DOJ indictment, and Connor (1998b) Table 9. Note: From known ADM sales for June 1992-June 1995, the market shares in Table 3 are applied to obtain total and other companies sales. For June 1992-June 1993, ADM=s share was 50% in U.S. Total includes Cheil Jedang from 1993 to 1995. Excludes liquid lysine.
45
In June 1997, G. Allen Andreas was appointed CEO and President of ADM. In fiscal 1997, ADM spent $1.8 billion on mergers and expansions. ADM becomes the leading grinder of cocoa with two large acquisitions. In July, Congress extends the ethanol subsidiary that benefits ADM primarily. By 2007, the U.S. Highway Trust Fund will have spent $10.9 billion on this subsidy, the majority going to ADM. By late 1997, scores of state-level price-fixing suits against ADM were proceeding in Alabama, Tennessee, and Michigan. Most are class actions. One class-action suit tried in San Francisco County Superior Court resulted in a $1 million judgment against ADM et al. Each client received 17 percent of the value of the lysine purchased; normally in cases of this kind, less than 7 percent is recovered. A second class-action suit by indirect buyers of lysine was settled for $2.125 million in Michigan, covering buyers in 16 states where indirect recoveries are permitted. Citric Acid The Cartel Somewhat less is known publicly about the citric acid conspiracy than about lysine (see Chronology, Appendix B). The allegations first surfaced shortly after the June 1995 FBI raid on ADM=s Decatur, Illinois headquarters. Documents containing detailed information on prices charged and volumes of production of major citric acid manufacturers worldwide were found in ADM files. Audio tapes provided by Mark Whitacre and video tapes taken by the FBI of the ALysine Association@ contain references to the citric acid conspiracy. In addition to the lysine meetings, ADM=s Terrance Wilson apparently met with representatives of Bayer and Hoffmann-La Roche in hotels in Paris and London, but it is possible that no video tapes exist for these meetings because the product was not managed by Whitacre. From the fines levied on the two companies and the two executives with responsibilities for citric acid, it is clear that the DOJ regarded ADM and Haarmann & Reimer as the two ringleaders. Terrance Wilson was a long-term manager with fierce personal loyalty to Dwayne Andreas. Hans Hartmann had been an employee of Bayer for 40 years. Having been executive vice president and president of H&R for more than a decade, he was knowledgeable about both the U.S. and European citric acid industries. As a German speaker, Hartmann was ideally placed to obtain the confidence of Jungbunzlauer=s leaders in Vienna and Bayer=s in Basel. The starting date of the citric acid conspiracy is critical in assessing the impact of the cartel on the market and, hence, the size of the civil damages it generated. In the plea agreement submitted to the U.S. District Court in Chicago in October 1996 (the terms of which had been carefully crafted through negotiation with the DOJ), ADM later admitted to colluding on citric acid prices and volumes Aat least as early as@ January 1993 and until June 1995, or a total of 30 months. The admission of a starting date Aas early as@ January 1993 was a very clever move by ADM=s lawyers, because there is evidence that the conspiracy began and began to affect price increases as early as the spring of 1992. First, there is the evidence of a change in price-leadership patterns in early 1992. When Cargill=s new, large, integrated citric acid plant in Eddyville, Iowa came on stream around June 1990, 46
it immediately assumed the leadership mantle by announcing list prices and in fact cutting prices to attract new customers. However, by late 1991 or early 1992, it was H&R that began leading list prices upward from the low $0.60 range to a high of $0.82 by January 1993, where they remained until the end of 1995. Canadian export prices closely parallel domestic U.S. transactions prices, and both these prices followed the list price movements quite closely (Connor 1998b). Second, Mark Whitacre has stated that the FBI has video tapes of a November, 1992 meeting of the Alysine association@ in Paris, France in which Wilson explains the details of the pricing and volume techniques already in place in citric acid. If this evidence exists, why would the DOJ agree to a vague statement about a possible shorter collusive period? Plaintiffs= lawyers assert that the DOJ was more excited about the imminent settlement of the criminal charges against ADM in the lysine case than considering the repercussions for private litigants in civil actions, particularly the citric and fructose cases. Focusing on ADMs criminal admissions, the unprecedented criminal fines, and the tremendous opportunity of ADM=s cooperation in prosecuting seven more large co-conspirators was only natural for the DOJ C it was such a big prize, redolent of favorable publicity after five years of investigation. Thus it is quite believable that negotiations over the commencement date of the conspiracies would be given so little attention.13 What may have appeared to be a tiny detail proved decisive for the calculation of civil damages. For the shorter, 30-month period the but-for price was arguably as high as $0.79/lb., the volume about 1.3 billion lb., and the cartel=s overcharge only $39 million. It the conspiracy was effective from January 1992 to December 1993, the but-for price (just prior to the beginning date) was $0.63 to $0.69/lb., volume 2.0 billion lb., and the overcharge was $250 to $350 million, or as much as eight times higher. Indeed, there is some evidence that the but-for competitive price may have been as low as $0.50 to $0.60/lb., which translates into an impressive $500 to $550 million overcharge, or roughly 40% of the purchase value of citric acid in the U.S. market. Third, the Canadian Competition Bureau negotiated a separate guilty plea with ADM in May 1998. This plea agreement clearly states that the lysine and citric acid conspiracies were effective in raising prices from 1992 to 1995. The unprecedented fine imposed by Canada=s Federal Court in Ottawa implies monetary compensation of 24% of lysine sales and 27% of citric acid sales. Investigation and Prosecution The DOJ prosecution activities were centered in the U.S. Attorney=s office in San Francisco, partly because citric acid is used in many processed tomato products. By February 1996, ADM was facing at least seven private price-fixing suits on their citric acid activities. Lawyers were trying to form a class-action group that will be recognized by a judge. The federal case was described as Astalled@ in the spring of 1996. The lack of video taped information was a disadvantage because
13
Another possibility is that omitting possible 1992 price fixing might have exposed the government=s principal witness to prosecution. Barrie Cox gave important information to the FBI and DOJ in interviews in San Francisco October 12 and 13, 1996. He was immunized against price fixing indictments if he cooperated, but only for the 1993-1995 period. 47
none of the conspirators was ready to confess. ADM was reported ready to argue that the conspiracy arose outside the United States without ADM=s overt participation. By August 1996, ADM was on the defensive because three Asian co-conspirators agreed to testify against ADM in the lysine case. With surprising suddenness, on September 29, 1996 ADM offered to settle the class-action citric acid suit for $35 million. The offer was surprising because the three European co-conspirators did not make separate offers until a month or two later. The timing was surprising because plaintiffs were still arguing for class-action status in federal court just the previous week. However, the timing could prove to be a smart move if the plaintiffs quickly accepted, because the civil agreement would not involve an admission of guilt and because the amount of the settlement might have escalated had it occurred after the settlement of the criminal case with federal prosecutors. (Criminal pleas were made by ADM in October 1996 and by the three Swiss co-conspirators in January and March 1997. It was only in the winter of 1997 that civil plaintiffs would have information on the Atwo-times@ fines with relatively low discounts). Just two weeks prior to the citric acid offer, ADM=s Board of Directors had undergone its second shake-up; two old (74 and 79 years) former officers resigned, bringing to eight the total resignations since the price-fixing allegations erupted. At the time ADM=s stock price was near its nadir, so the Board may have thought that dramatic offers to settle were in the best interest of stockholders. Moreover, the Directors themselves could have been held legally liable for failure of their duties had they not settled quickly and fully. A few weeks later at ADM=s annual meeting, it is revealed that a Acorporate governance@ committee of seven Aoutside directors@ was created a year before and authorized to make any plea agreements necessary with DOJ prosecutors. Seventeen shareholders= suits are eventually filed against the board of directors of ADM. On October 14, 1996, ADM announced that it will plead guilty of criminal price fixing in U.S. federal court in San Francisco and pay a fine of $30 million to the government for the citric acid portion of the case (and $70 million more to settle the lysine portion). The fines paid were based on the DOJ=s new Atwo-times@ rule (fines are twice the agreed-upon overcharges made by ADM to its customers), but the $30 million may have been discounted because ADM also made a major concession to the DOJ. ADM promised to offer full cooperation to the DOJ in its criminal prosecution of two ADM executives, M. Andreas (still the Executive V.P. of ADM) and T. Wilson (recently retired President of the Corn Products division of ADM), as well as prosecution of citric acid co-conspirators (both companies and individual officers). In addition, the DOJ offered immunity from prosecution for price fixing to Barrie Cox, V.P. of the citric acid division of ADM, in return for Cox=s full cooperation in its citric acid investigation. Cox divulged details of ADM=s conspiracy with Haarmann & Reimer (Bayer=s U.S. subsidiary handling citric acid sales), Hoffmann-La Roche, and other co-conspirators. The DOJ stated publicly that Cox Adid cooperate ... and it is substantial ...@ in its citric acid investigation. Legal counsel for Bayer and Hoffmann-La Roche also state that their companies are fully cooperating with the DOJ. In its plea agreement filed in U.S. District Court in Chicago, ADM admitted that its representatives attended meetings in the United States and overseas in which A... agreements were reached as to the prices the firms would charge for citric acid ... and the volume of citric acid each firm would sell.@
48
On December 9, 1996, four companies submitted a combined offer to pay $94.25 million to settle the class-action private antitrust suit concerning the citric acid overcharges in San Francisco District Court. The offers include ADM for $35 million (first made in early October), Hoffmann-La Roche for $5.68 million, and Jungbunzlauer for $7.57 million (both made in late October). The latter two companies imported citric acid made in their French, German, and Belgian factories. The fourth company was Haarmann & Reimer, a wholly owned subsidiary of Bayer AG, which offered $46 million. The DOJ signaled its approval of the $94 million private class-action suit by indicating that it would not seek further civil damages for injured buyers. In March 1997, plaintiff’s attorneys in the civil class-action suit in San Francisco stated that the overcharges to all buyers were as high as $400 million. They asked the judge to approve legal fees at the conventional 25 percent rate (or $23.5 million of the $94 million in damages to be paid). However, in July 1997, Judge Fern Smith approved a slightly reduced settlement of $86.2 million; the new settlement reduced Bayer=s share from $46 to $38 million. Four or five large buyers of citric acid opted out of the agreement; their 1991-95 purchases of citric acid were $350 million, which accounts for about 19 to 24 percent of total sales during those years. In March 1998, ADM announced that it was paying $36 million to four of the opt-out firms. (I estimate below that ADM, et al. paid a total of about $85 million to settle with the opt-outs, which is a settlement rate two to four times higher than the federal class received). Cargill still refuses to negotiate with plaintiffs, and in January 1998 Cargill was dismissed from the class action, primarily because of the testimony of Hans Hartmann that Cargill did not collude with the G-4 companies. Plaintiffs in the citric acid federal class action were at a serious disadvantage in their information and legal position. The October 1996 plea-bargain agreement permitted ADM et al. to admit to only a 30-month period of price conspiracy. As mentioned above, this short period yielded an overcharge estimate of only $39 million for treble damages of $117 million. Given ADM=s 30% share of the U.S. citric market during 1993-1995, its offer of $35 million made in September 1996 is exactly consistent with the $117 million estimate of treble damages. Section 8 of the Clayton Act specifically mandates the use of court records from criminal antitrust cases as prima facie evidence to determine damages in subsequent tag-along civil suits. However, rules of federal civil procedure do not allow plaintiffs access to FBI or DOJ investigative facts once the criminal phase is completed. The cartel members= plea agreements specified a conspiracy period of Aas early as@ January 1993 to June 1995, and this stipulation of fact had to be the basis of a class-action agreement. In fact, given a 1992-1995 conspiracy period, the cartel=s liability would have been 2 to 5 times greater. The few large buyers of citric acid that opted out of the class action later got proportionately much larger settlements than did members of the class. Hans Hartmann, the German senior manager of H&R, was indicted for criminal price fixing in January 1997. In addition, Bayer agreed in January 1997 to pay the DOJ a criminal fine of $50 million for its role in the citric acid case. In March 1997, the remaining two co-conspirators pleaded guilty to price fixing in the U.S. citric acid market. Jungbunzlauer and Hoffmann-La Roche supplied the U.S. market from its Western European facilities; they paid hefty fines of $11 and $14 million, respectively. Two executives of these Austrian and Swiss firms also pleaded guilty to criminal price fixing and paid small fines. A small U.S. subsidiary of the large Italian agribusiness firm Eridania that briefly joined the cartel was also fined. Whether other importers from Europe or China cooperated with the cartel is not known, but they were probably not active members of the 49
conspiracy. Thus ended the government=s role in the lysine and citric acid cases, which Gary Spratling of the DOJ termed A...one of the largest – if not the largest – conspiracies ever prosecuted by the Department of Justice.@ Federal officials emphasized that the $105 million paid in corporate criminal fines for citric acid (as well as the $91.3 million for lysine) could have been even larger had the four companies not helped the DOJ investigation. Under DOJ sentencing guidelines the fines paid could have been as high as double the overcharge for the two year conspiracy. Joel Klein, acting chief of the Antitrust Division, specifically refused to identify the total overcharge in the citric acid case at a January 29, 1997 press interview. Therefore, all we know is the $105 million fines were discounted substantially from the maximum possible fine, perhaps by 25 to 50 percent. Bayer seems to have been fined much more heavily than the others ($50 million for its 31-33 percent market share). Using Bayer=s fine as a guide the true overcharge by the four conspirators ranged from $150 to $165 million for the twoyear period. The two most reliable sources on U.S. citric acid production are slightly inconsistent, but annual U.S. consumption (production plus net imports) was in the range of 300 to 425 million pounds per annum in 1994-1996 (CMR, USITC). The most accurate consumption figure seems to be 366 million pounds, and the most reasonable price around $0.80 per pound. Therefore, total 19941995 wholesale sales were around $580 to $730 million. An overcharge of $150 to $165 million implies that prices were raised by 21 to 28 percent. Recall that in 1990 when Cargill entered into production of citric acid, prices fell to as low as $0.63 per pound. It is possible that Cargill=s marginal cost of production was in the $0.60 to $0.65 range. During 1994-1995, list prices of citric acid sold in the United States were $0.85 per pound. However, while some smaller buyers actually purchased citric acid at $0.85, the largest buyers seem to have paid closer to $0.80 per pound. Although these price data in no sense prove that price fixing occurred, they are consistent with the estimates just derived from Bayer=s fine. That is, the citric acid overcharge on smaller buyers was in the 31 to 42 percent range, while that imposed on larger buyers was in the 24 to 34 percent range. The role of Cargill in the citric acid conspiracy remains obscure, but in 1999 the clouds lifted a bit on this topic. Cargill accounted for about 30 percent of U.S. citric acid sales in 1994. Had it wished to increase that share, it could have done so by lowering its price during 1992-1995 below the cartel=s collusive prices of about $0.70 to $0.80 per pound (Connor 1998b: Figure 1). When it entered the market in 1990, prices plunged from about $0.80 to as low as $0.60 in the spring of 1991, yet Cargill remained in the market even at such low prices. It seems clear that Cargill avoided blatantly conspiratorial behavior with respect to the four or five citric acid conspirators during 19911995. The closest Cargill came to conspiring was sending it monthly production or sales figures to ECAMA. Whether it got in return each of the member=s market shares (probably illegal) or simply the group=s total sales (probably legal) is not known. Both Hans Hartmann and Barrie Cox stated under the threat of indictment for perjury that Cargill had no direct communication about the cartel=s agreements with the G-4 or G-5. For that reason, Cargill was never indicted for criminal price fixing by the DOJ, nor has it so far been held liable for civil damages. Cargill was even cited by Scott Lassar, U.S. Attorney for Chicago, during his closing argument as a good, clean company. Cargill has steadfastly refused to negotiate with private plaintiffs who purchased citric acid, and these plaintiffs have chosen so far not to sue Cargill separately (though its dismissal from the class action was still being appealed in late 1999). 50
In October 1996, just a day or two before ADM pleaded guilty, Barrie Cox was flown from England, where he continued to work for ADM, to be interviewed by the FBI. The memoranda of those interviews are now in the public record. Cox, who was virtually assured immunity from prosecution for price fixing so long as he told the truth (perjury would abrogate his immunity), told of about a dozen or more conversations with his counterpart at Cargill, William Gruber (now head of Cargill=s corn products division). It is difficult to interpret these conversations between Cox and Gruber as anything other than bid rigging and price fixing. Cox believed that Gruber viewed them as such. This two-company conspiracy was carried out with the full knowledge of Terrance Wilson and the likely awareness of Michael Andreas, but Cox opined that Gruber=s superiors at Cargill might have been ignorant of Gruber=s activities. However, Cox also stated that the G-4 was informed about Cargill's cooperation and acquiescence to the G-4's decisions on prices and output. Cox confirmed the general outlines of this back-channel conspiracy when he was cross-examined by Mark Hulkower in the Chicago lysine trial (Hulkower=s motivation for this damaging line of questioning is inscrutable). Why the DOJ, in light of Cox=s statements, did not indict Cargill is rather puzzling. Releasing the FBI=s Cox interview forms in January 1999 appears to have been no accident, but its motivation is Byzantine at this point. The move could benefit private plaintiffs in citric acid by adding Cargill to the list of civil defendants. Perhaps the release was intended to remind convicted defendants Andreas and Wilson that a second sword hangs over their heads should their sentencing prove to be too light. Or perhaps the release was intended to correct the impression left by Lassar=s closing statement that, to quote Cargill=s lawyer, Cargill is virtually Aa poster-child for good corporate citizenship.@ Thus, Cargill=s legal liability for price fixing in citric acid is very much in doubt at this point. Even if Cargill is not liable, it may have raised prices to the level that the price fixers were charging; if so, under the law in most U.S. court circuits, the conspirators are liable for Cargill=s over-priced sales. If Cargill kept its prices low, then the $150 to $165 million overcharge simply refers to a smaller sales base; in this case the conspiracy raised prices by 30 to 40 percent. In sum, the citric acid conspiracy raised prices by 21 to 40 percent. In June 1997, Haarmann & Reimer announced its intention to withdraw from citric acid production. Bayer=s decision does not seem to be directly related to its large fines and bad publicity. Rather, H&R is the only U.S. manufacturer of citric acid that is not integrated backward into corn refining, a factor that may drive up costs. H&R=s market share had been shipping badly prior to 1995, with ADM and Cargill benefiting. Up for sale were seven plants employing 1310 workers and with 1996 sales of citric acid of $393 million. The plants are in the United States (3), UK, Brazil, Columbia, and Mexico. In September 1997, finally responding to complaints of European buyers, the EU began investigating ADM, Bayer, et al. for citric acid price fixing in Europe. Moreover, in May 1998, after being quietly investigated by the Canadian Federal Competition Bureau, ADM was assessed by far the largest fine ($16 million Canadian) ever imposed on a company for price fixing. The fine covers ADM=s exports of both lysine and citric acid to Canada during 1992-1995. This fine implicitly represents 24% of ADM=s lysine sales and 27% of ADM=s citric acid sales in Canada during the conspiracy. ADM cooperated in the Canadian investigation against its co-conspirators. Canadian 51
fines amounted to U.S. $20 million (Table 5). Because the U.S. and EU markets are about the same size, and there is reason to believe that overcharges were in the EU were quite close to those in the U.S. market and probably slightly higher. In June 2000, the European Commission assessed fines on the five lysine cartel members of $105 million, which is 14% higher than the U.S. criminal fines. These fines, after adjusting for discounts, appear to have been based on the companies European sales of lysine during the conspiracy period (i.e. they were proportional to each company’s monopoly profits of overcharges). Corn Sweeteners The least information is available concerning the alleged price fixing in corn sweeteners. It is not even clear that HFCS was the sole sweetener suspected of being the object of price fixing. For ten years the DOJ pursued a civil merger indictment and trial regarding HFCS against ADM and others in the Des Moines U.S. District Court, which dismissed the government=s case in 1991. Whether this dismissal emboldened ADM to initiate new price-fixing agreements is not known, but price-fixing discussions (illegal in themselves) began in late 1992. In June 1995, the DOJ established a federal grand jury in Chicago, Illinois to investigate price fixing in lysine, citric acid, and HFCS. At least four companies were subpoenaed: ADM, Cargill, CPC International, and A.E. Staley. These defendants tried to get the civil cases consolidated into one class-action suit and moved back to the same judge that dismissed similar cases in Des Moines in 1991. The number of private HFCS suits rose to a maximum of 28 by February 1996. By early 1996, the grand-jury probe of the criminal HFCS case had moved to Atlanta. Two of the largest buyers, who control nearly 75 percent of the market, declined to sue ADM et al. The high buyer concentration and the absence of tapes showing ADM meeting with other corn sweetener manufacturers weakened the government=s case from the beginning. By September, ADM had offered settlements in both the lysine and citric acid private class-action suits, but the HFCS classaction lawsuit in Peoria, Illinois was left unchanged by defendants. However, CPC International did agree to pay $7 million to settle private suits against it. Cargill consistently denies any knowledge of price fixing in HFCS; this position is backed up by an interview published in Fortune by Mark Whitacre, who quotes M. Andreas as saying that his counterpart at Cargill would never participate in price fixing. In October 1996, as part of its plea agreement with the DOJ, ADM was granted immunity from criminal prosecution in the corn sweeteners markets during 1992-1995. The DOJ said then that its Joliet, Illinois grand jury investigation of price fixing in these markets by other companies will continue. The investigation ended in early 1999 with no indictments. Vitamins The multiple international conspiracies involving 13 vitamin products were remarkably complicated, long lasting, and injurious. There were wheels within wheels: eight overlapping groups of at least 18 vitamin manufacturers. While a couple of the conspiratorial groups were only able to persist in price fixing for four or five years, but several lasted for nine or ten years. Sales of the various cartels during their respective conspiracy periods amounted to approximately $5 to $7 billion 52
worldwide.14 On average, the cartels were successful in using their power to raise prices by 25 to 35 percent above more competitive levels. Therefore, the buyers of bulk vitamins in the United States were overcharged some $1.6 to $3.1 billion during 1989-1999, according to estimates of plaintiff’s counsel and their experts. More conservative estimates prepared by the present author place the U.S. vitamins overcharges in the $1.2 to $1.5 billion range.15 By extension, global overcharges for 19891999 conspiracy periods amounted to $6.9 to $8.0 billion – probably the most harmful global conspiracies of the late 20th century. The Conspiracies The complexity of the vitamins cartels permits only a brief summary of their formation and operation. It appears that the first of the main group of cartels began as a result of meetings between Hoffmann-La Roche and BASF in late 1989. They raised the prices on vitamins A and E on contracts that became effective in January 1990 (Connor 2001: Chapter 11). Rhône-Poulenc joined the two pioneers in 1990. Additional members (Hoechst and Eisai) were added to this cartel in 1991. List prices of vitamin A and E were increased several more times throughout the 1990s, and these increases had parallel impacts on transaction prices until early 1999 when the cartel was exposed by U.S. antitrust authorities. The U.S. transaction price of dry vitamin A rose by as mush as 62 percent form pre-conspiracy levels, though part of this increase can be ascribed to changes in U.S. dollar exchange rates that affected U.S. supplies imported from Europe. The initial success of the vitamins A and E conspiracy seems to have inspired replication in several other vitamin markets.16 In late 1990 or early 1991, four more cartel groups were formed. Roche was a leading member in all four of these second-wave cartels, and BASF was involved in three of them. Roche, Takeda, and Daiichi joined together to fix the prices of three B vitamins (B1, B6, and folic acid). Roche, BASF, and Daiichi began colluding on the price of vitamin B5. Roche and BASF monopolized world production of beta carotene and other cartoenoids from 1991 to 1998. Finally, the largest of the second-wave cartels was formed to fix the price of vitamin C; the collusive group was comprised of Roche, BASF, Takeda, and E. Merck of Germany. Recent indictments by the EU suggests that three or four more Japanese vitamin companies colluded, at least with respect to exports from Japan to Europe. In addition to the six collusive groups mentioned so far, two vitamin cartels operated with strikingly different participants on separate tracks. Hoffmann-La Roche was not a member of either the vitamin B3 or vitamin B4 cartels, though BASF did join later. Documents filed in federal court by the Canadian Ministry of Justice in 1999 provide a detailed record of the choline chloride (B4) conspiracy. They relate that the three North American producers of choline chloride began conspiring at a meeting held in January 1998 in Toronto. Chinook Group took the lead, joined by two U.S. firms, Bioproducts (owned by Mitsui of Japan) and 14
The larger figure includes sales of premixes. These estimates make no provision for overcharges on the sales of vitamin premixes. 16 Rhône-Poulenc began colluding with Hoechst on vitamin B12 sometime in 1990 also. 15
53
DuCoa (a DuPont-Conagra joint venture at the time). In addition to raising prices, the B4 cartel rigged bids and allocated customers among themselves. To further strengthen their grip on the supply of choline chloride, managers of three North American firms met in Mexico City in October 1992 with the three dominant producers in Europe (BASF, Akzo, and UCB).17 The two sets of manufactures agreed to refrain from exports to each other’s home territories, and they divided the rest of the world into exclusive selling zones. The choline chloride cartel ended in June 1995. The vitamin B3 (niacin) cartel also began in late 1988. The founding members were the Swiss firm Lonza and the German firm Degussa. Around 1991, the B3 cartel recruited at least two U.S. members to the group, a small New York company called Nepera and an Indiana chemical firm, Reilly Industries, which joined Degussa in a joint manufacturing venture.18 The four companies colluded on U.S. prices of niacin until as late as March 1998. The vitamin cartels involving Roche seem to have been modeled on the famous German chemicals cartel of the 1930s, I.G. Farben. Three levels of managers met in separate meetings to manage the cartel. First, in late summer the top corporate officers involved in the cartel met to set a “budget” for the cartels, that is, prices and market shares. Second, at the end of the year, division presidents and global managers would meet to adopt the budget for the coming year and review profitability for the past year. If necessary, compensation schemes would be implemented for members that had deviated from their quotes. Finally, each quarter the company’s regional sales managers met to report on prices and sales volumes and prepare reports for their supervisors, the global sales managers. In effect, these managers were operating on illegal global merger of their vitamins divisions. They even had a name for the virtual joint venture: Vitamins, Inc. Although two of the smaller cartels were abandoned in 1994 and 1995 because of increasing exports from China, most of the cartels continued operating up until the end in late 1998 or early 1999. That the Roche groups continued after late 1996 is surprising, because Roche itself was investigated for citric acid price fixing by U.S. authorities. In early 1997, Roche admitted its guilt and agreed to cooperate with the DOJ. Some of the same Roche officers who were interviewed about citric acid were asked about other conspiracies, but denied their existence. Roche also launched an internal antitrust probe of its own and issued new tougher guidelines, but the effect was to drive the vitamins conspiracies deeper under cover. For example, cartel meetings and records were hidden in private homes rather than hotels and offices. Investigation and Prosecution In late 1997, the DOJ set up a grand jury in Dallas, Texas to investigate vitamin price fixing (Barboza 1999). Complaints of vitamin buyers were heard, but little progress was made for the first year. However, for reasons relating to its desire to complete a major merger, representatives of the Rhône-Poulenc company approached the DOJ seeking amnesty in return for being the first party in a cartel to agree to cooperate with the DOJ’s investigation. Apparently, Rhône-Poulenc officers made tape recordings of a cartel meeting in early 1998. As the first corporate whistle-blower in the 17
Strangely enough, lysine manufactures also met in Mexico City just three months earlier to kick off the lysine cartel. 18 U.S. guilty pleas mention unindicted co-conspirators but do not reveal their names. 54
vitamins conspiracies, Rhône-Poulenc was forgiven approximately $130 million in potential U.S. antitrust fines. In December 1999, it merged with the large German chemical company Hoechst to form Aventis. The DOJ may have had some information about vitamin price fixing form Lonza, the leader of the B3 cartel. Although kept secret for six months, Lonza had agreed to plead guilty to price fixing in September 1998. Both Lonza and Roche make the vitamin biotin, and it seems likely that Lonza had offered the DOJ information about Roche’s involvement in return for a light sentence. Another possibility is that Chinook or DuCoa, two of the B4 conspirators, provided incriminating information about co-conspirator BASF. DuCoa also received a very lenient sentence from the DOJ, but the nature of its cooperation is not known. By March 1999, the DOJ had solid evidence on the nature and extent of the various cartels in which Roche had participated. After intense negotiations with Roche and BASF, the DOJ was able to announce in May 1999 historic guilty plea agreements with the two firms. Roche agreed to an especially severe penalty of $500 million because it was the biggest profiteer, the instigator, and a repeat offender. BASF agreed to pay $225 million. It is likely that these fines will remain U.S. antitrust records for many years to come. The personal penalties imposed on four Roche and four BASF senior executives also made history. Three Roche executives paid fines of $100,000 to $350,000 and agreed to serve U.S. prison sentences of up to four months. They, together with two BASF executives, were the first Europeans to serve prison sentences for criminal antitrust violations. More U.S. indictments, corporate guilty pleas, and individual antitrust penalties were announced in late 1999 and early 2000. The remaining members of the Big Six vitamin makers entered guilty pleas in September 1999. Takeda Chemical, Eisai, and Daiichi Pharmaceutical agreed to pay antitrust fines of $72, $40,and $25 million to the U.S. Treasury. In early 2000, more vitamin manufacturers pleaded guilty and paid fines. They include E. Merck of Germany, Degussa-Hüls of Germany, Nepera, Reilly Industries, Chinook Group of Canada, and DuCoa. By late 2000, a dozen corporate vitamins conspirators had paid nearly $1 billion in antitrust fines to the U.S. government. The unprecedented size of the injuries caused by the global vitamins cartels tempted many jurisdictions to launch official investigations of price fixing. Canada and the European Union, typically the most likely to act, were joined by Switzerland, Australia, Brazil, Mexico, New Zealand, and perhaps other countries that are keeping their probes secret. Canada imposed the highest fines ever seen in that country for antitrust violations. Moreover, it sentenced a former top officer of Chinook to nine months in prison for his role in the choline chloride conspiracy – a first for Canadian law. The EU investigation is proceeding slowly, with 13 vitamin manufacturers being sent warning letters in July 2000. Although the overcharges incurred by European buyers of vitamins were about the same as those in the United States, it is difficult to predict how high the EU fines will be.
55
Table 5. Summary of Non-U.S. Fines and Settlements Proposed or Paid, Up to Late 2000. Country: Case Defendants Date Amount Offered U.S. $ million Canada: Lysine ADM 5/98 7.9 Ajinomoto 7/98 2.4 Kyowa Hakko 7/98 0.0b Sewon 7/98 0.5 subtotal 10.8 Citric Acid Bayer/H&R 10/98 3.3 Jungbunzlauer 10/98 1.4 Hoffmann-La Roche 9/99 2.0 ADM 5/98 3.1 subtotal 9.8 Vitamins A, B2, B4, B5, C, E Hoffmann-La Roche 9/99 32.6 Takeda Chemical 7/00 3.6 BASF 9/99 12.9 Rhône-Poulenc 9/99 9.5 Eisai 9/99 1.7 Daiichi 9/99 1.4 Chinook pending -subtotal 61.7 Ontario: Lysine class action
Ontario: Citric class action Mexico: Lysine Citric Acid European Commission: Lysine
ADM Ajinomoto Kyowa Hakko Sewon Five companies ADM Others not named ADM et al. ADM Ajinomoto Kyowa Hakko Sewon Cheil
pending pending pending pending pending 6/98 NA pending
21.0E 0.125 NA 0.50E
6/00 6/00 6/00 6/00 6/00
45.4 27.1 12.7 8.5 11.7
Citric Acid
ADM Bayer Hoffmann-La Roche Jungbunzlauer
pending pending pending pending
Vitamins
Lonza Hoffmann-La Roche BASF Rhône-Poulenc
pending pending pending pending
56
17E
125E
800E
Country: Case
Defendants
Date Offered
(Nine other firms likely)
Amount U.S. $ million ___ 600 NA
Sodium gluconate
ADM
pending subtotal pending
Methionine
Degussa Rhône-Poulenc
pending pending
NA NA
pending pending pending pending pending
NA NA NA NA NA
Australia: Vitamins up to 20 firms New Zealand: Vitamins up to 20 firms Brazil: Vitamins up to 20 firms Switzerland: Vitamins up to 20 firms United Kingdom: Vitamins up to 20 firms E = Estimated by author. a Extrapolating from ADM=s fine and market shares of companies. b Leniency or amnesty for early cooperation with prosecutors.
Civil treble-damages suits were filed against some of the vitamin companies as early as 1997. By the spring of 1999, the civil suits were moving along even faster than the criminal ones. By June 1999, a federal class of 2000 plaintiffs had been certified and negotiations were intense. A “final agreement” of $1.17 billion was made by the Big Six vitamins companies with the federal class, and the agreement was approved in early 2000. However, an unusually large number of larger plaintiffs opted out of the agreement in order to seek larger settlements from the cartel members. The opt-outs, which account for a striking 76 percent of bulk vitamins purchases, will seek payments higher than the 20 or 21 percent of purchase value that the defendants agreed to pay the federal class. Indirect buyers of bulk vitamins in the United States obtained unprecedented relief from a suit brought by the attorneys general of 22 states, the District of Columbia, and Puerto Rico. In October 2000, the 24 attorneys general announced an agreement with the Big Six vitamins conspirators to compensate consumers and businesses in their states to the tune of $305 million. (An additional $35 million will be paid to 44 state governments that bought vitamins directly). While this was the largest settlement of its type in history, the remaining half of the U.S. population in 28 states that have no indirect-purchaser laws will receive no monetary compensation. Other Products Lysine and citric acid are but two of a long list of synthetic organic chemicals now being made by ADM, Cargill, and other wet-corn milling companies. Maize fermentation technologies are being applied to produce a widening array of organic chemicals at lower costs than traditional methods. The rapid growth of specialty chemicals made from corn starch is partly the result of encroachment of wet-corn millers into the traditional synthetic organic chemicals industry, which had sales of nearly $100 billion in 1995 (USITC). These products include food ingredients (such as sorbitol), feed ingredients (tryptophan), vitamins and medicinals. In November 1997, it became known that the DOJ had begun investigating possible cartel activity in the vitamin E industry. 57
While these chemicals are made by more than 700 U.S. manufacturers, the number of domestic sellers of the individual products is at times minuscule. For most specialty organic chemicals, only one to three domestic producers are active (USITC). For example, ADM was one of three U.S. manufacturers of lactic acid, sodium lactate, and sodium gluconate in 1994. As wet-corn millers continue to move into these specialty chemical markets with their high sales concentration, the opportunities for price fixing may increase. Moreover, public information on these markets is getting worse. The ITC=s report on the synthetic organic chemicals industry, which it published annually for nearly 80 years, was terminated by order of the Chairman of the ITC=s Congressional oversight committee, an unusual intrusion by Congress into the operations of an independent federal agency. The vitamins case is the biggest and most complex of the 1990's global price-fixing conspiracies (Appendix D). The DOJ empanelled a grand jury to investigate price fixing in bulk vitamins in 1987. Its investigation led to guilty pleas by a manufacturer, the Swiss firm Lonza AG for niacin price fixing, and five U.S. executives in charge of choline chloride sales at DuCoa LP of Highland, Illinois and Chinook Group of Toronto, Canada. Lonza=s plea was filed secretly on September 30, 1998 and revealed March 2, 1999. Lonza agreed to pay a $10.5 million fine for a conspiracy lasting approximately from January 1992 to March 1998. The choline conspiracy spanned January 1988 to September 29, 1998 B almost ten years. The DOJ=s press notice promised more indictments soon. Cartel watchers soon had their curiosity satisfied. The Wall Street Journal seems to have been the first to announce that impending guilty pleas in a May 19, 1999 article. On May 20th, Rhône-Poulenc announced that it had been involved in global price fixing in vitamins, but had been admitted to the DOJ=s leniency program because of its voluntary cooperation. Hoffmann-La Roche, the giant Swiss pharmaceutical firm, and BASF, a leading German chemicals manufacturer, pleaded guilty to criminal price fixing in U.S. District Court in Dallas. Simultaneously, the DOJ held a press conference announcing the deal. At the press conference, Joel Klein called the vitamin cartel A... the most pervasive and harmful criminal antitrust conspiracy ever uncovered.@ The indictments filed against Roche and BASF cited conspiracies in six vitamins (A, E, B2, B5, C and beta carotene) and in vitamin premixes for animal feeds. The conspiracies lasted from five (for B2 and C), to eight (premixes), to nine (B5 and carotene), to 10.1 years (A and B2), starting as early as January 1990 and ending as late as February 1999. The three firms (and others?) virtually formed a new joint venture (called AVitamins Inc.@), so comprehensive was the scheme. Roche will pay a $500 million fine and BASF $225 million. Rhône-Poulenc owes nothing to the government. In addition, Roche fired two of its top-eight managers; Dr. Kuno Sommer will pay a $100,000 fine and serve 4 months in prison B the first foreigner to do so for a criminal U.S. antitrust violation. Roche=s President, Franz Humer, admitted that the fine will equal or exceed Roche=s 1999 vitamin profits. Roche=s vitamin division generates about $2.5 billion in sales (15% of its total) and has a $110 billion market capitalization. One reason the fine was so large was that just two years before, Roche had paid $14 million for its citric acid conviction. However, at Roche=s sentencing hearing the government pleaded for a downward departure from the $1.3 to $2.6 billion fine required by the U.S. Sentencing Guidelines (i.e., a discount of 62% to 81%) because of Amitigating circumstances.@ [With a 30% to 40% global share of the vitamins markets, the total overcharge 58
implicit in this range is a whopping $2.2 to $3.25 billion]. The BASF fine seems to be more or less proportional to its global market share. Gary Spratling said that Asimply put, the vitamin cartel was as bad as it gets.@ There were three types of price fixing meetings. In August or September for 2 or 3 days, the cartel held Atopnotch@ meetings of global marketing heads (GMHs) and regional product managers (RPMs) to set next year=s Abudget.@ In December or January, division presidents and GMHs would meet to review the past year=s profitability and adopt the coming year=s budget. Then, the RPMs would meet quarterly to implement the plan and monitor progress and compliance. Enormous managerial resources were spent colluding rather than competing. Three Roche and four BASF managers were not given immunity under the plea agreement. Cover-up efforts were great. There was no U.S.-EU cooperation in this case. The cartel brazenly continued its conspiracy even though the grand jury had been meeting for more than a year. An article in the UK=s Financial Times noted that Roche had been caught rigging the price of vitamins 25 years ago. ALittle seems to have changed. Europe=s chemical industry, in particular, has a recidivist habit of price fixing...@ The paper opines that Boards need to be held personally responsible. Some financial analysts in late May speculated that the costs to Roche may eventually total $1 billion. Roche calls the estimate Apure speculation,@ yet as early as June 11, 1999 rumors begin to surface that plaintiffs have offered to settle with the three companies for $950 million and that the defendants= counter offer is $850 million. Thus, Roche already may have reached the $1 billion level before other jurisdictions bring cases. Roche refuses to make financial provisions for fines and settlements because it does not want to signal plaintiffs its willingness to pay. The civil actions are Aunusual,@ said the National Law Journal, in that plaintiffs= law firms met on May 17th, three days before the guilty pleas were announced. Schiller of Boies and Schiller claims to have discovered the conspiracy by accident from complaints by buyers of vitamins that they could not get competing price quotes from Roche and BASF. Also, vitamin C buyers were threatened with retaliation if they resold product. Plaintiffs= counsel claim overcharges of 20% to 40% for up to ten years. Measuring the Injuries The courts have held that price fixing is per se illegal under the 1890 Sherman Act. That is, prosecutors need only prove that an agreement (a written or verbal overt contract) was Abeyond a reasonable doubt@ made to restrain prices or output; it is not necessary to prove that the agreement was in fact put into operation or had any measurable effects on prices or output to establish illegality. In addition to the existence of an Aillegal combination@ (a cartel) or conspiracy, prosecutors must establish that the participants knew what they were doing (e.g., it was not play-acting) and that the proposed activity was directed at interstate or international trade or commerce. A conspiracy to raise (or lower) prices is illegal even if no economic harm can be identified.
59
However, antitrust offenses typically do cause economic harm to many groups: rival firms, buyers, suppliers, employees, shareholders, and other stakeholders. The adverse economic effects of illegal anticompetitive acts are called injuries. An injured party that can establish that an antitrust violation was the direct and identifiable cause of an injury is said to have standing. Standing is the right to stand before a court of law and sue a perpetrator for compensation for the injury. The compensation is termed damages under the law. If a cartel raises prices in an industry, rivals outside the cartel have no standing, but buyers probably would. Plaintiffs in a civil antitrust case must meet a lower standard of proof but bear a heavier burden of evidence than in a criminal case. The plaintiff must prove Awith reasonable certainty@ that the violation occurred (and may use evidence from an earlier criminal proceeding to do so); that it suffered a compensable harm as a result of the violation; and that the harm occurred within the statute of limitations (civil actions must be initiated no later than four years after cessation of the violation). Estimating damages is the work of economists, accountants, and other experts. Economic Theory and the Law In order to estimate damages, a plaintiff must determine the difference between the revenue or profits actually earned during the period of unlawful conduct and what would have been earned absent unlawful conduct. The amount of damages will also depend on which parties have standing (Page). Figure 4 illustrates the degree of overlap between economic concepts of injury and the legal treatment of damages in the case of an effective price-fixing conspiracy. There are five potential groups that may be harmed by price fixing. (Although illustrated by a case of raising the selling price of a finished product, the analysis also applies to cases where a cartel colludes to reduce the price paid for an input).
60
Figure 4. Price Fixing: Injuries and Standing
P is price, MC is marginal costs, Q is output, c is perfectly competitive case, m is observed market or monopoly case. Five Groups A
Overcharge to direct purchasers from cartel (e.g. lysine buyers). Courts always allow standing. A = (Pm - Mcm)Qm or (Pm - Pc)Qm
A´
Indirect or Aderived@ overcharge (portion of A passed on to indirect buyers, e.g., animal feeds buyers). Some state courts allow standing, U.S. not since 1977. [Shown in Figure 5].
A″
Portion of overcharge paid by direct buyers from non-cartel (Afringe@) suppliers that raised their prices toward Pm. No Supreme Court ruling; District Courts are split but have allowed payments in major beef and salmon cases.
B
Dead Weight Loss (DWL) to buyers forced reduce their purchases or to purchase an inferior substitute. Courts allow claims from non-purchasers that were regular clients of the conspirators, but proof is viewed as difficult. DWL = 2Ed(Pm - Pc)2 PcQc, where Ed is own-price elasticity of demand.
61
C
DWL to suppliers of factors of production to cartel members (reduced derived demand due to output contraction). Usually input suppliers have no standing because courts consider the injury Aremote@. An exception is made for injured whistle blowers.
Figure 5. Indirect Overcharge From Price Fixing. P
S
S΄
Pm
P΄m = Pc MCm P΄c
MC΄m MR΄
Qm
MR
Qc
D΄
D
Q
Note: P is price, Q is quantity, MR is marginal revenue, and MC is marginal cost. D and S are the primary demand and supply of lysine, whereas D´ and S´ are the derived demand and supply of lysine. That is, the demand for lysine by feed manufacturers, and S is the supply of lysine by corn refining companies in the U.S. or abroad. The curve D´ is the demand by farmers for animal feeds containing lysine (measured in lysine-pound-equivalents). With monopoly pricing of lysine, Qm is lysine output, lysine buyers pay price Pm, and farmers pay price PNm. C C C
The direct legal overcharge on feed manufacturers is (Pm-Pc) Qm. The indirect legal overcharge on farmers is (PNm-PcN)Qm. Both overcharges are less than the profits made by lysine producers (Pm-MCm) Qm or by feed manufacturers (PmN-MCmN) Qm. These profits are shaded
and
respectively, and correspond to rectangles A and AN as
discussed on Figure 4.
62
The first and clearest case of damages occurs in the case of actual direct purchasers who pay an inflated price called the overcharge (rectangle A in Figure 4).19 Direct buyers of lysine spend PmQm during the conspiracy, which generates Aexcess@ or Amonopoly@ profits of (Pm - MCm)Qm. Under economic reasoning the entire monopoly profits rectangle A is a transfer from buyers to the cartel and should be considered damages, but under legal standards only the upper portion of the rectangle (Pm - Pc)Qm is recoverable as damages. Direct buyers of lysine have had standing to recover the overcharge since the first federal case was decided in 1906. A portion of the overcharge is passed on to the indirect buyers of products containing Q. In the present case, hog and poultry farmers who buy prepared animal feeds containing lysine are harmed by the higher price of animal feed. Indeed, if an indirect buyer has a Acost-plus@ contract with a feed manufacturer, all of A is passed on to the farmer. With other purchasing methods, rectangle A shrinks depending on the location of the derived demand and supply curves (shown in Figure 5). Under many state antitrust statutes, indirect overcharges are recoverable in state courts, but since the famous Illinois Brick decision of the Supreme Court in 1977, no standing is given to indirect buyers in federal courts. Since 1977, bills have been introduced in Congress each year trying to overturn the Illinois Brick ruling, but none has yet passed. A third group of buyers may be harmed. If a cartel does not contain all the producers in an industry, it may happen that non-conspirators (Afringe@ firms) raise their prices toward Pm (the Aumbrella@ effect). Direct buyers from non-cartel sellers are harmed, while the fringe firms enjoy serendipitous excess profits during the conspiracy period. There is no Supreme Court ruling on standing in this case, but while U.S. District Courts are split on the issue, the great majority have allowed standing. Thus, cartel members are liable to pay damages even to direct buyers of output sold by nonparticipating sellers. This type of injury does not apply to lysine (because all sellers in the world belonged to the conspiracy), but it may apply to citric acid or HFCS. A fourth group harmed by price-fixing is those forced to buy inferior substitutes or those who reduce their purchases in response to the higher price. This injury is represented by the consumer portion of the dead-weight loss (triangle B in Figure 4). Although well accepted in economic theory, the parties incurring dead weight losses generally have been denied standing.20 However, the courts 19
The lower half of rectangle A represents short-run economic profits; in the long run profits will be smaller if there are fixed costs of production because the average total cost curve will intersect Qm above MCm. 20
The legal reasoning is that treble damages are meant to deny conspirators the fruits of their illegal conduct, but the deadweight loss is not a gain to conspirators. The courts view these losses as Aremote@ and identifying which non-buyers are injured as a speculative exercise. Many legal commentators believe that actual calculation is problematic, but the formula shown in Figure 4 is quite feasible to apply. 63
might allow damage claims if the parties can show Aa regular course of dealing with the conspirators@ during non-conspiracy periods. Moreover, one could argue that the dead weight loss should be computed when assessing penalties in public trials even when they are not permitted in private antitrust suits. The last injured group are those supplies of factors of production to the conspirators who lose sales or income due to output contraction. This corresponds to triangle C in Figure 4, the supply side of the deadweight loss. The courts do not usually allow standing for such parties, such as workers forced into unemployment, because the injuries are viewed as indirect or remote.21 A clear exception is that standing is allowed for employees who were fired because they refused to participate in pricefixing arrangements or became whistle blowers. Empirical Estimation Issues Estimation of the overcharges to direct buyers is in principle straight forward. Pm, the actual price paid by buyers, and Qm the volume sold, can be obtained from the business records of the plaintiffs or more conveniently from the cartel members during the pre-trial process called Adiscovery.@ Other information required is Pc, the price that would have governed sales Abut for@ the illegal conspiracy and the length of the conspiracy period. Determination of the unobserved Abut for@ price Pc is often the most contentious area of expert opinion. The correct level of Pc can be calculated in four ways: the Abefore and after@ approach (that is, examining price levels immediately before or after the known conspiracy period); time-series fixed costs; and theoretical oligopoly models that require information on actual concentration among all sellers (not just the cartel) and elasticity of demandError! Bookmark not defined. for the cartel=s product. econometric estimation of demand and supply relationships to obtain the competitive price (a dummy variable can be inserted to model the conspiracy period); obtaining information on costs of production by the conspirators (proprietary information on production capacity, utilization, variable costs, and fixed costs of manufacturing and distribution). In proving the extent of damages incurred by plaintiffs in conspiracy cases, the intent of the conspirators must be sharply distinguished from the degree of success in fixing prices. Strictly speaking, even an admission of guilt by the conspirators does not imply that the market=s price was affected as intended. Thus, an appropriate damages analysis must be neutral with respect to either allegations or admissions by the defendants. The before-and-after approach is particularly prone errors of estimation if no additional market information is not available to confirm the height of the overcharge and the duration of the conspiracy=s effects. Economic theory supports the possibility that the conspirators= prices can be lower than the monopoly price; conspirators may wish to limit entry or conceal their collusive activity. Cheating on cartel agreements may occur. However, in
21
Legal theory supports the identification of producers= deadweight losses as compensatory harms. Buyers who buy less during a conspiracy are harmed as directly as those who continue to buy at the higher price. Those who stop purchasing are in the same position as those who stop buying because of a refusal to deal; both are being illegally prevented from entering into a beneficial transaction. 64
practice, an admission of guilt does lend plaintiffs some strategic advantages in antitrust suits or outof-court settlement negotiations. An analysis of the lysine overcharge and dead weight losses using the first approach is shown in Connor (1996a). The overcharge was based on an assumed period covering two conspiracy periods of 31 months during 1992-1995. The inferred Pc was $0.70 per pound for lysine, so the monthly differences between the actual lysine price (Pm) and $0.70 yielded an overcharge estimate of $155 million to $166 million (see Figure 2). The dead weight losses were estimated to be $5 to $14 million, or 3 to 8 percent of the overcharges. The inferred competitive price was backed up by credible information that ADM=s cost of lysine production was $0.66 per pound during most of the conspiracy period (if the Asian producers had higher costs, the overcharge might be less). In other words, the estimate of Pc was derived using the first method discussed above and was crosschecked using the third method. Defendants= economists (both were former Chief Economists of the Antitrust Division of the Department of Justice, one serving during the Nixon-Ford years and the other during the Reagan administration) made several criticisms of these estimates, but they never provided alternative estimates of their own. First, the defendants argued that the first conspiracy period was never effective and that the conspiracy began in mid 1993 and ended in July 1995 about the time of the FBI raid in Decatur. This may be a just criticism, though there is conflicting evidence in the public records and no court testimony on the subject. If correct, the overcharge estimate is reduced to about $120 to $130 million. Second, the defendants suggested that there was a pronounced annual seasonality in lysine price movements that would account for some of the upward movements observed during the alleged conspiracy period. This is also a criticism with some face validity. Animal feed use peaks somewhat in the winter months, so regular season shifts in the derived demand for lysine might well induce systematic seasonal patterns in lysine prices. However, the four years of data available are too few to test this notion satisfactorily, and the fact that lysine is storable suggests that the idea should be treated with skepticism. As expected, the third and most serious issue turned on the proper height of Pc. It is in general illogical to identify Pc simply on the basis of the lowest observed prices. The $0.70 price was the average each of two periods (May-July 1992 and April-July 1993) that were given to be nonconspiracy periods. If the conspiracy period assumption is correct, then this procedure is a reasonable method of determining the Abut-for@ competitive price. However, the defendants made a more interesting economic argument concerning Pc. They presented data that demonstrated that the lysine market was highly concentrated (HHI = 3500), with high barriers to entry, no product differentiation, and large numbers of dispersed buyers. This information was available to the defendants but not to the plaintiffs prior to a July 1995 hearing, but there is little basis on which to doubt that the lysine industry has an oligopoly structure. Perhaps the only debatable portion of the assertion is that the animal feeds industry was atomistic; on a national basis that is true, but the animal-feeds market is geographically localized, which would imply moderate levels of buyer concentration. The defendants then go on to assert that, given such a market configuration, Aconditions are conducive to the implicit oligopolistic coordination that would keep prices substantially above the long run [competitive] price ...@(White). Moreover, they assert that the homogeneous Cournot model 65
is the appropriate model to use to calculate the Abut-for@ price and that Pc would be well above $0.70. (Warren-Boulton). In other words, the defendants take the position that in the absence of overt collusion (price-fixing) the lysine industry would have generated supra-competitive prices using a method of tacit collusion (Aimplicit coordination@ of prices or output). Moreover, without admitting that Pc was actually within the range of their illustration, they hint that Pc was mostly well above the $0.70 figure (Table 6). The predicted Cournot price is very sensitive to the assumed elasticity of demand for lysine by feeds manufacturers. In fact, the price is infinite if the absolute value of the elasticity is equal to the HHI of 0.35 and negative if less than 0.35 C a patently nonsensical result. The predicted price is also quite sensitive to the marginal costs of production which for ADM is believed to have been between $0.60 and $0.70 per pound. The model assumes that all firms in the cartel had equal cost structures, but the Asian lysine producers= were probably higher than ADM=s costs. Table 6: Hypothetical Equilibrium Price Under Homogeneous Cournot Conditions. Marginal Cost of Lysine
Own-Price Elasticity of the Derived Demand for Lysine in Animal Feeds -0.20
-0.40
-0.50 -0.60 Dollars per Pound
-0.70
-0.80
-0.90
$0.40 -0.53 3.20 1.33 0.96 0.80 0.71 0.65 $0.50 -0.67 4.00 1.67 1.20 1.00 0.89 0.82 $0.60 -0.80 4.80 2.00 1.44 1.20 1.07 0.98 $0.70 -0.93 5.60 2.33 1.68 1.40 1.24 1.15 $0.80 -1.07 6.40 2.67 1.92 1.60 1.42 1.31 Note: Assumes HHI = 3500, entry is blockaded, homogeneous product, all manufacturers with identical costs of production, and that each firm conjectures that all other firms will hold output constant if the firm changes its output. The predicted price is negative when ever the elasticity is less than 0.35 (HHI) and is infinity when equal to 0.35. If elasticity is -2.0, the price varies from $0.49 to $0.97. Although it is likely that the elasticity is between 0.15 and 0.50 (see Connor 1996a) for individual feed types (i.e., meat animal species), it is possible that lysine buyers can easily shift among feed types. In this case the proper derived demand comes from all meat, poultry, and fish (except beef), and this is likely to be quite inelastic, perhaps in the 0.10 to 0.40 range that yields the most ridiculous predicted selling prices. Given information about the monopoly price (P m during the conspiracy) and marginal costs, it is possible to derive the exact elasticity from a well-known monopoly formula. During the height of the conspiracy in 1994, P m varied from $1.10 to $1.20. Marginal costs for ADM most likely varied from $0.60 to $0.70. Under these price-cost conditions, the cartel was behaving as if it believed that demand was highly elastic (-2.00 to -2.75). There are several fundamental problems in assuming that Cournot pricing is the appropriate Abut for@ model. One might first ask why Cournot was chosen in the first place. Defendants= economists said that it is the oldest, the Astandard model,@ and the oligopoly model Amost often used by economists.@ All true, but irrelevant. The truth is not the result of a popularity contest. The main reason that the Cournot assumption is the one made most frequently by economists is because of its 66
Amathematical tractability@ (Kwoka & White, p.11). Indeed the Bertrand homogeneous model is nearly as popular, but using Bertrand was not in the defendants= interest because with three or more firms, Bertrand predicts an equilibrium price identical to the perfectly competitive price! It is also possible to question whether Cournot, Bertrand, or any other theoretical model with tacit collusion is reasonable for the lysine industry. Case studies generally support the proposition that long-term historical interaction among firms must occur before companies can learn to cooperate for mutual benefit. It is doubtful that the 1991-1992 price war was the kind of experience that would induce tacit cooperative behavior over the 1992-1995 period. As in so many aspects of industrial organization, theory cannot solve this conundrum, only rigorous empirics can. Many economists might have profound philosophical objections to adopting an oligopoly model as the standard of comparison in a price-fixing case. The fundamental purpose of the antitrust laws is uproot the sources of market power so as to maximize consumer welfare. The perfectly competitive market, while rarely achieved in practice, does that. Adopting an oligopoly price as the benchmark leads to a reductio ad absurdum. Future developments in theory might well lead to the publication of an oligopoly model that predicts the monopoly price. Or, defendants might argue that they intended to merge their operation into one legal organization. In either case, the Abut-for@ price becomes the monopoly price and the justification for antitrust laws vanishes. Public Penalties and Private Awards There are many legal sanctions and remedies for price-fixing violations, and the ADM affair has signaled a significant escalation in those penalties. First of all, federal or state prosecutors have to decide whether the price fixing is serious enough to warrant criminal charges or merely a civil suit. Criminal charges require that the prosecution prove Abeyond a reasonable doubt@ that defendants intentionally conspired to raise prices; that means that a jury must be convinced that there is no possible alternative explanation for the agreement. In a civil case, the standard of proof is lower, Athe preponderance of the evidence.@ Under federal statutes only the Department of Justice can bring criminal antitrust cases. Federal criminal procedure requires a grand jury indictment in order to commence a felony prosecution. After a grand jury is convened, it may subpoena individuals to testify, subpoena documents, issue search warrants, and immunize testimony through plea-bargaining (Daniel et al. 1997). The jury hears only evidence presented by the prosecution. After sufficient evidence is uncovered, the prosecutors will request authority from the Assistant Attorney General for Antitrust to present an indictment to the jury. If granted that authority, prosecution attorneys then negotiate informally with defendants= counsel allowing them to present arguments against seeking indictments from the grand jury. Some or all of the defendants may decide to bargain for a guilty plea at this point (eventually, seven corporate and five individual guilty pleas were made). The pleas are presented to a presiding federal judge for approval. If some of the defendants refuse to plead guilty, then indictments are presented to the grand jury and subsequently filed with the Court upon majority vote of the grand jury. In the lysine case, three executives were under indictment and awaiting trial in 1998 (though Ajinomoto=s former general manager has so far avoided arrest by remaining in Japan).
67
When conspirators are informed of the charges likely to be filed against them, informal negotiations between prosecutors and defense lawyers begin. If the defendants refuse to admit their guilt, a trial occurs within a year or two. With a guilty verdict by a jury, the prosecutors propose separate penalties for the company and for the individual managers who colluded, and a judge makes a final determination of the penalties. If during pre-trial negotiations the defendants agree to plead guilty, prosecutors will usually propose lower fines and jail terms. Penalties for individuals may include up to three years in jail and $350,000 in fines. So far, five managers have pleaded guilty and paid small fines, and three more have been indicted and face large penalties. Up until 1991, the maximum penalty for guilty companies was $10 million, but in 1991 new corporate sentencing guidelines permitted assessing fines that were double the profits or double the injury done to buyers. The first application of the Atwo-times@ rule in 1995 resulted in a $15 million fine. The second time this rule was invoked was against ADM in October 1996 when it was fined $70 million for the lysine conspiracy and $30 million for its leading role in the citric acid conspiracy (Table 7). These fines were front-page news around the world. However, it should be noted that the DOJ explicitly rewarded ADM with a discounted fine because the company agreed to cooperate in prosecuting two of its own officers (M. Andreas and T. Wilson) as well as the officers of Asian, Swiss, and Austrian co-conspirators. The Asian lysine producers got even larger discounts. The size of the discount awarded to the lysine producers for their good behavior is not known, but could be as high as 50 percent. In addition, the DOJ agreed to forgo prosecuting ADM for its role in the potentially larger corn sweeteners case, albeit the most difficult to prosecute of the three commodity price-fixing cases. Thus, the $70 million lysine fine is at most a minimum indicator of the true overcharges incurred by buyers of lysine. ADM had a U.S. market share of 48 to 54 percent during 1994-1995. The defendants maintained in court that the conspiracy was effective for only 18-20 months, but it could have lasted as long as 31 months. Therefore, one can infer that the total overcharge on buyers of lysine was at least $65 million to $73 million during an 18 to 20 month period, but it could have been as high as $140 million. Sales of lysine during that time were estimated to be $495 to $550 million, so the conspiracy raised lysine prices by a minimum of 12 to 15 percent.22 When guilty pleas are entered, normally a civil class-action suit is formed by injured private parties seeking treble damages under the Clayton Act. Indeed, the Clayton Act specifically authorizes the use of facts and judgments made in federally prosecuted cases in private suits. That is, Congress envisioned or intended private cases to follow public ones. The lysine case is more 22
Application of the full Atwo-times@ penalty rule in the future will become an important data source for IO economists and will assist plaintiffs in ascertaining the expected treble damages if the fines are announced before civil suits are settled. Because the two-times penalties are based on prosecutors= estimates of the overcharges, bargaining costs can be saved for private litigants. In general, the new information should favor plaintiffs.
68
complicated because the class-action suit was settled in July 1995 for $45 million and accepted by all but 32 larger feed manufacturers who opted-out of the agreement.
69
Table 7. Summary of U.S. Fines, Settlements, and Legal Costs Proposed or Paid up to March 2000. Case Defendants Date Amount Offered $Million A. Lysine Criminal ADM 10/96 70.0a,b Ajinomoto 11/96 10.0b Kyowa Hakko 10/96 10.0b Sewon America 12/96 1.25b Cheil Jedang, Ltd. 12/96 1.25c 3 executives 8/96 0.2+ 3 executives 7/99 0.70E Lysine Civil Class Action by Direct Buyers
ADM Ajinomoto Kyowa Sewon Cheil
Lysine Civil, 32 Opt-Out firms State Indirect Class Actions
ADM et al. ADM et al.
B. Citric Acid Criminal
Citric Acid Civil Class Action
Citric Acid, 5 opt-out firms State Indirect Class Actions
4/96 4/96 4/96 1/97 1/95 1996-97 1997-98 Lysine Subtotal
25.4 10.0 10.0 4.0E 1.0E 20.0E 15.0E 178.8
ADM 10/96 Bayer/Miles/H&R 1/97 Hoffmann-La Roche 3/97 Jungbunzlauer 3/97 Cerestar 6/98 2 executives 3/97 1 executive 6/98 1 executive pending
30.0a,b 50.0a 14.0a 11.0a 0.4 0.3 0.4 0.4E
ADM
35.0
9/96
Bayer/Miles/H&R 12/96 Hoffmann La Roche 10/96 Jungbunzlauer 10/96 Cargill(dismissed) 1/98
38.0 5.7 7.6 0.0
ADM et al. ADM et al.
85.0E 40.0E 317.8
70
7/97 1997-99 Citric Subtotal
Case
Defendants
C. HFCS Civil Class Action
CPC Intl. ADM Cargill A.E. Staley Am. Fructose
D. Vitamins Criminal (A, B2, B3, B6, C, D, E, B5 and premixes)
Date Offered 9/96 pending pending pending pending
Allusuisse/ Lonza(B3) 10/98 DuCoa (B3) 3/99 Chinook Group (B3) 9/99 Hoffmann-La Roche 5/99 BASF 5/99 Aventis/ Rhône-Poulenc 5/99 Takeda Chem. Ind. 9/99 Eisai 9/99 Daiichi Pharma. 9/99 Nepera 5/00 h Reilly/Vitachem 5/00 Mitsui/Bioproducts pending Merck (Germany) 5/00 Degussa/Vitachem 5/00 Aventis/Hoechst pending Solvay Pharmaceuticals Sumitomo Chemical pending Tanabe Seiyaku pending Sumika Fine pending Chemicals Congo Chemical pending 10 executives 1999-2000
Vitamins Civil same as above Class Action (33% of purchases)
pending
Vitamin Subtotal ADM Co. ADM Board
71
7.0 N/A N/A N/A N/A
10.5 0.0b 5.0 500.0 225.0 0.0b 72.0 40.0 25.0 4.0 2.0 11.0E 14.0 13.0 11.0 E pending 4.0 4.0 4.0 4.0 1.025 390.0E 1,560E
Vitamins Civil same as above Opt-Out Firms (67% of purchases) E. Shareholders== Suits: Mismanagement and failure to divulge material information
Amount
10/96 6/97
2,863.75 30.0 8.0
5.0 E
Case
Defendants
Date Offered
Amount
F. Fraud and Embezzlementf of ADM
Marc Whitacre, three others
3/98 1998-99
12.6 5.0E
G. Legal costs of defendants ADM et al. Legal costs of private plaintiffs many buyers
1995-99 1995-99 TOTAL
181.7Ed 450.0Ed 4,0547.7g
-- = Not available at present. E = Estimated by the author from market shares, similar fines, and other public information. None of the participants in the litigation or their counsel provided the author any information on these settlements. The author has had no access whatsoever to confidential information on these settlements. a These fines are based on the Atwo-times@ (profits or injury to buyers) rule outlined in 1991 federal felony sentencing guidelines. b This fine was reduced substantially because the party agreed to cooperate with DOJ prosecutors and FBI investigators. The reduction in the fines was much larger for the three Asian companies than for ADM because the former agreed to cooperate with prosecutors at an earlier date. Proportional fines for the three companies would have been $170 million based on their share of cartel sales 1993-95. In September 1998, it was reported that Sewon had not yet paid its fine. c Very low fine because company unable to pay calculated amount due. The DOJ initially proposed $10 million. d Extrapolated from costs of legal defense reported to shareholders by ADM to be 14% of amounts of fines and settlements paid by defendants. Assumed plaintiff=s costs were 20% for class action and shareholders= suits. Assumed vitamin defendants= costs were roughly $100 million. Prosecutorial costs omitted. e This estimate consists of a known payment of $36 million by ADM to four opt-outs (Procter & Gamble, Quaker Oats, Kraft Foods, and Schreiber Foods). ADM=s three largest co-conspirators may have paid a proportional amount of up to $35 to $38 million, but by settling earlier they likely got a reduced settlement (possibly around $30 million). Finally, it is believed that Unilever settled separately with the four defendants for an amount in the range $10-20 million. Thus, the total settlements for these five plaintiffs with about one-third of citric purchases as probably $75 to $95 million. f Criminal prosecution by DOJ settled in 3/98 for 9 years in jail and return of stolen money. Whitacre=s wife and mother, although originally indicted, were not prosecuted as accessories. Includes civil suit won by ADM in August 1999. g Total does not include defendant=s legal costs because these are already included in the recovery amount. h An Indiana joint venture between Degussa of Germany and Reilly Industries of Belgium. Note that the $45 million represents treble damages, or three times the implicit overcharges. In other words, the feed companies who took the early and safe money (apportioned according to procurement shares) got a bad deal. The $45 million was only 25 to 35 percent of a minimum estimate; had they waited the feed manufacturers could have received damage awards of $210 million or more. 72
The opt-out firms have negotiated privately with ADM, Ajinomoto, and Kyowa Hakko to arrive at an agreement on damages from lysine. Unless those negotiations break down (and there are no signs that they have) so that the cases go to open court, the treble damages paid to these firms will never become public. They should be able to recoup 15 to 20 percent of their purchase values of lysine if their lawyers do their jobs well. Tentatively, it appears that these feed manufacturers will have received about $20 million. There is more information available on the citric acid case. ADM was assessed a $30 million criminal fine by the DOJ, and three European co-conspirators were fined an additional $75 million (Table 7). The time period is not known, but probably covers at least two and one-half years (January 1993 - June 1995) and may extend for four years (1992-1995). ADM=s fine was discounted from the maximum application of the Atwo-times@ rule, but the fine assessed Bayer seems to be closer to the maximum. Bayer=s U.S. subsidiary Haarmann & Reimer had a 31 to 33 percent capacity share of the U.S. market. Thus, the total 1994-1995 overcharge by all four cartel members was at least $155 to $160 million. The U.S. ITC survey reports that 1994 manufacturer sales were $251 million; net U.S. imports were $54 million (Stat-USA). However, CMR reports higher U.S. citric acid consumption, which at prices of $0.79 to $0.85 per pound implies U.S. sales in the range of $340 to $365 million. Therefore, the citric acid price-fixing overcharge was at least 16 to 25 percent of industry sales during 1993-1995 (or, less likely, 12 to 13 percent if the DOJ assumed 1992-1995). The private parties in the San Francisco class-action suit are allowed to claim damages that are treble the actual overcharge. Based on the DOJ penalties as of March 1997, private treble damages in citric acid ought to be at least $230 to $240 million. However, seven weeks before the DOJ announced the huge criminal penalty on Bayer, the parties in the class-action suit initially agreed to payments of only $94 million (later reduced to $86 million). At the time, the lead attorney for the plaintiffs stated that AWe think this is an excellent result for the class...@ In retrospect, the classaction settlement seems like a good deal for the defendants, with plaintiffs getting less than half of what is due them. Confirmation that the federal class-action suit resulted in a low settlement rate came in March 1998 when ADM was forced to reveal the size of its settlement with four of the five citric acid, optout firms. ADM paid $36 million. By extrapolating ADM=s share of the market to its coconspirators, it is possible to estimate that the opt-outs were paid about $114 million (see Appendix A). Thus, the opt-outs got from 2.0 to 3.5 times more damages (per dollar of citric acid purchased) than did the settling class. Just as was the case with lysine, patience and risk was well rewarded. In summary, price-fixing overcharges on lysine and citric acid amounted to at least $220 million. Yet, proposed class-action settlements announced prior to the full imposition of criminal penalties amount to a paltry $131 million, which is at most 30 percent of the potential private damages that were due to plaintiffs. The citric acid opt-out firms received another $115 million or so, but the actual private settlements may never be known. The plaintiffs in the civil antitrust suit in vitamins will probably do much better by recovering an estimated $2 billion, which is more than single damages. Despite the fact that members of the class were under compensated, by historical standards the lysine and citric acid settlements are quite high (Table 8). It appears that in terms of the total
73
recovery value or settlement amount, these cases were the sixth largest in history (Table 9). Vitamins rank second. Table 10 lists all six of the international price-fixing cases prosecuted by the U.S. government in the 1990s. (A seventh possible case, the Japanese Thermal Fax Paper case involved collusion on exports only). Taken together, the lysine and citric acid cases resulted in fines totaling $200 million, or nearly half of the total fines assessed to date. While there are still at least 25 investigations on going (including graphite electrodes), the two ADM cases rank at the top based on fines imposed. Because during 1990-1995, the largest possible fines were $10 million per company, total fines imposed prior to 1995 were insignificant by comparison (The National Law Journal, 10/20/97). Conclusions The world markets for lysine, citric acid, and many other specialty products of the wet-corn milling industry have the structural characteristics that facilitate collusive price-fixing conduct. In most cases the products made by fermentation of corn starch are homogeneous and have few, if any, close substitutes over normal price ranges. Corn refining technologies increasingly are able to produce low-cost versions of many synthetic organic chemicals used as food or feed ingredients or medicinals, and the lower prices will make substitution even less likely in the future. The markets for these new biotechnology products are typically tight oligopolies: few sellers, high sales concentration, high barriers to entry due to scale economies or technological secrecy, large numbers of buyers, and the absences of price information from open markets. Archer Daniels Midland had a corporate culture and a decision-making structure that was well suited to the high-risk game of price fixing. ADM was conditioned to viewing markets not so much as inexorable engines for price formation but as creatures malleable to the intervention of regulators, politicians, and powerful businessmen. ADM=s leaders were used to thinking that the whole world was its oyster, that global domination of trade was an achievable goal, and that active multinational networking is an essential means to that goal. The company prided itself in its quick, decisive, and large-scale moves into new industries, even if technological barriers were to be skirted by ethically dubious methods. The dismissal in 1991 of price-fixing charges against ADM concerning HFCS and the looming slowdown in most of its soybean, gasohol, and corn sweetener lines of business may have been among the proximate causes that emboldened ADM to embark on its reckless decision to form two or more international cartels.
74
Table 8. Settlement Recovery Rates in Class-Action Price Fixing Litigation, Selected Cases. Number of Recovery Amt./ Case Years of the Defendants= U.S. Violation Affected Sales (%) 9
22a
In re Amino Acid Lysine Antitrust Litigation, MDL No. 1083 (No. District Ill. 1996)
2.6
11.3
3.
In re Citric Acid Antitrust Litigation, MDL No. 1092 (No. District California 1996)
3.5
15a
4.
In re Catfish Antitrust Litigation, MDL No. 928 (No. Dist. Miss. 1996)
10
8.3
5.
In re Folding Cartons Antitrust Litigation, MDL No. 250 (No. District Ill. 1980)
4
4.2
6. In re Eastern Sugar Antitrust Litigation, MDL No. 201a (East District Pa. 1976)
4
2.5
7.
In re Chicken Antitrust Litigation, Civil A No. C74-24548 (No. District Ga. 1979)
2
1.0
8.
Bagel Inn v. All Star Dairies, Civil Action No. 80-2645, (District of New Jersey 1982)
4
1.0+
9.
In re Armored Car Antitrust Litigation, Civil Action No. 78-139A (No. District Ga. 1979)
2
3.9
NA
3.5
11. In re Anthracite Coal Antitrust Litigation, MDL No. 293 (Middle District Pa. 1978)
4
3.1
12. Fisher Bros. v. Phelps Dodge Industries, Inc., Civil Action No. 83-2457 (East. District Pa. 1985)
4
2.4
13. In re Domestic Air Transport Antitrust, MDL No. 681 (No. Dist. GA. 1994) Litigation
6
0.3a
1.
In re Vitamins Antitrust Litigation, MDL No. (District of D.C. 1999)
2.
10. In re Plastic Tableware Antitrust Litigation, Civil Action No. 94-3654 (East. District Pa. 1995)
Source: Court records of MDL No. 1083, Lexis-Nexis, and Calkins (1997) search. a Including opt outs= settlements= recovery, the recovery ratios for vitamins, lysine, and citric acid were an estimated 35%, 16%, and 32% of sales. b This gargantuan case involved a certified class of at least 12 million individual and corporate plaintiffs against six of the largest U.S. airlines. The settlement awarded $50 million cash and coupons with a face value of $406 million, but many of these coupons have not yet and may never be exercised. Calkins (1997) estimated the value of coupons redeemed to be $200-300 million.
75
Table 9. Major U.S. Class-Action Price-Fixing Awards. 1972-1999. Total Settlement Amounts Net Recovery
Name of Case
Legal Fees and Costs Million dollars 147 122 NA
1. NASDAQ Market Makers (1999) 2. Vitamins (1999-2000) 3. Brand Name Prescription Drugs (1999) 4. Corrugated Containers 5. Heavy Electrical Equipment (1961-64)b 6. Lysine and Citric Acid (1996) 7. Folding Cartonc 8. Plywood (1983) 9. Petroleum Products 10. Infant Formula (1993, federal)d 11. Antibiotics 12. Travel Agency Commissions 13. New Mexico Natural Gas 14. Fine Paper 15. Gypsum 16. Sugar – Western Cases 17. Superior Beverage 18. Carbon Dioxide 19. Red Eagle Resources 20. Chlorine & Caustic Soda 21. Workers= Compensation 22. Cumberland Farms 23. Industrial Gas Average treble damagese
1,123 1,050f 723 550 405 321 218 171 140 126 87 90 81 80 75 60 58 53 53 53 50 50 50 0.45
44 41E 50E 14 26 29 33 29 22 11 10 9 10 18 10 19 12 12 14 12 0.19
Fees as a Percent of Recovery Percent 13.1 10.5 NA 8.0 10.1 15.6 6.6 14.9 21.0 26.3 33.3 28.3 14.0 12.7 12.4 17.1 31.2 18.0 35.9 22.8 24.7 27.2 24.5 42.2
E = Estimates - NA = Not Available. a ARecovery@ is the total amount of monetary damages paid by the antitrust defendants to the plaintiffs. Legal fees and costs go to the attorneys representing the class. It does not include settlements made by defendants with plaintiffs who opted out of the class. On average, costs represented 8% of legal fees and costs, but in some cases no costs were awarded. b Estimate contained in Shepherd (1985) of the results of about 1,900 private suits, only some of which were class actions. The bidding ring consisted of 29 companies. Public prosecution netted $1.9 million in fines and conviction of 45 company officers. Collusion involved seven products over Adecades.@ c Collusion among 23 manufacturers during 1960-1974 in a market with $1 billion in sales in 1974. Public prosecution netted brief jail sentences for 15 of 48 convicted managers and fines of $5,000. d In addition, the three formula manufacturers paid $200 million in a Florida class action suit (1993) and in 1996 paid $33 million to 17 states for overcharging state WIC programs. Several indirect-purchaser cases are still in litigation. e Average of 49 cases collected by Elizinga and Wood (1988). f Amount announced November 1999. Until a formula for dispersal is agreed upon, interest will accrue, raising the eventual payout. In February 2000, some 200 members of the class accounting for 75-80% of purchases left the remaining 3800 class members and will probably negotiate larger settlements. Sources: Shepherd (1985); Class Action Reports, Inc. (1999) AAttorney Fee Study;@ Table 4 and Lexis-Nexis .
76
Table 10: Major International Price-Fixing Cases Brought by the Department of Justice, 1985-99. Conspiracy Fines Imposed Year: Industry and sales Period On On Corporations Individuals Amount $ mil. 1996: Amino acid lysine, world sales in 1993-95a 5 6 94b 1995 $600 million (or 275,000 mt), U.S. sales $300 million. Citric acid, world sales $1.1 billion, 4 4 106c $400 million in the U.S. 1992-1995a 1997: Sodium Gluconate, global 1996 8/93-6/95 4 4 35 sales $50 million, U.S. sales $4 million. 1998: Bid-rigging for heavy-lift marine 1993-5/97 2d 1 49 construction services, global sales not released. Bid-rigging in semisubmersible heavy-lift transportation services, 1990-5/95 2 2 16 global sales more than $200 million. Graphite electrodes, global 1996 sales of $500 million, total $1.75+ 7/92-6/97 4e 3 296f billion during price-fixing period. Sorbates, $200 million in global sales annually, almost $1 billion 1979-6/97 3 2 68.6 during conspiracy. 1999: Bromine, with sales of $1.4 billion annually. NA 3 0 NA Sodium erythorbate and maltol, annual U.S. sales of $65 million. 1980-1995 2 0 20+ Amino acid methionine, sales of more than $1.0 billion per year NA 5 NA 150E (pending). Vitamins, annual global sales $3.7 1988-1999 14+ 10+ 922.5 billion, $26 billion affected sales Total October 1996-December 1999 40 19 1,757.1
77
Table 10. Continued a Lysine period as long as 11/92 to 12/95 or as short as 12/93-6/95; citric acid as long as 1/92 to 12/95 or as short as 1/93-6/95. b These fines were imposed in October 1996 and were record amounts at the time. The previous high fines were imposed in 1995 on a domestic explosive-industry cartel that operated in four states during 1992-1995. Thirteen corporations, led by Dyno Nobel of Utah ($15 million), and three individuals paid total fines of $40 million. Dyno Nobel was the first corporation to pay more than $10 million under the Atwo-times@ felony sentencing guidelines. c These fines, imposed in late 1996 and early 1997, were a new record at the time. ADM along paid $70 million for the lysine conspiracy and $30 million for the citric acid conspiracy, still a record for a single company. Bayer paid $50 million, the largest amount for the citric acid case. d Includes one un-indicted co-conspirator. The fines were paid by one company, HerreMac, v.o.f. e Includes one co-conspirator (Carbon/Graphite Group) that received amnesty and one company, SGL Carbon AG of Weisbaden, Germany, not yet indicted. f Fines paid by UCAR International of Danbury, Connecticut ($110 million) and Showa Denko Carbon, Inc. of Ridgeville, South Carolina ($29 million). Sources: Klein (1998); Connecticut Law Tribune, 4/13/98; The Legal Intelligencer, 4/9/98; Business Crimes Bulletin, Vol. 4, No. 12, p. 10 (January 1998). The financial impacts on ADM have so far proven more modest than the stock market at first predicted. Recall that the information about the FBI raid and the ensuing uncertainty caused ADM=s market value to fall by $2.4 billion for a few days after the June 28, 1995 FBI raid. For most of 1996, ADM=s value was 10 to 15 percent below its mid-June level. In late 1996, as announcements of class-action suit settlements were made, the market rewarded ADM with a 20 to 30 percent stockprice premium above its pre-raid price (though fundamental market factors also played a role in the price). As of mid 2000, total financial costs to ADM appear to be almost $400 million, far less than the stock market predicted initially. ADM=s after-tax profits declined by 13 percent in FY 1996 (year ending June 30, 1996) and by 53 percent in FY 1997 when compared to the monopoly-bloated profits of FY 1995. The direct antitrust expenses incurred by ADM (which are not tax-deductible) accounted for 70% to 80% of the FY 1996 decline in net income and for 76% to 78% of ADM=s FY 1997 profit decline. Using another benchmark, ADM=s direct antitrust expenses in FY 1997 (the larger of the two years) amounted to 18% of its liquid assets available in June 1996. While not fatal to the company, the antitrust costs were not negligible either. But did the gains from lysine and citric acid price fixing outweigh the costs? Probably not in the U.S. market. Assuming ADM earned monopoly profits proportional to its market share, then the direct antitrust costs were from 2.6 to 2.7 times the illegal profits (or about half the maximum possible). Illegal profits earned on exports are another matter. Additional fines and legal costs are likely from prosecutions initiated in Europe and Latin America. However, there are other costs that are likely to outweigh the strictly financial penalties in the long run. ADM has lost several capable, if unscrupulous managers. Top management has been greatly distracted by legal actions, and this dilution of management resources will continue for some time. Some 100 to 125 suits were filed in U.S. courts (many consolidated into class actions), of which 70 were still unresolved as late as June 30, 1997 (ADM). Foreign antitrust investigations are 78
just beginning to exact their toll as well. Although many ADM managers remain loyal to the company, there is little doubt that the company=s reputation has suffered: an April 1997 survey by Fortune magazine placed the company at the bottom of a long list of large U.S. food processors. While significant changes in the company=s governance structure have occurred, many of ADM=s largest institutional investors remain highly critical of the modest reforms of the board of directors. The board has experienced a turnover in the majority of its members, but the number of truly independent members remains small. Dwayne Andreas is still on the ADM board; his son, Michael Andreas, was employed as a “consultant” to ADM through 1998; and his nephew, G. Allan Andreas, is CEO and Chairman of the Board Something there is that does not like a big, successful company that fairly exudes hubris. The Department of Justice, smarting from the loss earlier in 1994 of a major international diamond cartel case, pursued ADM with everything it had. One reason the DOJ poured such large resources into pursuing ADM et al. was that the diamond case was dismissed because key evidence and witnesses in South Africa could not be obtained through normal subpoena processes (Daniel et al. 1997). Of course, targeting high profile companies is a wise use of constrained administrative resources because the deterrence effect is so large, but the DOJ=s vigor may well have been driven by a hubris of its own (Preston and Connor). In any case, the DOJ sought and received levels of penalties that have markedly changed the rules of the price-fixing gambit. Price fixers now face public penalties and private damages that are five times their ill-gotten gains, roughly a 50 percent increase in their previous exposure. Moreover, if the Atwo-times@ rule for fines is fully applied prior to private suits, then private plaintiffs will have a sure guide to the treble damages to which they are entitled. Thus, the new penalty guidelines may lower the time, uncertainty, and costs of legal negotiations. The Atwo-times@ rule for fines was applied by the DOJ to four price-fixing conspirators in the U.S. lysine market and four conspirators in the U.S. citric acid market for the period 1992-1995. Total corporate criminal penalties were $91 million for lysine and $105 million for citric acid. To put the $196 million in perspective, these fines along (paid in federal fiscal year 1997) were five times all antitrust fines obtained by the DOJ in each of the previous two fiscal years (Daniel et al. 1997). However, these fines are known to be less than the maximum possible because several of the perpetrators were rewarded with reduced fines because they agreed to cooperate with prosecutorial investigations. Based on the public record, it is apparent that ADM paid proportionately the largest lysine fine and Bayer the largest citric acid fine. From their market shares it is possible to infer the total price-fixing overcharges were at least $220 million or about 20 percent of U.S. sales in the two markets. Because they were international conspiracies, additional overcharges were very likely incurred by buyers of lysine and citric acid in Canada and other parts of the world. Lysine exports from ADM=s plant doubled in 1996, the year after price fixing ended, and it is likely that production restraints on other lysine and citric acid plants were lifted as well. No information was released on the effectiveness of price fixing outside the United States, but as 60 percent of the world market is outside the United States, non-U.S. overcharges were probably substantial. The final point is that private parties in the United States were entitled to treble damages of at least $600 million (but possibly as much as $900 million, depending on the DOJ=s discounting policy). As of 1998, civil settlements for lysine and citric acid are known to total only $166 million.23 Therefore, private 23
Most plaintiffs that were not members of the lysine class-action suit have probably settled 79
parties in the United States have so far recovered only 15 to 25 percent of the maximum allowed under the antitrust laws. The haste with which class-action settlements were reached in July 1995 (lysine) and late 1996 (citric acid) is one reason for the low damages. Perhaps this is one case where the old adage AJustice delayed is justice denied@ should be turned on its head. Perhaps the most important lesson of the ADM scandal for antitrust enforcers is the ease with which an international cartel was formed and executed. Although the two companies were direct rivals for less than two years, ADM and Ajinomoto apparently led the lysine conspiracy, coercing the two smaller Asian companies (Kyowa Hakko and Sewon) into joining. With just two or three top managers from each company attending meetings around the world every month or two, the conspirators were able to arrive at complex allocations of plant production, exports from three countries, and sales to at least four distinct continents that were, if not optimal, highly profitable. The cartel hung together in the face of gyrating and uncontrollable soybean and corn prices and a presumptive cultural chasm between ADM and its three co-conspirators. On the other hand, the Japanese companies hailed from a national business culture that rewards corporate cooperation. Management of the citric acid cartel was if anything even more challenging. The cartel controlled output from three U.S. plants (two owned by Bayer, one by ADM) and seven European plants (three belonging to Jungbunzlauer, one to Hoffmann-La Roche, and one each to Bayer, Eridania, and ADM). Additional complexity in coordinating output restrictions was provided by the apparent absence of Cargill=s formal cooperation (though it may have passively followed) and the more aggressive and erratic sales by Chinese government-owned chemical companies (probably acting in consort). Reports suggest that cheap Chinese exports to the U.S. market may have been tamed partly through the intervention of U.S. trade officials who followed up on dumping charges made by ADM, Cargill, or Bayer. As in the lysine case, initiative in the citric acid cartel was taken by ADM and one large partner, the U.S.-based subsidiary of Bayer; the other two European exporters with only 16 percent of the U.S. market simply fell into line at some point. Why the 1990s have spawned a major outbreak of international price-fixing cartels is something of a puzzle. U.S. authorities have increasingly targeted foreign companies and individuals in criminal antitrust cases. In 1991, only 1 percent of all such federal cases involved foreign corporate defendants (Klein). In 1997, fully 32 percent of all corporate defendants and 32 percent of the individual defendants were foreign. More than 20 federal grand juries were investigating international price-fixing conspiracies in 1996 (Bingaman). Fines announced in two recent international cartel cases indicate that the DOJ is becoming if anything harsher in sanctioning price fixers. In September 1997, four corporate defendants – all foreign – were assessed total fines of $32.95 million for price fixing in the sodium gluconate market during 1993-1995. Given the small size of this market, the fines imposed represent an extraordinary 400 percent of total U.S. sales. In April 1998, UCAR International announced that it had set aside $340 million to pay a $110 million DOJ fine and future fines and private settlements for 1992-1997 price fixing in the global market for graphite electrodes. In nominal terms the $110 million surpasses ADM=s fines (but in net present secretly. Moreover, some lysine and citric acid buyers have not sought damages. The $166 million refers only to direct buyers; indirect buyers may recoup $55 million in damages from state-level cases (Table 7). 80
value is somewhat less). The global lysine and citric acid conspiracies were among the events that have demonstrated the need for U.S. antitrust agencies to step up efforts to monitor international antitrust violations and to increase international cooperation in prosecution (Connor 1998). The multinational character of these two conspiracies underscores the wisdom of antitrust extraterritoriality. U.S. law is now clear that U.S. authorities can seek redress from off-shore conspiracies that affect the U.S. trade or domestic commerce. However, effective national prosecution is limited by the existence of significant assets in the nation=s territory. One defendant in the criminal lysine prosecution, Cheil Sugar Co., was fined only $1,250,000 because its U.S. sales office was Aunable to pay more,@ even though its parent=s global sales exceeded $1 billion. Formal annual meetings have recently begun among the U.S., Japanese, European Union, and other antitrust agencies. Cooperation is probably limited to sharing of information and prosecutorial procedures; the era of coordinated legal prosecution seems far off. Another approach would involve a multilateral agency in some aspects of antitrust enforcement. In April 1998, the director of the EU=s competition agency formally proposed enlarging the World Trade Organization=s mandate to encompass antitrust matters. The story of the lysine cartel has all the elements of classical Greek tragedy, and much of its high drama as well. Chairman Dwayne Andreas can be compared to the aged king of a city-state that he had taken from weak obscurity to a position of powerful renown. The means by which a small-town company had been refashioned into the global powerhouse ADM had become by the 1980s are those common to the great conquerors of old. The Harvest King had used many weapons: creating an extensive network of (Aforeign@) alliances with powerful outsiders (leaders with influence over economic policy decisions), schmoozing with rivals and giving them bear hugs (joint ventures) when they would accept them, instilling unquestioned authority to his person and his imperial designs in his troops, teaching his lieutenants blitzkrieg marketing tactics that employed cunning and guile, distributing well placed gifts, and creating a persona of the great statesman through careful cultivation of the organs of propaganda. The cult of personality and the obvious financial success of ADM blinded it to the fact that its loose, rapid, and informal decision making structure C in itself a matter of some pride C had become obsolete as its businesses multiplied and a need arose for more formal management systems. The tragic victim in this tale is the crown price, Michael Andreas, and the tragedy=s protagonist is Mark Whitacre. Michael had learned his father=s statecraft well. He proudly repeated the old man=s many maxims, as did his two chief lieutenants, James Randall and Terrance Wilson. Mark Whitacre was likely driven by many things: ambition to become President of ADM, money, and perhaps the excitement that comes from the danger of having one=s secret roles discovered. One thing that he didn=t swallow was the blind loyalty felt by most managers toward the Andreas family. Whitacre was able to exploit the great flaw in ADM=s management structure, its lack of checks and balances. The unusually wide discretion given to top managers worked well when all of those positions were filled by men loyal to the Chairman and his vision. However, this slim and flexible management style could easily be undermined by a determined deviant. Whitacre was also excellently positioned to become a government mole, a role that may well have emboldened him to carry out his nefarious embezzlement scheme. 81
The curtain on this tragedy opened in 1989, the year that ADM decided to build a lysine business and hired a promising biochemist away from the world=s best amino-acids company. The denouement is reached in September 1998 with a jury=s verdict of guilty. This report is the play=s epilog.
82
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Goodhue, Rachael E. Sustaining Collusion via a Fuzzy Trigger. Review of Industrial Organization 13(3):333-45 (June 1998). Grossman, Peter Z. The Dynamics of a Stable Cartel: The Railroad Express 1851-1913. Economic Inquiry 34(2):220-36 (April 1996). Herling, John. The Great Price Conspiracy: The Story of the Antitrust Violations in the Electrical Supply Industry. Washington, DC: Robert B. Luce, Inc. (1962). Hirth, Hans. Cartel Stability and Product Differentiation. Jahrbucher für Nationalökonomie und Statistik 218(3-4):325-45 (March 1999). Hollis, Nicholas E. Archer Daniels Midland: A Case Study of Corruption in the Ag/Food Sector, speech at the Economic Crime Summit, St. Louis, MO, April 28, 1998. Hui, Y.H. (editor). Encyclopedia of Food Science and Technology. New York: John Wiley & Sons (1992). Hviid, Morten. Endogenous Cartel Formation with Private Information. Canadian Journal of Economics 25(4):927-82 (November 1992). IDCH. International Directory of Company Histories. Detroit: St. James Press (published annually since 1988). Iyori, H. and A. Uesugi. The Antimonopoly Laws and Policies of Japan. Federal Legal Publications, New York (1994). Kahn, E.J. Supermarketer to The World: The Story of Dwayne Andreas, CEO of Archer Daniels Midland. New York: Warner Books (1991). Klein, Joel I. Testimony of Joel I. Klein, Assistant Attorney General, Antitrust Division before the Senate Committee on the Judiciary Subcommittee on Antitrust. Washington, DC, February 26, 1998. Krepps, Matthew B. Another Look at the Impact of the National Industrial Recovery Act on Cartel Formation and Maintenance Costs. Review of Economics and Statistics 79(1):151-54 (February 1997). KudÇ, Akira and Terushi Hara (editors). International Cartels in Business History. Tokyo: University of Tokya Press (1991). Kwoka, John and Lawrence J. White. The Antitrust Paradox. New York: Prentice-Hall (1989). Krugman, Paul R. How Copper Came a Cropper. Slate (www.slate.com/dismal/96-07-19). 85
Lambertini, Luca. Cartel Stability and the Curvature of Market Demand. Bulletin of Economic Research 48(4):329-34 (October 1996). Lanzilotti, Robert. The Great School Milk Conspiracies of the 1980s. Review of Industrial Organization 11 (1996): 413-458. Lassar, Scott R. and James M. Griffin. Government=s Proffer of Co-Conspirator Statements in United States of America versus Michael D. Andreas, et al. Chicago, Illinois: Office of the U.S. Attorney and U.S. Department of Justice (May 6, 1998), 54 pages. Levenstein, Margaret. Vertical Restraints in the Bromine Cartel: The Role of Distributors in Facilitating Collusion, National Bureau of Economic Research, Working Paper Series on Historical Factors in Long Run Growth 49 (July 1993). Lieber, James B. Rats in the Grain: The Dirty Tricks of ASupermarket to the World.@ New York: Four Walls Eight Windows (1999). Lieber, James B. and April L. Boyer. Attacking International Price Fixing Conspiracies: ADM Executives on Trial, A paper presented at the Allied Social Sciences Association annual meeting, New York City, January 5, 1999. Morton-Scott, Fiona M. Entry and Predation: British Shipping Cartels 1879-1929. Stanford Graduate School of Business Research Paper 1396 (June 1996). Manning, Blanche. Various Rulings in U.S. v. Michael Andreas et al. Chicago: U.S. District Court (1998-1999). Nicol, John and Jock Ferguson. The Price Fixers. Maclean=s (February 22, 1999):48-52. Norr, Knut Wolfgang. Law and Market Organization: The Historical Experience in Germany from 1900 to the Law Against Restraints of Competition. Journal of Institutional and Theoretical Economics, 151(1)5-20 (March 1995). Ostertag, Carlos F. World Production and Marketing of Starch, Chapter 13 of Cassava Flour and Starch: Progress in Research and Development, D. Defour, G.M. O=Brien, and R. Best (editors). Cali, Columbia: CIAT (1996). Page, William H. (editor). Proving Antitrust Damages: Legal and Economic Issues. Chicago, Ill.: Section of Antitrust Law, American Bar Association (1996). Pearce, David. Repeated Games: Cooperation and Rationality, in Jean-Jacques Lafont (editor) Advances in Economic theory: Sixth World Congress, Vol. I, pp. 132-74 (1992). Phlips, Louis. Competition Policy: A Game-Theoretic Perspective, Cambridge University Press, Cambridge, MA (1995). 86
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Schwartzman, David. The Japanese Television Cartel: A Study Based on Matsushita v. Zenith. Ann Arbor: The University of Michigan Press (1993). Shepherd, William G. Public Policy Toward Business, 7th Edition. Homewood, IL: Irvin (1985). Smith, Fern M. Decision, In re Citric Acid Antitrust Litigation, MDL 1092. San Francisco: U.S. District Court (January 23, 1998). Smith, W. James, Michael B. Vaughan and John P. Formby. The Role of Fines in Deterring Violations at the Margin. Southern Economic Journal 53(4):985-96 (April 1987). Staiger, Robert W. and Frank A. Wolak. Vancouver=s Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies. Review of Economic Studies 59(2):257-76 (April 1992). STAT-USA. On line service for U.S. international trade statistics maintained by the U.S. Census Bureau. Stocking, George W. and Myron W. Watkins. Cartels in Action: Case Studies in International Business Diplomacy. New York: The Twentieth Century Fund (1947). USITC. Synthetic Organic Chemicals: United States Production and Sales, 1994. Washington, D.C.: U.S. International Trade Commission (1996). Walton, Clarence C. and Frederick W. Cleveland, Jr. Corporations on Trial: The Electric Cases. Belmont, California: Wadsworth (1964). Warren-Boulton, Fredrick R. An Evaluation of AThe Cost to U.S. Animal Feeds Manufacturers of an Alleged Price-Fixing Conspiracy by Lysine Manufacturers, 1992-1995,@ In Re Amino Acid Lysine Antitrust Litigation, Master File 95-C-7679, U.S. 7th District Court, Eastern Division (1995). Wengenroth, Ulrich. Enterprise and Technology: The German and British Steel Industries, 18651895, Cambridge University Press, Cambridge, MA (1994). Whitacre, Mark. My Life as a Corporate Mole for the FBI. Fortune (September 4, 1995): 52-68. White, Lawrence J. (ed.). Private Antitrust Litigation: New Evidence, New Learning. Cambridge:MIT Press (1988). White, Lawrence J. Declaration of Lawrence J. White, In Re Amino Acid Lysine Antitrust Litigation, Master File 95-C-7679, U.S. 7th District Court, Eastern Division (1995). Wilke, John R. U.S. Court Rules Antitrust Laws Apply to Foreigners. Wall Street Journal (March 19, 1997): B5. 88
WSJ. (Scores of articles by Scott Kilman, Thomas Burton, Viveca Novak, Edward Felsenthal, Joan Lublin, and Laurie Cohen). Wall Street Journal (June 1995 - 1998).
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APPENDIX A Lysine and ADM * Chronology
*
Gleaned from scores of articles in Fortune, The Wall Street Journal, The New York Times, AgBiz (an Internet magazine), Chemical Marketing Reporter, and similar sources. Other citations may be found in the “References” section above. This section summarizes all events not specifically about citric acid, high fructose corn syrup, and vitamins (see Appendixes B, C and D below) and general articles on ADM.
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Prior to 1960, produced for decades by an extraction process in the organic industrial chemicals industry at high price (about $2.00 to $3.50 per pound). (USITC). In 1960s, three Asian chemical companies (Ajinomoto, Kyowa, Toray) develop a biotechnology that converts dextrose or sucrose into lysine by bacterial fermentation. Commercial production begins in Japan circa 1976. (Chemical Week 2/11/76, Nihon Keizai Shimbun 2/9/82). 1970: Ajinomoto executive Kanji Mimoto testifies that price fixing occurred in the Japanese market for lysine “from time to time” when he worked there (1970-1975 and 1985-1991). Volume allocation was not used (U.S. vs. M. Andreas Tr. 906-908). 1975: Ajinomoto executive Kanji Mimoto was sales manager for Eurolysine until 1983. During that time Ajinomoto engaged in price fixing but did not employ volume-allocation techniques (U.S. vs. M. Andreas Tr. 906-908). Kyowa agreed to limit exports to Europe to 510%. Early 1980s: ADM became interested in making lysine, did a literature search, and discovered that Ajinomoto held a patent on a strain of bacteria that produced lysine. The best strain (‘471) yielded 41 g/l lysine from dextrose (Robinson:4). 1986-1990: Testimony by Hirozaku Ikeda reveals some details of Ajinomoto’s and Kyowa’s early history of price fixing. The dates are not precise. The U.S. market was divided geographically “for a year or two.” In addition, Ajinomoto agreed not to sell lysine in Mexico, while Kyowa agreed to avoid sales in Thailand (U.S. v. M. Andreas Tr. 1858-1861). During at least one period of Ajinomoto-Kyowa price fixing, Ajinomoto got 55% and Kyowa 45% of the U.S. lysine market (Tr. 2005). Circa 1988, ADM discovers why Asian companies are importing so much dextrose from USA – to make lysine. (Whitacre). February 22, 1988: Forbes magazine says that “ADM . . . makes good money threading [the] bewildering maze . . . of federal farm policy.” Mentions ADM/Andreas political generosity as a sort of quid pro quo. Suggests the new presidential administration will be unfriendly (Forbes 2/22/88:40). April 1988: ADM hired a new research scientist, Kenneth Stewart, to develop a commercial production process to make lysine. Kodak offered to sell a 1051 strain that yielded 37 g/l of lysine, developed by its Genencor division. By July 1989, ADM had bought Kodak’s technology package for making lysine, and from 8/89 to 11/90 it made lysine on a pilot scale at Clinton, Iowa. During this time, ADM also examined un-patented strains mentioned in Ajinomoto’s patent (Robinson).
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Spring 1989: ADM opens negotiations with Degussa on a U.S. lysine joint venture, with Mark Whitacre representing Degussa, which ultimately rejects offer. ADM hires Whitacre October 1989 as head of its new Biochem Products division, later Bioproducts Division. During 1989-92, Whitacre hired many former Degussa colleagues to work for ADM. Besides 4 amino acids, ADM would enter bacitracin, vitamins C and E, MSG, and lactic acid (Lieber 2000). In late 1989, total U.S. consumption of lysine is estimated to be about 40,000 tonnes per year, of which half is imported. There are two domestic manufacturers. Heartland Lysine, a joint venture between Ajinomoto of Japan and Orsan, SA of France, operates a plant in Eddyville, IA that is producing close to its rated capacity of 12,000 tonnes. The second U.S. plant in Cape Giradeau, Mo is owned by BioKyowa, a subsidiary of Kyowa Hakko of Japan; this plant has a 7,500 tonne capacity, but is being expanded to produce 13,000 tonnes by 1990. Current list prices are reported to be $1.65 per pound, with some larger transactions in the $1.60 to $1.64 range. Ajinomoto and Orsan own and operate plants in Japan, the U.S., France, and Thailand that account for roughly 60 percent of world lysine production capacity. Kyowa Hakko owns plants in Japan, the U.S., and Mexico with 20 to 25 percent of world capacity. The Mexican plant is a joint venture with Sumitomo and the Mexican government called Fermex. The South Korean company Miwon owns one plant in Korea with about 15 percent of world capacity. Toray, Inc. of Japan has 2-3 percent of the world market but does not export much from Japan. [CMR 10/2/89:22]. In 1989, ADM commits $150 million to build the world’s largest lysine plant in Decatur, IL. When finished, at 250 million pounds (133,000 metric tons) rated annual capacity, this plant will account for almost 50% of world supply in early 1990s. Eventually ADM invested $1.5 billion in its Biotech Division 198901995 (Whitacre). In 1989, ADM commits $150 million to build the world’s largest lysine plant in Decatur, IL. When finished, at 250 million pounds (133,000 metric tons) rated annual capacity, this plant will account for almost 50% of world supply in early 1990s. Eventually ADM invested $1.5 billion in its Biotech Division 1989-1995. (Whitacre). October 1989. ADM hires Mark Whitacre to head the new Biotech division (B.S., M.S. Animal Science, Ohio State U.; Ph.D. Biochemistry, Cornell U.), then 32 years old. [Whitacre]. Whitacre had worked for Degussa and was familiar with its amino-acids technology and strategies. [Hollis]. He was formally appointed Vice President of the Bioproducts Division on November 13, 1989 (McCuskey 1999). In early 1990, lysine prices begin to drop to the $1.33-1.35 per pound range in anticipation of new ADM production. ADM promises production on line by August 1990 in its 47,000 tonne plant. Imports in 1989 were 23,000 tonnes: 10,000 from Japan; 7,000 from Korea; and 2,500 from Mexico. [CMR 2/26/90:16]. ADM production is delayed six months from its expected July 1990 on-stream date. 92
1990: U.S. price reaches $1.30 in 1990. One trade source reports U.S. consumption is 150 to 200 million pounds, (worth $200 to $250 million) but this estimate is too high (see next entry). Jan.-June 1990: Industry sources report that feed-grade dry lysine averaged $1.40/lb. in January 1990 and dropped steadily through May to a list price of $1.05/lb. (with discounts to $0.95 for large buyers). In June, new July 1, 1990 list prices of $1.20 are announced; the firming of prices can be explained by scheduled 7-10 day shutdowns of the Ajinomoto and BioKyowa plants during normal plant “turn-arounds”. The June ceiling price is $1.40. [CMR 7/29/91:5]. North American consumption is estimated to be 44,000 tonnes for 1989 and 48,000 tonnes in 1990. In July ADM’s plant is reported to be operating at 40-45% of capacity, which is to be expanded to 60,000 tonnes by 12/91. ADM’s rivals are skeptical that ADM can reach 60,000 tonnes [CMR 7/29/91:5]. 1990: U.S. imports reach $39 million at a price of about $1.00/lb. [Stat-USA]. Later research shows that this figure refers to all organic and amino acids, of which lysine is only a portion. March 7, 1990: A Heartland Lysine report entitled “Strategy Anti-ADM” shows that Ajinomoto began planning for ADM’s entry far in advance of production (U.S. vs. M. Andreas Tr. 840). A planning document prepared by Jacques Chaudret for Heartland Lysine is entitled “Strategy Anti-ADM.” A similar report dated 3/22/90 outlines possible strategies for Heartland (U.S. v. M. Andreas Tr. 1806-1815). One option is “fight at any cost . . . kick ADM out of the market . . .,” but Ikeda says that cost reductions were the options discussed, including a price reduction on the glucose Ajinomoto was buying from Cargill. Another option is to assert leadership in price fixing, but Ikeda “doesn’t remember” if this was part of Ajinomoto’s business culture. May 1990: Mark Whitacre was given the first of two promotions at ADM. His new title is President of the Bioproducts Division (McCuskey 1999). June 18, 1990: Well known political analyst Michael Kinsley criticizes ADM’s “deceptive public information TV ads” on the three Sunday morning interview shows (“Meet The Press,” etc.). They are called offensive, dishonest, cloying, strange, mysterious. The ads “. . . tout their patriotism rather than their products.” One ad quotes JFK’s famous speech, “Ask not what your country can do for you . . .” – this by a subsidy-enriched company. Another defends the U.S. sugar program by claiming sugar is cheaper in the U.S. than in China! Or the EU! Another extols the virtues of ethanol; another frightens about cancer-causing benzene (New Republic 6/18/90:4). July 1990: Miwon (Sewon) and Ajinomoto hold a meeting to discuss prices. See December 6, 1990 entry (Tr. 5913). December 6, 1990: A letter from Miwon to Ikeda at Ajinomoto says in part: 93
“After our meeting in July, the price of lysine has been raised sharply by help of your side . . . My opinion in the matter of further increase, up to $3.00 per kilogram in lysine price we talked about yesterday over the phone, is as follows. First, we should reach an agreement increasing the price in Southeast Asia, Central and South America, and South African market, taking into consideration present pricing level.” Six days later, a similar letter to Ikeda says: “At present I am very pleased to inform you I agree to your price increase in the world market, including Australia,” (Tr. 5913). December 6, 1990: A BioKyowa document (Wilson Ex. 40) expresses alarm about ADM’s impending entry: “ADM has notified each customer that they would offer a competitive price with that of the existing manufacturers” (Tr. 5920). February 1991: Both ADM and Cheil Jedang entered production of lysine. In his opening remarks in U.S. vs. M. Andreas, DOJ prosecutor James Griffin asserts that the pre-1991 price of lysine was high for two reasons: the three manufacturers had their plants at full capacity and they were price fixing. When ADM and Cheil entered the market there was chaos and a temporary competitive period. As soon as they were able to establish themselves in the market, they got together and “create[d] the conspiracy they had in mind from the beginning” (Tr. 711). Cheil’s subsidiary was named Cheil Samsung Astra (CSA) (Tr. 1085). February 1991: ADM builds its plant in record time, about 15 months from engineering plans to production. Production starts February 1991. “Tremendous price war” begins. Whitacre states that ADM’s original strategy was to cause one of their “weaker competitors” to exit with the low prices. [Whitacre]. February 1991: Cheil Jedang begins producing lysine in Indonesia almost simultaneously with ADM (U.S. vs. M. Andreas Tr. 913). In 1991, a federal judge in Des Moines dismisses a 10-year antitrust case brought by the DOJ against ADM that alleged an anti-competitive merger in the corn fructose industry. Sometime in 1991, Marc Whitacre began embezzling funds from ADM. The first instance involved a $100,000 kickback from a payment of $300,000 to an independent contractor. February 8, 1991: Kanji Mimoto and Mark Whitacre meet for the first time at dinner. Whitacre talks most of the time, rather boastfully (U.S. vs. M. Andreas Tr. 1223-1227). April 1991: Terrance Wilson joined Corn Sweeteners, Inc. in 1970, became VP of ADM’s Corn Sweeteners Division in 1982 after jobs in sales and plant operations, and became President of ADM’s Corn Processing Division in 1991. (Beverage World 4/91:76). 94
April-August 1991: Whitacre was having lots of problems with the lysine plant. The process kept “crashing” (Tr. 5801). This happened “a couple of times” at a cost of $7 million each time (Tr. 5798). Eventually, ADM would attribute it to a failure to sanitize completely. August 24, 1991: Mark Whitacre opens two secret bank accounts in the Cayman Islands that will later be used to hold embezzled funds (Tr. 4872). [See also 1/7/93 below]. October 1991: One of many interviews of D. Andreas on farm and trade policy – called “. . . the American businessman most knowledgeable on trade and investment in the Soviet Union . . .” (Chi. Trib. 10/6/91:C1). December 1991: ADM is near full capacity of 60,000 tonnes and aggressively prices lysine at $1.05 to $1.10/lb. with a few large transactions reported as low as $0.95/lb. ADM is exporting well over half of U.S. output to Europe (where it is marketed by BASF), Asia, and Latin America. September prices were about $1.20-$1.30/lb. [CMR 12/16/91:20]. December 1991: Total U.S. consumption in 1991 is about 48,000 tonnes. Total U.S. lysine capacity is about 93,000 tonnes (of which ADM 60K, Heartland 20K, and BioKyowa 13K). Outside the U.S., Miwon has a 40,000 tonne plant in Korea; and in 1991 Cheil Sugar of Korea opened a new 10,000 tonne plant in Indonesia. [CMR 12/16/91:20]. By 1992-1993, ADM is reputed to be the lowest-cost producer of lysine; industry executives believe that ADM’s break-even price is below $0.85/lb. [WSJ 7/28/95:A1]. January 30, 1992: A memo of a meeting in Tokyo within Ajinomoto states concern about the impending price drop: “ADM is ready to lower the price to 70 cents. ADM will probably eliminate Cheil and Kyowa from the U.S. market in a short period” (Tr. 5930). March 6, 1992: A Sewon internal document expresses skepticism about whether a proposed or announced price increase will stick because they believe that ADM is increasing its volume of production (Tr. 5931). About the same time, Sewon considers a 1991 claim by ADM that it had lysine manufacturing problems “a lie” (Tr. 5931). Early 1992: ADM’s price drips to as low as $0.60 in early 1992; ADM’s market share soars, but is “. . . losing . . . a few million dollars a month.” [Whitacre]. In early 1992, both the lysine and citric acid divisions are reorganized, placed under V.P. Terrance Wilson, head of corn products. Wilson urges Whitacre to meet with lysine producers. [Whitacre] Spring 1992: Mark Whitacre and at least three ADM employees who reported to Whitacre opened up bank accounts in Switzerland and the Cayman Islands. Prior to November 1992, Whitacre and associates implemented a system of false invoices for services performed for 95
ADM and sent to phony corporations controlled by Whitacre. For example, on November 23, 1993, a bogus invoice for $220,000 was sent to ADM for services rendered by Nordkron Chemie. Payment was approved by Whitacre and sent by ADM to an account controlled by Whitacre. By the end of 1992, Whitacre had defrauded ADM of $2.5 million. [Eichenwald]. April 1992: Whitacre and Wilson meet with Ajinomoto and Kyowa Hakko in Japan. ADM has 1/3 of world market and all are losing money at $0.60/lb. ADM proposes forming an “amino acids trade association.” Ajinomoto and Kyowa react favorably. [Whitacre]. April 14, 1992: Wilson and Whitacre meet in Tokyo with four managers of Ajinomoto. The top official was Kazutoshi Yamada; Kanji Mimoto and Hirozaku Ikeda were top managers of Ajinomoto’s lysine division; and Philippe Rollier was a manager of Eurolysine. Wilson proposed the formation of a world lysine association that would collect and report on members’ sales. These figures could be independently audited [Lassar and Griffin:21]. April 14, 1992: According to Ajinomoto’s Kanji Mimoto, at a meeting in Tokyo, Terrance Wilson proposed specific price increases from the current $0.80 per pound to $1.05 and later to $1.20, a trade association, audited sales reports, and avoiding future meetings in the U.S. as “too dangerous” (Tr. 880-920). April 16-17, 1992: Wilson and Whitacre meet with Masaru Yamamoto and Takaaki Sato of Kyowa Hakko. Wilson proposed raising the price of lysine (from less than $0.80/lb.) To $1.05 immediately and to $1.20 eventually. He describes this as an act of “friendly competition.” [Lassar and Griffin:21]. June 1992: ADM and corn organizations are lobbying the Bush administration hard for changes in EPA rules to help ethanol (Chi. Trib. 6/16/92:C1). June 1992: In Mexico City, T. Wilson suggests forming a lysine association on the model of ECAMA (Eur. Citric Acid Manufacturing Assoc.), which audits members’ shares (U.S. vs. M. Andreas Tr. 2186). June 1992: A letter from Mr. Ushioda of Heartland Lysine to another officer of the company says: “Unfortunately, the lysine business has turned into a dog fight of price competition sunk in a bog that I can barely call a business anymore” (Tr. 5915). June 19, 1992: M Andreas, Wilson, Whitacre, and Randall host a lunch and lysine plant tour in Decatur for three representatives of Sewon, Heon-Kang Park, Edward Kim, and Hoon Lim. They discuss the possibility of raising the lysine price. Wilson tells Sewon that its volume is very small, that it should follow larger rivals [ADM and Ajinomoto], and should join the proposed lysine association. Andreas also urged cooperation with ADM and formation of the association (Lassar and Griffin). 96
June 23, 1992: Seven men attend the Mexico City meeting: Wilson and Whitacre (ADM), Ikeda and Mimoto (Ajinomoto), Crouy (Eurolysine), and Yamamoto and Sato (Kyowa). Wilson took the lead by demonstrating the higher profits each company would make with price and volume agreements. He proposed a lysine price “. . . no lower than $1.20 by the end of the year.” The companies tentatively agreed to bring the price up in steps that summer, specifically to $1.05/lb. By October 1992. Wilson told the Asian rivals that ADM wanted one-third of the world lysine market volume (the same as Ajinomoto). The Asian companies responded with a counter-proposal that Wilson rejected as insufficient. Ajinomoto and Kyowa agreed to try to persuade Sewon and Cheil about the price and volume proposals, but the South Korean companies rejected the volume proposals. Later, Whitacre telephonically agreed with the other conspirators to raise prices in the U.S. without a quantity agreement (Lassar and Griffin: 22-24). [U.S. price rises from $0.64 in July to $0.92 in October]. June 23, 1992: Wilson, Whitacre, and Japanese managers have the first meeting of the “lysine association” in the Nikko Hotel in Mexico City. First of many meetings around the world. They discuss prices and volumes. Wilson repeats an ADM mantra: “The competitor is our friend, and the customer is our enemy”. [Whitacre]. June 23, 1992: Prosecutor James Griffin summarizes the evidence to be presented about the Mexico City meeting. Ajinomoto and Kyowa proposed a market share that Wilson regarded as too low (i.e., less than 33%). Wilson said that by competing on price as they were in early 1992, the manufacturers were failing to make almost $200 million in sales [collectively per year]. They agreed to raise their selling prices to $1.05/lb. By October 1992 and to $1.20/lb. By the end of the year in the United States. They agreed to encourage Sewon (Miwon) and Cheil Jedang to join in raising prices and to further implement the agreement by telephone (U.S. vs. M. Andreas Tr. 712-714). [In 1992, the four largest manufacturers actually sold 104 million lbs. of lysine; adding Cheil’s U.S. imports, total U.S. sales were about 110 million lbs. In June 1992, the U.S. transaction price of lysine was $0.69/lb., so a price of $1.20 would add at least $56 million in profits in the U.S. Wilson must have been referring to global sales, which were 467 million lbs. In 1992. If prices rose to $1.20, the increase in global sales would have been about $234 million at 1992 production levels.] June 23, 1992: Documents revealed in U.S. vs. M. Andreas indicate an intention to raise lysine prices in North America and Europe to $1.05 delivered per pound and $2.30/kg. c.i.f. for all other regions by 10/92; prices to rise to $1.20/lb. and $2.60/kg. respectively by 12/92 (Tr. 926). [See Appendix Table A8]. In this meeting ADM was claiming Decatur lysine capacity was 150,000 tonnes (Tr. 938). [See Appendix Table A5]. 97
June 28, 1992: A letter from Ajinomoto employee Shinohara to Toba, the head of Ajinomoto, states “on every occasion . . . when grain market prices started moving into a favorable direction in May, BioKyowa and us [sic] worked hard to the price in a collusive manner . . . Nevertheless, with ADM’s ambition, we could not even hold the price, resulting in a miserable outcome . . . so we are forced to change our policy after June” (U.S. vs. M. Andreas Tr. 841). January-June 1992: Testimony of Alain Crouy reveals that Eurolysine was selling about 40,000 tonnes of lysine at this time. The “price war” caused by the ADM/Cheil entries caused a decline of about $10-15 million in revenues for Eurolysine. Total sales volume by the Ajinomoto Group were 80-85K, of which Eurolysine 40K, Heartland Lysine 15-20K, Ajinomoto Thailand and Japan together were 20-30K total sales. [From these data and prices shown in Table A2 below, it can be inferred that Ajinomoto’s worldwide sales of lysine for the last six months of 1991 were about $185 million. In the first half of 1992 total revenue losses were $25-35 mil. for Ajinomoto, or 15 to 20% below early 1991]. An internal Ajinomoto document dated 1/92 estimated that by the end of 1991 ADM and Cheil had each obtained a 9% share of the Australian lysine market (U.S. vs. M. Andreas Tr. 2333-2348). June 23, 1992: Notes made by Ajinomoto employees at the Mexico City meeting quote “ADM” [probably Wilson or possibly Whitacre] saying that Rhône-Poulenc and Degussa were deterred from entering lysine manufacture because of ADM’s huge capacity (Tr. 5617). [Both companies would enter lysine in the late 1990s]. Summer 1992: Mark Whitacre told Dwayne Andreas that there were severe production problems in the lysine plant during the last few months. He gave the following explanation: Some employee of ADM was sabotaging the production process by contaminating the dextrose vats and trying to extort money from ADM. He said that a “Mr. Fujiwara” of Ajinomoto had called him to inform him that Ajinomoto had placed a mole inside ADM’s lysine plant, that Fujiwara wanted millions of dollars wired to his Swiss bank account, to stop the mole and to pay for Ajinomoto’s proprietary microbes to fix the problem. Whitacre’s report of this meeting is contained in written FBI investigative reports obtained by the New York Times. Later, it was discovered that Whitacre’s tale of the mole, the call, and the extortion was a complete fabrication. However, D. Andreas and M. Andreas believed the story and acted upon it. In August, 1992, M. Andreas contacted an associate, who got in touch with CIA representatives in London. The CIA decided that the alleged extortion was an FBI matter, which was turned over to the local Decatur, IL FBI agent, Brian Shepard, in November. Notes show that Whitacre repeated the tale to Shepard. [Eichenwald]. August 1992: ADM believed that the global lysine market totaled 155,000 tonnes; Ajinomoto’s superior estimate was 185,000 tonnes (U.S. vs. M. Andreas Tr. 1236-1239). [Both figures are low, see Appendix Table A6]. 98
August 1992: Japanese producers apparently are skeptical of ADM’s large volume claims, so Ajinomoto and Kyowa managers and engineers tour ADM’s Decatur plant to prove size of ADM’s capacity. Whitacre claims 250 million pounds (110,000 tonnes) capacity is operational. [Whitacre]. August 7, 1992: Representatives of Ajinomoto, Kyowa, and Miwon (Sewon) meet to discuss the ADM threat. Some suggest that the four Asian manufacturers should “join together to deal with [ADM]” (U.S. vs. M. Andreas Tr. 1782). August 27, 1992: A memorandum written by Sewon’s J. S. Kim reports on a meeting of “working level staff from five companies” (not including ADM) states “In Tokyo, fixing a domestic price can cause trouble, but talking about fixing international price is all right” (U.S. vs. M. Andreas Tr. 842). August 27, 1992: Kanji Mimoto, Yamamoto, and Uozumi of Ajinomoto meet in the Samsung Life Insurance building in Seoul, Korea with representatives of Sewon and Cheil. A report of the meeting quotes the Ajinomoto people saying that fixing prices in Japan is wrong, but not abroad. Mimoto calls this statement inaccurate (U.S. vs. M. Andreas Tr. 1427-1430). October 1992: The cartel met in the Hotel Pullman Windsor in Paris. The prices in North America and Europe were rising, but most discussion was on Asia and Latin America (U.S. vs. M. Andreas Tr. 2199-2202). October 1992: Whitacre reports fermentation problems. Lysine production costs were “running about double our market price” because of production problems. The market price for all suppliers was about $0.70 per pound at the time. Dwayne Andreas asks a friend with the CIA to help with suspected sabotage in fermentation operations. Michael Andreas was “pissed off” at his father’s action and tells Whitacre not to cooperate fully with FBI (i.e., not to reveal “lysine association”). (Whitacre). [Whether M. Andreas actually ordered Whitacre to obstruct the FBI investigation is in retrospect doubtful.] October 1, 1992: Second meeting of the informal lysine association in Paris includes representatives of all five manufacturers of lysine for the first time. They agree to further price increases, but again fail to agree on quantity. (Lassar and Griffin). [The U.S. price actually rises from $0.92 in October to $0.98 Nov.-Jan. 1993]. M. Andreas and Yamada believed that the cartels inability to agree on volume shares caused the drop in prices. Two key meetings between the two (Decatur 4/30/93 and Irvine, CA 10/25/93) eventually brought about a volume agreement that solidified the cartel (Lassar and Griffin:26). October 1992-April 1993: The Paris meeting of the lysine cartel (10/1/92) seems to have positive effects on prices in the U.S. and Europe. [U.S. prices rose from $0.92 in October 1992 to $0.98 from November 1992 to January 1992, but then started falling]. However, 99
prices did not rise in late 1992 in the other regions, indicating lack of cohesiveness in the cartel. “Accordingly the co-conspirators blamed each other, relationships deteriorated, and prices dropped.” [U.S. prices fell by 4, 5, 9, 12, and 4 cents during the months of February to June 1993 respectively]. (Tr. Ex. 9, 10-T, and 128-T). October 10, 1992: The second full meeting of the lysine cartel in Paris. According to Griffin, Wilson reported U.S. prices had reached about $1.05/lb. for lysine, almost too fast. He said to wait to November to raise the prices again (U.S. vs. M. Andreas Tr. 715). November 1992: Whitacre talks privately with Decatur FBI agent Shepard and agrees to become a “mole.” Telephones are tapped and Whitacre is wired. Whitacre is promoted to Corporate VP and eventually earns a salary of $320,000 per year. Whitacre’s undercover role lasts officially from January 1993 to July 1995. His FBI contract promises no prosecution for price-fixing activities from November 1992 onward. [Whitacre]. November 1992-June 1995: FBI gets hundreds of audio and video tapes of many meetings involving Wilson, Mick Andreas, Whitacre, James Randall, Barrie Cox, and Japanese and European managers agreeing to worldwide volume and prices of lysine, citric acid, sweeteners and other corn products. The conspiracy starts shortly after November 1992. [Whitacre]. [James Randall is never indicted.] November 1992: Whitacre informs Kanji Mimoto that the FBI is tapping phones at ADM because of a probe about price-fixing in the carbon dioxide market. Later in the month, Whitacre informs him that the probe is concluded, but they decide to use an AT&T voice mail system to ensure secrecy. They also adopt code names (U.S. vs. M. Andreas Tr. 14711472). November 1992: At the trial U.S. vs. M. Andreas et al. the minutes of a meeting of Ajinomoto, Kyowa, and Miwon are divulged (Tr. 1776-1782). The Asian manufacturers of lysine discuss their difficulties caused by ADM’s entry. Rollier of Eurolysine is quoted as saying “ADM is about 25 percent, and it is important that the remaining four companies . . . stick together” (Tr. 1779). At least one executive present opines that ADM is causing them losses of up to $100 million. Mimoto is reported to have told Whitacre over the telephone that ADM should stop selling lysine in Japan (Tr. 1818). November 1992: A memorandum of a meeting between Miwon and its Japanese coconspirators describes Miwon’s response to criticism that Miwon has not been “sufficiently loyal” to Ajinomoto in its price fixing behavior says on p. 129: “When your company, Eurolysine, started the lysine production, that is, from 1975 until present time, we have cooperated by restricting/inhibiting to five to ten percent level, five percent in the beginning, less than ten percent during the last ten years, of the European demand. Such cooperation that has been extended 100
between the two companies for at least 17 years is, I think, a true cooperation” (Tr. 5915-16). [As this passage illustrates, cooperative behavior is shown by Miwon’s recognition that Ajinomoto had an explicit hegemony over the European market by virtue of its early (1975) large, and unique production in Europe through Eurolysine. Large-scale exports by Miwon would be regarded as poaching.] November 1, 1992: Whitacre was appointed officially this day as an officer of ADM, Corporate Vice President and President of the Bioproducts Division (Tr. 5847). November 1-4, 1992: According to James Griffin, evidence will be presented showing that M. Andreas believed Whitacre’s story about sabotage in ADM’s lysine plant. Andreas called an ADM executive in Europe to relate the story, including the fact that the saboteur was willing to sell stolen technology that would be resistant to contamination for $6 to $10 million. Andreas asks the executive to inform the CIA about the extortion offer and to seek the CIA’s approval to buy the technology. The CIA immediately informed the FBI and local FBI agent, Brian Shepard, showed up at ADM’s Decatur headquarters on November 4, 1992 (U.S. vs. M. Andreas Tr. 715-716). November 4, 1992: M. Andreas invited the FBI to his home to discuss the alleged Fujiwara extortion matter, and he volunteered that ADM was meeting with rival companies in the lysine industry which ADM was trying to break into (U.S. vs. M. Andreas Tr. 2950-2953). November 5, 1992: ADM President James Randall informs security chief Cheviron that he had concluded that there was no lysine sabotage. Cheviron does not inform the FBI until 12/16/92 (Lieber 2000:300). November 5-9, 1992: FBI agent, Brian Shepard, visits Mark Whitacre’s home to install a telephone recording device as part of the presumed extortion investigation. Whitacre divulges the existence of a lysine price-fixing conspiracy. In fact, Whitacre calls one of the co-conspirators that night [probably in Tokyo] while Shepard records the conversation. The recording verifies that meetings did occur, that price fixing took place, and that future meetings were planned. Shepard also placed a telephone monitor on Whitacre’s second telephone line, a device that recorded the times and telephone numbers of incoming and outgoing calls. Apparently, a normal security check by ADM’s protection service detected the device. On November 9, ADM telephoned the FBI and ordered them to stop investigating the alleged extortion attempt (U.S. vs. M. Andreas Tr. 716-718). November 8, 1992: Two FBI agents (Shepard, Paisley) interview Whitacre in his home about the price-fixing allegations. Whitacre for the first time gives specifics about meetings in Tokyo, Maui, Paris, and Mexico City, supported with travel expense reports. Whitacre also showed them ADM’s lysine profits statements for July to October; in July and August there were losses, but in September and October positive profits due to price fixing (U.S. vs. M. Andreas Tr. 2834-2835). 101
November 9, 1992: ADM’s Security chief Cheviron called the FBI agent Shepard. He had discovered that the FBI had placed two taps on Whitacre’s telephones rather than the one line ADM had agreed to. Cheviron stated that ADM would no longer cooperate with the FBI in the (phony) extortion investigation. [It is highly unusual for a crime victim to cease cooperating.] (U.S. vs. M. Andreas Tr. 2835-2836. To prove the existence of the lysine cartel, Whitacre makes several calls to lysine rivals (to Mimoto, J.S. Kim, and Masura Yamamoto), finally reaching the last one. Shepard hears Yamamoto talk about the Paris meetings and the agreed upon $1.05 price (tr. 2843-2845). November 9, 1992: Mark Whitacre makes his first tape for the FBI to prove that ADM was indeed conspiring to fix lysine prices with rival manufacturers. He used governmentsupplied equipment to record telephone conversations with Asian co-conspirators. However, as his involvement increased, Whitacre became agitated about his role. At 9:10 on the night of November 16, 1992, he called FBI agent Shepard at his home, complained that the FBI was “destroying him,” that it was trying to hurt M. Andreas and “other innocent people,” and that he wanted to end his role as a mole. On November 18, he again called Shepard saying that his ADM superiors were “turning against him” and that he was depressed and suicidal. He complained that he “could not figure a way to win in this situation.” [Eichenwald]. December 1992-January 1993: According to Ikeda’s cross-examination, many internal documents from Heartland Lysine confirm that selling conditions in Canada were highly price competitive; Tyson was getting lysine at 984 in 12/92 (U.S. vs. M. Andreas Tr. 20482059). [Note: 984 was the average U.S. price in 12/92.] December 7, 1992: Apparently responding to an alarming report by Rollier of Eurolysine that the “survival” of Ajinomoto’s feed ingredients business was in jeopardy because of ADM’s entry, Pres. Tadasu Toba sends a letter to several executives of Ajinomoto’s lysine business. Toba says that ADM’s rivalry was “the hardest competition that we have ever encountered” (U.S. vs. M. Andreas Tr. 1801). Ikeda testifies that he agrees with Toba’s assessment, but the strong language in the letter is partly chosen to instill cooperation from those involved. Later, in remarks attributed to Yamada, the Asian companies are urged to “stop the hurricane started by ADM.” Ikeda admits that Yamada was worried about it. (Tr. 2060-2100). December 10, 1992: Whitacre alleges to the FBI that ADM is involved in several other illegal activities besides lysine. FBI agent Shepard testifies that on that day, Whitacre told them that an ADM employee named Brasser was fired (Tr. 2869). During a sidebar conference, it becomes clear that a tape was made on 12/21/92 containing statements by Brasser that he (Brasser) was fired because he refused to cooperate on price fixing with Wilson and Cox in citric acid. Additional incriminating statements are made about possible ADM price fixing in the sodium glutamate [could be gluconate?] and lactic acid markets (U.S. vs. M. Andreas Tr. 2868-2873. 102
December 10, 1992: Whitacre tells the FBI that ADM is involved in price fixing of citric acid and substantiates the claim by taping a conversation of ADM employee Brasser on 12/21/92. [Brasser is about to be fired from ADM for refusing to engage in price fixing.] Brasser states: “[Wilson] said don’t worry about it. He said if anybody has to go to jail, it would be Barrie Cox and myself [Wilson]” (U.S. vs. M. Andreas Tr. 2868-2873). December 17, 1992: Whitacre is concerned that he might be prosecuted. He offers to strike a deal with the FBI. Before the agreement was concluded, Shepard insisted on hearing more details about the alleged Japanese sabotage. On December 22, Whitacre failed an FBI liedetector test about the truth of his story. He confessed the story was false, but again failed a lie-detector test when he made up a second cover-up story. [Eichenwald]. December 21, 1992: Whitacre fails a polygraph test administered by the FBI. He confesses that the Fujiwara extortion and ADM mole story was false. The FBI does not inform ADM because it still believed Whitacre could aid their lysine investigation (U.S. vs. M. Andreas Tr. 2864-2867). (see 12/10/92 above) 1992-1993: Sometime in late 1992 or 1993, the FBI became aware that Whitacre was receiving cash kickbacks from vendors to ADM’s Bioproducts Division. He told prosecutors later that the payments were authorized bonuses. It is not clear when the FBI became aware of Whitacre’s embezzlement of ADM. [Eichenwald]. December 1992: From 60,000 tonnes capacity in late 1991, ADM’s Decatur plant was expanded to a rated capacity of 113,000 tonnes by 12/92. [CMR 5/10/93]. January 7, 1993: Mark Whitacre opens a secret bank account in Switzerland, his third secret account [See 8/24/91] (Tr. 4872). January 9, 1993: Mark Whitacre signs a “cooperation agreement” with the U.S. government in which he agrees to become a government agent in exchange for immunity for price fixing activities after 11/6/92 (Tr. 2874-2875). Shepard asserts that Whitacre violated the agreement by committing fraud and informs the jury that Whitacre was convicted for it (U.S. vs. M. Andreas Tr. 2874-2877). January 1993: Shortly after agreeing to become an FBI mole, Whitacre shows his newly hired gardener, Rusty Williams, his FBI-supplied briefcase with its hidden micro-cassette recorder. He refers to himself as “agent 014” because he considers himself twice as smart as James Bond (agent 007). [Eichenwald]. February 21, 1993: Whitacre authorizes a payment of $3.75 million by ADM to a Swiss bank account controlled by Mr. Whitacre. [Eichenwald]. March 10, 1993: The FBI has increasing doubts about Whitacre’s truthfulness and administers a second polygraph test. He fails on four key questions. From 12/21/92 to 3/10/93 he had refused to admit his involvement in lysine price fixing and had been telling 103
the FBI that ADM had abandoned the scheme. After failing the polygraph the second time, he admits his personal involvement in lysine and agrees to start taping again. The next taping of a telephone call was on 3/12/93 (U.S. vs. M. Andreas Tr. 2877-2879). March 17, 1993: A report from Heartland Lysine to Mimoto at Ajinomoto headquarters reads: “I think our lysine business is drowning. The entrance of ADM has drastically changed competition in the market. Until then, the business attitude of Miwon and [BioKyowa] was almost identical to ours, and they were controllable.” The report concludes that lysine has become much more price sensitive (U.S. vs. M. Andreas Tr. 848). March 17, 1993: Whitacre has a taped meeting with his bosses at ADM headquarters. T. Wilson and J. Randall attend. Whitacre tells them that Ajinomoto is accusing ADM of backing out of their agreement to limit production even if lysine prices fall. A message from Ajinomoto expressed anger that ADM had not held to its agreement to limit lysine production to 9 million pounds (4,080 tonnes) per month if lysine prices remained low. (Prices were about $1.00/lb. in the U.S. at the time). Whitacre replied that no definite production limit had been promised, only that he would "talk with his production people” if prices failed to rise. Mr. Randall asked for Ajinomoto’s reply. Whitacre said they threatened aggressive pricing action. Wilson said that Ajinomoto’s complaints were unjustified. (See 10/25/93 entry below). [Eichenwald]. Other evidence indicates that ADM in mid 1993, was operating at about 10 mil. lb./month (56,000 tonnes/year). See July 1993 entry below. April 1993, lysine prices fell to $0.78-$0.80/lb. With ADM the most aggressive in its pricing. Industry sources speculate that ADM may be trying to force Miwon (Sewon) to withdraw from the U.S. market. [CMR 5/10/93]. [CMR’s price report is an accurate one for April 1993 (see Appendix Table A2)]. April 1993: The cartel was facing a crisis. U.S. prices had fallen 20% since January, and outside North America and Europe prices had not risen in late 1992. The cartel members believed that an inability to agree on volume shares was the cause of the breakdown. In early April, Andreas, Wilson, and Whitacre held strategy sessions to plan for 3 meetings with Kyowa and Ajinomoto representatives later in the month. The Asian companies were accusing ADM of reneging on a promise made in 1992 to cut back on its output. [In fact, ADM’s sales volume increased 29% from June 1992 to September 1992; however, ADM’s volume did remain below the Sept. 1992 peak for seven months thereafter at about the same level as June 1992]. Wilson and Andreas contended that ADM’s promise was conditional on prices rising in all parts of the world, and this had not happened in Asia and Latin America. Moreover, ADM had always stated that it wanted parity with Ajinomoto. On April 13, Andreas suggested that Whitacre tell Kyowa that it was managerially disorganized. On April 15, Andreas repeated that theme: “. . . tell ’em that our management is convinced it’s unfortunate that . . . they are not . . . sophisticated enough that we can count on their . . . performance . . . ” (Lassar and Griffin:27).
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On April 15, 1993, Whitacre met with Kyowa’s Yamamoto in Chicago. Yamamoto said that all the companies in the cartel should reduce volume. At an April 16th briefing by Whitacre, Andreas said that if the price of lysine “ . . . gets up to where it belongs . . . we’ll probably cut back.” (Ibid. 28). On April 28, 1993, Wilson and Whitacre met in Chicago with two representatives in Eurolysine, Crouy and Rollier. Crouy suggested setting market shares in only North America and Europe [that is, Ajinomoto did not want to give up its dominant share of the Asian lysine market]. Then Crouy says, “Let’s not forget that, if the prices went up in Europe, it’s because we talked in Mexico first . . . and . . . in Europe after.” Wilson replies: “That’s right you made it happen.” (Ibid 28). Crouy and Rollier argued with Wilson about what they believed was ADM’s 1992 promises to lower its volume. Wilson said that ADM would not do so because prices had not risen to $1.05/lb. everywhere in the world (ibid). The four agreed that “peace in the market” would not be achieved so long as the Korean producers continued their aggressive pricing (ibid 29). After this meeting, Wilson instructs Whitacre not to put the cost of their dinner with Crouy and Rollier on his ADM expense report (ibid 29-30). On April 29, Whitacre briefed Andreas about Chicago meeting. On April 30, 1993 there was a summit meeting in Decatur. Andreas, Randall, Wilson, and Whitacre hosted Yamada and Ikeda at lunch in ADM’s headquarters. The purpose was to “restore the relationships” between ADM and Ajinomoto and “begin the process of developing a volume agreement.” Andreas alluded to the importance of controlling a company’s sales force: “. . . we have the same problem [price cutting] in every business . . . That’s the reason we like to keep so centralized” (ibid 30). Yamada asked Andreas to give ADM’s regional sales people authority to set prices in a given range. Yamada stated that “. . . everybody now understands it is necessary to adjust the supply delivery . . . even [Sewon] says it is reasonable . . .” (ibid 31). However, Yamada also said that Sewon would not join a lysine association if its purpose was to limit each member’s supply. After this meeting Andreas stated that Yamada clearly understood that Ajinomoto and ADM had to agree on volume shares between themselves first, and then approach the other producers [see 10/15/93 below]. Andreas also told Wilson and Whitacre to threaten Ajinomoto representatives at the upcoming Tokyo meeting by telling then that ADM intended to become bigger than Ajinomoto. [As if to demonstrate their commitment, ADM’s volume of sales increased 20% in April, 80% in May, and 107% in June compared to its JanMar average]. (Lassar and Griffin:31). April 28, 1993: The government presents taped evidence of a meeting at the Gaslight Grill in the Hilton Hotel at O’Hare Airport in Chicago that included Wilson, Whitacre, Rollier and Crouy. Wilson accuses Ajinomoto and Eurolysine of breaking their agreement to keep prices high in recent months, of cheating on the Mexico City and Paris agreements. He states that ADM never agreed to reduce output unconditionally, only that ADM would cut back if prices got high enough (U.S. vs. M. Andreas Tr. 723-724).
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April 29, 1993: Crouy testifies that lysine prices had fallen, so Crouy, Rollier, Wilson, and Whitacre met at the Hilton Hotel at O’Hare Airport to discuss prices and volumes. Wilson is caught on tape saying that Andreas and Randall take an “active role” in lysine price fixing; he also admits that the Mexico City meeting caused the price increases observed (U.S. v. M. Andreas Tr. 2202-2231). ADM’s estimate of world lysine consumption was 155KCabout 50 to 70K too low (Tr. 2371). (See Appendix Table A6). April 30, 1993: At the Decatur meeting with Yamada, M. Andreas explains that ADM’s entry into Lysine fit well with ADM’s overall strategy of focusing on fast-growing agricultural commodities. He hinted that they were also going to enter tryptophan and threonine soon. Somehow this is supposed to be non-threatening to Ajinomoto because lysine growth would spurt for all (U.S. v. M. Andreas Tr. 1878-1879). Ajinomoto manufactured both tryptophan and threonine in the United States. April 30, 1993: Andreas and Yamada hold a key meeting in Decatur. Yamada suggests that ADM’s salespersons get together with Ajinomoto’s, but Andreas was concerned about secrecy at ADM. Yamada reported that the other three Asian companies were ready to agree on volume controls (USA vs. M. Andreas Tr. 724-725). May 1-5, 1993: Andreas, Wilson, and Whitacre discuss the meeting of 4/30/93 with Yamada. They are pleased with the progress, and Andreas discusses the next steps. His plan is to agree first with Ajinomoto on market shares for the two leaders, decide on the likely growth of the market and divide that growth, and then go to the remaining three companies (U.S. vs. M. Andreas Tr. 725-726). [This is exactly his proposal on 10/25/93]. May 14, 1993: This general meeting was attended by ADM (Wilson and Whitacre), Ajinomoto (Yamada, Ikeda, Mimoto), and Eurolysine (Crouy). Participants argued about the size of the total market, with Ajinomoto taking the position that ADM’s share was smaller than it claimed. Wilson again pushed for a formal lysine association like the one ADM belonged to for citric acid. The citric association collected monthly volume figures from each producer, had the figures audited annually, and reported shares to each member. The reporting had to be “very confidential.” Citric cartel members only agreed on percentage shares, not absolute volumes, a procedure that avoided arguments about the remaining size of the market. He claimed that this type of agreement had caused citric acid prices to rise 41% (Lassar and Griffin:32). May 14, 1993: Wilson and Whitacre meet with their counterparts in Ajinomoto in Tokyo. They fail to agree on market shares, but Wilson suggests monthly reporting of volume to Mimoto (U.S. vs. M. Andreas Tr. 726). [See 12/8/93 meeting below]. May 14, 1993: At the Tokyo meeting, Cheil did not attend because they were not invited, testified Mimoto, because it was demanding too large a share. The four conspirators almost came to a share agreement (U.S. v. M. Andreas Tr. 1006-1007).
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May 14, 1993: Whitacre and Wilson meet Crouy and Ikeda. During the taped conversation, Wilson hints that he is aware or suspicious of a cartel involving Ajinomoto’s MSG production. “. . . you know, I’m sure that there’s something you do with MSG and . . . it works, and what you try to make [sic] deals with other products . . .” (Tr. 5978). [This comment comes after Wilson’s hypocritical statement that he must follow the U.S. antitrust laws]. May 17, 1993: Whitacre, Wilson, and Andreas meet to discuss strategy. The taped conversation catches Whitacre saying that he misreported ADM’s production or sales to be 70,000 tonnes to Mimoto, whereas the true number is “closer to 65” (Tr. 5979). Andreas says he is considering taking down prices of lysine immediately. [Prices in the U.S. do fall 20% from April to June 1993]. May 17, 1993: Whitacre briefed M. Andreas about the Tokyo meeting of May 14th. He reported that the Japanese expected ADM to cut its [annual] volume by 20,000 tonnes. Andreas said ADM’s position remained the same: Ajinomoto should reduce its volume down to ADM’s current level, then when lysine prices rise worldwide, ADM would cut its volume; until then, ADM would maintain its aggressive position. (Lassar and Griffin: 32). [In fact, ADM was acting aggressively on price and output. From Jan. to May, U.S. transaction prices fell 33%; from May to June they fell another 6%. ADM’s volume of sales rose by 65% and another 15%, respectively]. May 31, 1993: Whitacre, Ikeda, and Yamamoto agree telephonically to raise prices. Ikeda of Ajinomoto proposed that producers should agree on quantities as soon as possible at their upcoming Vancouver meeting (Lassar and Griffin: 33). Summer 1993: Lysine prices rise even higher than what was agreed to in Vancouver in June 1993. Prosecutor James Griffin suggests that the conspirators took full advantage of the Midwest floods that caused soybean prices to escalate (U.S. vs. M. Andreas Tr. 729-730). June 11, 1993: An ADM management conference is tape recorded. Lysine department is losing profits (Tr. 5980). [April-May prices were $0.66 to $0.78/lb.]. June 24, 1993: This is the first meeting since October 1992 at which all five producers of lysine are present. Meeting in Vancouver, Canada, the nine representatives negotiate inconclusively about coming to terms about volume shares, though they did agree on prices worldwide. The Asian producers wanted ADM to be limited to 45,000 mt per year, “the old proposal.” Wilson replied that ADM would settle for nothing less than 65,000 mt. The four Asian firms asked Whitacre and Wilson to leave the room for one hour, after which they increased their offer to ADM to 54,000 mt. When being briefed four days later, Andreas asked Whitacre which Asian company had agreed to reduce its volume; Whitacre said that none had agreed to a reduction, but rather they had simply agreed to increase their estimate of world production. Andreas considered the offer insincere.
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Apparently, the Vancouver meeting did produce an agreement on a price of $0.90/lb. to become effective in mid-July, 1993. [The U.S. price averaged $0.62 in June, rose to $0.88 in July, and $0.98 in September]. (Lassar and Griffin: 33-34). June 29, 1993: Wilson and Whitacre telephone Ikeda at Ajinomoto. They tell Ikeda that ADM refuses the 54,000 mt. offer, insists on parity with Ajinomoto, but promise no increase in ADM’s production if prices stay at $0.90 or more (Lassar and Griffin: 34). [This “promise” is easy to keep because ADM was at record levels of sales volume, about 61,000 mt. on an annual basis. ADM stayed at 41,000 to 53,000 mt. for the rest of the year]. July 1993: Experts report that in the U.S. in July 1993 four companies sell lysine: ADM, Ajinomoto, and Kyowa each have 30 percent of the market (18,000 tonnes each) while Miwon supplies about 10 percent (7,000 tonnes). U.S. exports jumped from 6,200 tonnes in 1991 to 38,000 tonnes in 1992, most going to Canada and Europe. With ADM doing nearly all the lysine exporting in 1992-1993, it appears that its production at Decatur had reached 53,000 to 56,000 tonnes (47% to 50% capacity utilization), of which 64% to 67% was exported. U.S. imports in 1992 were 11,000 tonnes, of which 65% originated in So. Korea and were made by Miwon, which sells through its agent, Southerland Co. USA. [CMR 5/10/93]. Thus, total U.S. lysine supply in 1993 is approximately 65,000 tonnes (feed-grade 61,000). July 1993: Following the Vancouver meeting (which agreed on fixing prices at $0.90/lb. by mid-1993), there are several telephone conversations among the conspirators about setting prices. “The U.S. price, which had plunged to as low as $0.60 for certain customers in early June 1993, began to increase, and by the end of July 1993, it had moved to $1.20/lb.” (Lassar and Griffin: 35). [Later, these conspirators would report that their monthly average selling price for June was $0.62, for July $0.76, and for August $0.88]. By 1992-1993, ADM is reputed to be the lowest-cost producer of lysine; industry executives believe that ADM’s break-even price is below $0.85/lb. [WSJ 7/28/95:A1]. October 1993: Whitacre attends the Paris meeting of the “lysine association” 10/5/93. As soon as he returns, Whitacre reports to Andreas who asks if the representatives agreed to volume allocations. The answer is that the group is very close, but that a personal meeting of Andreas and Yamada is needed to close the deal (U.S. vs. M. Andreas TR. 730-731). October 1993: Ajinomoto takes full ownership of its three lysine plants in Europe and the United States. Orsan divests (U.S. v. M. Andreas Tr. 1706). October 1993: Orsan is a European company that owned 50% of Eurolysine and also owned other manufacturers of MSG and other amino acids (namely, Heartland Lysine and Orsan Brazil). Ajinomoto owned 50% of Heartland and Eurolysine. Orsan itself was owned by Lafarge Group (63%), Ajinomoto (20%), and public stockholders (17%). Lafarge wanted to sell its 63% interest in Orsan. Besides Ajinomoto, there were four possible buyers: Amylm (a company owned by Pierre Callebaut and Tate & Lyle), Degussa, Roquette, and Feruzzi. 108
Early in 1994, Ajinomoto paid Lafarge 8 billion yen (about $656 million) for its share of Orsan (U.S. v. M. Andreas Tr. 2143-2154). October 1, 1993: When the lysine cartel met in Paris, they prepared a chart of future prices for all areas of the world (delivered for U.S., Europe but c.i.f. for export destinations). For the U.S. $1.05/lb., for Europe 4DM/kg., for Asian export $2.30/lb. c.i.f. The other regions were Taiwan, Australia, New Zealand, Mexico, South Africa, and South America (total of nine) (U.S. v. M. Andreas Tr. 953-955). [See Appendix Table A8]. October 5, 1993: All five companies meet for the third time. The meeting, in Paris, draws 10 representatives. This meeting establishes a pattern of quarterly “maintenance meetings,” for the cartel to agree on prices for the quarter. General meetings are scheduled for 6/93, 10/93, 12/93, 3/94, 5/94, 8/94, 10/94, 1/95, 4/95, and 9/95. Only the last is not convened. Although price agreement is reached in Paris, no volume agreement occurs. Indeed, none of the representatives have the authority to commit their companies to volume shares. Again, the cartel members use “top management” to solve this problem (Lassar and Griffin: 36). October 12, 1993: In a tape-recorded conversation with Mark Whitacre about the three largest Asian manufacturers of lysine, M. Andreas says “Well, they’re the club, though. You’re the outsider. It’s gonna happen when Cargill wants some of that citric acid club.” [This shows that Andreas understood that ADM had to break into a coordinated group that would view ADM as the upstart.] (Tr. 5614). October 12, 1993: Whitacre discusses the results of the Paris meeting of 10/5/93 with Andreas. The five companies agreed to hold their production constant for the next few months. Andreas asked if Whitacre had warned the others not to build any more capacity. Andreas agreed to meet with Yamada to settle the volume controversy (Lassar and Griffin 1998: 36-37). Andreas suggested that ADM “should be very quiet in the market place” in the winter of 1993-94. ADM would cut its production but, “would not stand for any poaching” by rivals. [From Nov. 1993 to March 1994, ADM’s monthly production was 7400 to 9100 mt. and rising, about the same as its fall 1993 average]. October 25, 1993: M. Andreas and M. Whitacre meet with 2 Ajinomoto executives to resolve ADM’s dispute with Ajinomoto about ADM’s failure (in Ajinomoto’s opinion) to adhere to an agreed-upon 9-million-pound production limit. This meeting at the Marriott Hotel in Irvine, California, was recorded by the FBI by cameras hidden in the room’s table lamps. Andreas proposed that 1993 lysine sales or production levels be used to decide on company production quotas for 1994 and future years. He further suggested limiting the industry growth rate to 6 percent per year (or 14,000 tonnes increase in 1994). The four participants then began to haggle over the allocation among companies. M. Andreas says: “What would we be willing to accept out of that 14,000 tons [sic] and what you would be willing to accept, 109
isn’t that the question?” The meeting ended in agreement over total industry and company production targets. Ajinomoto agreed to convey the agreement to the other members of the lysine cartel and to enforce compliance with the allocation. [Eichenwald]. October 25, 1993: A critical meeting is held between ADM (Andreas, Whitacre) and Ajinomoto (Yamada and Ikeda) in Irvine, California. Andreas proposed the following deal: give every producer the same tonnage in 1994 as they sold in 1993 plus a share of the market’s 1994 growth. They disagreed about the total size of the world market for lysine in 1993, pegging it at either 230,000 mt. or 250,000 mt. With high prices, the market would grow more slowly than its historical rate of 8% to 10%. They assumed that volume would grow 5% to 6% in 1994, or 13,000 to 15,000 mt. Therefore, the proposed allocation in metric tonnes for 1994 was: Company Ajinomoto ADM Kyowa Sewon Cheil TOTAL
1993
+
87,000 68,000 44,000 36,000 15,000 250,000
Growth 4-5,000 4-5,000 2,000 2,000 2,000 14-16,000
=
1994 91-92,000 72-73,000 46,000 38,000 17,000 264-266,000
Ajinomoto appeared to agree with ADM’s proposal and probably conveyed it to the other three Asian producers. Cheil was likely to be disappointed in the offer because it had claimed to 20,000 mt. capacity that it wanted to use fully in 1994. (Lassar and Griffin: 3941). [The offer was clever in many ways. It saved face for Ajinomoto by leaving it clearly in a number-one position, well ahead of ADM. It gave by far the largest percentage increases to Sewon and Cheil, the two Korean companies historically devoted to maximizing growth and market share. It represented a seemingly major concession by ADM, because it did not grant ADM “parity” with Ajinomoto in total volume, but it did give ADM parity in sharing the market growth. ADM had reached an annual output of 67,000 mt. in only one month in 1993; during July-Oct. ADM had averaged only 50,000 mt., so its 1994 proposed allocation would give it 44% more sales]. October 1993: World sales targets for 1994 were agreed to be: Ajinomoto 84,000 tonnes; ADM 67,000; Kyowa 46,000; Sewon 34,000; and Cheil 17,000. (WSJ 3/27/96). October-December 1993: In the months following the Irvine, California meeting, the lysine cartel works out details. ADM informs the others about strategies it uses to fix prices in the citric acid market, suggesting that the lysine cartel do the same.
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A key meeting was held on December 8, 1993 in the Palace Hotel in Tokyo. A tape recording shows that T. Wilson, M. Andreas, K. Yamada (all criminal defendants by 1997), and others “. . . adopted with minor changes the volume allocation plan for 1994 worldwide sales [of lysine] developed by defendants Andreas and K. Yamada . . . in an earlier recorded meeting on October 25, 1993, in Irvine, California.” This quotation is from a 1998 ruling handed down by the federal judge in Urbana, Illinois that allows Whitacre’s tapes to be entered as evidence. The ruling also notes that Wilson explained how ADM’s arrangements in its citric acid conspiracy were valuable as a model for lysine [Chicago Tribune 1/14/98: Business p.1]. The “citric acid association” receives monthly reports from each member. Each year, a Swiss accounting firm audited the numbers at ADM’s London and Decatur offices. [Eichenwald]. November 1993: The Irvine agreement came under attack by Cheil, which felt its share too small, and by Ajinomoto, which feared the market might not grow fast enough. ADM agreed to listen (Lassar and Griffin: 42). December 1, 1993: Mark Whitacre places a call to Hirozaku Ikeda of Ajinomoto to talk about an upcoming meeting about lysine in Tokyo on 12/8/93. Whitacre says that Wilson would come only if a lysine association is discussed; Wilson wants to explain his experiences with the Corn Refiners Association and similar associations. (U.S. v. M. Andreas tr. 17341736). December 1, 1993: A telephone call from Whitacre to Ikeda of Ajinomoto is taped. Whitacre tells Ikeda that he is following Andreas’ instructions (also on tape) to tell Ajinomoto that ADM will accept its volume allocation of 67,000 tonnes plus a share of the growth (U.S. v. M. Andreas Tr. 1734-1740). December 1, 1993: Whitacre meets with M. Andreas and complains that in a phone call with Ikeda that Ajinomoto is not promising 5000 tonnes increase in ADM’s share in 1994. Andreas tells Whitacre not to be upset, that ADM expects 5000 to 6000 more from industry growth but it’s not worth fighting about. The 67,000 allocation was a good deal and besides ADM is out of inventory (Tr. 5694). December 8, 1993: Eight representatives of the four largest lysine companies met in Tokyo to discuss prices and volumes. Cheil boycotted because of its small proposed share (17,000 tonnes). U.S. prices were at $1.08 to $1.10/lb. in the two months prior to the Tokyo meeting and rising. Slightly altered 1994 sales volumes were agreed upon by the four companies: Ajinomoto 84K, ADM 67K, Kyowa 46K, and Sewon 34K to 37K (depending on whether Ajinomoto and Kyowa agreed to an audit of their 1992 sales volumes). If 1994 growth were high, ADM might receive slightly more. [The implied volume of 1994 world consumption is 248K to 252K mt. or 546-556 million pounds]. Wilson assigned Kanji Mimoto to receive monthly reports of sales volumes and to distribute the information. The purpose was to allow each member to adjust volume to keep its market 111
allocation. Producers that undersell get “buy-in” from over-producers, i.e., the latter are to be forced to buy from the former the amount of the deficit at the cartel’s inflated price. Wilson proposed regular quarterly meetings of the lysine trade association, which would hold parallel sessions: official “legitimate” sessions and “unofficial” secret sessions where the cartel would do its work. He also discussed guidelines for reporting regional sales figures. Wilson reiterated ADM’s intention to crank up its volume if prices fall. (Lassar and Griffin 1998:44-45). December 8, 1993: Based on an audio tape made by Mark Whitacre, the details of one lysine price-fixing meeting at the Palace Hotel in Tokyo were recorded in full detail. The meeting lasted four hours and involved executives from four lysine manufacturers (ADM, Ajinomoto, Kyowa Hakko, and Sewon), who calmly discussed production and prices in four regions of the world (probably No. America, Asia, Europe, and Latin America). Terrance Wilson is recorded as suggesting that each of the companies telephone its monthly sales figures to Ajinomoto, which would then tabulate the figures and report back to each company. Mr. Wilson is quoted as saying: “We have to watch our telephones. We have to watch that. It can be done, but we must be very careful.” He urged establishment of an association that would “conceal that . . . competitors were secretly meeting to discuss price and sales volumes.” The New York Times reporter who listened to this and other tapes wrote that: “One of the most striking aspects of the whole sorry story was the matter-of-fact nature of its day-to-day planning. Here was the stuff of high drama . . . yet the executive haggled over their illegal production quotes as if they were negotiating a run-of-the-mill joint venture.” [Eichenwald]. December 1993: World lysine production capacity is estimated to be approximately 200,000 tonnes in 1993, of which the United States consumes 60,000 tonnes per year. Growth in volume has been sustained at 10% p.a. for many years. (CMR 5/10/93). 1994: Miwon Group changes its name to Sewon Group. Its U.S. sales subsidiary becomes Sewon America USA. 1994: Worldwide production of lysine for the calendar year was 253,000 metric tonnes or 558 million pounds. (These data are presumably from the internal, audited records of the lysine cartel.) Worldwide sales were about $650 million, which implies a manufacturer’s average price of $1.27/lb. (Lassar and Griffin: 2-3). February 1994: A memorandum dated 2/3/94 of a meeting of Ajinomoto, Heartland, and Eurolysine representatives, seems to show them trying to find ways to hide some of their lysine sales from the auditors who will help enforce the cartel’s volume agreements (U.S. v. M. Andreas Tr. 1824-1829). H. Ikeda, who was at the meeting, says that they were only removing liquid lysine, pet food lysine, and other products not covered by the price fixing agreement. Ikeda’s memory is very poor on other references to reducing sales figures (Tr. 1983-1836). 112
February 1, 1994: An internal Miwon document shows the sensitivity of companies to their home markets. “Should we sit idly by while ADM exported a whopping 180 tons to Korea?” (Tr. 6018). March 10, 1994: Mimoto describes the Hawaii meeting at the trial. The conspirators telephoned their January 1994 sales to Mimoto before the meeting and compared it to the allocation agreement. For example Miwon (Sewon) sold 3,249 tonnes, 20% above its 2,833tonne allocation. Cheil was invited only to the afternoon portion of the meeting. The other four companies thought Cheil was exaggerating its 1994 production. Chaudret of Eurolysine talked about setting up a “lysine association” as an “easy cover-up” for their price-fixing meetings. Mimoto confirms the global allocations for each manufacturer for 1994 (84+67+56+34+17 = 248K). They agreed to fix the U.S. price at $1.16/lb. and prices in the rest of the world as well. Sales were reported monthly for each region by each company. Always by telephone, never by fax (danger of being seen by employees). Regions in early 1994 were North America, Europe, Latin America, and Asia-Other. Mimoto informed Yamada about lysine prices often (U.S. v. M. Andreas Tr. 1090-1103). March 10, 1994: All 5 producers meet in Makaha, Hawaii to set prices and check volumes. Cheil was offered more volume than proposed last year, and agreed to rejoin the association. They reviewed Jan.-Feb. volumes and agreed to prices for the second quarter of 1994. Prices were set on a country-by-country basis in all four market regions (No. America, So. America, Europe, and Asia). This pattern of meetings was repeated every quarter through April 1995. These “Maintenance meetings” became so formalized that Wilson no longer needed to attend. Wilson’s final speech warned the group about the price-cutting and deceptiveness of buyers. Unlike the “friends” in the room, the buyers were the true enemies. Rivals had to trust one another. (Lassar and Griffin: 46-48). March 10, 1994: The “lysine association” holds a meeting in Hawaii to exchange sales data. One executive distributed an agenda for the association’s meeting, commenting that the organization was “an easy cover-up” for price fixing. At this meeting each company shared its February sales figures. They further debated whether to have their monthly or annual reports to each other formally audited; some expressed concern that audits of only one product might prove suspicious. Terrance Wilson reiterated that the representatives of ADM’s competitors were his friends. He said “I want to be closer to you than I am to any customer, because you can make it [sic] where I can make money or I can’t make money . . . Let’s put the prices on the board . . . Let’s all agree what we’re going to do and walk out of here and do it.” [Eichenwald]. 113
May 1994: A regular lysine meeting held in Paris (Lassar and Griffin). May 4, 1994: Wilson warns Whitacre not to leave the sales-volume reports in his office (Lassar and Griffin: 49). June 12, 1994: Wilson examines the lysine sales reports sent by Mimoto by mail and warns Whitacre not to leave them in his office (Lassar and Griffin: 49). August 1994: A regular lysine meeting held in Sapporo (Lassar and Griffin). August 1994: For the first time, T. Wilson of ADM was missing from a regular meeting of the “lysine association.” Mimoto was not surprised at his absence because the volume agreement was working well all year. The only surprise was that Miwon asked for a share increase (but promised to follow the price agreement) (U.S. vs. M. Andreas et al. Tr. 1104). October 3, 1994: Dwayne Andreas was invited to two White House dinners in one week – for Boris Yeltsin and to celebrate passage of GATT agreement. Headline: “Decatur Exec Becoming A White House Regular” (Chicago Sun-Times 10/3/94:12). [N.B. Indirectly, ADM is an investor in this paper.] Later, Andreas would be invited to travel on Air Force One to the funeral of former President Nixon. October 13, 1994: Mimoto, Yamada, Andreas, Wilson, and Whitacre meet in the Four Seasons Restaurant in Chicago. Andreas says he is surprised that Sewon wanted a share increase because they had just visited Decatur and seemed happy with the lysine arrangements (U.S. v. M. Andreas Tr. 1090-1095). October 13, 1994: Andreas, Wilson and Whitacre meet for dinner with Yamada and Mimoto at the Four Seasons Hotel in Chicago. Andreas proposed that Ajinomoto join it in a joint venture because “. . . it’s a good excuse to get together and have something to talk about.” The lysine cartel was having a little trouble with Sewon. It was refusing to send its monthly sales figures and it was planning on a plant expansion in 1995. The five were concerned about overproduction if Sewon went ahead. Andreas urged Ajinomoto to get Sewon in line. Andreas recalled that the week before when Sewon representatives came to Decatur, Sewon had raised the issue of ADM investing in Sewon. (Lassar and Griffin:49-51). October 24, 1994: A regular lysine meeting held in Zurich (Lassar and Griffin). January 1995: Department of Justice sources gave the world lysine “market shares” of the cartel members as: Ajinomoto 34.0%, ADM 26.4%, Kyowa Hakko 18.1%, Sewon 14.2%, and Cheil 6.3%. Other companies not in the cartel accounted for 1.0% of the world market. The Herfindahl Index of concentration was 2,422 and CR4=92.7%.
114
Whether the shares are based on production volumes or sales revenues is not stated, but it is probably the former. These shares correspond very closely to the shares reported by Eichenwald (1997) and shown in Table 2 of this report [WSJ 7/9/98:B10]. January 18, 1995: Worldwide production or sales shares of the lysine cartel were: Ajinomoto ADM Kyowa Hakko Sewon Cheil
34.0% 26.4% 18.1% 14.2% 6.3%
[Lassar and Griffin: 3]. January 18, 1995: A regular lysine meeting was held in Atlanta. (Lassar and Griffin). February 1995: The composition of Japanese lysine exports changed radically from 1989 to 1994: U.S. from $25 MM to $4.7 MM, Europe $13 MM to $4.4 MM, but China and Hong Kong from $9.3 MM to $37.6 MM (Jap. Chem. Wk. 2/22/96:4). As late as March 1995, Whitacre is still highly regarded by ADM. In that month, D. Andreas circulated a laudatory report by the investment firm Dain Bosworth which mentions Whitacre as the likely next president of ADM. [Hollis]. April 1995: Ajinomoto sues ADM over patent infringement of a process to make threonine. Whitacre does all he can to stop the suit because he knows that the discovery process will uncover his embezzlement. April 1995: Kanji Mimoto confirms that lysine production by Ajinomoto in Japan was to cease very soon. The reason was high costs in Japan and new facilities outside Japan (U.S. v. M. Andreas Tr. 1395-1397). [See July 1995 entry below]. April 21, 1995: A regular lysine meeting held in Hong Kong. June 1995: Because of ADM’s pique, Heartland Lysine was losing several large customers to ADM around this time. Tyson was buying 25% of its lysine from Heartland, but signed an exclusive contract with ADM this month (U.S. v. M. Andreas Tr. 1411-1412). Federal grand jury in Chicago established by DOJ in early June 1995, before raids began. [WSJ 6/29/95:C17]. The government’s lysine case was initially headed by James M. Griffin, chief of the DOJ Antitrust Division’s regional office in Chicago. By March 1996, Deputy Attorney General Jamie Gorelick (the no. 2 Justice official) has assumed supervision of the three ADM-related grand juries and the criminal investigation of Whitacre. Assistant Attorney General for 115
antitrust Anne K. Bingaman was also involved in supervising the prosecution. In the fall of 1995, Gorelick brought in Scott Lassar, first assistant U.S. District Attorney in Chicago, to co-direct the prosecution with Griffin when Whitacre’s embezzlement and tax fraud came to light. Lassar, a highly regarded and experienced prosecutor, would probably become the lead trial lawyer against ADM [WSJ 3/27/96]. [This is a highly unusual arrangement]. Joel I. Klein was transferred from the White House in the late spring of 1996 to work together with Gorelick on the ADM cases. Gorelick left a few months later, and when Assistant Attorney General Bingaman resigned from her post in October 1996, Klein was appointed acting Assistant Attorney General for Antitrust. He was confirmed by the Senate in mid 1997. [Hollis]. Like Bingaman, Klein would become identified with a newly assertive Justice Department in antitrust matters. The night of June 27, 1995: FBI sends 70 agents to houses of ADM officers, raids Decatur corporate headquarters of ADM, and issue subpoenas for records on corn products from 10 multinational manufacturers: ADM, Cargill, Ajinomoto, Kyowa Hakko, Sewon, Samsung, Tate and Lyle’s A.E. Staley, CPC International, Bayer, and Hoffman-La Roche. Events widely reported in world press. [WSJ 6/29/95: C17]. Virtually every corporate officer of ADM from D. Andreas on down were interviewed by the FBI that night. However, the search warrant restricted the headquarters’ search to the offices of only M. Andreas, Wilson, Cox, and Whitacre. D. Andreas immediately hires the Washington law firm of Akin Gump which is governed by Robert Strauss, friend of D. Andreas and ADM director. [Hollis]. June 28, 1995: Whitacre confides his role as FBI mole to John Dowd (attorney of Akin Grump team hired by ADM to interview employees). Dowd informs ADM management. Whitacre claims that Dowd promised attorney-client confidentiality. [Whitacre]. June 28, 1995: Howard Buffett later tells the FBI that he observed a box full of documents being removed out the back door of Dwayne Andreas’ sixth-floor ADM office. Around the same time, Martin Andreas supervises five ADM employees to purge several other employees’ office files of documents. Large amounts of shredded documents are seen (Lieber 2000:326). June 29, 1995: Whitacre ordered to leave ADM headquarters, is formally fired August 7, 1995, and is charged with fraud and embezzlement of at least $2.5 million. (Amount later raised to $10 million). Whitacre hires a personal lawyer to defend himself; he attempts suicide in late August. [Whitacre]. July 1995: For a month or two after the FBI raid, Whitacre was an American folk hero. Neighbors praised the Whitacres as model parents, citizens, and philanthropists. But ADM fought back to discredit him, first with charges of résumé fraud concerning his MBA then 8/8 with embezzlement (Lieber 2000:326). 116
July 1995: The last regular meeting of the lysine association was scheduled to convene in the Cayman Islands, but no one showed up. (Lassar and Griffin:51). July 1995: Howard Buffett, son of billionaire investor Warren Buffett, resigns his post with ADM’s Board of Directors and as a special assistant to D. Andreas, in reaction to the ADM scandal. [Ag Biz 9/7/97]. July 1995: Ajinomoto has halted the making of lysine in Japan, and Kyowa is also shifting production out of Japan. (Jap. Chem. Wk. 7/20/95: 7). July 3-4, 1995: Warren Buffett, secretary to the ADM Board of Directors and media spokesperson, resigns. This takes the company by surprise; he is banned from the premises by ADM on 7/10/95. “. . . no other manager besides Buffett would resign in protest” (Lieber 2000:8). July 14, 1995: Another profile of ADM and D. Andreas. A highly secretive company best known for “. . . 35 years of unashamed influence-peddling in Washington . . .” Andreas “ . . . has long been regarded as the most politically connected agribusinessman in the U.S.” Heavy investment in the Bioproducts Division, which is expected to generate 10% of ADM’s income by 1997. Has high shares in lysine, citric, HFCS and is known for “. . . muscling into market position.” Has cozy relationship with Tate & Lyle, (lots of JVs), since T&L bought A.E. Staley. (Carlson 1996) July 19, 1995: At its regular quarterly meeting, the ADM Board of Directors appointed 9 of its 17 members to a special subcommittee in charge of advising the management on the criminal and civil suits arising from the alleged price fixing. Co-chairs are M. Brian Mulroney (Canadian Attorney) and John H. Daniels (ret. ADM chairman). Other members are Shreve Archer (private investor, heir of founder), Ralph Bruce (retired ADM exec.), Ray Goldberg, F. Ross Johnson (chair of RJM Group), Mrs. Nelson “Happy” Rockefeller, John Vanier (farmer), O. Glenn Webb (Chmn. Growmark). Ages are 56, 73, 72, 78, ?, ?, 69, 67, 59. Archer is father of ADM Treasurer C.P. Archer; Vanier is brother-in-law of H.D. Hale, Chair of ADM Milling Co.; Webb is CEO of co. with ADM JV; Mulroney handles ADM’s Canadian legal business; Goldberg and Goldberg’s father were close friends of D. Andreas, as is Rockefeller. [Thus, only Johnson is believed to be an outside director, in the strict sense]. It is normal practice for companies to form special committees for sensitive matters, excluding employee board members, and including only “outside” members. [WSJ 7/20/95:A4]. July 22, 1995: Relationships between ADM and its rivals in corn wet milling are described “cozy,” the large number of links “unusual,” and a “certain kind of harmony” that is not found among rivals in other industries. Points: the 3-mile pipeline in Decatur between the ADM and Staley plants; ADM’s ownership of Tate & Lyle stock and Am. Maize Products Co. also; revolving doors (ADM’s Larry Cunningham is former CEO of A.E. Staley, and 117
Staley’s director of operations Michael McFate came from ADM). An official of Amaizo denied that its 28% ownership by ADM had any impact at all. (Washington Post 7/22/95:F1). July 24, 1995: A U.S. News and World Report article predicts long term negative fallout for ADM: depressed stock, problems in DC. “[Dwayne] Andreas is one of the nation’s bestconnected executives in the halls of political power,” especially close to Bob Dole. Depends on government policy: e.g., John McMillin estimates 39% of ADM’s net earnings come from HFCS and U.S. sugar policy. July 24, 1995: CMR profiles ADM. “Since 1989, . . . Archer Daniels Midland Company has entered over half a dozen . . . biochemical businesses using vertical integration, marketing savvy, deep pockets, and . . . aggressive market tactics.” In doing so, ADM has ruffled feathers and alienated business rivals. ADM entered lysine in 1991, citric in 12/90, methionine by merger in 8/93, threonine, tryptophan, sorbital (1990 liquid, 1994 crystalline by merger), lactic acid (1993 on stream), vitamin E (late 1994), monosodium glutamate (1994), and distilled monoglycerides (1995?). Rumors persist of ADM interest in biotin, vitamin C, and gluconates (gluconic acid or sodium gluconate). (CMR 7/24/95: 3). July 28, 1995: Kyowa Hakko states that it was a “minor player” in setting lysine prices and that bigger Ajinomoto coerced Kyowa into colluding. Cargill denies involvement in price fixing in citric acid or corn sweeteners. [WSJ 7/28/95: A1]. July 28, 1995: Subpoenaed and seized ADM documents show 1992-1995 monthly “sales targets” for lysine and actual monthly sales for three largest world producers. [WSJ 7/28/95: A1]. July 30, 1995: Decatur citizens recall the night of June 27th with amazement. More than a dozen senior executives homes served warrants; several hundred pounds of documents seized from ADM’s headquarters. The “strike force” had more than 100 agents and investigators in it. ADM’s immediate response? A 2-sentence press release and hiring of “squadrons” of lawyers for ADM executives all over the world. (Chicago Tribune 7/30/95: 1). July 31, 1995: ADM known to be “. . . a secretive, aggressively competitive company . . .” and “is controlled by Dwayne Andreas . . . and several members of his family.” Family overrepresented on ADM’s Board. Might damage its “vaunted political clout” (Crain’s 7/31/95:3). July-October 1995: Subpoenaed documents from a dozen firms are received by DOJ investigators. ADM stock price falls 24% or by $2.4 billion in market value.
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August 1995: In looking for evidence to dismiss Whitacre, ADM is reported to have stumbled on evidence of his embezzlement. Whitacre finds out that ADM knows and confesses to $500K to the FBI (Tr. 3296). Whitacre was fired “for cause” on 8/7/95 (McCuskey 1999). August 1995: The FBI first becomes aware that Mark Whitacre is embezzling from ADM, a crime that began in 1991. The fabricated story of the Japanese extortionist who was contaminating ADM’s lysine plant was probably Whitacre’s attempt to steal as much as $10 million in 1992, says James Griffin (U.S. vs. M. Andreas Tr. 721). August 8, 1995: On the same day Whitacre is publicly accused of embezzlement, he appears to attempt suicide by carbon dioxide poisoning. It is difficult to decide whether it was earnest or staged (Lieber 2000:15). August 9, 1995: Whitacre attempts suicide by leaving his car running in his large garage. His gardener finds and revives him (WSJ 8/9/95). Whitacre was fired from ADM on August 7th. September 1995: ADM’s Washington lawyers persuade the DOJ to base all investigations other than antitrust in Washington D.C., in the fraud section of the Criminal Division. Lassar, Shepard, and the Chicago DOJ Antitrust office were removed from the embezzlement case entirely even though the crime occurred in Illinois. ADM’s law firms in D.C. exercised “far more influence” over the DOJ there than in Chicago where the “lobbyist lawyers” were regarded with contempt (Lieber 2000:16-18). September 1995: More than 20 civil suits filed against ADM by buyers of lysine, citric acid, or HFCS. Several seek class-action status. Some want consolidation across products or change in venue. [WSJ 9/26/95:B8]. September 19, 1995: Mark Whitacre filed a counter-suit against ADM charging retaliatory discharge, breach of contract, defamation and material injury. Most of his claims were dismissed 8/5/99 (McCuskey 1999). September 21, 1995: ADM President James Randall fires three executives involved with Whitacre’s embezzlement (AP, 10/10/97). October 16, 1995: ADM sues Whitacre in a Swiss court for return of $6.25 million they allege he stole (AP, 10/10/97). October 25, 1995: Mark Whitacre became CEO of Future Health Technologies, a Chicagoarea start-up biotechnology company. No evidence could be found of the company’s existence. (Business Week 10/23/95:34). October 27, 1995: A long news article in the Wall Street Journal profiles the extraordinary management style of ADM and its CEO. 119
Dwayne O. Andreas, born in 1918, was made a director of ADM in 1965 and groomed for the position of CEO from that time. Although he owns personally less than 1% of ADM’s stock, “. . . Andreas has gained near-total control with the help of family members, loyal executives and directors whose combined stake is nearly 15% . . . He collaborates with his biggest competitors, spends prodigiously to influence the media and public opinion, and spreads large sums among politicians of all stripes.” (A1). “Over the years, he has moved aggressively to neutralize any obstacles to his dominance . . .” At the 10/95 annual meeting, “. . . he summarily cut off a critic by turning off his microphone [and said] ‘I’m chairman. I’ll make the rules as I go along.’” Article called this “rough tactics.” Andreas is given much credit for ADM’s superb performance: 1987-97 stock appreciation of 17% p.a. vs. 15% for the Wilshire 5000. Wall St. analysts see ADM as impervious to takeover. The sugar program’s major beneficiary is ADM; fructose generates about 40% of ADM’s earnings. Also, ADM dominates ethanol production, which gets a 544/gal. federal subsidy. Andreas was called the “Forest Gump of the political-influence money game” by Fred Wertheimer. Andreas & ADM’s PAC has given generously to both parties and all presidents. He gives to the Democrats and to GOPAC. “He buys futures in Washington” says Charles Vanik. He courted both Gorbachev and Yeltsin, Robert Dole and Elizabeth Dole ($1 million to Red Cross). Lobbying is through National Corn Growers Association, Corn Refiners Association, Renewable Fuels Association, etc. Andreas often says “Keep your friends close and your enemies closer.” So in 1992, ADM built a 3.5 mile pipeline from its Decatur plant to A.E. Staley’s plant. Reduces risk and helped Staley break a (threatened?) strike. ADM owns 8% of Tate & Lyle (Staley’s parent) and has a Mex. JV with Staley in HFCS. Andreas denies having an alliance with Tate. Does have many JVs with grain coops: Growmark, Gold Kist own 2.0, 2.7 mil. shrs. of ADM and are on the Board. ADM Board is “exceptionally supportive” of Andreas. 4 members are Andreas, 6 are current or former ADM officers. Even four “outsiders” are closely connected to Andreas: Mulroney, Strauss, Goldberg, Webb. Total 17. All major decisions made at the top by 3 or 4 officers, D. & M. Andreas, James Randall, and T. Wilson. Managers have no budgets, little paperwork, informal meetings. Secrecy within and without is extreme, e.g., no quarterly earnings reported. Andreas delights in his image as the most important agribusiness leader & his role in backchannel diplomacy for U.S. presidents. Legal problems have not stuck: gave $100k in cash to R. Nixon; wrote $25k check given to Watergate burglar B.L. Barker; prosecuted for illegal $100k corporate gift to Humphrey; fixed $8k by FEC in 1993. ADM sued by rivals for theft of tech. (Ajinomoto, Ralston). 120
ADM hedges its bets with generous support of key news programs on ABC (This Week With David Brinkley), NBC (“Meet the Press”), CBS (“Face the Nation”), and PBS (Jim Lehrer Newshour). Spent at least $16/mil. 1/94-4/95, incl. 27% of the PBS show’s budget. ADM also owns 10% of American Publishing newspaper chain, which owns the Chicago Sun Times. More subtle contacts: Andreas is chairman of the Sea View condo in Bal Harbor, FL., where Bob Dole and Brinkley both own condos. [WSJ 10/27/95:A1]. Another form of influence cultivated by Andreas and ADM is through its membership and support of agricultural trade associations and other agricultural support groups. Most ADM lobbying for subsidies, trade barriers, or other government favors is done through the Corn Refiners Association, the Renewable Fuels Association (for ethanol), and the National Corn Growers Association (NCGA). The large membership rolls of groups like the NCGA impress members of Congress. ADM has given millions to land-grant universities “. . . virtually buying deans, professors, and chairs.” (Andreas was the founding patron and president of the International Agribusiness Management Association). D. Andreas has a long history of making large political contributions, and has got into trouble at times. Investigators during the Watergate scandal found a $25,000 check written by Andreas in one of the burglar’s bank accounts. After President Nixon resigned, a bundle of $100,000 in cash given by Andreas was found in the White House safe and later returned. “During Senator Sam Ervin’s impeachment hearings, Andreas reportedly dodged subpoenas by living in Europe.” Andreas and his wife were fined by the Federal Election Commission for excess contributions. “Andreas, his family and ADM are, by far, the largest political contributors in the country.” [Hollis]. October 1995: DOJ spokesperson announced that ADM was not the target of any investigation by the Criminal Division. That is, in an indecently short time, the DOJ had decided against the validity of Whitacre’s claim that his fraud was in fact normal bonus schemes at ADM (Lieber 2000). October 27, 1995: At ADM’s annual meeting, the most significant event was not D. Andreas’ imperious style but ADM’s general counsel’s statement that the DOJ had “no credible evidence” that the tax-free bonuses were a practice at ADM. To lie at the shareholders’ meeting would constitute securities fraud (Lieber 2000). November 1995: ADM faces 11 private antitrust suits by lysine users. More than 30 shareholders sue for “material mismanagement.” Total suits rise to more than 70. M. Andreas and Wilson told they will be indicted by the DOJ. [WSJ 11/17/95]. December 1995: Department of Justice sources gave the annual world lysine “market shares” of the cartel members as: Ajinomoto 34.0%, ADM 26.4%, Kyowa Hakko 18.1%, Sewon 14.2%, and Cheil 6.3%. Other companies not in the cartel accounted for 1.0% of the world market. The Herfindahl Index of concentration was 2,422 and CR4 = 92.7%.
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Whether the shares are based on production volumes or sales revenues is not stated, but it is probably the former. These shares correspond very closely to the shares reported by Eichenwald (1997) and shown in Table 2 of this report. [WSJ 7/9/98:B10]. Early January 1996: David Hoech, scourge of ADM, wrote a letter to Masaru Yamamoto pleading with him to become an informer against ADM, which he did shortly thereafter (Lieber 2000: 30). Hoech predicted that ADM would pay a fine voluntarily from the beginning, but feared $300-400 million would get M. Andreas off the hook. January 1996: Among the changes in ADM’s governance structure was to reduce board members’ compensation to about $40,000 per year (from about $100,000), of which half in ADM stock, and mandatory retirement at age 70. These changes largely mollified the important institutional investors, whose pull-out could have ruined ADM’s stock price (Lieber 2000). January 1996: A long profile of ADM’s governance structure. ADM “. . . has been run for 25 years by the iron hand of its chairman, Dwayne O. Andreas, and governed by directors named Archer, Daniels, Andreas and their friends.” The firm has been insular and rife with cronyism. In 1995, a special committee of the Board of Directors recommended a smaller board with more independent members and a succession plan for the chairman and president. Andreas said he agreed with the recommendations 100%. The present ADM board is “. . . handcuffed by company insiders, family members, cronies, and friends of the powerful chairman.” Of the 17 members, 3 are close relatives, 2 are officers, 3 are former officers, 2 are Archers and Daniels, 3 are close friends of Dwayne (Strauss, Mulroney, Rockerfeller), 9 are 69 or older, others have business relationships. (Washington Post 1/21/96: H1). January 15, 1996: ADM agrees to reduce the size of its Board and remove several inside directors (AP, 10/10/97). January 1996: The lysine class-action suit is assigned to Judge Milton Shadur of Chicago’s U.S. District Court. He auction’s the right to represent plaintiffs to Kohn, Swift & Graf of Philadelphia for a fixed fee of $3.5 million. [WSJ 2/15/96:B10]. February 1996: Total suits against ADM reaches 85+, including 14 by lysine buyers or groups of buyers. Some of these are later consolidated. ADM creates a “reserve fund” to pay suitors, but size is unknown, and states that it is willing to consider settling out of court (SEC filing). ADM’s legal costs for October-December 1995 reach $6 million. [WSJ 2/15/95:B10]. February 19, 1996: Dwayne Andreas was appointed to the Board of Directors of Hollinger International, Inc., the U.S. subsidiary of Hollinger, Inc., a Canadian publisher. Robert S. 122
Strauss and Henry Kissinger also joined. Hollinger owns more than 600 newspapers (Canada Newswire: 2/19/96). March 1996: Michael Andreas (Exec. VP), James Randall (President), and two more ADM officers resign from the 17-member ADM Board. Board will consist of majority “outsiders” for first time. Dwayne Andreas (77 years old) remains Chairman, CEO, and Board member; other Andreas’ close friends include brother Lowell, M. “Happy” Rockefeller, Ray A. Goldberg, Ross Johnson, and Brian Mulroney (former Canadian premier and lawyer representing ADM in Canada). [WSJ 3/22/96:A2]. March 15, 1996: A lengthy analysis of antitrust by Ralf Boscheck, professor of economics and management strategy at IMD, focusing on strategic options of private companies. As a rule competition law and enforcement is becoming more rigorous in the major industrial countries. Markets are becoming increasingly narrowly defined [agree] with lower concentration thresholds for enforcement [disagree]. Agencies are trying to “automate” antitrust rules by specifying more per se prohibitions and “block exemptions.” More companies need antitrust compliance programs that are clearly supported by top management, are used for performance evaluation, are clearly spelled out by “do and do not” rules that are company and industry-specific (discounts, communications on prices or shares, uses of associations, retention of records, industrial espionage). Spring 1996: DOJ’s case falters because not a single ADM officer will agree to cooperate; Wilson refuses to plea-bargain; in a very unusual move, DOJ announces that D. Andreas is not a target. Whitacre’s testimony is weakened by ADM’s embezzlement suit and by his own admission that he did not pay taxes on at least $10 million in income. Some large lysine buyers (e.g., Tyson Foods) refuse to cooperate (Don Tyson is another close friend of D. Andreas). Powerful Washington law firm of Williams & Connelly hired to defend ADM from DOJ lysine prosecution. [WSJ 3/27/96:A1]. March 1996: ADM and its Board now have 70 civil suits against them. In an unusual move, all three grand jury cases against ADM et al. come under the supervision of Jamie Gorelick, No. 2 DOJ antitrust official; shows government’s high priority and extreme caution. [WSJ 3/27/96:A1]. April 1996: For the two years 1994-1995, ADM, Ajinomoto, and Kyowa agree to pay “treble damages” of $45 million ($25, $10, and $10 million, respectively) to about 150 buyers who agree to join a class-action group. Settlement was negotiated by Kohn, Swift and Graf of Philadelphia, which won a novel January legal-services auction. [Kohn’s fees were the lowest offered (capped at $3.5 million for any settlement, $25 million]. Such a fee arrangement offers perverse incentive to settle with haste. [Kohn never hired any economic experts and completed the deal in a shockingly swift 3 months.] Normally, civil suits are negotiated and tried and settled after criminal cases settled, but ADM et al. have not yet been indicted!] Moreover, no ADM officials have yet submitted to pre-trail “discovery” (fact123
finding). Legal experts consider a settlement offer at this early stage of discovery very surprising. Judge Milton Shadur must approve this class-action deal. Lysine buyers must decide to join, opt-out and pursue a separate suit later, or to bring no actions whatsoever. An executive of one large buyer of lysine (probably Tyson) said they will not sue because even at $1.20/lb., it was “still a good buy” compared to lysine obtained in soybean meal; i.e., the buyer was still receiving a portion of its consumer’s surplus. It is reported that six outside directors form a special committee to oversee the antitrust legal strategy; this committee is urging ADM to plea-bargain with the DOJ. [WSJ 4/12/96:A1]. Wall Street reacts positively to the news of the proposed lysine class-action settlement. ADM’s stock rose 2% in one day. If accepted, the class-action settlement would represent an annual overcharge of 2 to 3% of U.S. sales. [WSJ 4/15/96:A1]. April 7, 1996: A writer for a major political magazine reviewed the major events in corporate crime in 1996 and chose the ADM scandal as the biggest such story of the year. ADM (“super-briber to the political world” and “Jim Lehrer’s Fallen Angel”) got a sweetheart deal from the DOJ. The fines were “bargains” and the grants of immunity too generous. Dwayne Andreas was not even interviewed. “Andreas once again proved himself to be a masterful escape artist.” The author hints that Andreas’ political largess is the reason, including the $3.5 million raised for President Clinton’s 1992 campaign as co-chair of a political dinner. The punishments meted out were insufficient: “. . . in the United States a prison sentence is rarely looked upon as the proper fate of corporate villains.” “The trouble is . . . most of the federal agencies with jurisdiction over the business world are woefully out manned by the huge array of corporate lawyers. It isn’t a David and Goliath situation – it’s more like Shirley Temple versus King Kong.” (Robert Sherill, The Nation 4/7/97). April 19, 1996: Three replacements on the ADM Board are announced, but two are believed to be “close” to D. Andreas: Mollie Hale Carter, daughter of retiring ADM VP and niece of a remaining Board member; John Block, Illinois hog farmer, former Secretary of Agriculture, and active member of many associations in which D. Andreas is active. [WSJ 4/19/96:A4]. May 1996: ADM starts to negotiate actively to settle class-action suits (lysine, citric acid, and shareholders). More than 90 suits have been filed. [WSJ 5/16/96:B8]. June 1996: ADM fights subpoenas by DOJ concerning Whitacre’s untaxed income through phony invoices. Whitacre claims that it was company policy to reward top officers in this way, that it avoided jealousy by junior officers with lower compensation. Whitacre has admitted to receiving $3.75 million in ADM funds through a phony Ukrainian company in 2/95 and $2.5 million through a bogus contract with a Swedish agricultural company in 10/93 ostensibly to pay for fermentation technologies. [WSJ 6/19/96:A3]
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July 1996: The competition law directorate of the European Commission (DG-IV) begins its investigation of the lysine cartel upon hearing the confession of Ajinomoto Co. (RAPID 6/7/00). July 9, 1996: 25 ADM lysine customers opt-out of the proposed class-action settlement and 7 others object to the size of the proposed settlement, partly because of analysis by John M. Connor that concluded that a fair settlement would be 11 to 12 times larger than the proposed $45 million. ADM’s lawyers and economists criticize the estimate as too high. The DOJ has not yet filed criminal indictments. [WSJ 7/10/96:B4]. July 14, 1996: A very long profile of Dwayne Andreas, interviewed in his ADM office. A short, trim man with slightly flashy accessories. Office full of mementos and pictures of major political leaders. “Andreas knows everybody.” Mother Jones said simply “Dwayne Orville Andreas runs the world.” Until 6/27/95, things had always got better for D. Andreas. He takes a lot of credit for the U.S.-Soviet rapprochement. He says none of the legal events bother him a bit even though his legacy is in jeopardy. He gives away $5 to $10 million per year to politicians, saints, and Barry University, which gave him an honorary doctorate. He claims never to talk with politicians about “his business,” but tells many stories about favors returned by politician friends. In 1995, about 40% of ADM’s profits came from federal subsidies. D. Andreas denies that ADM lobbies, a misleading statement. The resulting publicity after the FBI raid has been devastating for ADM and the Andreases. D. Andreas says that the $25 million lysine settlement was simply to rid the company of the unwanted attentions of 50 lawyers. He claims they knew Whitacre was a crook and stealing by Nov.-Dec. 1992. Why not fire Whitacre then? Because they needed the time “to get our money back,” D. Andreas says. (Carlson 1996). July 14, 1996: One of the most complete profiles of Mark Whitacre yet to appear. To the author, he appears young even for his 39 years, boyish, and guileless, especially for one who spent 2-1/2 years as an industrial spy. His story of the ADM price fixing episode is amazing, but “knowing what to make of it is somewhat complicated” because many of his stories of high level thievery in ADM are uncorroborated and denied by D. Andreas. Whitacre began work in the fall of 1989, reporting straight to Michael Andreas. Lysine was his first priority. In early 1992, Whitacre says that Andreas offered him a secret bonus of $200,000, which he had heard were being given to favorites, were tax-free, and he readily accepted. At the same time, his reporting line was changed to T. Wilson who, he says, already had a reputation as “ADM’s resident price-fixing expert.” The $200K he now views as a kind of bribe to engage in illegal price fixing [or perhaps a tool of control over reluctant executives]. Whitacre repeats the story about the “Fujiwara” extortion story to Carlson, but in this version Whitacre went to Mick Andreas about the alleged sabotage, who then authorized Whitacre to 125
offer a “finder’s fee” to a knowledgeable Ajinomoto official to identify the saboteur. Later, Andreas authorized “a couple of million dollars” to steal Ajinomoto’s secret lysine production technologies. [Later, the evidence points to James Randall as the perpetrator of this scheme]. On November 4, 1992, Mick Andreas called him and said “My [expletive] dad called the CIA about the sabotage at the plant.” That night, he revealed “everything” to the FBI, except the “secret bonuses.” As a mole for the FBI he taped more than 1000 conversations. The conspiracy worked well. “We were losing $4 million a month when Mick [Andreas] met with [Ajinomoto officials] in October ’93. We were earning $7 million a month by the time deal was implemented in ’94. From a $4 million loss to a $7 million gain -- that’s an $11 million swing a month. Whitacre’s reward was $6 million in secret offshore bonuses. Whitacre claims he taped a conversation in the ADM executive dining room in which Mick updated Dwayne on all the details of the price fixing. “Dwayne heard all those details -- on tape. He didn’t comment much -- just ‘Un-huh, uh-huh.’ But he definitely got updated. Definitely.” Dwayne Andreas claims that ADM thought well of Whitacre: “We trusted him completely -a good man, a good salesman for us.” Shows irritation at the FBI’s recruiting him to spy on ADM. Andreas believes that the tapes will show entrapment. (Carlson 1996). July 15, 1996: Plaintiffs that opted-out argue before Judge Shadur that the proposed settlement of $45 million unreasonable and hasty. ADM et al. promise to pay that amount. ADM is ordered to reveal lysine cost of production to the lawyers representing the opt-out firms. [WSJ 7/16/96:A2]. July 17, 1996: Hirozaku Ikeda, recently retired manager of Ajinomoto’s Feed Division, and Kanji Mimoto, his successor, are interviewed by the FBI in Hong Kong concerning their roles in the lysine cartel. They agreed to do so through their lawyer, John S. Magney, in mid July (U.S. v. M. Andreas Tr. 1759-1765). July 19, 1996: Judge Shadur approves the class-action settlement as “reasonable and fair,” but 33 companies decide to “opt-out”, which frees them to bring their own private antitrust suits. [Most of the “opt-out” firms probably settled privately with ADM et al. in late 1996 or early 1997, but the terms of these settlements are not revealed. Some of the “opt-out” firms take no action] [WSJ 7/22/96:B5]. August 14, 1996: DOJ prosecutors say (off the record) that they may seek a fine of up to $400 million from ADM (Chicago Tribune 8/14/96). August 27, 1996: The DOJ indicts three companies and three of their managers on the same day they sign guilty plea agreements in the lysine conspiracy case. The agreements must be approve of by the U.S. District Court Judge Ruben Castillo at a later date. The parties are: (1) Ajinomoto Co. Inc. of Tokyo, Japan and Kanji Mimoto, Deputy Gen. Manager and General Manager of the Feed Additives Division (includes Heartland Lysine, 126
Inc. headquartered in Chicago); (2) Kyowa Hakko Kogyu Co., Ltd. of Tokyo, Japan, Masaru Yamamoto, Dep. Gen. Mgr. and later Gen. Mgr. of its Agric. Products Dept., and BioKyowa, Inc. in Cape Giradeau, Mo., and (3) Sewon America, Inc. headquartered in Paramus, NJ and Jhom Su Kim its president. [The fact that Sewon of Korea was not indicted is significant]. The first two companies agreed to pay “the statutory” $10 million in fines each, but Sewon “a fine as large as the court deems it reasonably can afford to pay.” Mimoto and Kim will pay $75,000 each and Yamamoto $50,000. [www.usdoj.gov/atr/ . . . ] August 27, 1996: In a shocking setback for ADM, the three largest other co-conspirators file guilty pleas in U.S. District Court. Ajinomoto, Kyowa, and Sewon admit price fixing and agree to testify against ADM. Three executives admit guilt, pay personal fines of $75,000 each, and also agree to cooperate with the DOJ. The DOJ now has three credible witnesses to corroborate Whitacre’s charges. [WSJ 8/28/96:A3]. August 1996: The guilty plea bargain filed by the DOJ for Ajinomoto calculated that the volume of U.S. commerce affected by Heartland Lysine 1992-1995 was $122 million (U.S. v. M. Andreas Tr. 1450). September 1996: Two inside ADM Board members resign. The two former ADM officers cite their ages as reasons (74 and 79 years) for quitting. Since the scandal erupted, 8 board members have resigned. However, 10 of the current 17 board members are ADM officers, retired officers, or close relatives of officers. D. Andreas’s salary remains fixed at $3.6 million; no bonus or merit raise is awarded. SEC filing shows that “outside” directors were paid “unusually high fees” of more than $100,000 per year. One new “outside” director is Glenn Webb, Chairman of Growmark, Inc., a major supplier of ADM. ADM’s fiscal 1996 net income was $696 million, a 12.6% decline from fiscal 1995. On June 30th, ADM had $2.5 billion in cash and liquid securities. [WSJ 9/17/96]. September 1996: In ADM’s annual report for the fiscal year ending June 30, 1996, the company reports that selling general and administrative (SG& A) expenses increased at least $37 million because of the lysine and citric acid antitrust litigation. As no fines or settlements were paid up to June 1996, these represent lawyers’ fees, probably in the $40 to $50 million range for 1997. (From other SEC filings, we know that legal costs were $6 million during 10/95-12/95 and $25 million during 7/96-9/96). [ADM]. September 3, 1996: Ajinomoto expressed regret about the price fixing and said it will train employees to prevent a reoccurrence. Kyowa Hakko said it will try to be more careful in the future. Ajinomoto said that it signed the plea agreement in order to settle the matter as quickly as possible [16 months after being charged] (Kyodo News Service 8/27/96). September 17, 1996: The management’s board restructuring plan (approved in October) brought about the resignation of 8 of the 17 members since October 1996, and 3 new ones added to the new 12-person board. 127
September 19, 1996: ADM files $30 million suit against Mark Whitacre, including $20 million in punitive damages, for embezzlement of $9.5 million from ADM. [WSJ 9/23/96]. Whitacre calls the lawsuit a “publicity stunt” (AP, 10/10/97). September 29, 1996: ADM surprisingly offers to pay $30 million to settle a shareholders’ suit arising from its price-fixing activities. ADM’s lysine sales are estimated to be $300 million worldwide. [WSJ 9/30/97:A3]. October 15, 1996: Judge Ruben Castillo holds a hearing in U.S. District Court in Chicago at which Steven Mills, ADM’s controller, testifies that ADM agrees to the terms of its plea agreement and waives its right to a trial. After the prosecutors inform the Court of the charges and outlines its evidence, Mills testifies that the Board and the company’s management do not dispute the prosecutors’ facts. Judge Castillo asks James Griffin to explain how the fines relate to the federal sentencing guidelines. In the case of lysine, the base fine of 20% of sales results in a $30 million fine guideline; the culpability score of 9 implies multipliers of 1.8 to 3.6, or $54 to $108 million ($70 million is in the range). [Note that the DOJ chose to use ADM’s U.S. sales of lysine of $197 million, rather than two larger sales concepts available]. In the case of citric acid, the “relevant affected commerce” for 6/92-6/95 is $350 million which implies at 20% of sales a base fine of $70 million. A culpability score of 8 means a range of 1.6 to 3.2 multipliers or a fine range of $112 to $224 MM. [By parallel reasoning the citric acid fine should have been $145 MM or any amount in the range]. The Government asks for a downward departure based on “substantial cooperation.” [In this case, $30 million is a 73% to 87% discount]. Mills pleads guilty and the judge accepts it. “It’s not a good day for corporate America . . . I’m hopeful that this black day will be overcome by the new behavior of the Archer Daniels Midland Co.” “. . . some will say that this fine is not high enough.” “. . . no American company is above the law, and if a hundred million dollars doesn’t send that message, then I don’t think there is a number on God’s earth that I can set that would send that message.” [The 20% rule comes from an assumed average 10% overcharge. The Guidelines allow the upper end of the range to be used if actual overcharges were substantially more than 10%. Lysine was at least 20%, and possibly 50%, so a fine of > $100 MM was called for]. October 15, 1996: ADM pleads guilty of criminal price fixing and will pay the DOJ $70 million for the lysine conspiracy. It also agrees to help the DOJ prosecute its own corporate officers, M. Andreas and T. Wilson. Barrie Cox and other ADM officers are given immunity. ADM stock climbs to a record high $21.75, up 5.5% in one day. The Wall Street Journal claims that the “Andreas Era” at ADM could be over. However, D. Andreas has a brother on ADM’s Board and one son and two nephews who are current ADM officers.
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Although the fines paid by ADM for lysine are almost five times larger than previous record fines, ADM gets two valuable concessions from the DOJ. First, the DOJ will not prosecute ADM for price fixing in corn sweeteners, potentially the largest case in terms of fines and overcharges. Second, the DOJ agrees to end a federal grand jury investigation in Springfield, Illinois of ADM’s theft of technology and trade secrets. [WSJ 10/14/96:A3 and 10/16/96:A4]. Hollis suggests that the dim prospects for Bob Dole’s winning the presidency may have played a role in the timing of ADM’s capitulation. He also notes that ADM “upstaged the DOJ press conference” set for 10/16/98 by leaking news of the plea and by emphasizing the huge fine rather than DOJ concessions (Hollis). [Additional DOJ concessions do leak out later]. October 15, 1996: Janet Reno, Joel Klein, Gary Spratling, Jim Burns (U.S. Attorney, Chicago), and William Esposito (Assistant Director, FBI) hold a press conference in Washington, D.C. on the day ADM pleads guilty, Reno says the $100 million should “send a message worldwide” about “tough, tough penalties” for criminal price fixing. Costs to manufacturers, farmers, consumers very high. Klein calls ADM’s behavior “shameful,” motivated by “simple greed.” Burns praises Scott Lassar and Phil Guentert of his office, who worked beautifully together with Jim Griffin in Chicago. Calls the plea, fine, and case “historic.” Esposito tells how the investigation began in Decatur with one agent and ended with almost a dozen fully assigned to the case. Spratling defends granting immunity to ADM in HFCS on the basis of “. . . a great complexity of factors and prosecutorial discretion.” Disagrees with a question about whether the fine is small relative to ADM’s exposure. Could the DOJ have required Andreas and Wilson to withdraw from ADM’s management? Spratling: Maybe, but we didn’t do it here. Can he praise Mr. Whitacre’s role in the ADM case? No. ADM’s “cooperation” is to produce all demanded documents anywhere in the world, to secure the cooperation of every employee for interviews or testimony at its expense. That’s it. D. Andreas and J. Randall are not required to be interviewed, but are subject to the other terms. Spratling: “There are no politics involved in this deal.” Andreas and Randall will be talking to the DOJ, but not as part of a formal interview. (Federal News Service 10/15/96). October 15, 1996: The DOJ states that ADM is the first of many price fixers to pay new higher fines based on the “two-times” rule (up to twice the profits made from the conspiracy or twice the harm to victims, or less if the perpetrator cooperates). The $70 million lysine fine is termed a “turning point” in determining fines for criminal price fixing. Because ADM controlled 2 of the U.S. market, the implied overcharge for 1994-1995 by all three conspirators is at least $70 million and treble damages $210 million. This latter amount is 4.7 times larger than the class-action settlement approved by Judge Shadur in July but is about 50% of the amount calculated by Connor for the same period. [WSJ 10/16/96:A4].
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Where does the $70 million fine (plus $30 million more for citric acid) actually end up? Since 1994, the U.S. Treasury has place all criminal fines assessed for price fixing and other illegal acts into a special “Crime Victims Fund.” Monies in the Fund are dispersed to the states annually on the basis of population to aid victims of violent crimes, such as those injured or killed in the Oklahoma City federal office bombing. In 1996, the fund dispersed $529 million. The largest source of funds in 1996 was a fine of $340 million paid by Daiwa Bank for fraudulently covering up huge bond-trading losses; the $100 million paid by ADM was the second largest contribution to the Fund. Other ADM co-conspirators paid an additional $95 million to this fund in 1996 and 1997, bringing the total to $195 million. [Bloomberg News Service Wire]. October 15, 1996: ADM reveals that, during its fiscal quarter ending September 30th, it incurred price-fixing costs of $174.4 million, compared to quarterly operating earnings of $180 million. Of the $174.4 million, $100 million is to settle the DOJ criminal cases, $25 million for the lysine class-action civil suit, $25.4 million for the proposed citric acid classaction suit, and $25 million for legal costs for three months (July-September 1996). [WSJ 10/16/96]. The fines and settlement payments are not deductible for federal income-tax purposes. October 15, 1996: Testimony in an unnamed civil suit said that ADM raised prices of lysine by 75% during the conspiracy. Steven Ross of the DOJ is reported to have said that a the fine imposed on ADM is hard to make high enough to hurt the company. [St. Louis Post Dispatch (10/15/96):A1]. October 15, 1996: ADM is indicted and signs a guilty plea agreement on two counts of criminal price fixing (lysine and citric acid) on the same day. The dates of the two conspiracies are “about” 6/92 to 6/27/95 for lysine and at least as early as 1/93 to 6/27/95 for citric acid. The plea agreement calls for ADM to pay $100 million in fines ($70 and $30 million, for lysine and citric acid respectively). Worldwide sales were $600 million and $1.2 billion, respectively. Now four companies have agreed to cooperate with the DOJ investigation. All officers involved, expect two at ADM, received immunity from prosecution. (The DOJ’s press release does not say that ADM received immunity for price fixing in fructose). [www.usdoj.gov/atr/ . . . ]. October 16, 1996: ADM sues Mark Whitacre in a Swiss court to force the return of $6.25 million deposited there. In addition, ADM is seeking $30 million from Whitacre in state court in Decatur, IL. October 17, 1996: ADM holds its annual shareholders’ meeting. M. Andreas is placed on “administrative leave” and T. Wilson, age 58, announces his retirement, at a contentious annual meeting. At last year’s meeting, Chairman D. Andreas imperiously dismissed the importance of the gathering legal storm and stifled discussion on the price-fixing charges. This year, he briefly apologizes to shareholders. The Board of Directors rejected Andreas’ 130
offer to resign. A resolution offered by two major institutional owners to raise ADM’s standard of “independence” for outside directors receives an unusually high 42% of the vote. The Board awarded M. Andreas with a 15% raise just before placing him on leave; D. Andreas also gets a smaller pay raise. There is no known successor for the 78-year-old chairman. [WSJ 10/18/96]. October 17, 1996: On the day angry stockholders were descending on Decatur for the annual meeting, the NYT discovered that an insider, David Swanson of Countrymark Coop., had been invited and had accepted a position on the board. The company took steps to hide this information from its stockholders. Several institutional investors were irate. (NYT 10/17/96: D1). October 20, 1996: Ajinomoto tries to plea “no contest” in criminal price fixing in lysine. (This type of plea cannot be used in evidence in related civil trials). U.S. District Court Judge Ruben Castillo angrily rejected the plea when he learned that Ajinomoto destroyed evidence after the June 1995 FBI raid. Kyowa was allowed to plead guilty and pay $10 million. Kyowa and Sewon stated that they were forced to join the conspiracy because of “threats and intimidation by Ajinomoto and ADM”. Nine Ajinomoto executives were granted immunity because they are available to testify for the DOJ, but the lead conspirator Kazutoshi Yamada was not. Sewon’s U.S. unit says it is too poor to pay $10 million. [WSJ 10/21/96:A4]. (See 12/5/96 below). On October 21, 1996, Ajinomoto sued ADM for patent infringement in U.S. District Court in Delaware. Ajinomoto claims that 14 Russian inventors working for a firm called Genetika sold patent rights to production methods covering 20 amino acids, including lysine, threonine, etc. in October 1991. October 28, 1996: Time magazine columnist John Greenwald first to use humorous sobriquet for ADM: “Price Fixer to the World.” Comments on the ADM guilty plea, which makes ADM a “govt. informer” but lets if off the hook for HFCS conspiracy (if any). A public humiliation for D. Andreas, a powerful Washington political insider that has received about 65% of the $6 B in ethanol subsidies since 1980. He faces an investors’ revolt at the annual meeting last week and had to apologize for the scandals. The fine was “peanuts” and a “good deal” for ADM, less than 10% of its cash on hand. Stock market had expected more. November 1996: the ADM Board names a three-person “Office of the Chief Executive” to assist chairman D. Andreas in managing the company he has led since 1970. The three include James Randall (age 72), long-time President and COO of ADM; Charles Bayless, VP for soybean processing; and a nephew of D. Andreas. Board member Gaylord Coan, CEO of Gold Kist, is named Vice chairman, a title also held by M. Andreas. Gold Kist has a joint venture with ADM. These changes are the first step in assuring Wall Street that ADM has a succession plan for D. Andreas. [WSJ 11/1/96:A3]. 131
November 1996: Ajinomoto pleads guilty to one count of criminal price fixing of lysine. Fall 1996: Buyers of lysine that opted-out of the class action suit quietly negotiate private agreements with ADM et al. Settlement amounts may never be known because ADM does not have to reveal costs of settlement that it decides will not have a “material effect” on its earnings. November 13, 1996: Robert Strauss is interviewed about ADM’s problems by the Washington News Editor of Business Week. He says the press corps was mostly fair, but that some of the conduct of the FBI and DOJ was “almost obscene and shocking to me.” He is referring to Whitacre’s being wired and “eavesdropping” in ADM’s HQ, tapping phones, and reporting illegal activities only to the government (and not to “the people he’s working for”). “I’m talking to you because several people have told me that Business Week is out to do a real number on ADM.” Andreas is misunderstood – he is a major contributor to charities like Mother Teresa. Strauss is adamant about ADM Board’s role in the scandal: “I don’t think corporate governance had a damn thing to do with the problems the company found itself in.” “I thought [the board] performed admirably.” Has ADM been hurt in its ability to lobby Congress or the administration? “No, I don’t think so . . . ADM has never had paid lobbyists in this town. I’ve never made a call to a soul in the Congress . . . on behalf of Archer Daniels Midland . . . the issues just seem to take care of themselves.” (Bus. Wk. Online www.businessweek.com). November 1996: A Business Week survey of 295 top experts rated ADM’s board as among the worst in the U.S. (Reuters 11/14/96). December 3, 1996: A federal grand jury in Chicago hands down four criminal indictments for a price-fixing conspiracy in the world lysine market. Under the Sherman Act the maximum personal penalties are 3 years in prison and $350,000. The four are: Michael Andreas, Terrance Wilson, and Mark Whitacre, all former employees of ADM; and Kazutoshi Yamada, managing director of Ajinomoto, whose U.S. subsidiary Heartland Lysine, Inc. is headquartered in Chicago. In late December 1996, an arrest warrant was issued by a U.S. federal magistrate for Mr. Yamada who has refused to come to the United States to face trial. The Japanese Ministry of Justice is considering extraditing Yamada to face trial in the United States. A small South Korean company, Cheil Jedang, Ltd. also pleaded guilty and paid a $1.25 million fine. Wall Street analysts worry that tapes of pricefixing meetings could contain items that would further damage ADM’s relations with customers. Mark Whitacre, an FBI mole for 2 years, was apparently charged because he refused to admit tax fraud and wire fraud against ADM; some of the fraud took place while Whitacre was a mole. The DOJ offered Whitacre immunity against pricing fixing charges from the time he began cooperating in November 1992, but he is being indicted for price-fixing activities that 132
took place prior to November 1992. Whitacre claims that the FBI induced him to confess but never told him of his “Miranda” rights. [WSJ 12/3/96:A6 and 12/4/96:A3]. December 3, 1996: The fifth lysine conspirator is indicted, Cheil Jedang, Ltd. (or Cheil Foods & Chemicals, Inc.) of Seoul, Korea. Cheil distributed lysine made by a joint venture [in Indonesia] controlled by Cheil. There is no press release concerning a plea agreement at this time. [www.usdoj.gov/atr/public/press_releases/ . . . ]. See 1/29/97 below. December 3, 1996: In the Government’s indictment of Michael D. Andreas, et al., ADM’s global lysine sales from June 1992 to June 1995 were $454 million, of which $197 million were sales to customers in the United States. Thus, 57% was exported. If, as alleged, annual global sales were $600-650 million, then ADM’s global share was 28-30% (www.usdoj.gov). December 5, 1996: In October, Ajinomoto tried to plead “no contest” to an accusation of criminal price fixing of lysine, but in November it changed its plea to guilty. A company spokesperson said that it greatly regretted the incident. “We don’t know the details.” Ajinomoto President Shunsuke Inamori was expected to hold concurrently the post of managing director in place of Kazutoshi Yamada. (Daily Yomiuri 12/5/96:12). December 30, 1996: The Japanese Ministry of Justice will consider extraditing Kazutoshi Yamada of Ajinomoto to the U.S. to face criminal price-fixing charges if a request is made by U.S. officials. Mr. Yamada will not voluntarily appear in Chicago, as ordered on 12/9/96. [WSJ 12/30/96]. January 1997: The DOJ lost an important part of the Thermal Fax Paper antitrust case in jury trial held in Milwaukee. In U.S. v. Appleton Papers, Inc. (E.D. Wis. 12/13/95) the government’s main witness was a Japanese businessman. The defendant was a local paper company and its president. Although there were other issues that determined the outcome, the specter of a convicted foreign price fixer testifying against a U.S. citizen “. . . does not present the most attractive enforcement picture to a jury” (p. 219). “. . . . the jury took little time to acquit the U.S. citizen and his company” (pp.219-220) (Klawiter 1998). [Joel Klein has written about how the Thermal Fax Paper case shows the usefulness of international cooperation in U.S. antitrust enforcement. One must assume that the prosecutors of Michael Andreas et al. were conscious of this problem; were defense lawyers inspired by it also?] January 1997: The Appleton Papers case bears a strong resemblance to the 1998 trial of Andreas et al. Three convicted Japanese executives testified against the CEO of the largest U.S. company in the industry in a jury trial. The biggest differences between the two were the absence of tapes and the outcome: the Appleton Papers’ CEO was acquitted. At the beginning of the trial, the DOJ had already snagged guilty pleas from several thermal fax paper companies, most of them Japanese. Appleton Papers controlled 37 percent of the U.S. market and had raised its prices by 9.3 percent on August 7, 1991, exactly six days after 133
the only other U.S. company making the product (Kanzaki Paper) had announced a 9.3 percent increase. The price increase was preceded by almost two years of declining prices, a 40 percent drop from 1989 to July 1991. There were two key meetings involving Kanzaki’s CEO, Kazuhiko Watanabe. He testified that he met with Jerry Wallace, Appleton’s director of thermal fax paper, for dinner in Springfield, Massachusetts on July 10 to ask Wallace to raise prices and then by telephone on July 12th Wallace agreed. On July 29, 1991, Watanabe met in Tarrytown, New York with officials of Mitsubishi Corporation where they agreed to raise paper prices; Watanabe told them that Appleton would follow (confirmed by a Mitsubishi memo). At trial, Watanabe’s testimony was, according to a Canadian prosecutor present, “straightforward and sincere.” Two other Japanese executives corroborated the events, but the defense attacked his honesty mercilessly during cross. That Wallace negotiated a license for a Kanzaki dyeing technology was the cover story. After one hour, the jury voted to acquit because of “reasonable doubts” about the stories of the three main witnesses (The American Lawyer, April 1997:66). January 1997: ADM heads the list of “The Ten Worst Corporations of 1996,” compiled by Russell Mokhiber. ADM is called “Super-racket to the World” and a “self congratulatory/welfare queen/crime boss” combination. Kenneth Adams decries the lack of specificity of the plea agreement, who was involved, etc. He estimates that the harm to buyers was at least $500 MM ($400 MM for citric, $100 MM for lysine); if so, the $100 MM ADM fine was one-tenth the maximum possible under the law. Gary Spratling defended the size of the fine as based on the evidence available. (Multinational Monitor: www.corpwatch.org/trac/corner/worldnews). January, 1997: More details emerge about Whitacre’s tax-evasion indictment, returned in U.S. District Court in Springfield, IL. The scheme began in 1991, when he declared on his income tax return that he owned no foreign bank account. By 1994, he had bank accounts in Switzerland, Hong Kong, and the Cayman Islands. He also is charged with obstruction of justice because he is alleged to have tried to persuade a witness to lie to the grand jury. [AgBiz 9/7/97]. Whitacre sues FBI agent Shepard for denying his requests to see a lawyer and a psychiatrist (AP, 10/10/97). January 29, 1997: Buried in a press release about Haarmann & Reimer, the DOJ announces the guilty plea of Cheil Jedang, Ltd. and its $1.25 million fine. [www.usdoj.gov/atr/public/press_releases/ . . . ]. February 1997: In a Fortune interview, Mark Whitacre states that in November 1992 (when he began his FBI mole role) ADM had started lysine price-fixing discussions, but had not yet implemented the plan quite yet. [Note that Whitacre has immunity from all price fixing charges beginning in November 1992, but not before]. He also quotes M. Andreas as saying 134
that Cargill would never fix prices as a matter of policy. He charges the FBI with suppressing this and other evidence, including price fixing discussions involving D. Andreas and President Jim Randall. When the DOJ found out about the untaxed income Whitacre had received, they canceled certain payments or allowances that he had been promised. Whitacre claims that he has a tape of M. Andreas approving a $2.5 million illegal bonus for Whitacre. Whitacre says that he is being treated for manic-depression. In December 1996, the DOJ launched an internal investigation of Whitacre’s charges of official misconduct: suppression of price-fixing tapes (about Cargill & D. Andreas), denying Whitacre access to a lawyer or doctor, and failure to follow Miranda rules. Whitacre’s charges about FBI misconduct, if true, will be useful to the other ADM defendants. Whitacre admits he has tapes about price-fixing meetings and his dealings with the FBI that he has not turned over to prosecutors. In November 1996, those tapes were subpoenaed by a federal grand jury and Whitacre was questioned about them by the panel. [Fortune 2/3/97:8292]. February, 1997: Mexico opens an investigation of lysine price fixing [ADM]. February 24, 1997: Marty Allison, Bioproducts Division VP, pleaded guilty to assisting Mark Whitacre in diverting $300,000 from ADM. He received a sentence of probation (Decatur Herald & Review 2/25/97). March, 1997: It is reported that opt-outs from lysine class action suit settled for $20 million. One lawyer representing lysine plaintiffs said that those who took the $45 million settlement were “as dumb as rocks.” [Alan Guebert. “Ag Is Sacred.” The Pantograph (3/2/97):E3]. March, 1997: A class-action case under California state law by 20 animal-feeds manufacturers against ADM et al. was settled in San Francisco County Superior Court. Each client was awarded $50,000, which was 17% of the value of the lysine purchased. Lead attorney Jeff Parrish stated that this settlement was one of the largest class-action settlements ever recorded (in California?). “In most class-action suits the amount of recovery is 7% or lower,” he said. Other lawyers interviewed agreed with the “7% or lower” figure [San Jose, CA Business Journal (3/17/97):3]. April, 1997: A Corporate Reputation Survey by Fortune magazine ranks ADM last among food processors. [Fortune]. April, 1997: A deputy director of Japan’s Fair Trade Commission came to central Illinois in the last week of April to learn more about how the lysine case was investigated. [Journal of Commerce 4/30/97:6B]. April 1997: Cheil Jedang Co., the “mother company” for the Samsung Group, was divested after the country’s Fair Trade Law was relaxed. Assets are $2.04 billion, almost all owned by Lee Jae-hyon (Asia Pulse 4/17/97). 135
April, 1997: The class-action case encaptioned “Big Valley Milling et al. v. ADM et al.” was settled for $2.125 million. The settlement covers indirect buyers of lysine in 16 states that allow such recoveries. [Feedstuffs (4/21/97):5]. April, 1997: Settlement of ADM’s shareholder’s suit was approved by the court on 4/11. Three ADM officers (M. Andreas, T. Wilson, and M. Whitacre) scheduled to go on trial May 1998. April 7, 1997: A writer for a major political magazine reviewed the major events in corporate crime in 1996 and chose the ADM scandal as the biggest such story of the year. ADM (“super-briber to the political world” and “Jim Lehrer’s Fallen Angel”) got a sweetheart deal from the DOJ. The fines were “bargains” and the grants of immunity too generous. Dwayne Andreas was not even interviewed. “Andreas once again proved himself to be a masterful escape artist.” The author hints that Andreas’ political largess is the reason, including the $3.5 million raised for President Clinton’s 1992 campaign as co-chair of a political dinner. The punishments meted out were insufficient: “. . . in the United States a prison sentence is rarely looked upon as the proper fate of corporate villains.” “The trouble is . . . most of the federal agencies with jurisdiction over the business world are woefully out manned by the huge array of corporate lawyers. It isn’t a David and Goliath situation – it’s more like Shirley Temple versus King Kong” (Robert Sherill, The Nation 4/7/97). April 17, 1997: D. Andreas retires as CEO of ADM (AP, 10/10/97). April 18, 1997: Glenn Webb, chair of ADM’s Board’s committee on executive succession said that G. Allen Andreas was the only person interviewed for the presidency of ADM (WSJ 4/18/97:D2). May, 1997: ADM announces its intention to build a new bioproducts manufacturing plant in Cedar Rapids, IA to make glycerol, lysol, xanthan gum, citric acid, lactic acid, theronine, and tryptophan. [Feedstuffs (5/12/97):1]. Another source states that the new Cedar Rapids plant will make 100 million pounds of lysine annually beginning in the fall of 1998. Moreover, lysine production at ADM’s Decatur, IL plant is to be expanded to 350 million pounds by 12/97 at a cost of $80 million. [Cedar Rapids Gazette 5/8/97]. May, 1997: The lawsuit in Switzerland against Mark Whitacre is quietly dropped. [Ag Biz 9/9/97] June 12, 1997: The EU opens an investigation of ADM’s European lysine business, which accounts for about 25% of ADM’s world lysine sales of $280 million and also 25% of the EU’s total lysine market [WSJ 6/13/97:A16]. The day of the announcement, ADM’s stock fell 4.0%. June 12, 1997: DG-IV, the competition-policy directorate of the European Commission, announced that its investigators raided offices of ADM and Kyowa Hakko Kogyo in Britain 136
and Germany seeking information on price fixing in lysine. ADM’s offices in Kent and Weisbaden and Kyowa’s offices in Dusseldorf were affected. According to a Commission source, Ajinomoto is cooperating with DG-IV. Under EU laws, companies that cooperate on such investigations can receive reduced fines [The Guardian 6/13/97:25]. June 1997: ADM made a proposed settlement in response to 17 shareholders’ suits charging gross mismanagement by the Board of Directors. The Directors agree to pay $8 million to ADM (covered by insurance), to require classes in corporate governance for directors, that only outside directors will serve on the board’s audit committee, that no directors on the board’s audit committee, that no directors on the board before audit committee, that no directors on the board before June 1995 can nominate new directors. No specific directors are required to resign. [WSJ 6/2/97:A6]. June, 1997: Tapes made by Mark Whitacre of price-fixing meetings are ordered to be released to attorneys representing class-action plaintiffs. Both the DOJ and lawyers for M. Andreas and T. Wilson object to their release. June 20, 1997: The EC Commission decision to open an investigation of lysine price fixing was prompted by “complaints” received as well as by ADM’s 10/96 guilty plea. Lysine sales in the EU were 250 million euros in 1996. (Agri-Industry Europe 6/20/97). June 23, 1997: G. Allen Andreas, nephew of Dwayne Andreas, is appointed CEO and President of ADM, assuming most of the responsibilities of D. Andreas, M. Andreas, and 72year-old President James Randall. Randall “typically built plants with plenty of excess capacity . . . a strategy that . . . helps warn away competitors from markets in ADM’s gun sights.” G. Andreas has spent $1.8 billion on acquisitions and plant expansions in fiscal 1997 alone, including two acquisitions of cocoa plants with 410,000 tonnes of grinding capacity that makes ADM the world’s largest processor. Three firms control 40% of world cocoa capacity. [WSJ 6/24/97:B13]. June 30, 1997: ADM issues its annual report for its fiscal year ending this day. The “Management Discussion” reveals that S,G, & A expenses increased substantially in FY97 because of antitrust litigation expenses of $240 to $250 million (an increase of $171 million over FY96 antitrust expenses of $70 to $80 million). Moreover, ADM’s effective incometax rate rose from its historical 33 to 34% level to 41% principally because the fines and settlements are not tax-deductible (see Table A-1). Pre-tax income declined from $1,182 million in FY95, to $1,054 million in FY96, and to $644 million in FY97. Changes in profits for ADM in most years are driven by changes in output volume, output prices, and raw material prices. However, direct antitrust litigation costs were equal to 55 to 63% of the 95-96 profit decline and 59% to 61% of the 96-97 decline. In addition, the price declines of lysine and citric acid from FY95 to FY97 were probably in the 10 to 20 percent range, thus reducing ADM’s worldwide sales of these products by $40 to $100 million, ceteris paribus. Finally, ADM’s top management was so distracted by the litigation during 1995-1997 that it is possible that profitable strategic moves 137
were lost. It is conceivable that all of the ADM profit declines may be attributable to antitrust violations. The FY97 antitrust costs for ADM amounted to 18% of ADM’s liquid assets available at the beginning of FY97. A FY96-FY97 decline in liquid assets of $627 million was the primary factor responsible for a decline in stockholders’ equity, the first such decline by ADM in many years. Summer 1997: Two anthropologists attempt to interpret ADM’s corporate misconduct in cultural terms. ADM’s corporate culture was “super organic,” a family-like organization whose principal value was loyalty to the patriarch personally and to his vision for the company. His vision was that of control over markets by political influence. “In the business world, price fixing is the ultimate form of control . . . the economic equivalent of a sailor being able to control the wind.” Questioning or resisting price fixing would have been seen as an unthinkable act of personal disloyalty. ADM’s tragedy is that it had a smallvillage mentality when what was needed was a corporate governance structure with clearly defined rules and impersonal sanctions, more like the formal legal structures of nation-states, to replace the prestige-based authority of the headman operating through kinship rules (Law and Contemporary Problems 60:5, Summer 1997). [Whitacre was a deviant who did not accept the patriarch’s authority or wanted to usurp it. Allen Andreas’ enthronement symbolizes continuity of the traditional values]. July, 1997: Two state pension funds (California’s CALPERS and Florida) appeal the settlement of the shareholders’ suits against ADM’s Board of Directors. They object to the lawyers’ fees (49% of $8 million) and to the weak definition of an “independent director.” [Ag. Biz 9/9/97] July, 1997: The Commodity Futures Trading Commission bars any ADM employee involved in ADM’s criminal conduct from working for two futures-trading companies owned by ADM. The two companies will be required to perform special weekly monitoring of trading for four years. [Ag Biz 9/9/97]. July, 1997: Cargill decides to enter the U.S. lysine market, rivaling ADM. A joint venture with Degussa AG of Frankfort, Germany, the world’s largest maker of amino acids, to be built in Blair, NE at 165 mil. lb. capacity. The Blair plant began operating in 1995 after an investment cost of $300 million. To add the lysine capacity the added cost will be about $100 million, but will give Cargill about 1/3 of world market of about $1 billion. ADM has 2 world market and production costs of $0.60/lb. Degussa has 25 plants, 26,000 employees, and $24 billion in sales. Cargill employs more than 76,000 people. [AgBiz 9/9/97 and WSJ 7/9/97:A4]. July 1997: Controversy erupted over the settlement in the case of investors who sued ADM management for mismanagement in the price-fixing cases. Of the $8 million, 49% went to the “vulture firms” representing nominal shareholders, the rest to ADM (to be paid by a $10 million insurance policy covering ADM management and its Board)! On the other hand, 138
“ADM is as good a corporate villain as you can get” said the head of the Council of Institutional Investors (Washington Post 7/22/97: D1) July 1, 1999: James Randall retired as ADM’s President after 22 years in the position. (AP 6/23/97). July 1, 1997: James Randall, 72, officially retires after 22 years as ADM’s President and 29 with the company. Called D. Andreas’ “right-hand man.” Will continue as consultant. (Minneapolis Star Tribune 6/24/97: 3D). September, 1997: Whitacre files for bankruptcy, listing $1.25 million in liabilities (AP, 10/10/97). September 1997: Ajinomoto boosting capacity of lysine 50% in U.S. and Thailand in 1998; new 15 kt plant in Brazil began production 8/97. Expects 220 kt cap. worldwide by 2000 (Nikkei Weekly 8/25/97:8). September 30, 1997: ADM’s SEC 10-K report lists three federal grand juries and three foreign investigations involving price fixing against ADM (Mexico-lysine, EU-lysine, and EU-citric acid). In addition, ADM is a defendant in 30 federal HFCS suits, 1 HFCS plus corn syrup, 6 California state class actions on HFCS, 1 Alabama state class-action on HFCS, 5 state class action lysine cases, “several” opt-out-firm lysine cases, 13 citric acid cases (11 class actions), 6 state class actions on HFCS plus citric acid, 6 state class actions on all three products. [ADM]. October 10, 1997: Mark Whitacre pled guilty to fraud and embezzlement of $9 million from ADM and tax evasion. During most of the period (1991-1995) Whitacre was an FBI informant. The DOJ will recommend a jail sentence of 6 2 to 8 years. Three subordinates of Whitacre were involved in a complex scheme that created phony subsidiaries, fake invoices, and secret bank accounts in Switzerland, Germany, Hong Kong and the Cayman Islands. Marty Allison, who was working for ADM in Germany, pleaded guilty in early 1997; Reinhard Richter, who was based in Mexico City, has also been charged. Whitacre formerly charged the FBI with misconduct, but no supporting evidence has come to light. [WSJ 10/13/97:B10]. In late 1997, Ajinomoto was reported to be expanding its IA plant, and Cheil Sugar its Indonesian plant. Sewon announced an expansion of its Korean plant from 96k tonnes in 1997 to 135k by mid-1998. [CMR 10/27/97:16]. Moreover, BioKyowa intends to expand its MO plant to 25k tonnes capacity in 1998, and will double the capacity of its Fermex plant (to 40k for three amino acids), bringing its global capacity to 100k tonnes. [CMR 1/26/98:4]. However, in March 1998 the Asian financial crises blocks Sewon’s plans. It’s parent, Daesang Group agreed to sell all its lysine assets (including technology) to BASF for $600 million. Lysine sales are about $150 million and account for 20% of Daesang’s sales. Daesang’s debt/asset ratio will drop from 3.5 to 1.5! This is the first large So. Korean company to be sold to a foreign owner. 139
October 1997: During 1995-1996, U.S. lysine prices “hovered just above $1.00 per pound” reports this trade magazine [in fact, prices in 1995 actually ranged from $0.90 to $1.30 in 1995 alone!]. Prices sometime in 1997 (no dates given) reached a peak of $2.80 to $3.00 per pound, but plunged “recently” (probably fall of 1997) to as low as $0.79. The plunge was ascribed to aggressive selling by one producer, guessed to be Cheil Sugar Co. By October 1997, lysine prices had reached $1.00 as buyers bought large quantities on speculation [CMR 10/27/97:16]. October 1997: Cheil Jedang Group spent $50 million building feed plants in Indonesia and Philippines “recently.” Has 870 kt cap in S.E. Asia. (Asia Pulse 10/31/97). October 1, 1997: In FBI interviews made available by the government to the Tribune, Mark Whitacre alleged several illegal and unethical acts by ADM and its officers. The interviews took place on August 7 and September 5, 1995 and were part of a government filing dated 9/19/97. In them, Whitacre says that M. Andreas was his mentor at ADM and advised him on the kickback schemes orchestrated by Whitacre, which are explained in detail. [The FBI never disclosed if these allegations of multiple and systematic fraud were investigated]. Whitacre even claimed that he kept Andreas appraised of the size of his kickbacks. Whitacre first told the FBI about his embezzlements on August 2, 1995. Whitacre also described several instances of theft of technology by ADM. On August 7, 1995 at a meeting in the U.S. Attorney’s office in Chicago, Whitacre was informed that his fraud and failure to disclose it abrogated his cooperation agreement and nullified his immunity from prosecution. (Chicago Tribune 10/1/97). October 2, 1997: Further accusations by Whitacre against ADM include: suitcases full of cash to bribe Russian politicians; bribery of Indonesian politicians to avoid taxes and to get environmental permits; the use of corporate jets for personal use by Michael Andreas and other ADM executives; and the hiring of prostitutes to compromise Ajinomoto employees in Eddyville, Iowa and extract technology secrets. [Only the last two accusations were confirmed]. (Chicago Tribune 10/2/97). October 28, 1997: Former ADM lysine sales executive in Mexico, Reinhard Richter, pleads guilty to fraud against ADM [see 10/10/97 and 5/29/98]. (Chicago Tribune ADM “Time Line” on-line). November 1997: Early history of Cheil was part of Samsung, Korea’s largest chaebol with 1996 sales of $93 billion. Samsung was founded in 1938 and grew quickly after the Korean War by importing and two main manufacturing subsidiaries, Cheil Sugar and Cheil Wool Textile. Cheil Sugar was a monopoly (Bus. Times of Singapore 11/11/97:10) since 1953.
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November 1997: Andrew Young, a new ADM board member, is fast developing a reputation as an apologist for big business. Former UN Ambassador and civil-rights activist, Young wrote a widely publicized report for Nike Company that said that he found no systematic or widespread abuse of worker’s rights during tours of Nike’s mostly Asian factories. However, a January 1997 audit by Ernst & Young commissioned by Nike and leaked to reporters in November found that employees in a large Vietnamese factory were exposed to the carcinogen tutuene and had developed a high incidence of respiratory problems. (WSJ 10/18/99). November 6, 1997: Sidney D. Hulse is indicted by a grand jury for filing false income-tax returns. Hulse was the head of ADM’s Atlanta sales office for its Bioproducts Division and reported to Mark Whitacre. Hulse operated some financial accounts in the Cayman Islands and Switzerland for Whitacre. He is the fourth ADM employee to be indicted for tax evasion or fraud. [WSJ 11/7/97]. November 1997: From newly released court records and from still-confidential tape recordings, transcripts of tapes, FBI investigation notes, and other corporate and government files, a clearer picture is finally emerging of the extent and mechanics of the ADM pricefixing scheme. Taped discussions at ADM headquarters suggest a wider involvement of ADM officers than the three who have been indicted (M. Andreas, T. Wilson, and M. Whitacre), “. . . with some tapes indicating that even the company’s president, James R. Randall, now retired, was told of [the conspiracy meetings].” Randall’s lawyer has stated that Randall had no knowledge that anything improper transpired at the meetings. Another startling fact is that the conspirators employed an accounting firm to audit portions of the price-fixing scheme. [Eichenwald 1997]. December 16, 1997: U.S. District Court Judge Blanche Manning expressed frustration over the government’s handling of the criminal trial against M. Andreas and T. Wilson. She was “deeply concerned” about the difficulty the defendants have had in finding out whether any tape recordings may have been destroyed. Mark Whitacre alleged in November that the FBI had told him to destroy tapes favorable to ADM and said that he had sent them to David Hoech. Hoech, a consultant for Asian companies that want to form joint ventures with U.S. companies, is a friend of Whitacre. Hoech has worked hard to spread Whitacre’s views on ADM to the media “. . . sending a regular bombardment of letters filled with allegations about widespread wrongdoing at ADM.” Hoech has refused to answer questions when subpoenaed by the defense, and Manning chastised the FBI for not requesting immunity for Hoech. James Griffin, the DOJ prosecutor in Chicago, said that the government believes that Hoech has no credible evidence to offer.
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Robert Herndon, one of Whitacre’s supervising FBI agents, testified that Whitacre had requested a payment of 10% of the government’s fines recovered as a result of the investigation that he had initiated. Sidney Hulse, a Georgia ADM employee once supervised by Whitacre, pleaded innocent that he helped embezzle nearly $1 million from ADM with Whitacre. (Hulse was not charged with tax evasion). In late October 1997, another Whitacre associate, Reinhard Richter, pleaded guilty to conspiracy to defraud ADM and tax evasion. Sentencing was expected in January 1998. [Chicago Tribune, 12/17/97:1]. 1998: Global demand for lysine reached 400kt, 150kt in Europe-ME-Af., Asia 100kt (5kt in Japan, 40kt in China), No. Am. 90kt, and Latin Am. 40kt. From 1998 to 1999, two Japanese manufacturers each plan to expand capacity by 40kt, Kyowa Hakko Kogyo (plants in U.S., Mex., Vietnam, Hungary) and Ajinomoto (investment completed, new cap. on stream 2000). Volume growth is above 10% p.a. globally, higher in China and Lat. Am. (CMR date unknown). 1998: Andreas’ lawyer, Reid Weingarten, age 48, specializes in litigating criminal cases. He was briefly a prosecutor in Pennsylvania, a trial attorney for the DOJ for ten years, and served as a counsel for several high profile federal investigations (Iran-Contra). In the mid 1990s he defended Agriculture Secretary Mike Espy from bribery charges. (L.S. Times 9/10/94). 1998: Blanche Manning, 64 years old, was admitted to the bar in 1967, became a judge in Cook County Circuit Court in 1979, appellate judge in 1987, and ran unsuccessfully for the Illinois Supreme Court in 1992. In May 1994, she was nominated for U.S. District Court judge by Illinois’ U.S. Senators Carol Mosely-Braun and Paul Simon. In November 1994, she was sworn in to that position. (Jet 5/23/94, 11/28/94). January 1998: A long analysis, picks ADM as one of 3 egregious examples of failure of a Board of Directors. (Association Management 1/98: 52). January 5, 1998: The New York Times and Dow Jones & Company filed an appeal with U.S. District Court Judge Blanche M. Manning who will preside over the criminal case against M. Andreas, et al. The appeal requested the release of all audio and video tapes that the government will enter into the court record as part of the prosecution’s evidence, even though only small portions of the tapes or brief transcriptions may be entered. The appeal was entered onto the court docket on January 30, 1998. The government soon appealed this request in a 30-page brief that questioned the District Court’s jurisdiction to decide the issue. Previously, the Court had ordered that pre-trial motions filed by prosecutors or defendants had to be released to the public, but with “confidential” portions removed. The 142
government did not oppose the earlier appeal (but defendants did). [Why the government opposed the more recent appeal is not evident.] January 29, 1998: Kyowa Hakko is adding substantial lysine and threonine plant capacity. By mid-1999, its Missouri plant will increase lysine capacity from 20,000 mt to 25,000mt and will add a new facility of 5,000 mt to make threonine and tryptophan. In Mexico, Kyowa’s Fermex subsidiary (75% Kyowa, 25% Sumitomo) will double its lysine capacity to 40 kt. In Hungary, Agroferm (85% Kyowa, 15% Tomen Corp.) capacity will also grow. Kyowa is evaluating Asian lysine sites. By mid-1999, Kyowa will have 100 kt of global lysine capacity out of about 350 kt total, with growth at 10% p.a. Its threonine capacity will reach 10kt. (Japan Chemical Week 1/29/98). January 30, 1998: Reinhard Richter, ADM’s sales representative in Mexico, was fined $25,000 and given 1 year’s probation for helping Whitacre’s embezzlement (Lieber 2000: 56). January 30, 1998: Reinhard Richter, a German national whom Whitacre had hired from Degussa around 12/90 to work for the Bioproducts Division of ADM in Mexico, pleaded guilty to defrauding ADM in Urbana, Illinois federal court. After praising ADM as a great company, Judge Baker sentenced him to one year of non-reporting probation in Mexico and $25,000; he paid no restitution of the $290,000 he allegedly stole. Because the “downward departure” from USSG standards was approved by the fraud division of the DOJ, clearly Richter had received the sweetest deal of anyone in Whitacre’s alleged “fraud ring” for agreeing to testify against Whitacre, Sidney Hulse, and perhaps others. Richter’s attorney denied on the record that his bonus was illegal; he characterized Whitacre as a “Machiavellian pied piper who brought them dream careers . . .” (p. 56) Richter was paid $600,000-700,000 by ADM [details not clear, probably 1/91-8/95]. He said Richter just “parked” Whitacre’s illegal money and got more himself, but other evidence contradicts this limited role. Although Richter changed his story in late 1997 (when he was plea bargaining), a letter dated 12/4/90 to ADM, a 11/8/91 ADM memo, an FBI interview on 11/8/95, and his German tax returns all confirm that the $290,000 “signing bonus” was approved by Randall and most of it paid by phony invoices (Lieber 2000). February 25, 1998: Mark Whitacre was briefly the president of a small North Carolina biotech company, but resigned in October 1997 when he pleaded guilty to fraud, money laundering, and tax evasion. Three other subordinates were also indicted. ADM also is suing Whitacre and several of his relatives in a federal civil case for recovery of fraud damages. (Chicago Tribune 2/25/98).
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February 28, 1998: By mid-1999, BioKyowa will have capacity of 27,600 mt for lysine at is Missouri plant. Also adding capacity for theonine and tryptophan using a new low-cost process. In 1984, lysine capacity in MO was 8.3 kt; by 1998 it reached 22 kt. Kyowa Hakko is doubling lysine capacity at its Vera Cruz, Mexico plant from 22 kt to 44 kt. Cost of two lysine expansions is $77 MM. (Japan - U.S. Business Report 2/28/98). February 28, 1998: Mark Whitacre, now 40, teaches high school and college courses to his fellow prison inmates and sings in the prison choir. He was reluctant to speak to reporters, but did dispute D. Andreas’ claim that he was the “dark cloud” over ADM. “It’s proven I wasn’t the dark cloud over the company -- the price fixing was.” (P.49). Still feels his sentences are too harsh. ADM faces new farmer suits in Canada seeking compensation. D. Andreas took over ADM leadership in 1966. Had a “knack for brokering international agriculture deals,” dealing with Stalin, de Gaulle, and Haile Selassie. Has personally known every U.S. president since Harry Truman. Among agribusiness people, ADM Along had a reputation for business practices that were close to the edge,” (p. 50). In 1978, ADM pleaded no contest on charges that it had conspired to fix prices on food sold for international relief programs. In 1992 and 1994, it paid $2 million to settle civil suits that it had fixed prices on carbon dioxide. Brian Mulroney was the principal negotiator for the ADM Board, for which he gets a minimum of $110,000 per year. Said Ray Goldberg: “It took someone with a great deal of diplomacy to explain to Dwayne {Andreas] the necessity for all the things that had to be done . . . which was not an easy thing.” In September 1995, Mulroney said “ADM is the cleanest company in America.” Mulroney coordinated ADM’s guilty plea. The greatest concession was immunity of the HFCS price fixing allegations. In an interview of Harry Chandler, who headed the Canadian government antitrust investigations of the lysine and citric acid cartels, said that he worked very closely with U.S. antitrust officials. In October 1996 Kyowa Hakko agreed to assist Canadian authorities in return for immunity. In October 1997, Canadian investigators spend 10 days in Hong Kong interviewing Kyowa and Sewon executives. In late 1997, Ajinomoto and ADM were sent target letters. ADM agreed to plead guilty and paid C$14 million for lysine and C$3.1 million for citric acid. In exchange for ADM’s cooperation, Canada gave it immunity from prosecution in sodium gluconate. Ajinomoto and Sewon later paid C$3.5 million and C$70,000 for their roles (Nicol and Ferguson 1999). March 2, 1998: Federal prosecutors said that Mark Whitacre had retracted his allegations that an FBI agent had told him to destroy tape recordings that might exonerate T. Wilson or M. Andreas of criminal price fixing. The retraction was sent to the DOJ in an affidavit received a few days before the 3/2/98 pre-trial hearing held before U.S. District Judge Blanche 144
Manning in Chicago. Defense Attorneys have requested that the tapes made by Whitacre be ruled inadmissible. [WSJ 3/3/98: B10]. Whitacre’s suit against the FBI was dismissed in February 1998. March 4, 1998: Mark Whitacre was sentenced to 9 years in federal prison for defrauding ADM of $9.5 million by Judge Harold Baker in U.S. District Court, Urbana, Illinois. In addition, restitution of $11.4 million was ordered ($9.5 plus $1.9 million in interest). Judge Baker stated that Whitacre had sometimes displayed “socio-pathic behavior” and was motivated by “garden-variety venality and greed.” Whitacre still maintains that his behavior was due to his bipolar disorder and that ADM superiors approved of the diversion of funds. A DOJ spokesperson said that no evidence exists that ADM approved the diversion. Mr. Whitacre had failed to appear for his original sentencing hearing in late February; he told his lawyer that he had again attempted suicide, but local authorities considered the incident to have been staged. Some of Mr. Whitacre’s 237 audio tapes of price-fixing meetings were played for a special “antitrust committee” of ADM’s Board of Directors (probably around July-September 1996). These tapes were the main reason that the Board instructed ADM’s management to negotiate a quick end to the government’s criminal case. [WSJ 3/5/98:B5]. March 4, 1998: Whitacre holds fast to his story that the money he got from ADM was a bonus scheme. Bill Walker, his lawyer, said to Judge Baker that the FBI has a tape confirming that such a plan was in effect at ADM. The DOJ’s attorney, Donald Mackay, denounced the suggestion Sources inside Whitacre’s defense team think that the FBI might have been doing D. Andreas’ bidding (he said, “Mark Whitacre will regret the day he was born,” when he learned Whitacre was a mole). They believe ADM manufactured the evidence of his embezzlement. Also suspicious is why the DOJ pulled the Whitacre prosecution from the U.S. Attorney’s office in Central Illinois to the DOJ’s fraud division in D.C., a decision requested by ADM’s counsel Williams & Connelly. (The Pantograph 3/15/98: E3)/ March 6, 1998: Gary Spratling, DAAG of the DOJ, gives a speech to the ABA on the new “titanic” antitrust fines. There are still 25+ grand juries sitting on antitrust cases with international scope. Their investigations have turned up cartel meetings in 50 cities in 25 countries (14 USA, 5 Netherlands, 4 Mexico and Switzerland, etc.). In FY 1997 the DOJ collected $205 million in criminal antitrust fines, or six times the previous record amount. In 10/1/97 - 3/31/98, almost $130 million more was collected, of which 90% was for international cartel activity. The OECD’s Committee on Competition Law and Policy passed a resolution recommending each member to adopt laws, enforcement, and sanctions that will deter cartels. 145
Antitrust violations result in automatic expulsion of non-citizens by the INS, but DOJ has negotiated an agreement that allows it to petition the INS for amnesty for cooperative aliens. The FBI has doubled the number of agent-hours spent on cartel investigations since 1997. The DOJ believes it has the authority to apply criminal fines on the basis of a violator’s world wide sales, not just U.S. sales. This has not been litigated yet, but was used in guilty pleas for the sodium gluconate case. One defendant paid $2.5 million even though its U.S. sales during the conspiracy were only $2.6 million, so its global sales and its harm was used to set the fine. The $10-million-fine “club” now has 14 members (www.usdoj.gov). March 13, 1998: Judge Sue Robinson of U.S. District Court for Delaware ruled that Ajinomoto had failed to prove that ADM had infringed on an Ajinomoto patent for a method to produce lysine. ADM got the bacteria strain from Eastman Kodak Co. (now Eastman Chemical?) legally. Ajinomoto claimed that ADM had stolen a superior strain and substituted it for the Kodak bacteria, which was not patented. The Judge ruled that the two were similar but not identical. (Intellectual Property Litigation Reporter 4/8/98: 8). March 18, 1998: BASF, AG announced that it had agreed to buy the lysine business of Daesang Co. Ltd. of South Korea. BASF will pay about $600 million for the division that had annual sales of $250 million (21 percent of the world market) from its Kunsan plant (234 employees). In 1997, 90 of Daesang’s lysine sales were exported. In 1997, BASF generated $1.25 billion in animal nutrition products. Daesang is South Korea’s 29th largest company with sales of $12 billion (CMR 3/18/98). April 1, 1998: World demand in 1998 at 350 kt and growing 7.5% p.a.; U.S. is 100 kt and 5.4% p.a. Large capacity expansions going on. Cargill/Degussa’s new plant will start early 2000 with 75 kt capacity, second after ADM’s 116 kt Decatur plant. In late 1997, Ajinomoto’s new Brazil plant (15 kt) started up. (Chem. Wk. 4/1/98). April 15, 1998: Judge Manning rules on three defense motions. First, the defense [not having access to Whitacre’s testimony] asked the court to grant testimonial (use) immunity to Mrs. Ginger Whitacre, David Hoech, and Whitacre’s former lawyer Richard Kurth. Then they could be compelled to testify in the trial, especially about the alleged exculpatory tapes destroyed by Whitacre or Hoech. The request is denied because there is no evidence that prosecutors refused to grant immunity to intentionally distort the fact-finding process. The U.S. Attorney did not immunize Ginger Whitacre because there is evidence she was involved in the embezzlement of ADM. Hoech was taped conversing with Whitacre saying that he destroyed some tapes sent to him by Whitacre. In an FBI interview, Hoech denied possessing any such tapes, but never said he heard tapes in which Shepard tells Whitacre to destroy exculpatory tapes. Kurth already testified, so it’s moot.
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Second, defendants move to suppress all audio tapes made by Whitacre because his taping was “selective.” Of Whitacre’s 114 calls to Ajinomoto or Kyowa, only 34 were recorded. The judge hints at FBI inexperience in antitrust matters and violation of its own rules in handling cooperating witnesses. It “borders on gross negligence.” Third, defense motion to compel prosecution to turn over hidden evidence is denied, because it doesn’t exist (Manning 4/15/98). April 17, 1998: U.S. District Judge Blanche Manning ruled that the audio tapes made by Mark Whitacre will be allowed as evidence in the trial of M. Andreas and T. Wilson. She was highly critical of the FBI for giving Whitacre far too much discretion as to which conversations to tape. Though improper, the governments’ misconduct was not intentional, and, thus, the evidence cannot be suppressed [WSJ 4/20/98:B9]. May 12, 1998: Lysine prices are up due to strong demand. ADM plans to build a new 100 MM lysine plant in Cedar Rapids and has already begun an $80 MM expansion to 350 MM lb. at Decatur. Heartland’s Iowa plant will add 50% capacity by mid 1998 for $35 MM. Current price is $2.28. Iowa plant also will make glycerin by fermentation, a new product for ADM (CMR 5/12/97: 1). May 15, 1998: ADM’s 10-Q for the quarter ending 3/31/98 brings the total sodium gluconate cases to three. A new one was filed in U.S. District Court for the Northern District of Illinois on 2/12/98 (no name given). On April 9, 1998, all three were transferred to San Francisco for consolidated pretrial proceedings. Also, ADM makes provisions of $48 million for all antitrust costs in fiscal 1998, bringing the total to $279 million for three years. (ADM 1999). May 28, 1998: ADM pleaded guilty to price fixing of exports of lysine and citric acid in Canada. The plea, in Federal Court in Ottawa, carried a fine of Canadian $16 million (U.S. $11.04 million), which was 6.4 times larger than the previous record antitrust fine in Canada. The penalty was assessed after a three-year investigation by the Canadian Competition Bureau; the fine includes $9 million for illegal price fixing in general, $5 million for lysine, and $2 million for citric acid. Co-conspirators named by the Competition Bureau were Ajinomoto, Kyowa Hakko, Sewon America, and Cheil Jadang Ltd.; these companies are still under investigation (The Gazette, Montreal 5/28/98: E10). ADM is “cooperating” in this investigation. Another article reported that during 1992-1995, ADM sold Canadian $48 million of lysine in a total market of $89 million. [Thus, the $5 million lysine-specific fine represents 10.4% of lysine sales; prorating the “general” fine of $9 million and adding it to the $5 million lysine portion implies a total fine of 23.8% of ADM’s lysine sales]. (J. Commerce 5/29/98:3A). [Proportional fines on Ajinomoto, Kyowa, Cheil, and Sewon would likely be about Canadian $14.8 million for their role in the conspiracy]. 147
May 26, 1998: The U.S. Attorney for the No. District of Illinois made a filing in federal court alleging that M. Andreas, T. Wilson, and M. Whitacre had intimidated rival producers of lysine into joining the lysine cartel. They threatened to dump massive quantities of lysine on the U.S. market in order to punish rivals that did not agree to the price-fixing scheme (Bloomberg News 5/26/98). May 29, 1998: Sidney Hulse, former VP of the Bioproducts Division pleaded guilty to fraud and received a 10-month sentence plus an order to make restitution to ADM of $995,000. He had asserted his innocence for 3 years, but was “pressured” by the DOJ’s fraud section to plead guilty when Reinhard Richter got a greatly reduced sentence for fraud and agreed to testify against Hulse (See 1/30/98 above) (Lieber 2000). May 29, 1998: Former ADM sales executive [Sidney Hulse] working under Mark Whitacre in Atlanta pleads guilty to fraud for his role in assisting Whitacre in embezzlement from ADM (Chicago Tribune ADM “Time Line” on-line). June 1998: Ajinomoto has six lysine factories, global 40% share, and 140 kt production (capacity?). Cap. to reach 160kt in late 1998, 200 kt by 2000. Has 40% of Chinese market. Claims to have lowest production costs in world (Jap. Chem. Wk. 6/8/98:3). June 5, 1998: The Wall Street Journal reports that the price of ADM’s stock jumped 14% on widespread rumors that DuPont Company may make a merger offer. Analysts noted that Cargill and Monsanto announced a joint venture to create and market biotech products for grains and feeds markets. A merger with DuPont could remove ADM’s “stigma” that is depressing its stock price. The guilty plea in Canada reinforced the stigma [WSJ 6/8/98]. June 8, 1998: A large number of subpoenas were issued to vocal critics of ADM and those possibly connected with David Hoech, demanding that copies of speeches, letters, etc. be turned over to counsel for M. Andreas (anonymous). June 22, 1998: ADM was fined $125,000 by the Mexican Federal Competition Commission, concluding its lysine case (ADM). June 29, 1998: BASF will soon complete the acquisition of Daesang Group’s lysine assets, which make 20% of the world’s $600 mil. per year lysine (Jap. Chem. Wk. 6/25/98:11). July 2, 1998: In a rare article about D. Andreas that does not mention price fixing, he is complimented by the American Corn Growers Association for urging the reinstatement of corn price supports (PR Newswire 7/2/98). July 9, 1998: Judge Blanche Manning rules on the admissibility of tapes in the Chicago trial. Defendants moved to exclude tapes because Whitacre invoked his 5th Amendment rights and so could not authenticate most of the tapes. Manning accepts the prosecutors argument that a rational juror can decide authenticity, with the help of other participants and tape experts. 148
She refuses to delete offensive language by Andreas and Wilson, agreeing that it has probative value. She allows evidence on prior price fixing in citric acid, because it is reasonable to infer that the lysine conspiracy was modeled on citric acid. She denies severance of Wilson from Andreas and Whitacre from both. At several points she chides defense motions as “misconstruing” rules of evidence, failing to “articulate” specifics, “rehashing” arguments already ruled on, and mistakes in citations. She rules that the government will not refer to ADM’s guilty plea because it would be prejudicial to do so. [Both sides agreed to avoid reference to ADM’s civil settlement]. However, individual guilty pleas can be mentioned. She also rules against the government by allowing defendants to bring up the issue of alleged selective taping and tape destruction by Whitacre, the issue of FBI guidelines on handling informers, the issue of FBI/government motivation in pursuing its investigation. She delays ruling on the admissibility of evidence that the conspiracy may not have had any impact on commerce. She agrees that such economic evidence is irrelevant as evidence of specific intent to conspire (as argued by defense), but will wait until she sees the government’s evidence on intent. She rules in favor of the government’s motion to exclude impassioned pleas expounding on ADM’s or defendants’ virtues as employers. [Manning: 7/9/98].July 19, 1999. July 9, 1998: Manning rules that no evidence that might appeal to ethnic animosities may be introduced. She rules that defendants may not question the fairness of granting immunity to certain witnesses by prosecutors. She rules that defendants have had plenty of time to prepare a defense and examine the government’s evidence, thus, they must “immediately begin producing documents . . . they intend to introduce at trial.” [All of the above decisions sound decisive and clear, but during the trial defense attorneys skirted up to and perhaps over the lines set above]. (Manning: 7/9/98). July 9, 1998: Jury selection in the criminal price-fixing case against Andreas et al. began today. This article summarizes some of the highlights in Lassar and Griffin (1998). What the writer calls “the most compelling evidence” is “numerous conversations, at times laced with obscenities” on the government’s tapes. Why ADM President James Randall was not indicted is raised as an issue. [NYT 7/10/98:D4]. July 9, 1998: The “final chapter” of the ADM et al. pricing-fixing scandal begins today in U.S. District Court in Chicago, Judge Blanche M. Manning presiding. Michael Andreas, Terrance Wilson, and Mark Whitacre are defendants in a criminal antitrust trial that charges the three with price fixing in the global market for lysine. [If found innocent, can the DOJ bring a second trial for their roles in the citric acid market?] “Legal scholars view it as a landmark trial because it is the largest U.S. criminal case ever involving an international cartel, a new area for the Justice Department’s Antitrust Division.” “Jurors will have to digest parts of 237 expletive-laced undercover tapes and 250 boxes of 149
documents . . .” that will prove guilt. “The tapes secretly made inside ADM headquarters picked up so many vulgarities that defense lawyers asked U.S. District Court Judge Blanche M. Manning to have them edited.” The proceedings will probably bring out many details of the conspiracy, including comments about co-conspirators and ADM customers. One likely witness will be Barrie R. Cox, president of ADM’s food-additives division, who reported to Wilson during the conspiracy. A fourth defendant, Kazutoshi Yamada, was Ajinomoto’s principal representative to the lysine cartel. He has refused to come to the United States to face prosecution. The government’s plan is to portray Andreas as the major strategist in the cartel, with Wilson carrying out details of the plan. U.S. Attorney Scott Lassar will lead the prosecution team. Wilson is defended by Reid Weingarten of Steptoe & Johnson, Andreas by John M. Bray of King & Spalding. Both lawyers are well known defenders of white-collar criminals. ADM is paying Andreas’ legal fees because he is still a paid consultant of ADM and “has stayed active in ADM affairs.” Wilson retired from ADM in 1996. The defense will probably focus on Whitacre’s bizarre behavior and the alleged loss of control of the FBI’s lysine investigation. Lassar may try to build the prosecution’s case without putting Whitacre on the stand as a witness. [WSJ 7/9/98:B10]. July 10, 1998: After 3 years of secret investigations and negotiations, the trial in Chicago is finally revealing evidence in the price fixing cases. James Randall seems to have been aware of the schemes, but was not indicted. July 12, 1998: ADM’s stock remains depressed (about $18/share). This article suggests that Mick Andreas may yet succeed his father, if he is exonerated, and return the company to profitability. The defense will try to portray the evidence on the tapes as inconclusive. They may argue that lysine prices in fact were not “fixed”, that prosecution witnesses, are lying to save their own skins, and that Whitacre had too much discretion in when to run his audio tape recorder. Andreas’ attorney Bray is quoted as saying that this last issue is the central question. Judge Manning will allow the defense to argue that Whitacre destroyed tapes with evidence favorable to Andreas and Wilson. [But these arguments seem not to apply to the FBI’s own video tapes]. An unpredictable factor is the possible testimony of Mark Whitacre in his own defense. Bill Walker, his attorney, said that he was “leaning toward it.” [Chicago Trib. 7/12/98]. July 14, 1998: After two weeks in Chicago’s Metropolitan Correctional Center, Mark Whitacre asked to return to his federal prison in North Carolina. Lawyers for Andreas and Wilson, after trying for months to separate their own trial from Whitacre’s, objected. Manning granted Whitacre’s request. [Chicago Trib. 7/14/98]. 150
July 15, 1998: Opening statements in Andreas et al. contain few surprises. [Chicago Trib. 7/15/98]. Griffin promised the jury that the prosecution will never rely solely on Whitacre’s statements. Instead three Asian mangers will testify about the conspiracy. He stressed the importance of Andreas’ threats to flood the world lysine market with output in order to punish cartel deviants. Defense attorney Bray characterized the government’s tapes as ambiguous: Andreas never said “. . . this is great, we just fixed prices.” Rather, Andreas was bluffing, trying to gain information about Japanese production capacities, and urging “fierce competition against a criminal cartel from Asia” that went so far as to send “agents” to tour ADM’s plant in order to scoop up secret micro-organisms used to make lysine. (WSJ 7/16/98: B7). July 15, 1998: The trial U.S. vs. Michael M. Andreas et al. moves beyond jury selection. The first half of the morning session concerns motions by the NYT, WSJ, and Chicago Trib. to get access to both transcripts and the tapes themselves as soon as they are heard by the jury. The defendants resist because of bad publicity, affecting the jury’s objectivity, and affecting concurrent grand juries in San Francisco (citric acid) and Atlanta (corn sweeteners) that may yet bring charges against Andreas. Whitacre’s lawyer and the government took no position. In addition, the government objected to the use of many defense counsels’ visuals that refer to the FBI and to Whitacre (his foreign bank accounts, embezzlement, failing polygraph tests). The defense objected to several of the prosecutor’s visuals. Judge Manning overruled both objections. James Griffin gives a long, detailed opening statement. He explains price-fixing law, the lysine market, the companies, the main characters, the history of entry, and major conspiracy meetings. How the FBI got involved and recruited Whitacre. He promises that tapes will show the illegal agreement being made by Andreas and Wilson and will be confirmed by notes, memos, and testimony. Prices do change and market shares evolve as agreed. “. . . never will we ask you to rely on the truth of anything that Mark Whitacre says.” (P. 744) (U.S. v. M. Andreas Tr. 703-746). In the afternoon, the government objects to defense counsel presenting evidence that the price of lysine rose after June 1995 fearing it will confuse the jury, but these facts are allowed. The government surprises the defense by selecting FBI Agent Herndon to stay at the prosecutors’ table throughout the trial. Agent Shepard must leave the room until his testimony is complete. John Bray opens for Andreas. He argues that the tapes have no explicit price-fixing language on them, that Whitacre manipulated Andreas with his superior technical background, that ADM was helping America fight an existing Asian lysine cartel, that many exculpatory tapes were not made, that Andreas had been candid with the FBI in the “Fujiwara” extortion incident, that the FBI left Whitacre on the case too long, that Andreas was sparring with the Asians just to get market sales data, that the FBI coached Whitacre to “plant words in Mick 151
Andreas” mouth (p. 791), that Whitacre had every motive to falsify and denounce, that the FBI (esp. Shepard) were dishonest or stupid (U.S. vs. M. Andreas Tr. 755-801). July 16, 1998: Counsel for T. Wilson, Reid Weingarten, opens his defense. He argues that a true agreement is revealed by behavior not words, that the best evidence is in the “locker room” meetings at ADM before or after the conspiracy meetings, that Whitacre was unsupervised in taping, that Wilson repeatedly says that lysine prices will “maximize the volume” of sales, that Wilson believed that ADM had no excess capacity, that the perfect substitutability of natural lysine from soy or fish meal makes market control impossible anyway, that Whitacre disliked Wilson because he was uneducated and “gruff.” Wilson is portrayed as a loyal ADM employee, high school education only, came to ADM straight from the Marines in his early 20s, blindly following Andreas’ orders. All the government witnesses are immunized and got low fines, if any. The market share “score cards” made by Mimoto for the cartel contain phony data – shows bluffing. (U.S. vs. M. Andreas Tr. 827-864). Weingarten tries to sneak in a remark that Whitacre had destroyed tapes favorable to the defense, but an objection that it is hearsay is immediately sustained. July 16, 1998: (TR 865-1000) Testimony of Kanji Mimoto begins in English. At present president of Ajinomoto Indonesia, a manufacturer of monosodium glutamate. He confirms price fixing in lysine. He paid a $75K fine and was not reimbursed by his company. When Lassar asks him about Ajinomoto’s guilty plea, Weingarten objects to the information being “inflammatory,” but is overruled. Mimoto began working for Ajinomoto in 1970, exporting lysine and other amino acids from Japan. Became sales manager for Eurolysine in France in 1976-1983. Became section manager in feed additives division of Ajinomoto in 1985 reporting to Ikeda, who reported to Managing Director Yamada. Says prices determined by (1) alternative amino acid prices in soy meal and fish meal, and (2) competitive conditions. Says world prices of lysine in various regions stay close together. Ajinomoto fixed lysine prices in Europe from 1985 and in Japan when he worked there, but did not allocate market shares. He describes the first attempt to fix prices in Mexico City in June 1992 with 7 executives of 3 companies present. Mimoto confirms the government’s view of the meeting: an agreement to raise prices in two steps, but disagreement over market shares. He describes his visit to the Decatur plant in 1992 with Ikeda, Fujiwara, and Brehaut (the last two Ajinomoto and Eurolysine engineers). Such tours among competitors are “very unusual.” (Tr. 938-940). Over strenuous objections of defense councils, Mimoto testifies that fake agendas were prepared for the Paris meeting to provide a cover story (Tr. 941-947). 152
Mimoto is asked about distrust among the lysine conspirators. He said that cheating was frequent but “the range of cheating is not so big . . . they kept their promise about 90 percent. Something like that.” (Tr. 999-1000). July 16, 1998: Kanji Mimoto, one of Ajinomoto’s central representatives to the lysine cartel, testified against Andreas et al. in Chicago. Mimoto said that Wilson pressed the lysine makers to allocate markets and raise price, with ADM to get one-third (AP 7/16/98). The prosecution appears to agree with the defense that several Asian companies had engaged in price fixing of lysine long prior to ADM’s entry in 1991. Griffin emphasized that the government’s burden of proof is to show that: “The agreement is the crime . . . It does not matter if the conspirators kept the agreement.” But fixing shares was ADM’s idea, Mimoto said. (NYT 7/16/98). Mimoto acknowledged that he had fabricated a document to disguise the true purpose of a lysine cartel meeting. “It was camouflage . . . There was a fake agenda . . .” (Reuters 7/17/97). July 20, 1998: Direct examination of Mimoto continues, concerning the Tokyo meeting of 12/8/93. At the meeting, Ikeda informs participants of the 1994 volume allocations given to each of the 5 manufacturers that were agreed upon at the Irvine meeting. They also agreed to audit their 1992 lysine sales, but could not agree on a method. The video tape of the Hawaii meeting of 3/10/94 is played and Mimoto confirms prosecutors’ views. Similarly for a tape on a Chicago meeting 10/13/94. (U.S. vs. M. Andreas Tr. 1047-1111). July 20, 1998: Tapes played at the trial of Andreas et al. showed distrust among rival lysine makers. They often quarreled. They considered hiring Ernst & Young accountants to calculate shares, but eventually dropped the idea (Chicago Trib. 7/20/98). July 21, 1998: In the midst of the Chicago lysine trial, the White House announced that Scott Lassar will be nominated to be U.S. Attorney for the Northern District of Illinois. (Chicago Daily Law Bulletin 7/21/98:3). July 21, 1998: Mimoto’s direct ends with testimony about the remaining 1994-95 lysine association meetings. He is cross-examined about the pre-1991 lysine price fixing among Ajinomoto, Kyowa and Miwon. He is pressed to mention all the Ajinomoto group employees who knew about the 1992-95 price fixing: Ikeda, Crouy, Vetter, Sacchetti, Rollier, Chaudret, Shinohara, many sales people, many Tokyo feed-additives employees and only Mimoto fined. Defense counsel insinuates Mimoto got off very lightly, is being paid for testifying, treated by the government very well in Chicago. Mimoto agrees that ADM’s entry worried Ajinomoto, but not to the extent of kicking it out of lysine. It was ADM that was trying predatory pricing against Ajinomoto. (Tr. 1209). He 153
admits trying to sample the lysine microorganisms inside ADM’s Decatur plant. He admits that Ajinomoto’s superior knowledge of the lysine market was kept from ADM, partly because ADM underestimated world consumption and therefore believed its share larger than it really was (Tr. 1240). Defense counsel tries to get Mimoto to admit that the last 1992 prices increase was due to “inventory depletion” or supply constraints after record-low prices in early 1992, but Mimoto disagrees with this explanation. He will not admit that Ajinomoto lied to “hide” lysine output, e.g., liquid lysine, in order to cheat on the cartel. (U.S. vs. M. Andreas Tr. 1127-1293). July 21, 1998: Mimoto testifies that as soon as news of the FBI raid in Decatur reached Ajinomoto in Tokyo, its legal department ordered all documents related to the lysine conspiracy destroyed. All such documents in Ajinomoto offices were in fact destroyed, but Mimoto later remembered that he had stored some in the attic of his home, and these were produced when Ajinomoto changed its policy and agreed to cooperate. Mimoto is now head of Ajinomoto’s 3000-person Indonesia operation. (Chicago Tribune 7/26/98). July 21, 1998: Mimoto is cross-examined by Wilson’s lawyer Reid Weingarten, who asked whether ADM’s 1991 entry boosted competition in the lysine market. Mimoto: “The entrance of ADM caused Ajinomoto to lose a lot of money.” He believed that ADM was using predatory pricing to force out smaller rivals. He agreed that the lysine rivals [when meeting] sometimes lied to each other “over small things.” He admitted trying to steal microorganisms from Decatur’s lysine plant. He was unsuccessful. (Chicago Trib. 7/21/98). July 22, 1998: The day opens with extensive and heated discussions about the admissibility of certain tapes in chambers and the extent of cross-examination of Mimoto. In open court questioning Mimoto, defense lawyers emphasize how few meetings Wilson attended in 1994-1995; how Wilson believed audited production data could be shared legally; how Wilson was just trying to collect lysine market data; how ADM acted aggressively by stealing customers; how the price of $1.20 was actually lower than before ADM’s entry and lower than late 1995; how some Ajinomoto business documents showed they expected ADM to be aggressive in 1994 and lowered prices to $1.15 in April 1995. Mimoto gives little ground. For example, the April 1995 price cut by ADM is explained as a temporary fit by Whitacre because Ajinomoto had filed its threonine patent-infringement suit. Mimoto said that these actions did not cause the agreement to fall apart. [The defense seems to be putting almost all its case to the jury in the form of cross-examination of Mimoto]. The fact that Mimoto was “rewarded” by Ajinomoto after his guilty plea is insinuated in defense counsel questions; Mimoto says that his new job was a sideways move. The small fine he paid and special treatment for his cooperation is emphasized. (U.S. vs. M. Andreas Tr. 1294-1463). July 23, 1998: The Canada’s Competition Bureau announced the resolution of all proceedings against firms in the global lysine cartel. Ajinomoto was convicted of one count of conspiracy and fined C$3.5 million. Sewon America, Inc., a subsidiary of Sewon Co., 154
Ltd., pleaded guilty to conspiracy and was fined C$70,000. Kyowa Hakko Kogyo Co., Ltd. had a prohibition order imposed on it by the federal court proscribing any future price fixing. Ajinomoto and Sewon received similar prohibition orders. The price fixing occurred from 1992 to 1995 and affected commerce in Canada of about C$89 million during that period. Annual global sales of lysine now total C$ 960 million. Kyowa was granted immunity by Attorney General for being the first to cooperate with the Bureau. Sewon also cooperated at an early stage. [Canadian Corporate Newswire 7/23/98). July 23, 1998: John Bray presses Mimoto hard on whether he knew about Whitacre’s many lies and exaggerations; many prosecution objections are sustained. Bray tries to get Mimoto to say that Andreas ordered Whitacre to make no deals, but Mimoto demurs. Bray tries to insinuate that Whitacre was under orders to try to fix prices from the FBI, not Andreas (Tr. 1506). Mimoto states that Ajinomoto’s world consumption data were superior to ADM’s (and Miwon’s) because they had spent years compiling trade statistics (Tr. 1517-1520). Before the Mexico City meeting, Ajinomoto and Kyowa had to meet to pool their information to estimate world and regional demand for lysine. Bray tries to get Mimoto to admit there was no volume agreement at the Irvine meeting, but Mimoto explains a subsequent “disagreement” as different memories over ADM’s claimed sales (67,000 vs. 73,000 tonnes). Bray gets Mimoto to admit that “quantity agreement” was never mentioned at the 10/13/94 meeting in Chicago with Andreas, but Mimoto says everybody at the meeting assumed that everybody was informed about it (Tr. 1540-1547). Bray gets Mimoto to admit that the majority of his conversations with Whitacre were not taped. At one point Bray starts to question Mimoto about whether Ajinomoto was dumping lysine in the U.S. as part of a Japanese-government policy. After intense sidebar discussions, the judge allows Mimoto to be examined in camera, but he does not admit that such a policy existed nor that there were any barriers to exporting lysine to Japan. During redirect, Lassar clarifies several key points in Mimoto’s testimony: that the proposed lysine assn. had dual purposes, that prices in fact responded to agreements made, that Whitacre did not appear to be entrapping, that Wilson’s 5/14/93 statement that “ADM doesn’t make deals” was not believed by others, that Andreas seemed to understand everything about the cartel when they met in Chicago (U.S. v. M. Andreas Tr. 1468-1666). [N.B. Trial broke for 4 days]. July 26, 1998: Journalists believe that prosecutors are leading with their best evidence: the California, Hawaii, and Atlanta video tapes. In the Atlanta meeting, when a bellhop knocks on the conspirators’ hotel room door to deliver a briefcase, Kanji Mimoto makes a nervous joke: “Yes? FTC?” Little did he know that the bellhop was a disguised FBI agent delivering a briefcase fitted with a hidden tape recorder that would be activated by one of its own agents, Mark Whitacre.
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Later, the tape shows members of the cartel challenging Sewon’s claims about the large size of its Korean plant. Mimoto noted that the plant’s wastewater treatment facility was too small to handle the kind of lysine volume being claimed by Sewon. “Korea is belonging to [sic] the London dumping treaty, and they cannot put the waste into the sea,” said Mimoto. The Sewon representative contradicted him: “Yes, illegally, or very cleverly, they can dump out the waste material to the ocean.” Everybody laughed and someone said that dumping waste into the Yellow Sea was a “smart idea.” These tapes make the defense’s explanation of Andreas’ and Wilson’s behavior (“they were only lying to the Asians”) difficult to win the day. (Chicago Tribune 7/26/98). August 1998: A long exposé of the renewal of the ethanol subsidy in 1997. Total cost to the treasury 1980-90 is $7 billion, with few environmental benefits. Since 1988, ADM and the Andreas family has given $2.6 MM to the Republicans and $1.9 MM to the Democrats in “soft money” contributions. In 1997 alone, it was $110,000 and $78,000 respectively. The House Ways and Means Committee voted against extension in 1997, but Speaker Gingrich stacked the House-Senate conference committee with ethanol supporters, which extended the subsidy to 2007. Trent Lott also helped in the Senate. (Common Cause News, 222.common cause.org). August 3, 1998: Several newspapers report on the criminal trial of M. Andreas et al. The prosecution played several tapes and questioned Hirozaku Ikeda, a former manager with Ajinomoto Company present at the Irvine meeting. An audio tape of the April 30, 1993 meeting in Decatur between ADM and Ajinomoto officers was played. On it, James Randall is quoted as saying: “We have a saying at this company: ‘Our competitors are our friends, and our customers are our enemies’.” An 82-minute video tape of the October 1993 meeting in Irvine, CA was played to the jury. The four representatives spent a good deal of time arguing about the accuracy of each other’s volume figures. At one point, the Ajinomoto representatives said that the other lysine producers would not believe ADM’s sales numbers. The ADM executives replied that “the two companies should instead give lower, false numbers to the other companies.” The tape also quotes M. Andreas as saying that senior management kept a close handle on developments in its businesses, especially the Bioproducts Division. “Myself and my father and Mr. Randall, we all know all the time what is going on, especially with new businesses that need our attention.” [NYT 8/4/98:D1]. Ikeda testified that M. Andreas agreed to limit ADM’s lysine production during the Irvine meeting. Andreas also said that at ADM decisions about lysine pricing was not left to the discretion of its salespersons, whom he called “agents for the customer.” “We pay them, but they’re not our friends. They’re friends with the customer.” Andreas expressed his wish that Ajinomoto would also have its top executives set prices and not delegate that function to salespeople. [AP 8/4/98:01:13 EDT]. 156
After the meeting ended, when Ikeda returned to Tokyo, he wrote a memo sent to the three smaller lysine manufacturers telling them that the two companies had “agreed on a tentative quantity allocation.” [Chicago Tribune 8/4/98:Bus. P. 1]. August 3, 1998: Observers consider the 82-minute video tape excerpt the “centerpiece” of the government’s case against M. Andreas. The agreement on volume is made on tape with Ajinomoto, and Ikeda’s memo to the smaller Asian manufacturers confirms that agreement. Bray argued that the tapes only show Andreas pumping the Japanese for market information, yet Andreas tells the Ajinomoto managers “We know our figures are right.” [A few months later ADM accepts Ajinomoto’s larger figures as correct]. Andreas also explains ADM’s management style as highly centralized in a small group: Michael, his father, and James Randall “. . . all know what’s going on all the time.” An audio tape quotes Randall saying “Our competitors are our friends. Our customers are the enemy.” (Chicago Tribune 8/3/98). August 3-4, 1998: The prosecution examines Hirozaku Ikeda, who retired from Ajinomoto in 1994 after 34 years with the company. He was manager of the feed division, reporting to Yamada. He confirms the government’s views of events, especially the pivotal meeting in Irvine, California, 10/25/93 with Yamada and Andreas, which was played for the jury. Ikeda testifies that Miwon (Sewon) and Kyowa agreed to accept the volumes allocated at Irvine; on 12/1/93 ADM also accepted its allocation. On cross examination Ikeda admits lysine price fixing with Kyowa and Miwon shortly after he became manager of the Feed Division of Ajinomoto in 1985. Conspirators at Kyowa were Ken Mochi and Masura Yamamoto; at Miwon, Lee and J.S. Kim. At times, he was ordered to do so by his bosses Matsumura, Kiosi, Yamamoto, and finally Yamada; at times, he initiated it. The President of Ajinomoto, Mr. Toba, was not charged. Ikeda claims he signed the plea agreement because it was presented by his legal department and did not know he was getting favorable terms. The plea agreement also stipulates that Ikeda’s testimony cannot be used as evidence against fellow Ajinomoto officers, a point Ikeda claims to be ignorant of. [Ikeda paid no fine]. [This may explain why the DOJ never requested extradition of the indicted Yamada. With Yamada not at the defendants’ table, Mimoto and Ikeda, both loyal Ajinomoto employees, would feel freer to testify.] Ikeda claims no knowledge that Ajinomoto got a large discount on its corporate antitrust fine because he agreed to cooperate. John Bray tried to get Ikeda to admit that he was “auditioned” for the FBI interviews because the 11 pages of notes typed by the FBI are full of details of dates and meetings. Ikeda says the details followed from being shown letters and memos.
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Bray, in his cross of Ikeda, tries to prove that the Asian co-conspirators acted together as a cartel (within a cartel?) against ADM. Ikeda testifies that he doesn’t recall if there was hostility expressed against ADM in November 1992. He remembers some “general worry” but nothing too serious. He doesn’t recall meetings of the 4 Asian companies in which some representatives suggested forming a bloc to oppose ADM’s incursions. He doesn’t recall warning ADM’s Tokyo representative not to export to Japan. (During a sidebar conference, John Bray states that the DOJ turned over more than 2 million documents to defense counsels.) Ikeda recalls little about Ajinomoto’s alleged plans to hide some of its sales, to mislead ADM on market size, to extract information from ADM, etc. (U.S. v. M. Andreas Tr. 1670-1894). August 5, 1998: A distinctly iconoclastic view of the ADM-lysine conspiracy and the Andreas trial was expressed by Holman W. Jenkins in an op-ed piece in the Wall Street Journal. It is full of factual errors and unique arguments. If only rivals could meet publicly to discuss prices, there would be no need for price-fixing laws. The trial is a big waste of time. ADM was just unlucky because it hired Whitacre . . . “a mental case,” and a severe narcissist who caused those around him to become crazy. Price-fixing laws breach freedoms of contract, speech, and assembly. Worse, they create barriers to entry. It works like this: ADM couldn’t keep prices low because that would be predatory, so it was compelled to collude. The fines in many cases were imposed where the “victims” were U.S. Steel, Exxon, and Coca Cola, and we shouldn’t feel sorry for such firms. The fines are just a way of raising taxes. (WSJ 8/5/98). August 5, 1998: Ikeda is pressed in cross-examination to admit that ADM’s estimates of the size of the lysine market (245,000 tonnes) and expected future growth (10%+) are both too high. Ikeda believes that 245k was a “theoretical” figure [possibly based on nameplate capacity, 100% utilization] and that 6-7% growth was more reasonable. The cross examination attempts to portray Ikeda in the worst possible light: long time price fixer in the U.S. and elsewhere on lysine, attempting to bribe ADM’s rep. in Japan to keep ADM out of lysine, afraid of ADM’s entry, wanting to avoid Wilson because he was a tough negotiator (U.S. v. M. Andreas Tr. 1895-2039). August 6, 1998: Ikeda is cross-examined on many topics, but is not very forthcoming. Communications from Heartland Lysine during 1991-1993 use strong language to describe how perilous or precarious its market position was, but Ikeda generally declines to attribute this to ADM’s aggressiveness. One report sent 3/17/98 to Mimoto says “I think our lysine business is drowning” (Tr. 2060). Ikeda doesn’t recall sharing HL’s sense of alarm about ADM. The minutes of the HL Board meeting of 4/29/93 reveal that HL lost $1.9 million in profits in FY 1992, partly due to “market chaos” created by ADM (Tr. 2065).
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Ikeda and Yamada met on 4/30/93 with M. Andreas, et al. in Decatur where Andreas says “My dad always says that the best cure for low prices is low prices.” Ikeda admits this saying is inconsistent with price fixing. Yamada states that getting accurate sales information is difficult, but Ikeda will not admit to trying to “hide” Ajinomoto sales six months later. Lassar objects to the defense introducing many new documents that Ikeda has never seen just so Ikeda can say “that’s what the document says” as a waste of time. Manning declines to limit the cross-examination. In redirect of Ikeda, the prosecution gets him to state that Andreas and Yamada did agree to a volume allocation proposal to be brought to the other Asian manufacturers for their approval. Ikeda also explains how a dispute about the agreement there was resolved in a telephone call to Whitacre on 12/1/93; the judge refuses to allow the tape to be played because it is “highly prejudicial” to Wilson and Andreas. In re-cross of Ikeda, Bray seems to lose his patience with Ikeda: “You seem to have a greater ability to respond to the government’s questions than you do to our questions . . .” (Tr. 2131). Ikeda denies the suggestion. Bray further insinuates that he was coached by the government or his own lawyers. Weingarten hints that Ikeda was told to say that he “didn’t remember” if he got a question he didn’t like. (U.S. v. M. Andreas et al. Tr. 2030-2137). August 6, 1998: Late in the afternoon, the defense is allowed to bring H. Ikeda on the stand for its direct examination (out of order) so that Ikeda can return to Japan rather than be recalled a month later. The defense plays a 1 hr. 20 min. portion of the video tape of the 10/25/93 Irvine meeting not previously played by the government. This early portion of the meeting dealt with Ajinomoto’s forthcoming purchase of Amylm and Orsan’s interests in Eurolysine. Yamada asks Andreas his opinion of the possible buyers and whether there would be any antitrust problems if any of them were to buy Orsan’s interest in Eurolysine. Ikeda admits that both Yamada and Andreas frequently mentioned their intention to comply with antitrust laws (in U.S. and EU?) if and when Orsan shares were sold to Ajinomoto. [Defense counsel means to leave the impression with the jury that Yamada and Andreas were punctilious in their observation of all antitrust laws. Oddly, the prosecution takes no opportunity to cross-examine Ikeda on this point]. (U.S. v. M. Andreas Tr. 2142-2156). August 10, 1998: The prosecution’s third witness is Alain B. Crouy, President and CEO of LaFarge Aluminates. Worked at Eurolysine 9/90 - 9/93. EL sold lysine in Eur., W. Asia, No. Africa, and a little bit to N. and S. America in 1993. EL was co-managed by Ajino and Orsan) Crouy became CEO of EL in spring 1991, reporting to Philippe Rollier the CEO of Orsan. EL sold to distributors in each country. He kept tabs of the U.S. price to avoid geog. arbitrage. Crouy testifies from his notes of the Mexico meeting. Prices went up because of the agreement, but not immediately because of “price protection clauses” in some large lysine contracts (Tr. 2198-99). 159
Crouy explains the role and mechanics of “volume allocation” as discussed by lysine producers in 1992-93. Wilson suggested using percentages. The group considered percentage shares superior because lysine sales were erratic on a month-to-month basis because of external factors” (soy meal and fish meal prices, weather, value of the dollar). With absolute quantity allocation, then members could sell at below the price agreed upon and not disturb the profitability of the other members. Some type of volume agreement was desirable to avoid downward pressures on the agreed price due to cheating on extra sales. Wilson warned the group (5/93 Tokyo) against implementing a “don’t touch [each others’] customers” policy because it increases the risk of “legal problems” (Tr. 2239). Crouy explains that refusal to deal is illegal in itself and “second, the customer will say: Why is he not giving me an offer?” (ibid). That is, customers will suspect immediately that there is a price fixing agreement [and complain to authorities] and sour customer relations (Tr. 2241). [Crouy’s explanation is the most lucid so far, perhaps because of his excellent command of English]. Crouy also explains his understanding of Andreas’ famous remark on 5/14/93 that “We don’t do deals. We can tell you what we want to do without any quid pro quo, but you have to be very careful . . . “ (Tr. 2242). Basically, the whole remark was not understood by Crouy because it was completely inconsistent with everything that went on before and after, i.e., how to set up a volume allocation agreement. [Was it a joke?]. The government seeks to reverse an earlier ruling by Judge Manning that ADM’s guilty plea cannot be given to the jury because it is prejudicial. They argue that Barrie Cox’s upcoming testimony requires it and that the defense has been continually portraying ADM as an innocent company trying to bust the “Asian Cartel.” Crouy’s cross-examination by Wilson’s attorney began in the afternoon. The immunity agreement and “prepping” by prosecutors are driven home, and lack of sanctions imposed emphasized. In 1989, the European price was about 20FF/kg., dropped to 12 FF in 1990, and during the height of the “price war” in mid 1992 to 8FF. (U.S. v. M. Andreas Tr. 22332382). August 11, 1998: Crouy is cross-examined on all the same documents, meetings, and subjects as Mimoto and Ikeda for the period 9/90-6/93. (U.S. v. M. Andreas Tr. 2383-2522). At a long side bar discussion, defense lawyers file motions to bar Cox from testifying and exclude references to ADM’s guilty plea. Weingarten argues that the plea is prejudicial because “. . . in the world ADM and Andreas are equivalent” (Tr. 2535). Andreas’ lawyer argues that the citric acid case is too dissimilar to allow it, but the Court disagrees. August 12, 1998: Barrie Cox testifies that ADM still produces citric acid in its Ringaskiddy, Ireland plant. The two plants of ADM produce about $150 million of citric acid (U.S. v. M. Andreas Tr. 2605). August 12, 1998 (am): The Court rules that Cox’s testimony will be allowed, but no references to ADM’s guilty plea. 160
James Griffin conducts the direct testimony of Barrie Cox, VP of ADM’s Food Additives Division, now President of the Division (1993-1998). Employed at ADM since 12/90; before that VP of marketing for Pfizer’s Chemical Division in NY. Reported to Wilson. Admits citric acid price fixing from early 1991-1995 (Tr. 2614). He identifies the five conspirators and states their global share at 65-70%. The individuals who conspired are Wilson and Cox (ADM); Drs. Hartmann and Schaller (H&R-Bayer); Huari, Sommer, and Haas (Hoffman-La Roche); Soiron and Bichlbauer (Jungbunzlauer); and Kluzer for Cerestar (Tr. 2619). He describes the meetings that started and maintained the cartel. Wilson and Cox made most of the day-to-day decisions on pricing of citric acid. The “official” meetings of the European Citric Acid Manufacturers Association (ECAMA) took place in Brussels in the fall of each year, the headquarters of ECAMA and of SEFIC (translation?). In May or June each year, a second official meeting was scheduled at a location chosen by one of the members (e.g., Vienna in May 1991). At the official meetings, the ECAMA secretary presided and took the minutes (Tr. 2649-2650). At the parallel “unofficial” conspiracy meetings, there was no agenda, secretary, or minutes; customer representatives were not present. The last planned meeting of the conspirators took place in Brussels in November 1994, though the last “spontaneous” meeting occurred in May 1995 after the cartel had “unraveled.” (Tr. 2651). Wilson and Cox both met biannually from March 1991 to November 1994 (8 meetings). Counting May 1995, there were 9 meetings altogether (Tr. 2657) where both were present. Each of the 9 conspiracy meetings followed a largely standard format: review latest cartel sales reports, discuss price trends, discuss competitive situation, and discuss “problems affecting the group” (i.e., cheating). Compensation sales were arranged at at least two of these conspiracy meetings, with ADM below its quota. Cox testifies without qualification that Cargill was not a member of the citric acid cartel (Tr. 2674-2675). Nor were any of the Chinese producers (Tr. 2675-2676). In January 1995, ECAMA officials traveled to China to warn members of China’s National Fermentation Association about dumping citric acid in Europe. Cox was warned by Wilson that if the price fixing were ever discovered, then Cox would be “on his own.” That is, ADM would not defend him legally (Tr. 2681). Cox said Wilson never said that he was just bluffing at the cartel meetings, or just trying to get information from the group. Over strenuous defense counsel objections, the government asks Cox about Wilson’s reaction to learning about Whitacre’s taping in a September or October 1995 conversation (Tr. 2683-2685). Wilson said there was “bad stuff” on those tapes about the lysine conspiracy. [This is quite damaging to Wilson]. Defense moves for a mistrial because of introducing the extraneous case; it is denied. They also move Cox’s testimony be accompanied by limiting instructions to the jury, but Manning 161
decides to issue such instructions only in the case of Whitacre because Cox’s testimony is direct evidence of a conspiracy at ADM. (U.S. v. M. Andreas 2579-2710). August 12, 1998, p.m.: Cox’s cross-examination begins by Mark Hulkower for Wilson. Cox relates a number of stories told by Whitacre that turned out to be pure fantasy: about being brought up in a Cincinnati orphanage, that his parents were dead, that his adopted parents owned King’s Island in Cincinnati (Tr. 2718-2721). After a long sidebar, the Judge allows a clearly inappropriate question to be asked: When Wilson said that there was “bad stuff” on Whitacre’s tapes in 9/95, did Cox know whether it was “public knowledge” that Whitacre had boasted to his gardener, “Once I get Mr. Wilson on tape, I can make these tapes say anything I want.” Cox replies that he doesn’t know. Cox didn’t like Whitacre. He admits that Whitacre after 11/92 became nosy about citric acid matters and that Cox’s attempt to hold him off made him disappointed. (Tr. 2736-2737). Whitacre was “unnecessarily curious” about citric acid affairs. Cox testifies that there were more than 100 citric acid manufacturers and that G-5 controlled about 65-70% of the world market. He describes his 21-year career with Pfizer in Europe, Canada, and the U.S. (1969-1990). Pfizer first made citric acid by fermentation in 1923 and before that by non-fermentation means. It was a major Pfizer product. Pfizer had a small citric acid plant in Canada in the 1980’s. In 1990, the sales price of citric acid was in the 55-65 cent range; before that time citric had ranged as high as 78-834/lb. At ADM all sales terms were approved by Cox. The low prices in 1990 were due to Cargill’s entry in 1989 and to the six months of uncertainty between ADM’s announced purchase of Pfizer’s citric acids assets and the completion of the sale in 12/90 (Tr. 2746-2749). In October 1996, Cox was interviewed by the FBI in San Francisco. During that interview he told them that sometime during 1991-1995, Cox had had price discussions with an individual at Cargill, about bidding prices for certain accounts (Tr. 2750). [This sounds like price fixing].[See June 1999 entry in Appendix B]. Prices began to rise after 1990 because of market forces in part: accelerated buying by detergent markers in Europe in the very early 1990s, conversion to liquid detergents in the U.S. a little later; beverage demand increased modestly. By 1995, the list price was 85 cents. Pfizer was involved in price fixing in the 1980s, and the employee’s names were Moriarty and Hunter. Hunter attended ECAMA meetings. Cox testifies that meetings of the G-4/G-5 occurred on average at least 5 times per year, so at least 25 total during 1991-1995 (Tr. 2768-2775). In addition, a dozen or so bilateral meetings occurred. Of the 37-plus meetings, Wilson attended only seven and Cox all but 162
one. The companies eventually created two types of meetings to handle price fixing and sent two types of managers to them: higher-level (called “masters” and lower-level “sherpas”). Cox was one of the few that was both. In addition, there were many telephone calls to discuss prices and volumes: daily when things were active and biweekly when quiet; Cox handled virtually all these calls, Wilson virtually none. Cox admits that there is “no physical evidence” that Wilson conspired – no notes, no documents, no tapes. The ADM travel records only prove that Wilson attended the ECAMA meetings. Cox divulged the citric acid conspiracy to ADM’s VP of Operations, Roger Dawson, who also came from Pfizer. The two had about 100 conversations on the topic, but Dawson says he has no knowledge of Wilson’s involvement. [Hulkower tries to pull a fast one in court by asking Cox if Wilson was ever charged on citric acid; the Judge quickly intervenes]. Cox admits both he and Wilson disliked the “Japanese way of doing business,” (Tr. 2782). They put national interests before competitive behavior (Tr. 2795) and prevented foreign entry. Cox clarifies the number of meetings of G4/G5 attended by Wilson as nine (not seven), of which one was not held concurrently with an official ECAMA meeting. Also, he agrees he was basically a “Sherpa,” one that concentrated on the detailed numbers of the conspiracy, whereas Wilson was a “master.” He confirms that the “primary factor” in the U.S. price rise from 60 to 804 was the price agreement; in the U.S. the increase in revenues for the G5 was $50 to $60 million per year in 1994 when G5’s total revenues were $200 million (U.S. v. M. Andreas 2714-2801). The next witness is FBI agent Brian Shepard, a 26-year veteran, assigned to Decatur in 1983. On 11/4/92, he and two other FBI agents interviewed M. Andreas in his home (Tr. 28052810). When Whitacre told M. Andreas about the $6 million extortion attempt, D. Andreas contacted a lawyer in Europe who knew sabotage specialists. A specialist contacted Mark Cheviron, ADM’s security director. M. Andreas also contacted “authorities” about the matter and an ADM executive in Europe (London?) who contacted the CIA. The CIA alerted the FBI. Shepard interviewed Whitacre the same day in Shepard’s office with Cheviron present (very unusual). He went to Whitacre’s house at about 8 PM on 11/5/92 to install a tape recorder on Whitacre’s home phone, but instead Whitacre spent 4 to 5 hours sitting in Shepard’s car telling Shepard a series of bizarre stores (Tr. 2813-2817). He revealed the lysine story. In addition, he said ADM President Randall had hired one Michael Frain to steal a valuable microorganism to make bacitracin. In addition, Randall had arranged with Cheviron to try to steal technology about lysine production at Ajinomoto’s Iowa plant using call girls. Whitacre provided the technical questions. (U.S. v. M. Andreas Tr. 2714-2837). August 12, 1998: Journalists listening to Barrie Cox’s testimony on the citric acid cartel consider his testimony quite credible. They quote him saying:
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“Prices were low in Europe and around the world. They were depressed and they needed to be increased. We decided [in 1991] we should do something about it.” Wilson studiously avoided looking up at Cox on the witness stand. (Reuters, Chicago Tribune 8/12/98). August 13, 1998: Brian Shepard continues testifying. He explains the care that is taken by the FBI in handling tapes. There is a signed consent form from Whitacre for every tape except three (dated 4/28/93, 10/15/94, and 11/23/93). Every tape received by the FBI from Whitacre was carefully cataloged, but Shepard admits that Whitacre might have taped some additional ones not turned over. For a while after 11/9/92, Whitacre refused to cooperate, giving a number of incredible excuses. No further taping occurred until 3/12/93. Whitacre also hid his meeting with Yamamoto (1/93) and Mimoto (1/93) from the FBI. The FBI began to doubt the $6 million Fujiwara extortion story within a few days, so they arranged for a polygraph test of Whitacre on 12/21/92. He failed and admitted the whole extortion story was a hoax intended to explain away start-up contamination problems. The FBI was unaware of Whitacre’s foreign bank accounts and embezzlement of ADM at this time (Tr. 2864-2866). The government tries to introduce information about price fixing in citric acid and other fermentation products during Shepard’s direct testimony, but the Judge rules that this information can only be elicited during redirect even though the topic was raised during defense counsels’ opening statements (Tr. 2869-2873). Shepard recounts how difficult handling Whitacre proved to be, including a long period of non-cooperation from 12/21/93 to 3/10/93. In the entire history of the FBI, no cooperating witness has ever been as high-level an executive as Mark Whitacre (Tr. 2882). He explains the two recording devices used, one a commercial-type micro cassette recorder, another a reel-to-reel Nagra recorder in a briefcase that is available only to law enforcement agencies (the latter was sometimes attached to Whitacre’s clothing). The lysine meeting in Paris on 10/5/93 was not recorded because the French government would not permit it. Shepard operated the video camera used in the Irvine meeting which was important because it was the first time Shepard heard directly actual price fixing (Tr. 2887-2888). Whitacre made about 120 to 130 tapes during 1992-1995 (does not include video tapes). There is long testimony on taping procedures. A phrase repeated by several people in ADM’s management was “Competitors are our friends, customers are our enemies” (Tr. 2904). Shepard did instruct Whitacre to use the word “agreement” in lysine meetings. The FBI thought it had sufficient evidence in the lysine conspiracy by the time of the 12/93 Tokyo meeting or certainly Hawaii in 3/94. However, they continued investigating to get 164
evidence of price fixing in other product lines (Tr. 2906-2908). Direct examination concluded at 10:15 AM. Bray cross-examines Shepard. A tape of a conversation between Whitacre and Shepard recorded 12/3/93 is played in which Shepard is giving Whitacre instructions about what to do at the 12/93 Tokyo meeting. Bray fails to get Shepard to admit that the FBI wanted to get words on the tape by Whitacre incriminating Andreas. Shepard also denies flouting Japanese government laws on taping in Japan (Tr. 2928-2930). Shepard is pressed as to why Whitacre’s fraud was not suspected during the investigation. He is interrogated about the November 1992 meetings and Shepard’s alleged bias against the two Andreas (Tr. 29502965). ADM refused to cooperate in early November 1992 in the FBI’s investigation of the “Fujiwara extortion,” but by 12/8/92 they began cooperating again by preparing a list of possible moles. Bray presses Shepard on why ADM was not told that Whitacre had fabricated the mole story, why FBI procedures were not followed in Whitacre’s case (lots of jousting over Whitacre’s category: A “cooperating witness,” “informant,” or “confidential source”?). (U.S. v. M. Andreas Tr. 2841-3066). August 13, 1998: Observers consider the 82-minute video tape excerpt the “centerpiece” of the government’s case against M. Andreas. The agreement on volume is made on tape with Ajinomoto, and Ikeda’s memo to the smaller Asian manufacturers confirms that agreement. Bray argued that the tapes only show Andreas pumping the Japanese for market information, yet Andreas tells the Ajinomoto managers, “We know our figures are right.” [A few months later ADM accepts Ajinomoto’s larger figures are correct]. Andreas also explains ADM’s management style as highly centralized in a small group: Michael, his father, and James Randall “. . . all know what’s going on all the time.” An audio tape quotes Randall saying, “Our competitors are our friends. Our customers are the enemy.” (Chicago Tribune 8/13/98). August 17, 1998: Shepard’s cross-examination continues for the second full day. Defense argues that Whitacre was part of “undercover” operation, which has different rules for tape recording than “cooperating witness.” The Judge cannot decide which category Whitacre falls into, and decides to allow a “liberal” cross-examination of Shepard (Tr. 3060-3082). Bray brings in the topic of Whitacre’s naked ambition to become the CEO of ADM, insinuating that toppling D. Andreas and M. Andreas was his motive for taping and cooperating. Tape-handling procedures are criticized. Bray quizzes Shepard about Whitacre’s embezzlement of ADM (Tr. 3296-3303). Even though the Judge interrupts, Whitacre’s counsel refuses to object to this line of questioning. Bray tries to introduce evidence of a meeting between Shepard and D. Andreas in the latter’s house in which the investigation is revealed on 6/27/95; Andreas is cool at that meeting, protesting that the tapes don’t prove anything. The prosecution strenuously objects that 165
statements of that type are hearsay, a way for the defense to get Andreas to testify as to his innocence that cannot be cross-examined. The FBI asked Andreas to cooperate at that 6/27 meeting. Judge Manning considers the objection. (U.S. v. M. Andreas Tr. 3067-3288). August 18, 1998: Shepard’s cross-examination continues for a third day. Whitacre turned in 120-130 audio tapes to the FBI. In addition, video tapes were made in Hawaii, Irvine, Atlanta, and Chicago. A sidebar discusses Whitacre’s dates of culpability which the government contends is from June 1992 to November 4, 1992. Whitacre’s lawyer says that Whitacre and Shepard were the best of friends for 2 and one-half years. He says that Shepard directed Whitacre to place incriminating documents in or near the offices of Andreas, Wilson, and Cox. (Tr. 3339). Wilson’s lawyer probes Shepard about Whitacre’s many accusations of illegal activity at ADM (Tr. 3383-3388), that Randall illegally bought a microorganism, that Cheviron was obstructing justice, that ADM hired hookers to spy on Ajinomoto, etc. Shepard says they were corroborated on tape. By the time the price fixing investigations were completed, the statute of limitations had run out (5 years). Shepard confirms that Whitacre wanted lots of money (10X his salary or a bounty), but never got more than $270 to alter a suit (Tr.3389). More questioning about the FBI’s taping instructions to Whitacre. Shepard is grilled about alternative explanations for the price rise in mid-1993: Midwest floods, corn and soy price increases, capacity constraints (Tr. 3401-3407). Weingarten asserts that Mimoto and Whitacre were lying about price quotes to each other and that the FBI never checked these prices! Bray examines Shepard about the 6/27/95 interview with M. Andreas. The FBI gave him a chance to “cooperate,” but a one-time chance only, and only if it is kept confidential. He essentially refuses by telling the FBI he will immediately call the ADM lawyers (Tr. 35033508). At a sidebar, Lassar says that the ADM plea agreement specifically immunizes ADM, Randall, and Cheviron for stealing technology, specifically bacitracin (Tr. 3509-3911). He objects that Weingarten continually suggests that the FBI was remiss in not informing ADM of all the illegal activities they knew about, whereas no one can mention ADM in fact pleaded guilty of them or were granted immunity. Moreover, the prosecution couldn’t explain Cox’s motive for testifying against his own company (i.e., the plea agreement) (Tr. 3512-3515). August 19, 1998: At sidebar there is discussion of a tape of a conversation between ADM’s Brasser and Whitacre, where Wayne Brasser refers to his price fixing of sodium gluconate. Brasser was worried about being caught and talked to Wilson about it; Wilson replies “You don’t have to worry, Mr. Brasser, because if anyone goes to jail, it’s gonna be either Mr. Cox or myself [for citric acid]” (Tr. 3544-3545). Another tape of M. Andreas just after the raid shows that Andreas falsely assumed that Brasser was the FBI’s informant, which shows that 166
Andreas knew of the sodium gluconate price fixing (Tr. 3545). Lactic acid also mentioned (Tr. 3547). The Judge refuses to allow the Brasser tape to be played in court (Tr. 3549). She also disallows a tape of James Randall admitting to illegally buying a microorganism for bacitracin and using prostitutes to steal Ajinomoto’s lysine technology. Lassar in redirect of Shepard shows that his investigation of ADM made him and his family very unpopular. Old friends shunned them (Tr. 3570). A long examination about why Shepard trusted Whitacre even though he lied a lot – the tapes themselves. Wilson’s lawyer says he is quite ill (Wilson leaves the courtroom). Allison Ebel, a DOJ paralegal, testifies (Tr. 3619-3646). She prepared U.S. price lines for Bioproducts Division internal reports. The prices exclude liquid lysine by prior decision, because dry lysine was the product mentioned on the tapes. Liquid sold at a lower price (Tr. 3622-3626). A 3% rebate was given to some large customers, e.g., Hudson Foods. Ebel is grilled on whether the rebates are reflected in the government’s exhibit, but doesn’t know. (Wilson returns). Bruce Koenig testifies, a private expert on tapes (Tr. 3650-3758). He is a former FBI agent and instructor, manager of largest forensic tape unit in the world, lots of forensic experience, 286 testimonies. Opens his testimony with procedural explanation of his analysis. He testifies that all the tapes in evidence are “originals.” There are 239 tapes in this case (Tr. 3697), of which Koenig tested 38. Of the 38, 3 were over recorded. Lots of questions to impugn his objectivity (Tr. 3736), to criticize the FBI’s tape handling. He spends 50 hours per tape analyzing them. FBI agent Robert Herndon testifies (Tr. 3764-3797). Began on ADM (“Harvest King”) case when transferred to Springfield 6/93. He twice personally briefed Louis Freeh, FBI director. He utilized 2 Assistant U.S. Attorneys (AUSAs) and 2-3 antitrust DOJ lawyers as resources for advice, continuously and frequently. By 7/93, M. Andreas, Wilson, Cox, Randall and a former employee were the subjects of the investigation at ADM; also Yamada, Ikeda, Mimoto, Chaudret, Rollier, Suh, Kim, Lim. He describes how the FBI handled Whitacre and the tapes. Whitacre had to use a commercially purchased recorder and tape when he was in Japan, at the request of the government of Japan. One recorder was sewn into the lining of his suit. August 20, 1998 AM: (Tr. 3805-3896). Herndon direct continues. He confirms the accuracy and completeness of the tapes by Whitacre. August 20, 1998 PM: (Tr. 3897-3919) More of same with Herndon. Wilson’s lawyer moves for a mistrial because the government asked Herndon a question about 1995 surveillance and he referred to being busy on investigating “other products” (beyond citric?).
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Monday, August 24, 1998 AM: (Tr. 3920-4048). Herndon cross-examination, by Weingarten. Tries hard to discredit him. Whitacre’s 3 trips to Cayman Islands cited as lack of FBI control (3926). A tape of the 3 ADM defendants of 3/18/93 shows there was a lysine price war on (Tr. 3950). On 5/28/93 Whitacre and Ikeda discuss the fact that ADM just took a big customer, Agro Provision of NC from Ajinomoto. A tape of 12/1/93 shows Andreas and Wilson’s distrust of the Japanese and has statements that could be interpreted as an ADM commitment to aggressive selling (Tr. 3951). A long cross on taping procedures and instructions to Whitacre, who was to tape all ADM conversations relevant to price fixing, but not ordinary legitimate conversations. Implication that exculpatory statements by Andreas and Wilson were missed. Whitacre asked the FBI for 10% of the fines to be paid by the lysine defendants as compensation for his cooperation (Tr. 4033). There is a skirmish at sidebar over the defense’s desire to bring in Whitacre’s guilty plea on the ADM fraud (Tr. 4038-4048). The Fraud Division of the DOJ “took back” the guilty plea when Whitacre disagreed with some of the facts outlined in the agreement. A government prosecutor claims that the ADM plea agreement was written by the Fraud Division, not the Antitrust Division, so the plea agreement may not contain “true facts” or the “total truth” (Tr. 4043). When Whitacre disavowed the original agreement he was given a much longer sentence than what was agreed to originally. His charge on what the facts were hurt the DOJ’s fraud case in Atlanta. As a result his culpability score went up by 3 pts. = >84 mos. raised to 106 mo. Judge Manning decides not to allow the plea agreement to be introduced (Tr. 3901-4048). Monday, 8/24/1998 PM: (Tr. 4049-4099). Herndon hit with many questions about Whitacre’s embezzlement, but Herndon knows little, did not investigate this aspect of the case. Based on defense questions, amounts and dates of thefts were: $200K (11/1/93-4/94), $2.5 MM (5/94), $1.5 MM (1/94), $3.75 MM (2/95). A tape is played of a meeting in St. Louis between Whitacre and Jhom-Su Kim (4076). On redirect, the government gets Herndon to say several times that the word “agreement” appears several times on the tapes in which Whitacre did not prompt the use of the word by Andreas and Wilson. Also, Herndon gives several reasons why tape information, especially the “Four Seasons” lunch recording, confirmed to the FBI the truthfulness of what Whitacre had been relating to the FBI (Tr. 4080-4081). Herndon explains why the FBI did not tap ADM’s phone system (ADM’s security system was too good). Herndon personally recommended terminating the FBI lysine investigation after the Makaha, HI meeting (4083). The FBI considered releasing Whitacre from his agreement after 6/93, but as far as lysine went “There was no one else.” (4084). 168
In sidebar, Manning asks both sides about how close the end of the trial might be because she likes to instruct the jury 2 or 3 days before the end. Lassar says Yamamoto, their last witness will take one day. The defense will begin 8/31, but Weingarten says it would be “premature” to estimate [In light of the defense’s strategy to offer virtually no witnesses this response is dissembling] (4097). Tuesday, 8/25/1998 AM: (Tr. 4100-4115). Juror Wood is ill, so the jury is dismissed. Wednesday, 8/26/1998 AM: (Tr. 4116-4199). Wood is still ill. The defense wants to keep him on. Weingarten admits that the defense case will move “with alacrity.” The government wants him dismissed because he had napped. Judge agrees, Wood was inattentive. She eventually dismisses him. Whitacre is contemplating testifying, though his counsel is still against it. Whitacre is in lock-up because of threats against his life in North Carolina. Masaru Yamamoto is examined by Griffin (4132 ff.). He began selling lysine for Kyowa Hakko in 1971. Admits he pled guilty to price fixing of lysine and “other feed additives” (4134) from June 1992 to June 1995 (4146). He paid a fine personally and Kyowa paid $10 MM. He was first employed in accounting from 1964, then head-office export department, 1968-1971, then lysine exports 1971-1978. In 1978 he moved to Kyowa Hakko USA in NYC, which became BioKyowa in 1982. Moved back to Tokyo Headquarters in 1989, in charge of lysine worldwide. In 1983, he moved to St. Louis to help get BioKyowa started up; the Cape Girardeau, MO plant started in 1985 with 5K tonnes capacity, expanded to 15K tonnes in 1989 or 1990. He was general manager for Kyowa’s biodivision from 1985 to February 1996, reporting to Senior Manager Director Akita 1992-1995. He admits that Kyowa fixed prices of lysine with Ajinomoto and Miwon/Sewon in the U.S. before 1990 (4145). Kyowa was the “host” of the Mexico City meeting 6/92. Kyowa and Ajinomoto proposed a 40K share for ADM, but Wilson rejected that proposal saying ADM wanted 1/3 of the market (4148). Kyowa and Ajinomoto counter proposed 48K for the year 1993, but ADM again rejected. After the meeting, they all raised their U.S. prices of lysine [Miwon also raised its price to 804, but not as a result of the meeting (4150)]. One week after Mexico City, Whitacre called to say ADM would raise prices to 804, and Yamamoto agreed that Kyowa would also. He reads from his notes about the Whitacre phone call: agreement on 804 and ADM’s agreement to the 48K share if it was parity with Ajinomoto (4154-55). Yamamoto then called Mimoto, who agreed to the 804 price also. On 8/20/92 Yamamoto and Whitacre agreed on the telephone to raise prices further to 954. Yamamoto called Sewon, Cheil, and Ajinomoto about this new price, to go into effect 169
8/17/92. All agreed (4157-4158) except possibly Cheil (no mention this time). They also discussed prices for Europe and Asia, and planned more increases in the U.S. (to $1.05 in 9/92). Cheil (Mr. Suh) was informed of the new price increase (804, 954, $1.05), but Cheil had no U.S. sales at that time. Yamamoto confirms the 1992 price increases were carried out by Kyowa and by the other 3 U.S. sellers as well. Prices went up worldwide (4160-4162). The first conspiracy meeting of all 5 manufacturers occurred in Paris 10/92. First they discussed “marketing information,” i.e., which customers were getting below list prices (4163). They agreed to a new price $1.20, for early 1993. No volume allocation agreement yet, so the 1993 price didn’t stick. At the 6/93 meeting at the Regency Hotel in Vancouver, BC, all 5 companies present (4165). From his notes of the meeting, Yamamoto mentions the topics: market situation, price, volume, lysine association, and communications methods. More accusations about cheating. A specific sales volume allocation was proposed: for ADM 45K dry plus 3K liquid (actual 1992 sales); for 1993, world sales (“low” estimate) given as 225K. Plans for 6/94 allocations are also discussed. But ADM would not accept less than 1/3 share again (4171). At Vancouver, Ajinomoto proposed a new “communication method,” essentially a series of 5-company regional meetings, but ADM and Kyowa did not agree. Wilson said that at ADM only he, Whitacre, and M. Andreas knew about the conspiracy. Prices of lysine rose quickly after 6/93, partly because grain (and oilseed) prices rose then. The several price increases in lysine were the result of agreements made during the summer of prices (4173). The lysine association met at the Grande Hotel in Paris 10/93. Price agreements reached but no volume agreement. He was told by Mimoto about the Irvine meeting. On 11/10/93, Yamamoto, Mimoto, Ikeda and two others met in a Tokyo restaurant and were told about the sales volume agreement (4174-77). The Vancouver proposal was for 84 Kt (Ajino), 54 (ADM), 46 (Kyowa), 34 (Miwon), and 14 (Cheil). The new proposal from California was 84K, 67K, 46K, 34K, and 14K, respectively. The next meeting in Tokyo 12/93. Wilson formally accepted ADM’s 67K share (4182), but asked to have it expressed in percentage terms (27.35%). Also, percent sales shares were identified for each region: No. Am., Europe, Cent. Am., Asia, etc. To enforce this more detailed conspiracy, monthly reporting of sales by region was to be made to Mimoto, a Wilson proposal.
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They also agreed to establish an “official” lysine association in Europe for market development, government feed regulations and other legitimate purposes. There would also be “unofficial” parallel meetings (4185). Yamamoto said that at Tokyo 12/93 they agreed on regional lysine prices for the first quarter of 1994. Kyowa stuck to the agreement, as did all the others. At BioKyowa, one-time customers paid list price but contract customers got below-list (4187). Also, contract customers got one-month price guarantees after list went up. This procedure was the industry-wide practice. The first 1994 meeting of the lysine association began 3/94 in Hawaii. Cheil agitated for more share and got 17K, based on a new world total of 248K. Prices for U.S. to be maintained April-June at $1.20 (4196), but raised elsewhere. August 26, 1998 PM: (Tr. 4200-4328). A video tape of the 3/94 meeting is played. Yamamoto explains the mention made of FEFANA, a European organization of feed additives manufacturers, which had a section for lysine and methionine. The Paris lysine meeting occurred using FEFANA as a cover, but none after that. Market shares excluded liquid lysine because in 1994 only 3 to 4K made and only by Ajinomoto and ADM for 3 or 4 customers (4212). Customers needed special tanks and spray equipment. In 1994, actual shares were so close to agreed shares that no compensation was necessary (4216). In 1996, Yamamoto was demoted by Kyowa (4233). [Is this the only case of a conspirator sanctioning one of its managers for price fixing?]. At the Atlanta meeting 1/95, prices were weakening, but the conspirators agreed to raise list to $1.30. Last meeting 3/95 in Hong Kong. In June 1995, BioKyowa got a subpoena. Cross-examination begins (4217 ff.). The usual questions about how sweet the plea agreement is, trying to suggest the company pressured him to join their plea, that immunity for his co-workers drove him to the plea. Six employees got immunity (4245). Yamamoto admits that Kyowa first fixed lysine prices in 1986, with Ajinomoto and Miwon (4259). Kyowa’s Ikeda was the principal individual involved. Prices were set on a monthly basis from 1986 to 1990. Then the defense tries to impeach Ikeda’s testimony on this topic because Ikeda said they only fixed prices “a couple of times” (Tr. 4261 ff.). Griffin objects and accuses the defense of intentionally misleading Yamamoto, confusing his boss Akita with Ikeda of Ajinomoto. He confirms the 55/45 split (not clear if Miwon involved in U.S. share fixing, but probably was).
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A Kyowa 1990 business plan is introduced showing that it preferred to let Ajinomoto believe it was cooperative whereas it was in active rivalry. Lysine reached a maximum price of $2.75-3.00 per pound in 1988 due to price fixing and high agricultural commodity prices (4273). Yamamoto met Whitacre in the U.S. when Whitacre worked for Degussa, before 1989; met him again in January 1991 in Japan as a visitor. He said at that time that ADM’s plant would be about 60MM pounds capacity, but later ADM announced 130MM pounds. Lots of questions about Kyowa’s fear of ADM’s aggressive entry (4282 ff.). Kyowa lost many accounts and sales agents (15 - 20% of its sales thru agents) during 1991. BioKyowa’s sales manager Ina wrote in 11/91 that ADM was offering prices 54 lower than BioKyowa’s (4289). By late 1991 Kyowa had resigned itself to the expensive option of meeting ADM’s prices (4297). A 12/91 Kyowa document explains how lysine prices respond to market price of soybeans (positive, a subst.) and corn (negative because a complement (4298). In late 1991, ADM began selling abroad; in W. Europe BASF was ADM’s sales agent for lysine (3299). In a sidebar, Andreas’ lawyer pleads to introduce evidence of jingoistic/chauvinistic lysine advertising by ADM issued 12/91. Griffin objects as to relevance because “. . . we don’t even contest that competition was going on [in late 1991]” (4302). [Ad contains a reference to Pearl Harbor.] In 1990-93, BioKyowa lost at least 2 experienced sales persons to ADM (4313). August 27, 1998 AM: (Tr. 4329-4457). At sidebar, Lassar complains to Manning about lack of notification about defense witnesses, one an economist named Martin who prepared charts showing no price-fixing effects by comparing actual lysine prices to “simulated” ones. The prosecution has received no report, no data lists, no model. Most important, the government can’t tell the jury that the ADM Co. pled guilty to price fixing! Yamamoto testifies that the first lysine price war occurred in 1984 when prices fell to 704. In the second 1991-92, prices hit ca.654. (4341). Seasonality in lysine prices explored: prices bottom out in mid summer (4342-43). Wilson and Whitacre first met with the Kyowa lysine people in December 1991 in Tokyo. Wilson proposed a lysine association (4346-47). It would be a forum for “friendly competitors” to meet. The Kyowa people were skeptical because at the same time ADM was causing prices to fall, though it was not yet a true price war. [In this answer, Yamamoto speaks as if the meeting occurred in April 1992]. Yamamoto clarifies the ADM-Kyowa meetings: 1/91, 12/91, and 4/92, the first two in Tokyo and the last in Hawaii. In his opinion 172
the price war started just after 4/92. In December and February and March, Yamamoto thought ADM was mainly interested in learning about the lysine market from Kyowa (4352). In early 1991, ADM announced a lysine price increase from 804 to 904. Kyowa thought it was a signal from ADM to follow its price upward, but Kyowa didn’t think the two companies yet had an agreement, so it didn’t follow ADM. Defense lawyers ask whether Kyowa hired David Hoech/Global Consultants to spy on ADM and paid large amounts of money “to obtain secret information from Mark Whitacre” (4353). Kyowa did pay Hoech about $175K during 1992-95, but Yamamoto says the information came from published sources and securities/industry analysts. However, Hoech did meet Whitacre and some of his information was “nonpublic.” Yamamoto denies seeking secret information or ever getting any, but a faxed letter from Hoech shows that he was getting some sort of information directly from Whitacre (4357). In one memo [probably written in the spring of 1993] Hoech quotes Whitacre saying that ADM was going to produce 17MM pounds of lysine per month in June [1993] at a cost of about 50 cents per pound (4358). Whitacre once told Yamamoto about ADM’s 50 cent costs directly at the ADM-Kyowa meeting in Hawaii in April 1992. Yamamoto did not believe the 50 cent figure. Letter was sent in April 1993 (4360). Whitacre said the high June 1993 production was to start a price war. [In fact, ADM did reach a peak of production in June 1993, but only 11.3 MM lb.]. Hoech also passed on information on which lysine buyers ADM was targeting that came from Whitacre (4361). Yamamoto agrees that this was confidential information, but says that Kyowa’s own salespeople also knew the same information. Hoech told Kyowa that ADM was targeting “Agri Provisions,” an East Coast buyer of lysine. Yamamoto claims that Whitacre had already told him the same thing previously, and he knew that the size of the account claimed by Whitacre (10-11 MM lb) was greatly exaggerated. Information on ADM not buying a methionine plant was also given to Kyowa, but Yamamoto says that was public information or soon became public (4366). Another fax from Hoech reveals the third quarter earnings in the Bioproducts Division, which is clearly confidential, from Whitacre (4366-68). Hulkower then charges Yamamoto with paying Hoech so he would bribe Whitacre to get this information. Another fax dated 7/93 from Hoech refers to ADM’s July profits. A later memo refers to ADM’s plans to build a corn refining plant in China or Vietnam (4370). Hulkower probes Yamamoto as to why Hoech’s reports were not given to the government when subpoenaed; Yamamoto says they weren’t kept (4374). Kyowa and Ajinomoto talked about bringing an anti-dumping action against ADM, but it was never serious, never got their legal departments involved (4377-78). They also shared lysine capacity information in an April 1992 meeting, just before the Maui, Hawaii meeting. Yamamoto and Mimoto also discussed the possibility of driving Miwon out of the lysine business in June 1992. 173
At the Mexico City meeting, Ikeda was the chair and opened the meeting with a 10-minute speech. Wilson interrupted him to say that ADM was going to get as big as Ajinomoto (4387-91). Ajinomoto was offended. Yamamoto believed there was no explicit agreement on price, but there was a “common understanding.” Miwon shortly after unilaterally raised its price to $0.80 (4390). However, a week later by telephone, Yamamoto thought Whitacre agreed to a price explicitly (4391); also, Whitacre agreed to a 48K-ton sales share for ADM if ADM would get parity in three years (4392). Kyowa and Ajinomoto could not accept parity. Yamamoto is shown a series of BioKyowa sales reports dating from 7/6/92 onward (43944413). He explains that customers have a one-month price guarantee (on their contracts?). Defense tries to show ADM was aggressive price-cutter, customer-stealer in late 1992, but Yamamoto refuses to budge on the fact that the price tendency was up during that period. There is extensive discussion about the second lysine price war, which Yamamoto dates from January 1993 to June 1993 (4425-4428). During the decline BioKyowa bid to keep its sales volume up to its share out of fear that when price is renegotiated they might get a lower share. When prices were at the bottom, BioKyowa was losing millions (in profit?) And he believes Ajinomoto and ADM did lose also (4429). The Vancouver meeting reversed the decline. The second war was a “signal” that ADM wants a share agreement at Vancouver (4430). Who caused the price wars – ADM? No, says Yamamoto, other companies as well, but ADM initiated both. •
August 27, 1998 PM (Tr. 4458-4609): Defense introduces many Kyowa documents by salespersons that speak of ADM cutting prices, taking customers. Kyowa maintains its share and sees average prices rise (44604520). Akiyama, President of BioKyowa, proposed in 12/94 to expand their plant from the present 15K tonnes capacity. At the Atlanta meeting (1/95) the conspirators tried to raise the price to $1.30, but it didn’t stick. Instead, sometime around the time of the Hong Kong meeting (4/95), ADM and Miwon turned aggressive and prices fell during the spring. In 1994, Fermex was producing 11K tons of lysine, but its share fell with ADM’s entry into the Mexican market (4536). The ’94 “market overview” predicts that in 1995 ADM would reach an early 70K” in sales (quota was 67K) by gaining first place in the U.S. market and expanding sales in Latin American and China (4536-4538). Yamamoto says Kyowa was unconcerned and besides the report could not mention the agreement on paper. [Yamamoto has an excellent memory and is unafraid to contradict his interrogator, e.g., see “ADM premix” issue Tr. 4540-4542]. 174
ADM may have been “cheating” on the sales allocation by increasing its sales of liquid lysine. A February 1995 BioKyowa sales report suggests ADM’s liquid sales were about 12MMlb. (5.4K tonnes), not the 3K-4K that Kyowa had earlier estimated (4543-4547). BioKyowa sales reports in early 1995 show prices of lysine falling from about $1.25 in January to $1.13 4/18/95, to $1.08 5/5/95 (4556). Andreas’ attorney tries to get Yamamoto to admit that price fixing is common in Japan, but Judge Manning disallows on relevance (4578). Phelan objects to the ruling because it does not support the defense theory that ADM was fighting an Asian cartel. Griffin tries once again to get ADM’s guilty plea before the Jury, in view of the hours of time spent in crossexamination showing ADM was aggressive at times. Prosecutors say that the company admitted guilt and the facts in the plea; it was not a nolo contendere agreement; “Yes, there were economic reasons for them [ADM] to enter the plea agreement. They got a good deal in citric acid. They were facing hundreds of millions of dollars in fines . . . and they paid a $30 million fine” said Griffin (Tr. 4582). Manning does not budge on ruling, but says that the defenses’ case could get her to change it. On redirect, Yamamoto testifies that Wilson initiated their first meeting in December 1991 (Tr. 4589-4590) and played golf with them on Maui 4/17/92. In Maui, Wilson proposed higher prices and the formation of an association, but Kyowa rejected the latter. At Mexico City, the “common understanding” reached about prices was that lysine should be sold at 54 to 104 below the “shadow value” (corn-soybean ceiling price) (4590-4592). The lysine conspirators fixed list prices but did not allocate customers (4595-4506). At their meeting, all the firms complained to each other about customer turnover. Wilson warned the group not to allocate specific customers to avoid being discovered. Only in Mexico or Thailand or other special cases were territories allocated (though even here, not 100%). Kyowa believed the monthly sales volume reports from Mimoto were accurate, and they were the key to detecting any cheating by ADM et al. (Tr. 4606-4607). Monday, August 31, 1998 AM: (Tr. 4610-4695). Wilson was hospitalized Sunday night for arrhythmia, but may be released Monday PM. Most of the morning spent on housekeeping details. The defense wants to call Ms. Barbara Holman, a lysine buyer for Tyson Foods for 20 years, as a fact witness only (not an expert). [Note that D. Andreas and Mr. Tyson (Don) were close friends]. Tyson bought exclusively from ADM for “the last five years.” Moreover, Tyson was a member of the federal classaction suit in lysine and received part of the settlement, over $2 million. The defense wants no questions from prosecutors on either the criminal plea or the civil suit directed by Ms. Holman!
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Griffin expresses an opinion that the defense case is going to last only a couple of hours because the witnesses the defense has listed (48 hours in advance) are so few. Bray is coy about his intentions (Tr. 4682). Manning rules to allow Holman to testify. August 31, 1998 PM: (Tr. 4696-4704). Wilson will not be discharged until Tuesday PM. Tuesday, September 1, 1998 AM: (Tr. 4705-4761). Discussion about putting up Russell Williams, Whitacre’s gardener, as a defense witness who will testify that Whitacre said (hearsay) that tapes can be altered to “get these [ADM] people.” He reportedly said it after June 1995. There is a speakerphone conference in Chambers with Mark Whitacre from his prison in Butner, North Carolina. Whitacre states that he no longer takes any medication whatsoever and that physicians and psychiatrists find him in good health. [Does this mean he never had bipolar disease?]. He waives his right to testify. Walker argues against bringing Williams to testify. Whitacre bought Williams a truck and paid him $125,000 per year. Williams has a “mysterious key” of Whitacre’s in his possession. He was uncooperative in FBI interviews. Whitacre lived in Dwayne Andreas’ former house, and thought it was bugged (4719-4721). [This may explain why Whitacre insisted on talking to Shepard in the latter’s car in 11/92]. Whitacre’s ties to the Cayman Islands did not raise the FBI’s suspicions because they were mostly legitimate business trips; ADM has property there; he was accompanied by ADM employees. September 1998: Ajinomoto is largest lysine maker in China, with JV Chuanhua Ajinomoto Co. now increasing production capacity from present 10kt to 20kt. Kyowa Hakko has transferred its lysine technology to Taiwan’s Vedan Enterprise Corp., which has just completed a 10kt lysine plant in Vietnam. China’s Guangxi Lysine will soon expand from 3kt to 10kt per year and plans 20kt cap. By 2000. BASF’s plant in Korea has 70kt cap. (Jap. Chem. Wk. 8/27/98:6). September 1, 1998 PM: (Tr. 4762-4846). Wilson absent. Scores of new documents are introduced. Dennis M. Mullane, V.P. and Controller of Heartland Lysine is examined, employee since 6/85 and still V.P. He is to verify that Heartland business records are true. The defense objects to Mullane’s competency because he doesn’t read Japanese. Manning allows them to be entered. 176
Kyung Mo Kim, Treasurer and Secretary of Viatrek America, testifies as to authenticity of Sewon business records. Lots of defense objections to certain lines in meeting memoranda. September 2, 1998 AM: (Tr. 4847-4945). Thomas M. Tomlinson, property accounting manager of ADM, testifies as to authenticity of ADM financial records as exhibits, including monthly sales and prices of lysine (Government Exhibits 60, 62, 64, and 67). In cross-examination, the records include inter-department export shipments that reached as high as 25% of total sales value. For true sales to third parties, the invoices may not be credited for a few weeks. In January 1995, ADM had 9.5MM lb. of lysine intra-firm exports (IFE), the largest such month during FY 92-95 and twice that for 1/94 and for 2/95 (486769). Andreas’ lawyer implies that these data were fabricated by Whitacre as part of his embezzlement scheme. Tomlinson verifies that Whitacre’s theft began in 4/91 and that he opened 2 accounts in the Cayman Islands on August 24, 1991 (4872), a Swiss account January 7, 1993. He also confirms that ADM’s actual global dry lysine sales in 1994 were 69,928 metric tons (4883), 4.4% higher than ADM’s cartel quota; however, dry and liquid lysine sales in 1994 were 75,092 tonnes, or 12.1% above the quota (for dry alone). In 1995 Q1, dry lysine sales were 19,442 tonnes [10.8% above 25% of the annual quota; N.B. no adjustment for seasonality] and dry + liquid were 20,920 tonnes (19.2% above dry quotas). He also reports that actual sales for 1995 Q1 were 30.6% above “reported sales” (seems to be dry + liquid actually divided by 1/4 of dry annual quota (4890). In 1994, ADM reported to Mimoto 68,334 tonnes of dry lysine sold, but actually sold 9.9% more (including liquid) (4890); in 1995 Q1, the actual dry + liquid was 40.5% above reported; in 1994, actual dry was 2.3% above reported dry (68,334 tonnes) (4892); dry actual was 30.6% above “reported” in 1995 Q1 (4893). [Note that 1993 Q1 was the beginning of the second lysine price war]. In a sidebar, the government asks leeway in questioning Tomlinson because Andreas’ lawyer was essentially doing a direct examination and because the defense introduced documents during the government’s case! Surprisingly, the government did not object. Manning rules that the government can lead Tomlinson, as though he is a hostile witness (4895-96). In redirect, the government gets Tomlinson to agree that he has no knowledge of false invoicing, that the cartel’s “budget” was annual and not quarterly, that the “score sheets” were based totally on dry lysine, that inclusion of liquid in the figures was done at the request of defense lawyers, that the charts misleadingly begin at 100% not 0%. In chambers, Weingarten states that the defense will put on only 2 or 3 short witnesses and rest their case today. [Again, Weingarten misleads; only one witness is called]. Judge Manning is surprised (4933-34). Off the record, they discuss scheduling the rest of the trial. The government rests. 177
The defense moves for acquittal. September 2, 1998 PM: (Tr. 4946-5064). The defense argues the case for acquittal. John Bray (for Andreas) says the evidence is insufficient to convict. The tapes never contain the words “price fixing” (4949). He also argues that the “second” charge, volume allocation, is not a per se violation (4950), citing the “car-carrier case.” Rule of reason would require the government to use experts to prove market power benefits (4953-4954). Volume allocation is not the same thing as the (admittedly per se) “market division” cases (e.g., Addison Pipe) or “customer allocation” cases. Walker (for Whitacre) and Anderson (for Wilson) second Bray’s motion. In addition, Anderson argues that the volume allocation was not for 3 years, only a discrete event in late 1993. Moreover, price fixing was at most late ’93 to 6/27/95. Anderson argues that the evidence shows ADM patriotically attacking an Asian cartel. There was a price war until at least 2/94! (4961-4962). Tapes were manipulated by Whitacre. The government responds that Andreas was taped saying that the Europeans in 1992 “got the price up” because they were “better managed.” (Tr. 4966). Whitacre informed Andreas many times about the course of the conspiracy. Andreas asks, “Did you tell them to take the price up a nickel?” The “rule of reason” argument on volume allocation is just ludicrous. Many price-fixing cases involve colluding on price discounts, an exactly parallel notion. Of course, there was cheating, and there was variation in the effectiveness of the conspiracy (4969-4970). It still was a conspiracy (cites U.S. v. Wilson 134F. 3rd 855 from the 7th Circuit). They brought price schedules to the meetings from which they negotiated an agreement. They agreed to a cover-up. They agreed to monitor each other. The defense calls its only witness, Akua Coppock, a legal assistant with Steptoe and Johnson, Wilson’s firm. [Technically, Coppock is the second defense witness because on August 6th Hirozaku Ikeda was briefly called by the defense so that he could return to Japan early (see Tr. 2142-2156)]. She checked Whitacre’s phone records for calls to Wilson 19931995. Also compiled travel records and meeting dates (Tr. 4988 - 5035). The Asian co-conspirators met 14 times between 3/91 and 4/95 without ADM representatives (5018). [The two defense witnesses take up 61 pp. of transcript, less than 1% of the total record! The mysterious economist Martin is never called. Martin submitted several proposed exhibits on various economic topics, but none were entered into the record. Nor was a promised technical expert on audio tapes called, as promised]. Both sides rest their cases at Tr. 5038. 178
In response to a request from Andreas’ attorneys to present a “statement of facts” to the Judge, Whitacre’s attorney gives a long complicated explanation of why Whitacre got 9 years instead of 6 or less originally recommended (Tr. 5053-5064). He blames the Fraud Division of the DOJ for the additional two years Whitacre got. He asks that the jury instructions disregard the fraud charges. September 3, 1998 AM: (Tr. 5065-5169) Lots of discussion about exhibits and how to feed the jury the tapes in the most convenient way. Should the jury be trained to bring up snippets from the tapes used in Court? Paper copies only? Electronic “scrolls” of what the tapes say? [Apparently there are few precedents of trials that used high-tech tape equipment]. The two sides argue the instructions to the jury sentence by sentence. There are especially long arguments concerning the extent of immunities to Mimoto, Ikeda, Yamamoto, Crouy, and Cox. Some were “use” immunity, others “transactional” immunity. Whitacre’s status as a cooperating witness is discussed. How far to incorporate references to companies as coconspirators, especially ADM itself, was an issue. How to express the fact that the defendants could legally conspire among themselves (i.e., intra-company) but not with persons employed by other companies. September 3, 1998 PM: (Tr. 5170-5339). More on jury instructions. The phrase “knowingly or intentionally” is required for the conspiracy itself, but “knowingly” does not apply to the price-fixing law. Lots of discussion on the topic of taping, the defense wanting the jury to be warned of possible manipulation of tapes (even though their promised tape expert never showed.). Manning agrees to warn the jury to be cautious, while at the same time informing it that consensual taping is perfectly legal. [All taping done with Whitacre’s consent was legal, but when he left the room (e.g., during lunchtime at the Irvine meeting) the taping had to stop]. An instruction suggesting that no weight be given to six weeks of prosecution case vs. one day of defense was considered. Technically, Mr. Ikeda was called by Andreas as a witness (but testified nearly the entire time on the stand as a government witness) and the paralegal was Wilson’s only witness. It was a government proposal, but they withdrew it, and then Andreas objected to the withdrawal, so Manning decided there was no prejudice by including it. Defense lawyer Duffy charges the government with placing their informant Whitacre a defendant simply in order to prevent him from being called as a witness for the defense. (5238). The prosecution says it was their discretion because he did not cooperate. Manning says that the government could have indicted Whitacre separately for violating his cooperation agreement; moreover, the government opposed defendants’ motion for severance. “I think that the facts in this case certainly could lead to the conclusion that there has been abuse of prosecutorial discretion . . .” (5263). She chides Walker for not seeking severance for Whitacre (ibid.). 179
The defense wants instructions to the jury that tacit collusion is legal and that checking for merely matching cartel prices, if done without an explicit agreement, is also legal (Gypsum, In Re Uranium). Just checking prices with rivals is not price fixing. The government wants no instructions on tacit collusion or “free rider” legality; because it would be inconsistent with ADM’s guilty plea. Besides, the government has the burden of proving an intentional agreement was reached, so listing exceptions is redundant (5285-5288). The Best Way case is brought up: an agreement is not illegal if none of the members intended to abide by it. The government opposes reference to it. The defense argues that there are four U.S. conspiracies mentioned in testimony: late 1980s Japanese only, 1992 lysine price, 1994-95 lysine price, and 1994-95 volume allocation. They want the jury instructed about multiple conspiracies; the government wants only a single count to be considered. [The proposed instructions for Andreas’ lawyers alone runs to 200 pages!]. Bray, Weingarten absent. September 4, 1998 AM: (Tr. 5340-5385). Lots of discussion about how to instruct on Barrie Cox’s testimony (5347-5352). It is to be used as evidence of Wilson’s knowledge or intent concerning lysine, but not as evidence of increased propensity to collude in lysine. Heated discussion on the instruction that Whitacre’s failure to testify may be interpreted as “unfavorable to the government” (i.e., he would have denied price fixing prior to 11/5/92) (Tr. 5356-5359). The government hates it, his own counsel Walker says it violates his 5th amendment rights. Lassar says he decided to prosecute Whitacre the day he heard about the embezzlement (8/3/95). “It was no strategic advantage for court” (5360). It was because he violated his undercover agreement. Duffy says that the agreement allows the government to force Whitacre to testify. Also, if Whitacre had been indicted on price fixing separately, he’d lose his 5th amendment right whether judged innocent or guilty. (If tried for perjury or embezzlement, he’d still have the right of the 5th). Lassar says that he’s sure there’s never been a “missing witness” instruction for a defendant given before. Walker says that Weingarten’s closing is going to blame Whitacre for all the price fixing, and asks the Judge if it is fair for defense attorneys to act as prosecutors in their closing arguments. Manning says it’s a real problem. But Whitacre opposed severance. September 7, 1998 AM: (Tr. 5386-5547). The Judge and lawyers meet in Court on Labor Day. Manning announces that she will rule that the Rule 29 motions will be denied, that the “missing witness” instruction will not be given to the jury (but lawyers can raise the issue in their closing arguments). The lawyers present their views on the details of Manning’s jury instructions defining “agreement,” “price fixing,” and the intent or effects of price fixing. Both sides claim to use the ABA pattern. She rules for some of the government’s positions and for some of the 180
defendants’ positions. Nearly every word is closely parsed. Even brackets are argued about. Defendants try to introduce the concept of “tacit collusion” into the instructions. This session ends around 2 PM. Tuesday, September 8, 1998 AM (Tr. 5548 - 5660). With the jury out, fine points on the judge’s instructions are hammered out early in the day. Another matter concerned testimony of Tomlinson on September 2nd, which inadvertently revealed some ADM confidential information (see Tr. 4847-4893) during Jim Mutchnik’s cross-examination. At the DOJ’s behest, ADM’s lawyer, Jim Shaftner, came to court to discuss this breach of an agreement between the DOJ and ADM that allowed ADM to expunge all tapes and exhibits of trade secrets and confidential company information. Tomlinson revealed confidential ADM production and capacity information. Shaftner recognizes that the figures were heard in open court, but asks Manning to put portions of the transcript under seal (Tr. 5573). Manning refuses. The jury is admitted and Manning reads the jury its instructions on the rule of law and the duties of the jury: weigh the evidence, judge credibility of witnesses, ignore statements of counsel not supported by the evidence, ignore objections, and presume innocence until convinced beyond a reasonable doubt. The indictment is explained. The government must prove (1) the defendant knowingly formed a conspiracy, (2) became a member of it intentionally, and (3) it affected interstate commerce or “occurred within” it. Price fixing is defined, as is share fixing, knowingly, and intentionally, and interstate commerce. Warns the jury about testimony of immunized witnesses. Scott Lassar gives his closing argument (Tr. 5600-5717), starting late in the morning and ending after the lunch break. He lays out the three elements required for guilt in simple, easily understood terms for the jury. He guesses that by the facts that there was an agreement on prices and volumes and that it involved interstate commerce is not an issue for them. Only whether each defendant was a knowing, willing and intentional participant is the main issue. He focuses on this last element. Defendants need not participate during the entire time. The agreement doesn’t have to be formal, written, or detailed to be illegal. A “participant” can order or consent to allow other people they supervise to collude (this may apply to Andreas). Motives and effects are irrelevant to guilt, just the action alone of agreeing is the crime. “. . . the case presented here by the government is one of the most compelling and powerful that has ever been presented in an American courtroom.” (Tr. 5605). He lists in order of powerful evidence: videotapes, audiotapes, four co-conspirators’ testimony, defendants’ notes, price-fixing in citric acid that shows their intentions, the defendants’ lies when confronted by the FBI on 6/27/95, and the fact that all six types of evidence are consistent and self-reinforcing.
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Lassar destroys the defendants’ position that Andreas was “unimportant” at ADM, just a “grain trader” following his father’s orders. He characterizes Wilson as involved in lysine only to help set up the fix, then dropping out when it was institutionalized. Then Lassar tells the story chronologically to help bring the bits and pieces together. First, the citric acid conspiracy; “. . . the lysine conspiracy was explicitly modeled after the citric acid conspiracy in almost every way,” (Tr. 5609). Cox’s testimony is credible because “he is one of them. He still works for ADM. . . . They couldn’t suggest he was lying.” (Ibid.). The citric acid conspiracy was for real, not just to get market information about rivals and cheat on them. In both conspiracies, ADM’s share was 27%; there was no customer allocation because of detection problems (as tapes of Wilson and testimony of Yamamoto and Crouy confirm); the compensation system was the same; Andreas was aware of both (indeed, hired Cox for that very purpose). Lassar speculates that Cox’s raise and transfer to London was an attempt by Andreas and Wilson to make him unavailable for the testimony. [Cox in fact resigns shortly after the trial ends]. ADM entered lysine because it could be the low cost producer and it was easy to fix. In April 1993, the Ajinomoto people were told about ADM’s mantra. “What kind of company is this that should be their corporate slogan? The customer is the enemy.” (Tr. 5616). More citric/lysine parallels: monthly sales reports, a trade association as cover, share agreements, huge excess capacity built by ADM, threats to flood the market with output, use of secrecy about the meetings, keeping the number of insiders to a minimum (3). Lassar says the case has “an arsenal of smoking guns” (Tr. 5621). The Mexico City notes of Crouy are one because they show the cover-up mentality: Crouy found out ADM’s European representative didn’t know about the conspiracy (Jansen). Warnings not to use the telephone; falsifying travel records. The auditing of sales volumes was Wilson’s idea. Another “smoking gun” is Mimoto’s notes of the Paris meeting where prices were set for 9 regions. Andreas’ knowledge of the price fixing is proven by a Spring 1993 tape recording instructing Wilson and Whitacre to blame the Japanese for the on-going price slide when they meet in Chicago. The 4/15/93 tape was Andreas saying that the Japanese producers are disorganized, don’t control their salesmen, thus causing the price to drop. And on a 4/16/93 tape after the meeting Andreas complains that “. . . we raise the price, they cut. What did they say about that?” (Tr. 5634-5635). Whitacre was already embezzling before be approached the FBI. When he made up the wild story about the “Fujiwara extortion” offer, Whitacre was counting on two things to help him get the $10 million: (1) Andreas would never call the FBI and (2) that Andreas would be interested in buying some stolen technology (Tr. 5637). “. . . and he was right on both counts” (ibid.). Whitacre alleged to Shepard that Randall had paid $50,000 to steal a microorganism to make amino acid bacitracin (Tr. 5638). ADM lost its case over Ajinomoto’s threonine-patent suit. 182
Lassar reads from the statement of stipulated facts in the case. When D. Andreas was interviewed by the FBI, he said that he and Michael had decided to call the CIA rather than a law enforcement agency. That way, if they paid the extortionist, ADM’s legal position would be secure. Also, Lassar suggests, with the CIA involved, the FBI would have to stay out. The FBI’s involvement was due to the CIA’s referral of the matter, not to Andreas’ intention. Also, there was testimony that Randall believed that there was no contamination by a mole, only ADM’s failure to sterilize sufficiently. On 11/5/92, Whitacre was confronted by ADM’s general counsel and its head of security (Cheviron) about the Fujiwara story, including the telephone call to his daughter at Culver Academy. Whitacre admitted the lie. Lassar asks: Why didn’t Andreas fire him? Answer: because Whitacre knew too much. When Andreas was interviewed about the “extortion” by Shepard in 11/92, why didn’t Andreas tell the FBI about the lysine cartel, not even the Japanese conspiracy in the 1980’s? Because he didn’t want the FBI “nosing around.” Cheviron stops cooperating when he finds out that the FBI was monitoring Whitacre’s phones. The 4/28/93 tape of Wilson in the Chicago meeting is played, showing he knew the Mexico agreement had worked and that he was carrying out Andreas’ instructions about getting a volume agreement. After this meeting Wilson says, “I’m going to let Mick handle that one.” In a taped meeting in Decatur 4/29/93, Andreas, Wilson, and Whitacre talk about the “We don’t make deals” statement of Wilson. Lassar shows how it is just a bargaining slogan. Wilson advises against using it again, because in the view of the Japanese ADM did in fact make deals (price fixing ones). Andreas agrees to drop the bargaining ploy by letting Wilson let them know that ADM does do deals “off to the side” (Tr. 5651). The Decatur meeting 4/30/93 between Andreas, Yamada, et al. was taped. It went well, Yamada signaling that volume allocation was possible. After the meeting Andreas instructs Whitacre to match Ajinomoto’s prices, don’t cut prices. After the Tokyo meeting 5/93, Whitacre and Wilson report to Andreas that Ajinomoto wants ADM to cut 20,000 tonnes in sales volume. Andreas says, “If the prices improve, we’ll reduce our volume . . . to assist them” (Tr. 5660). [Lunch break.] September 8, 1998 PM (Tr. 5662-5776). With the jury out, Weingarten moves for a mistrial. First, because Lassar used the citric acid testimony to show Wilson’s “propensity” to fix prices contrary to the Court’s instruction. Second, because Lassar stated the evidence was the most powerful he’s seen. Manning agrees the second was improper, but not the first. She denies the motion, but makes Lassar stop using a chart where he is giving arbitrary “points” for each infraction by a defendant. Lassar continues with his closing arguments, recounting the Vancouver meeting 6/24/93. The Asian companies offered ADM a 54,000 tonne allocation, but Wilson refused. They 183
also wanted regional meetings on prices, but Wilson said absolutely not (because of ADM’s small number of managers in the know). Shortly afterward, Andreas gets a detailed update from Whitacre in his office. Andreas doesn’t act surprised or shocked at the volume negotiations. Indeed, he gives him instructions to hold output steady and raise prices “a nickel” in mid-July. The price does rise after Vancouver, partly because of the cartel, partly for other reasons. After the Paris meeting, the first Amino Acid Association meeting, Whitacre reports to Andreas on 10/12/93 that they agreed to raise the European price from $1.30 to $1.50. Andreas merely inquires about production levels. Conclusive proof again of Andreas’ guilt (Tr. 5681). Then Andreas says that he wants a meeting with Yamada: “. . . maybe we ought to come to an agreement” (Tr. 5638). This is another smoking gun. In the same conversation, Andreas tells Whitacre that he’ll get a raise of $250-300,000, which Lassar maintains is a quid pro quo. In discussing the Irvine meeting, Bray said that it shows ADM fighting a fierce war against a criminal Asian cartel. In fact, in the first part of the meeting Andreas was offering advice to Ajinomoto about partnering with Cargill. He called Cargill “difficult” and advised against a joint venture. The second part of the meeting is pure price-fixing, the agreement of sales volumes by company. The Government retrieved the paper charts written by Andreas on an easel, which became government Exhibit 23. Excerpts are shown on the video tape including Andreas’ threat to “bury you” with lysine production increases (Tr. 5691). Other tapes showed that Andreas prevented knowledge about the price fix from spreading beyond the three involved, specifically not telling John Ashley in Singapore (Tr. 5692). At the 12/8/93 Tokyo meeting, four of the five manufacturers agree to the volume plan worked out in Irvine. Wilson explains that the volume restraints are necessary to support the high lysine prices; without it they could have another price war, like in mid-1993 (Tr. 5696). Wilson also says that the ADM share was negotiated by Andreas in Irvine (Tr. 5697). It is equivalent to fixing annual sales volume shares, just like citric acid. Wilson proposes external auditors, which shows that he was not planning on cheating. Secret monthly reporting, compensation, trade association cover all the same as citric acid which also shows Wilson’s intent to price fix. At the 3/94 Hawaii meeting, Wilson is the group’s coach. Tells them to keep the allocation, not to worry about others selling below the target price. By the time of Hawaii, the scheme was fully in place (except for auditing) just like citric acid (Tr. 5705). After Hawaii, Wilson and Andreas drop out of active managing of the price fixing. On October 13, 1994 a tape records Andreas, Wilson, and Whitacre in a car on the way to meet Yamada and Mimoto in Chicago (Four Seasons Hotel). Andreas asks for an update on the lysine cartel (Tr. 5708-5710). He’s told that ADM’s allocation for 1994 is 73,000 tonnes (67 + 6) and that ADM is actually below its allocation in dry lysine. Whitacre tells them that Mimoto handles the sales reports. Andreas: “Sounds good. He’s the quarterback.” Whitacre: “Kind of like Roche is on the citric, right?” 184
At the Four Seasons they discuss a problem with Miwon wanting a larger share and not reporting sales in 1994. Andreas is familiar with the problem and some details, e.g., that Miwon canceled a U.S. contract to supply 3K to 4K of lysine so as not to exceed their U.S. quota (Tr. 5711). When he says good-bye to Yamada, Andreas says: “We hope you make a lot of money, and if you do, we will too.” (Tr. 5712). Funny thing to say to a rival. In the company plane back to Decatur, Andreas tells a story about meeting a fructose (HFCS) manager from CPC. “I said . . . if you guys would just agree, [the] market would be great. The guy said, I refuse to speak to you about volume, but I’ll talk to you about the price. I thought to myself, what is wrong with you?” (Tr. 5712). Shows Andreas’ proclivity to collude and the importance in his mind of an agreement on volume. The Atlanta meeting was uneventful but interesting because they poured over the final 1994 results. Share allocations matched actual sales almost exactly, with ADM a little low. Lassar compares sales reported to Mimoto by ADM with ADM’s own internal records by month. Slight discrepancies above and below, but no pattern. ADM “. . . did not cheat on the agreement” (Tr. 5714). On 6/27/95, both Wilson and Andreas lied repeatedly during their FBI interviews. Lassar asks why the two didn’t try to mention the same defenses that their lawyers presented at trial? They had the chance. Lassar briefly addresses Whitacre. Whitacre’s conviction is based on conversations with Mimoto and Yamamoto in Mexico City and Paris, before 11/5/92. [Lassar ends his impressive closing]. Bray and Weingarten move for dismissal on the basis that Lassar’s last point (they lied to FBI agents) causes prejudice by calling attention to their refusal to testify at trial. Manning decides to study the issue. Manning instructs the jury to ignore Lassar’s statement that the lysine case was one of the most powerful as “irrelevant.” Bray closes (Tr. 5729-5776) for Andreas. He belittles Lassar’s comments about the overwhelming evidence says he sees it all the time. Claims that all the witnesses “except two” paid no fines. Says Andreas never used the words “price fixing.” Very irritated by Lassar’s interpretations of Andreas’ words. Reiterates that Andreas was trying to get lysine volume information: “. . . lysine market data figures are not published anywhere” (Tr. 5736). Denigrates Ikeda’s command of English when in meetings with Andreas. Says Andreas’ threats to flood the market were legal, just stating his intentions. He plays up “at ADM we don’t make deals.” Says Andreas never knew about the lysine association and never saw the “score sheets.” Bray says the government figures on “ADM’s lies” were created by Whitacre (Lassar objects). Bray says that the lysine figures were affected by “intra departmental 185
transfers” that were controlled by Whitacre (Tr. 5759). Whitacre also manipulated the tapes, poorly handled by the FBI. Bray says that all the conduct observed was legal: following prices, collecting information, forming a trade association, hiring Cox because he knew the Swiss firms. Whitacre in March said no agreement had been reached in Mexico City. Several tapes on which Andreas says to follow the laws carefully. All the government’s witnesses are admitted price fixers with “sweetheart deals,” so their testimony against Andreas is a “distortion.” September 8, 1998: Trial observers think that Yamamoto’s testimony did not help the prosecution very much. He spent only three hours being examined about familiar material, but more than a day of cross ended up confirming the “Asian Cartel” theory of the defense to some extent. One former prosecutor said that the defense might rest early as a result (Chi. Trib. 9/8/98: no pg.). September 9, 1998: Terrance Wilson’s lawyer, Weingarten, states ADM’s strategic goal about as clearly as anyone: “ADM’s top management has a clear-cut policy on sales share. Their intent is not to insist on having an absolute majority of the sales share, such as 50 percent or more, but rather to have the same scope of shares [sic] as the largest competitor in that industry, not only for lysine, but in any other industry” (Tr. 5932). Wilson enunciates this policy several times on various trial tapes. “. . . on this point he’s inflexible” (Tr. 5933). September 9, 1998 AM: (Tr. 5777-5982). Bray opens with the Asian Cartel theme. Shows prices at $3.00 in summer of 1988. “ADM’s competition brought the price down to . . . 90 cents a pound” (Tr. 5788) and saved consumers $100 million. After the FBI raid “. . . the price did nothing but go up (ibid.). Whitacre framed Andreas. He is the “least credible witness imaginable” (Tr. 5792). Bray claims that ADM thought that the extortionist might have been involved with the Japanese government (Tr. 5798), and that’s why the CIA was called. Because Whitacre knew that the Fujiwara story was false, he offered to “give” both Andreas’ to the FBI on 11/5/92 as a way of distracting the FBI away from his embezzlement. Bray dumps on the FBI also in its alleged failure to follow taping rules, the so-called extortion, the failed polygraphs, missing tapes. Walker begins his closing argument for Whitacre about 11:45. Only four events apply to his case: Mexico City, Chicago, Paris, and a telephone call on 7/2/92 (from Yamamoto). As for Mexico City, Wilson, Whitacre, and Wilson said no agreement took place. Ikeda said he 186
“couldn’t answer.” Crouy said there was a “tentative price agreement” but later said he didn’t recall. The 7/2/92 telephone call, Walker says, was just ADM announcing its new 804 price, which Miwon had announced earlier independently. The 9/8/92 Chicago meeting of Whitacre, Ikeda, Mimoto. Mimoto denied there was any price fixing at that meeting, Ikeda wasn’t asked. The 10/92 meeting in Paris. Crouy said they fixed prices, but didn’t remember when first interviewed in Brussels 1/30/97. Tells the jury Crouy is not credible. [Adjournment called partly because two jury members are asleep]. September 9, 1998 PM (Tr. 5883-5982). Wilson’s lawyer complains about Walker’s closing, especially Wilson being cited as a “witness” to the Mexico City meeting. This calls attention to Wilson’s not testifying. More objections to Lassar’s comments about the abundance of evidence to convict. Weingarten closes for Wilson (Tr. 5903 ff.). ADM busted up an Asian cartel, brought the price down. There were 2 long price wars, and just at the time the FBI raided ADM “. . . a third price war had started” (Tr. 5904)! Rivals complained about stolen customers. “This is a fixed market?” (Ibid.). The FBI “never looked at the marketplace!” The tapes show ADM pretended to agree to price fixing (Tr. 5906). “. . . one of the great fictions of this trial” is that the government punished the Japanese conspirators (Tr. 5909). The biggest fiction of all is that lysine prices were affected by agreements (Tr. 5911). The government charts show only ADM’s prices, no prices of other companies (“perhaps they wouldn’t be in sync”) or world-wide! Prices were governed by market forces (Tr. 5912). Weingarten shows the jury on a monitor letters among the Japanese and Korean makers of lysine that are overtly price fixing [all are Wilson Exhibits previously entered but that I cannot recall being discussed in detail; is the defense putting on its main case during the closing?]. By 1992, Ajinomoto is unable to raise U.S. lysine prices, in spite of favorable grain-oilseed price movements, because of ADM’s aggressiveness [unclear if date is before June 1992]. He quotes documents from Miwon saying that fixing prices within Japan is illegal but fixing prices internationally is not illegal (just like the Webb-Pomerene Act in the USA!). [Weingarten continues the jingoistic “Yellow Peril” theme to the last.] (Tr. 5917). In a rather strange digression, Weingarten quotes from a 1990 BioKyowa strategic plan (Wilson Exhibit 39) that says it will pretend to be cooperative with Ajinomoto but will secretly behave aggressively (undersell, steal customers). This seems at odds with the “Japan, Inc.” theme. He goes on to emphasize the high degree of mistrust, misinformation, etc. expressed by Mimoto, Crouy, Rollier during the conspiracy (Tr. 5917-5919). 187
The Japanese were “terrified” of ADM [many exhibits from Asian rivals, most 1990-1992 (Tr. 5919-5925)]. They had a different culture from ADM. ADM was just “stating its (false) intentions” and gathering information about their rivals. They don’t teach this at the University of Chicago Business School it’s the “school of hard knocks” (Tr. 5929). So, many post-June 1992 Japanese documents are introduced showing their fear and distrust of ADM (Tr. 5929 ff.). Weingarten makes a big deal over the fact that no Sewon or Cheil executives were brought to testify at the trial and hints that they would have somehow exonerated ADM [Surely, Weingarten knows that the defense had every opportunity to do so!]. [At this point in his closing, Weingarten plays a subtle linguistic trick. Beginning on p. 5928, he starts to refer to ADM as “we” and the Asian companies as “they.”] He examines Ikeda’s notes of the Mexico City meeting (Government Exhibit 4) showing that Ikeda meant “to suppress ADM” by using ADM’s too low estimate of world lysine consumption (155,000 tonnes) instead of Ajinomoto’s superior figure (185,000 tonnes) (Tr. 5933). He quotes Mimoto’s testimony that the Mexico City agreement was conditional upon a volume agreement (Tr. 1244). Weingarten says that contingency agreements are not illegal price fixes (ibid.). The Government asserts the true agreement came in Whitacre’s telephone call to Yamamoto agreeing to 80 cents price and a 48,000 tonne allocation, but Weingarten disputes this. He says ADM agreed to 80 cents only after Miwon raised its price to 80 cents and ADM merely (legally) followed [but was ADM aware of this?]. There’s no evidence that Andreas or Wilson knew about “Whitacre’s price decision.” Tapes with Wilson on them are played, emphasizing the rough competition, Wilson’s aggressiveness, ADM’s hunger for information. Many pages trying to prove dissension within the cartel 1993, including Yamamoto’s hiring of David Hoech as a spy/conduit to Whitacre. [Focuses on early 1993 when the cartel was experiencing a breakdown]. The Andreas’ quote, “The best cure for low prices is low prices” is correctly interpreted by Weingarten as “. . . companies work themselves out of price wars because they can’t constantly lose money. And eventually . . . they raise prices” (Tr. 5975). Tapes and documents up to June 1993 are displayed, each showing cartel dissension, suspicious, lack of cooperation. Thursday, September 10, 1998 AM (Tr. 5984-6065). Weingarten continues his relentless spinning of the tape and memo evidence. As he says “I don’t want to summarize” (Tr. 5986). [He is in fact putting on Wilson’s defense for the first time (other than during cross-examinations).] He parses a telephone conversation between Wilson and Ikeda held on 6/93, just after the Vancouver meeting (Tr. 5990-5993). Wilson agrees to hold to the price agreement unless it loses market share. Weingarten says the threat of ADM increasing production means that it was not a true agreement. The rise in lysine prices that begins in late summer of 1993 is due to floods in the U.S., rising soy meal prices, and the dollar/yen exchange rate, says Weingarten, supported by an 188
Ajinomoto sales report (Tr. 5993). [Lassar has admitted that this was a factor, though rising corn prices did not favor a price increase]. Weingarten makes the unsupported assertion that, “. . . from virtually everybody who testified and every lawyer, no price agreement can be effective without a volume agreement.” (Tr. 5995). [Of course, there was no formal volume agreement until 10/93 or 12/93]. Weingarten says there’s no evidence that ADM tried to avoid meetings in the U.S. (Andreas specifically invited Yamada to anywhere in the U.S. in 10/93), telephone calls, or open plant tours. (Tr. 6000). Wilson doesn’t attend the Irvine meeting because Whitacre wanted to manipulate Andreas into being taped, Weingarten says. He spends considerable time trying to show that the scorecards were phony (Tr. 6010 ff.). Mimoto was dishonest, Ajinomoto hid liquid lysine sales and pharmaceutical-grade, ADM cheated in reporting also (4.4% higher than its volume allocation in 1994, and 10% higher in 1996 Q1 in dry only), ADM omitted liquid also (though BioKyowa was aware of these sales). [All this to refute the government’s pie charts showing actual and planned volume shares identical!]. Wilson was video taped at the 3/94 Hawaii meeting. Just seeking information, Weingarten says. Cites complaints from sales people at BioKyowa and Heartland about ADM’s aggressiveness even in 1994 [not very relevant information, is it?]. Dozens and dozens of documents. The judge intervenes telling Weingarten he is over his allotted 3 hours, he begs for 30 minutes more (Tr. 6042). Weingarten denigrates Cox’s testimony. Says that Cox “. . . brought this (citric) price fixing to ADM,” used no tapes or documents, and was immunized. “[B]ut the real issue here is if the Government has problems with Terry Wilson in citric, they should charge him.” (Ibid.). Ends with a hokey, highly hammy speech to each of the 12 jurors to take charge of one piece of evidence. There is a heated discussion over Lassar’s closing rebuttal. He wants to say that Wilson and Andreas lied to the FBI on the night of 6/27/95 in ways contradictory to their defense positions. The Judge refuses to allow it. September 10, 1998 PM (Tr. 6066-6145). Lassar rebuts defense closings. He starts by showing logical inconsistencies in the arguments by Bray and by Weingarten: Andreas says no deals were made, Wilson says “me too” but if I did deal I didn’t mean it. Bray in 3-1/2 hours never mentioned Wilson’s name. The idea that ADM had to attend many meetings all over the world just to get one number (total world production) is preposterous. That they spent $100 MM to build a plant not knowing that figure doesn’t compute. Why was Wilson, the corn head, at the lysine meetings (wrong division)? Why did both cover up? Why didn’t Andreas tell Shepard on 11/5/92 that 189
there was an “Asian” cartel (two with U.S. plants) if he believed that? Wilson lied when interviewed on 6/27/95. Crouy’s notes of Mexico City show that only 3 at ADM knew about the fix and that ADM proposed a specific sales allocation (not just giving their “intentions”). Telling rivals your “intentions” about a sales allocation is per se illegal. The tape of Andreas, Wilson, and Whitacre made in Decatur 5/4/93 just before the Tokyo meetings is devastating. They discuss how honest to be in sharing sales data. Wilson says “If they’re lying’, we’ll feel it in the market place,” and when Whitacre asks “So you’re saying if they’re honest, we should be honest?” Wilson replies “Absolutely” (Tr. 6084). Other witnesses confirm that cheating could be seen from market sales and prices [a residual demand function argument]. Wilson pressed for outside auditors, which only makes sense if he wanted the agreement on volume to work. Lassar then addresses several “diversions” raised by the defense, issues irrelevant to guilt or innocence. There include attacks on the veracity of the tapes, the reason the AndreasYamada lunch was not taped by the FBI (with Whitacre absent a court order would be required, and with Whitacre cooperating a Court would have turned it down), the FBI instructions to Whitacre (all proper), the absence of Miwon testimony (their notes are sufficient), the “we don’t make deals” slogan, the “sweetheart deals” for the prosecution’s witnesses (they’re not saints but told the truth and paid their fines), the FBI cooperating witness guidelines (all proper), etc. This last rebuttal was interrupted by numerous objections, most overruled. Ends at Tr. 6117. September 11, 1998 AM (Tr. 6146-6172). Both sides agree to have two paralegals train the jurors to use a personal computer to retrieve exhibits. Many other housekeeping details. The jury’s request for the trial transcript was denied. September 15, 1998 AM (Tr. 6173-6181). Technical difficulties in listening to audio tapes in the jury room. It was corrected. September 16, 1998 PM (Tr. 6182-6102). Lawyers skirmish over a jury question concerning exhibits. The Judge instructs them to refer to her earlier instructions. September 17, 1998: Judge Blanche Manning rules that prosecutorial misconduct did not occur as a result of Scott Lassar’s closing arguments. She also refuses to dismiss the case on the basis that volume allocation is not a per se violation (it was done to further the price fixing objective), that the conspiracy began only as late as late 1993 (Wilson’s taped Mexico City statements belie this), or that defendants were fighting an Asian cartel (an argument to be decided by the Jury. (Lexis-Nexis). 190
September 17, 1998, 2:20 PM (Tr. 6203-6213). The jury reached a verdict at 12:25 PM. At 2:20 PM, the parties all assembled, the foreperson, Ms. Hale, hands the verdict forms to the Judge. All three defendants are guilty as charged. Each of the 12 jurors affirms their agreement with the verdicts. They are Jerome Montgomery, Mary Gusman, Maria Fernandez, Jeffrey Evans, Lafell Peterson, John Callaghan, Norris Smith, Fritz DuJour, Marilyn Isles, Mary Harris, Linda Heflebower, and Janet Hale. The jury is thanked, indeed praised, for its service. It is dismissed. The sentencing date is set for January 7, 1999. Defendants are ordered to report to the court’s Probation Department for preliminary interviews. The Judge commends the lawyers for their professionalism. End of trial. September 17, 1998: Defendants allege prosecutorial misconduct in the case of three comments made by Scott Lassar during closing in U.S. vs. M. Andreas et al. When Lassar said that the defendants had not rebutted Cox’s testimony and that they had refused to say much on 6/27/95, he was improperly calling attention to their silence. His comment or “the most powerful evidence” likewise was improper. The Judge almost calls for a mistrial, were it not for her curative jury instructions. (Decision, U.S. vs. Andreas 9/17/98). September 17, 1998: The convictions of three of its officers serves to remind the public of ADM’s “shady image,” “the whiff of corruption,” that it is “everybody’s favorite bad example,” its history of criminal deals, and its willingness to lie and cheat to achieve market advantages. John McMillin speaks of ADM’s “scarlet letter” [“A” for antitrust?]. He says the company has no clue how to sell itself to investors. “. . . politicians have been a specialty.” (Chicago Tribune 9/17/98). In FY 1997 Dwayne Andreas was paid $4 million in compensation, but it dropped to $800,000 in FY 1998. Mick Andreas received $1.4 million in both FY 1997 and 1998, even after his conviction. G. Allen Andreas’ pay went up from $909,000 to $2.13 million in 1998. “. . . the company seems not to have lost clout in Washington [where its] contributions seem to have paid off most recently when House Speaker Newt Gingrich of Georgia blocked an effort by fellow Republicans to end a tax break for ethanol.” (ibid.). September 18, 1998: On NPR “Morning Edition,” Wilson’s attorney, John Bray, is interviewed and asked about Whitacre’s motive for “framing” Andreas: “It’s for Mr. Whitacre to eliminate his chief competition as the next potential president of ADM and also to conceal . . . one of the world’s most massive embezzlements . . .” (NPR 9/18/98). [Bray’s proposed motive for Whitacre makes no sense. M. Andreas was unopposed as Chair and CEO, and Wilson’s job was no promotion. It was Randall’s title of President (and effectively COO of ADM) he aspired to, but Randall was never indicted]. After the verdict, one juror said that Whitacre was the most difficult to convict. 191
September 18, 1998: Several articles profile the convicted men. Wilson was tough, utterly loyal to ADM, and proud of his association with the Andreas family. Whitacre’s role is “. . . a mystery wrapped in controversy.” He was either out of his depth, outfoxed by a den of thieves, or craftily cheating the company from the beginning. A successful man who felt compelled to lie about personal facts. One juror, Fritz Dujour, said that the video tapes were the most compelling evidence at the trial. Had a hard time deciding about Whitacre. They were surprised at the brevity of the defense’s case. Several jurors were not satisfied with the FBI’s handling of Whitacre (Chi. Trib. 9/18/98). September 18, 1998: The WSJ said that Mick Andreas was “the most prominent American executive ever convicted for international price fixing.” Bray told reporters that one basis of his appeal will be the fact that, as a defendant, Whitacre could not be compelled to testify. Total fines paid by eight companies and seven individuals in lysine and citric so far in the criminal cases is $197,340,000, but Sewon has not yet paid and neither have the “Chicago 3.” Moreover, former ADM employees involved in citric acid may yet be prosecuted (WSJ 9/18/98: interactive). September 18, 1998: The NYT carries responses to the 9/17/98 Chicago guilty verdict, which “. . . marks a sweeping victory for Federal prosecutors.” Video evidence was unprecedented in an antitrust trial. Despite D. Andreas’ political influence, he could not prevent “the weight of the judicial system from falling on his son and one-time heir apparent . . .” (NYT 9/18/98). A.V. Krebs opines that “this is probably the best-documented case of corporate crime in history . . . It shows how corporations operate behind the scenes . . . .” Piece says all three defendants’ legal fees are being paid for by ADM [True?] (Wash. Post 9/18/98). September 20, 1998: Reactions on the guilty verdict. Sam Pelzman, U. Chi. Bus. Sch. Prof., opines that the “family fiefdom” model at ADM likely cannot continue. Lack of stock market reaction may imply that stockholders approved of Mick’s removal (or predicted the outcome). John McMillin: “. . . some people want less Andreases involved in the boardroom.” Prosecutors guessed that fines imposed on the 3 men could go as high as $90 million (twice the harm) (AP 9/20/98). September 24, 1998: ADM’s FY 1998 annual report has information on its now six labs for bioproducts and protein research (Decatur), starch and enzyme (Clinton IA), bakery (Olath, KS), cocoa (Milwaukee and The Netherlands), and feeding trials (Quincy, IL). Expenditures for 1996-98 were $11.5, $12.2, and $17.1 million each year, or from 0.09% to 0.12% of net sales (ADM). September 29, 1998: Cargill held groundbreaking ceremony for its new $100 MM lysine plant in Blair, Nebraska on the Missouri River. Production will require 70 employees of 400 total at plant. Global demand now 700 MM lb. (up from 100 MM in 1992 ? they say). Plant capacity will be 165 MM lb. of feed-grade lysine called Biolys 60, a Degussa brand. Degussa 192
now sells $150 MM in feed additives p.a. worldwide. Since 1995, Cargill will have invested $500 MM at its Blair plant by 1999, of which $50 MM for lactic acid plant (JV with CSM of Holland) and $50 MM for low-calorie sweetener erythritol (JV with Mitsubishi Chemical) made from dextrose. (Omaha World Herald 9/29/98). October 1998: A retrospective assessment of the 1998 Chicago lysine trial. ADM retains its worldwide leadership in lysine, a $700 million/year global market highly profitable for ADM (20% pre-tax profit on sales or more). [CMR and Forbes made these estimates; corresponds to average transaction prices of $0.95/lb. or more]. The trial provided vivid details about how the cartel was managed and about how cozy these rivals became with each other. ADM didn’t trust its own salespeople. In retrospect, the civil settlement of $45 million was unreasonable. Access to the FBI tapes would have helped plaintiffs. In Illinois, only the Attorney General can bring suits for indirect buyers but the chief of the Illinois Antitrust Bureau said that it would not. Alabama farmers are claiming $12 million in overcharges. Foreign prosecutions continuing. (Illinois Legal Times October 1998:1). October 12, 1998: A noted columnist for The National Law Journal, John C. Coffee, cited the lysine class action as an example of the flaws in allowing firms to bid for the right to represent plaintiffs. The procedure leaves the winner “with little incentive to maximize the recovery for the class.” The lysine case “remains a study in class-action pathology” for the following reasons: (1) usually private settlements vastly exceeds the criminal fine, (2) the “race to settlement was unusual and did little to benefit the class,” (3) the settlement of $45 MM may have represented 7.2% of purchases (“over a 4-1/2 year period” claims the firm, Kohn Swift!), but this cannot be compared meaningfully to averages of all private antitrust settlements “because most private settlements do not have the opportunity to piggyback on a criminal conviction,” and (4) although the fee was modest, class members do not want to minimize fees, they want to maximize net recovery. Robert Swift of Kohn Swift says that the case settled for “almost $50 MM,” partly because his firm pursued Sewon America for nine months after the three largest defendants settled and also chased Cheil for more money. He also cites small number of opt-outs (33) versus the 2500 notices sent. Finally, the 7.2% was one of the highest-percentage recoveries in antitrust price fixing cases. (National Law Journal 10/12/98: A20). October 19, 1998: An extradition treaty with Japan for indicted criminals exists, but has never been used in an antitrust case (anonymous DOJ lawyer). October 21, 1998: A columnist calls for “Power Dwayne’s” resignation as Chair of ADM. “Even though he was not charged in the scandal, it happened on his watch.” Criticized for “lackluster” management, failing to appoint enough independent Board members (Chi. Trib. 10/21/98:C1). 193
October 22, 1998: D. Andreas called “the forgotten man” at ADM’s annual stockholders’ meeting. Barely presided. G. Allen Andreas was the star, who said legal expenses were $40 MM so far. One stock analyst said few changes at ADM are expected (Chi. Trib. 10/23/98:C3). October 29, 1998: The European Commission initiated formal proceedings against ADM and others by adopting a Statement of Objections. (ADM 1999) November 1998: Degussa will expand methionine capacity at its Fermas subsidiary in Slovakia from present 4.5 kt to over 8.0 kt. Lysine capacity at the Slovenska Lupca plant is 13 kt. Degussa has invested $42 MM in this subsidiary since 1992; Fermas’ sales are $36 MM per year. Degussa says site has very favorable cost structure (CMR 11/9/98:7). December 5, 1998: A small Japanese newspaper reported that Ajinomoto expressed regret for the lysine price fixing. Its president, Shunsuki Inamori, has assumed Yamada’s duties as managing director. (Yomiuri Shinbun 12/5/98:12). January 1999: A survey of the ADM shareholders’ derivative suit against the board of directors. In January 1996, ADM’s board adopted a number of corporate governance reforms, including the requirement that a majority of the board be “independent” members. Several large shareholders, including the giant California state pension fund CALPERS, believed that these reforms were inadequate and sued for gross mismanagement seeking $190 million in compensation (the amount paid by ADM in fines and settlements over lysine and citric acid). In May 1997 after five months of negotiations, plaintiffs’ lawyers reached a settlement with ADM’s insurance company: $8 million and an agreement to implement the same governance reforms already adopted in 1996. Of the $8 million, $4 million was earmarked for plaintiffs’ lawyers and $4 million for legal fees that ADM had incurred in implementing the corporate reforms! Shareholders got nothing though their own lawyers valued the ADM reforms to be worth $158 million! At the final hearing to approve the settlement held a mere 4 weeks after notice was sent out (July 1999). CALPERS et al. appeared and contested the fairness of the settlement. They argued that the settlement did not benefit either ADM or its stockholders and that the $4 million in attorneys’ fees was excessive. The judge in the U.S. District Court for the Central District of Illinois approved the settlement anyway. CALPERS et al. appealed the ruling all the way to the Supreme Court (Mullenix 1999). The Supreme Court decided against the appellants on a technical point having to do with Rule 24 of federal court procedures. (CALPERS had no standing to appeal because it had merely appeared in court and had not formally intervened as a party to the suit). [The case illustrates the hyper-litigiousness of American society. On the other hand, CALPERS et al. could have become parties to the suit earlier and perhaps achieved a courtordered change in corporate governance at ADM with real teeth to it. The negotiated settlement smells like a sweetheart deal]. 194
The directors were represented by Cyrus Vance (former Secretary of State under President Carter) and the New York law firm Simpson, Thacher & Bartless. (Chicago Daily Law Bulletin 8/3/95:3). January 1999: Judge Manning ruled that reversing the convictions of M. Andreas et al. was not justified. The concealment of the price-fixing meetings shows knowing violation of the law. That volume allocation “is not a method of price fixing is a specious argument. Defense arguments that the tapes were doctored are weak; they had ample opportunity to challenge reliability in court. The video tape of Andreas haggling with Yamada is compelling evidence. (Manning) January 14, 1999: Lysine consumption growing about 10% p.a. Global demand 1998 about 400 Kt, of which Europe 150 Kt, Asia 100 Kt, N. Am. 90 Kt, S. Am. 40 Kt. China is now at 40 Kt and Japan 5 Kt. Growth fastest in China and Latin America. Demand and Supply are “well balanced,” though lots of plant expansions are planned. Kyowa Hakko will expand its four plants by 40 Kt in 1999, Ajinomoto by 40 Kt 1998-2000. ADM expanding. These 3 plus BASF dominate. (Comline 1/14/99). January 20, 1999: The ADM-related case CALPERS et al. v. Fletzen was affirmed for the lower court ruling in a 4 to 4 vote of the Supreme Court (Lexis-Nexis 1/20/99). An obscure fight over standing of shareholders, which ADM and Fletzen won. January 25, 1999: Dwayne Andreas, 80, officially retires as Chairman of ADM, succeeded by G. Allen Andreas, 55, who is already CEO. John McMillin was surprised: “Frankly, I thought he would die with his boots on.” Dwayne continues to be involved as a director. Long-time observer Scott Kilman thinks he will best be remembered for opening agricultural trade with Moscow, as a preacher for new soybean uses, persuading soft drink makers to switch from sugar to HFCS, and creating the ethanol industry. (WSJ 1/26/99: interactive). Dwayne will continue to work daily at ADM’s HQ. Some outsiders doubt that he is passing on any of his power to Allen. (Chicago Tribune 1/25/99: interactive). January 1999: Defendants’ counsel submit a brief arguing that the court should use the alternative fine statute USSG §2R1.1 based on “the volume of commerce affected” so as to avoid the time and expense a complex and elusive analysis of damages would require. They oppose the prosecution’s desire to invoke 18 USC §3571(d) for that reason and because the two-times analysis would set a fine of $92 MM on Andreas, or 263 times the maximum fine under 15 USC §1. Complexity of the calculations includes costs of production and distribution for ADM of lysine, the prices of substitutes, the but-for price under oligopoly (and these models are really bad and diverse). 195
The government failed to mention the possible use of alternative fine provisions at two previous hearings in 12/96 and 1/97 and during the trial. Thus its use is a “flagrant after thought.” (Bray et al. 1/99). [This is not true. Prosecutors mentioned their intentions in posttrial interviews in September 1998]. January 25, 1999: Judge Manning rules that the U.S. Sentencing Commission’s §2R1.1 will be applied to an upward adjustment of Andreas and Wilson’s sentences. The relevant market is all domestic (U.S.) dry lysine sales made during the conspiracy. An evidentiary hearing to review expert economic testimony was set for 2/5/99 [later vacated]. The controlling precedent is U.S. v. Hayter Oil Co. (6th Cir. 1995). On 12/9/98, the parties revealed their disagreement over the proper “volume of commerce” to be applied to calculate the sentence under §2R1.1. Defendants wanted only dry lysine “directly affected by the conspiracy” (i.e. the amount sold at an inflated price). Prosecutors wanted all U.S. dry lysine. Oral arguments were presented on this issue 1/15/99. She rules for the prosecution because of the “plain meaning” of the words in §2R1.1 and because sales avoids the difficult and time-consuming analyses required to calculate damages, in the per se rule. The mandatory minimum under §2R1.1 is $20,000 and 6 months is prison. (Manning January 1998). January 25, 1999: Dwayne Andreas officially resigned as chairman this day. Allen Andreas has started to become more accessible to big investors. (Bus. Week 2/8/99). January 25, 1999: On this day, Dwayne O. Andreas chaired his last ADM Board of Directors meeting. Several directors showered him with testimonial compliments. Brian Mulroney spoke of D. Andreas’s global business triumphs and his personal modesty. Andrew Young praised D. Andreas for contributing “anonymously” $50,000 to rebuild Southern black churches burned down by bigots. Robert Strauss recalled that D. Andreas gave $1 million for a program to teach banking to Russian students. In short, an exemplary leader and world citizen. Senior business writer David Greising writes that “others know a different Andreas . . .[the one] who looked the other way as his son . . . conducted a global price-fixing scheme . . .” the “political heavyweight” who made ethically dubious political contributions. Who is the real Andreas, asks Greising? He was a complex man for a complex age. His knowledge about Russian politics was profound and realistic. He is the last of the old-style corporate bosses. The last time he saw Andreas was at the closing arguments in the Chicago trial: “His thin hair tinted a youthful red, a perpetual Florida tan on his grim face, wearing a high-tech hearing aid as he listened to the lawyers.” 196
Robert Strauss said of Andreas “you can’t taint a life that’s been lived like his,” but Greising concludes that “. . . the taint won’t wash out.” (Chicago Tribune 1/26/99). January 26, 1999: Like Robert Strauss and F. Ross Johnson, ADM Director (since 1997) Andrew Young stands almost alone in defending ADM’s actions. He said that the company “never intended to violate the law” and asserted, “this was not a company driven by greed.” Young further stated that the Board’s 1996 decision (made the year before Young joined) was a practical business decision made out of fear of losing sales if it continued to fight the government in court. “The board made a decision that this [allegation of price fixing] isn’t worth fighting about” he said. (Chicago Tribune 1/26/99). In 1996, F. Ross Johnson publicly ridiculed FBI investigators in the lysine and citric cases as “scumbags” with “almost a criminal mentality.” January 26, 1999: A profile of Dwayne Andreas says he “. . . pioneered the art of political campaign contributions.” His strategy of lavish contributions to members of both parties has become a model for other corporate executives seeking political influence. To Fred Wertheimer he is the symbol of a corrupt system of improper influence for special interests. He attended Wheaton College, IL for one year (1935-1936), CEO Honeymead Products (1952-72), VP Cargill (1946-52). (Washington Post 1/26/99:E1). February 1999: James B. Lieber, a lawyer, attended several weeks of the 10-week criminal trial, U.S. v. M. Andreas, et al., and analyzed it. The defendants advanced two theories: (1) ADM was not price fixing, only gathering information and (2) gathering information is not illegal. The evidence on cover-ups, tapes about threats by ADM, and Cox’s testimony are compelling. The Japanese were credible, and had good memories. The anti-Asian theme did not get a good reception from the pluralistic jury. The judge made a number of difficult but fair decisions. The most important was to allow the tapes even though they might have “gaps.” Oddly, the defense never put on their tape expert to discredit them. He believes Whitacre’s absence made the trial more fair, but Yamada’s failure to be extradited was strange. Would he have implicated D. Andreas or J. Randall? The 45-count indictment against Whitacre is a bad precedent for whistle-blowers. It contrasts with the inexplicable single count against Andreas et al. Why not mail and wire fraud also? Why not citric price fixing too? With convictions on 4 counts, they could have served long sentences. (Lieber and Boyer 1999). February 5, 1999: John D. McNamara became president of ADM, replacing G. Allen Andreas. He joined ADM in 1985 as a merchandising manager. (AP 2/6/99). February 12, 1999: A class action suit is initiated by Ontario farmers against ADM, Ajinomoto, and Sewon America for lysine price fixing in Canada. They are asking for C$25 million in actual damages and $10 MM in punitive damages under the Competition Act. (Toronto Star 2/12/99). 197
February 12, 1999: In ADM’s 10Q Form for the quarter ending 12/31/98, ADM has set aside $48 MM in FY 98 for antitrust costs (on top of $200 MM FY 97 and $31 MM FY 96). No provision for HFCS yet. [Does it cover all legal expenses?] (ADM). February 13, 1999: In court papers concerning sentencing, prosecutors contend that M. Andreas is unrepentant and shows “. . . an obstinate refusal to accept the jury’s verdict.” They ask the court for a maximum sentence. (Milwaukee Journal Sentinal 2/13/99: Bus. 1). Prosecutors are seeking 3-year sentences for Andreas and Wilson and a $25-million fine for Andreas (AP 2/12/99). February 16, 1999: David Hoech, in a 2/3/99 letter to Janet Reno, charges the DOJ with engineering an ADM cover-up by not releasing tapes unfavorable to Howard Buffett (shown pressing Whitacre and Wilson for reimbursed political gifts) and derogatory comments about ethnic minorities and rival companies. Hoech charges that the six tapes the FBI has under seal have D. Andreas discussing price-fixing matters (Agribusiness Examiner 2/16/99). February 19, 1999: Judge B. Manning delayed the M. Andreas et al. sentencing hearing originally set for 2/26/99 and denied defendants’ motion not to apply the “alternative fine provisions” under 18 U.S.C. 3571(d). [This motion was reversed, see 6/2/99]. The government’s sentencing memorandum asked for a fine of $25 million on Andreas, “in excess of $350,000” for Wilson, and a smaller fine for Whitacre because the gross harm to buyers exceeded $12.5 million. A fine of more than $350K has never been litigated for Sherman Act violations. She rejects Andreas’ argument that ADM enjoyed the gain, not Andreas himself, because §3571 plainly says that gains to third parties must be counted in sentencing. However, calculation of the harm is complex and difficult when the crime is global. She quotes Joel Klein’s 2/26/98 Senate testimony that complexity is one reason to give the DOJ a new higher statutory $100 million limit. She defers implementing §3571 until (1) seeing how complex the analysis is and (2) seeing Andreas’ proffer of evidence on the harm. (Manning 2/19/99). February 24, 1999: Judge Blanche Manning issues a decision made 2/19/99 delaying sentencing of M. Andreas et al. until an evidentiary hearing is concluded. The Government is asking for $25 MM fine for Andreas, “in excess of $350,000” for Wilson, and less for Whitacre. Andreas replies that fines about $350K conflict with the Sherman Act and notes that no federal court has ever applied the alternative sentencing provisions of 18 USC §357(d). Total sales during the conspiracy of the conspirators (4 or 5?) was $460 MM, and the guideline fine range is 1% to 5% of the volume of commerce. Andreas argues that the pecuniary gain was not enjoyed by Andreas, only by ADM [this does not affect a loss calculation] and that the complex analysis required for loss calculations is just what USSG 198
§2R1.1 seeks to avoid. Moreover, calculation of the loss, if too convoluted, requires that the $350K maximum be used as a default. Congress specifically did not exempt the Sherman Act from 18 USC §357 (e). Moreover, in 1987 Congress amended the law to apply to third-party gains by individuals. The Court accepts §3571(d)’s alternative fine provisions as applicable to the case, but conditional upon judging the complexity of the calculations. (Decision, U.S. vs. M. Andreas et al. dated 2/19/98). March 1999: For recent data on the size of global conspiracies, see speech by Spratling in Appendix D (March 4, 1999). March 1, 1999: The EC Commission held a hearing on the lysine charges against ADM et al. (ADM 1999). April 18, 1999: Joe Klein, AAG for Antitrust, and Michael Dunn, Assistant Secretary of USDA for Marketing and Regulatory Programs, spoke to more than 800 farmers at a “town meeting” on Concentration and Agriculture in St. Paul, Minnesota. Klein confirmed that he supervised and signed off on ADM’s $100 million antitrust fine. Dunn confirmed that Klein was involved in the decision not to disbar ADM from keeping its $85MM in USDA contracts. In a letter dated 5/3/99, David Hoech writes Judge Ruben Castillo that ADM’s Steven Mills and ADM’s lawyer Aubrey Daniel “did not reveal the truth” during the 10/15/96 plea hearing. They did not reveal the USDA decision was part of the plea agreement (none of which mentions the issue). According to Hoech, criminal guilty pleas require an automatic three-year disbarment from government contracts, as happened with Sun-Diamond Growers in October 1996 [Hoech 1999]. April 19, 1999: A leaked confidential Cargill debt prospectus reveals more than usual about company finances. In the quarter ending 2/28/99, Cargill’s earnings were $192 mil. up 53% from the same quarter in 1998, due to depressed grain and livestock prices. Its long-term strategy of spreading investment across the whole food system seems to be stabilizing earnings’ cycles. Domestic earnings increases offset export declines. Cargill’s financial unit lost $171 MM in the first 9 months of FY99 on bad bets on Russian debt; for 9 months, net earnings were $779 MM on sales of $34.43 (2.3%). (WSJ 4/19/99: B12). May 13, 1999: A Chinese corn-processing company, Changchun Dacheng Industrial Group, wants to build a 10 Kt plant for lysine. Construction costs are expected to be $20 million and sales to reach $22 MM p.a. (Asia Pulse 5/13/99). May 16, 1999: Nearly four years after its legal problems began, ADM remains in the deep financial trouble. Its stock price is still below its 1995 high. It is constantly cited as an exemplar for ineffectual corporate governance. Its impressive growth before 1995 now is attributed to “criminal activity, corporate welfare and other dubious sources.” Takeover 199
rumors repeatedly arise. ADM is frequently portrayed as “flouting the law when it served its interests” or “corporate America’s black sheep.” Part of ADM’s troubles are cyclical. G. Allen Andreas seems to be broadening the pool of top decision makers, but remaking the company’s culture won’t be easy. Sales of some company assets seem likely, a way of improving profitability. (Chicago Tribune 5/16/99). June 1999: The DOJ web page includes a list of all companies fined $10 million or more for Sherman Act violations. There are 21 companies in the A$10 million Club.” (www.usdoj.gov/atr/public_releases/1999/2456.htm). June 2, 1999: Judge B. Manning reversed her 2/19/99 ruling. She denies the government a sentencing hearing that would allow the alternative criminal fine provisions of 18 U.S.C. 3571(d) to be applied to Andreas and Wilson. Sentencing will occur on July 9, 1999. The reason for the present order focus on the serious conflict between the two alternative fine rules [USSC §2R1.1 and 18 USC §3571(d)], the government’s handling of sentencing procedures, the inadequacy of information available to defense, and exasperation with the prosecution’s arguments and behavior. The tone throughout is highly critical of the government’s behavior, insinuation at best bad faith and at worst misconduct. Her previous concerns about “complexity” of the overcharge calculation, lack of “guidance” on what “gain” or “harm” mean, and undue delay in sentencing seem to have receded completely. The first major paragraph (I.A.) Notes that both parties had stipulated that the Court would consider only U.S. sales of dry lysine to determine the applicable criminal fines. [This point is lost in the remaining 10 pages of the ruling]. She seems to agree that defendants were “sandbagged” by the government’s late announcement (ca. 1/99) that they would seek alternative fines. After her 2/19 ruling, defendants requested more time but the government wanted a quick decision. This shows the bad faith of the DOJ. “The government, of course, would not suffer delay since it already had the report of its retained expert, Dr. John Connor. Dr. Connor, using unidentified public information, created a hypothetical “but-for” price [and calculated] the amount of gain or loss for §3571(d) purposes” (pp. 2-3). “By all accounts the potential fines . . . would be staggering to the individual defendants” (ibid.). [The comments “already had” and “unidentified” are not accurate]. Manning says that using §2R1.1 was at one time proposed by the government since it is based only on the size of “affected commerce.” [i.e., 1% to 5% of the $460 million in U.S. dry lysine sales, or a $4.6 to $23 million fine]. She says that it is unnecessary to chose between 2R1.1 and 3571(d) because of the government’s “. . . waffling on . . . a simple motion to compel documents from foreign lysine producers” (p. 3). “The government’s response . . . bordered on being ludicrous” when it said that subpoena’s could not be served abroad and extraterritorial enforcement of cooperation agreements was an unsettled question 200
of law. “The government played hard ball with Mark Whitacre and presumably could have done the same here” (p. 4). The last 5 pp. (of nine) cite all the flaws in the overseas data that was produced, mostly lack of monthly production data for 1991-1997 and some missing selling costs [recall the stipulation above]. The burden is on the government to establish the harm, and imperfect data on small Indonesian lysine plants puts defendants’ economists at an unfair advantage (Manning 6/2/99). June 5, 1999: Judge Manning’s 6/2/99 ruling is reported widely in the press. Reports focus on the large reduction in the fine limit and Manning’s comment that the government’s letter to foreign producers was “so incredible that it bordered on being ludicrous.” June 17, 1999: ADM is diversifying into the meatpacking industry. In mid-1997, it purchased 10% of IBP’s stock, up to 13.3% in 1999. In September, it bought all of Morman’s, a large animal-feed manufacturer. By 1999, ADM owned half of Consolidated Nutrition of Omaha, which has 14,000 sows in production (Agribus. Examiner 6/17/99). July 2, 1999: Kyowa Hakko is expanding lysine plants worldwide. In Mexico, capacity will soon reach 40 Kt, doubling its size. In U.S., plant will go from 20 Kt to 25 Kt, and it hopes to attain a global 20% share of sales. (Japan Chem. Week 6/24/99:16). July 9, 1999: M. Andreas and T. Wilson were each sentenced to 2 years in prison and fined $350,000 for lysine price fixing by Judge B. Manning today. Whitacre received 30 months and no fine. He said in court over a speaker phone from federal prison in Edgefield, SC: “[The government] would have no case without me, against ADM and its executives. I risked my life and career for them, and I have yet to see anything.” He also said that he likes prison better than working at ADM. Andreas smiled as he heard Whitacre speak. Andreas sort of apologized, but did not admit his guilt. “I love this country, your honor, and I thought I knew its rules. I did not want to commit a crime and did not think I had committed one.” Wilson made no attempt to deny his responsibility: “I accept total and complete responsibility for my actions.” Prosecutors Lassar and Griffin expressed satisfaction with the sentence: not the longest ever imposed but a relatively long one under the guidelines (AP 7/9/99). July 10, 1999: Major U.S. and foreign newspapers carry extensive coverage of the sentencing of Andreas, Wilson, and Whitacre. Prosecutors are perplexed at Whitacre’s heavier prison 201
sentence (10 months concurrent and 20 months added to his 9 years of embezzlement). Most puzzling is Manning’s determination that Whitacre was the conspirator that “managed” the conspiracy, while Andreas and Wilson had no managerial responsibility. The government had requested that all three be deemed managers of the scheme, and Whitacre’s lawyer was the only one not to object to that designation. Whitacre’s status as a “repeat offender’ probably raised his sentence. (NYT 7/10/99:C1). Manning praised Andreas and Wilson as “wonderful” family men and members of the community. [ADM organized a letter-writing campaign of the “rich and famous.” Wilson’s wife testified in his favor, the only witness at the hearing.] Dwayne Andreas, 81, was not present. Many papers noted the political and economic importance of the elder Andreas and the influence ADM had in the food system (“a global powerhouse with its products in every grocery-store aisle, supermarket to the world”). (Washington Post 7/10/99:E1). The Financial Times described D. Andreas as the leader that built ADM from a rather small, troubled company in 1965 to an agribusiness powerhouse and courtier to Congressmen and global leaders. Defendants’ lawyers’ actions delayed sentencing by several months (Financial Times 7/10/99:3). [Only the partially ADM-owned Chicago Sun-Times seems to carry less than 100 words on the sentencing]. July 10, 1999: The Chicago Tribune placed the sentencing of Andreas et al. on p. 1 with 5 color photos. In addition to the facts reported elsewhere, defense lawyers said that Andreas and Wilson would probably remain free until an appeal is heard. The hearing lasted four hours. Andreas and Wilson remained calm throughout. Whitacre said: “I was both young and stupid to play the risky and unethical games of the ADM elite. Life in prison has been better than life at ADM.” Manning said she was impressed by letters of support sent to her by friends of Andreas and Wilson. She also said that she disagreed with the government’s view that Andreas and Wilson were managers of the conspiracy. “Wilson and his wife sat stone-faced as Manning issued his sentence. Andreas reddened when his was pronounced, staring down and touching his mouth with a finger.” (p. 8). (Chicago Tribune 7/10/99:1-8). After the hearing Andreas’ attorney John Bray asserted that the government targeted his client simply because of his family’s prominence. Griffin said that the chances of bringing Kazutoshi Yamada to trial “remote.”
202
July 11, 1999: Columnist David Greising opines that no one was a winner at the 7/9/99 sentencing hearing. The government got a conviction, but the sentences were lighter than it wanted. It should have jettisoned Whitacre (a “Pinocchio with a Ph.D.) far earlier. The biggest loser was Michael Andreas, who had a privileged life (“Growing up an Andreas in Decatur is like growing up a Windsor in England”) and a sure entree to become CEO of ADM. After being sentenced: “. . . Andreas took the walk that we’ve seen mobsters, college gamblers, and crooked politicians all take. He walked across the plaza of the Dirksen Federal Building pursued by television cameras and radio station microphones, his face grim and his eyes straight ahead.” (Chicago Tribune 7/11/99). July 12, 1999: In the recent past, only half of those convicted for criminal price fixing have received prison sentences, and the average sentence has been 10 months. Wilson’s wife appealed for home detention for her husband, arguing that he was too frail for prison. Wilson smokes heavily [and reputedly drinks heavily] and had triple-bypass heart surgery in 1983. (WSJ 7/12/99:interactive). July 13, 1999: Judge Blanche Manning explains her reasoning behind the 2-year prison sentences for M. Andreas and T. Wilson (A&W) and the 2-1/2 year sentence for M. Whitacre in a judicial order signed this day. Mostly it is an explanation of §2R1.1 of the U.S. Sentencing Guidelines, 1998 edition. Price fixing is a base 10 offense level. An upward adjustment of 7 points is justified by the size of affected commerce, i.e., ADM’s U.S. dry lysine sales of $168 million, which is greater than the $100 million required for, 7 points. The Pre-sentence Investigation Report (PSI) of the U.S. Probation Office further recommended 4 more points because Andreas and Wilson (A&W) were “managers” of the conspiracy, bringing the total to 21. This places them in Zone D of the sentencing table for a sentence of 37 to 46 months, but the maximum is capped by law at 36 months. For Mark Whitacre (MW), the PSI recommends a base level of 14: an upward adjustment for lack of acceptance of responsibility and for supervising 5 or more people (salespersons), but downward for his government cooperation. Manning spends 5 pages considering if the citric acid conspiracy, based on Cox’s unrebutted testimony, was “part of” a larger scheme, which would also require a further upward adjustment. This adjustment requires only a “preponderance of the evidence,” not the usual beyond-a-reasonable-doubt standard of proof. She looks at “similarity” of the offense, “regularity,” “time intervals,” common victims, common accomplices, common purpose, and similarity of modus operandi. She concludes that accomplices, victims, and “similarity” are lacking (except that they are both “agricultural products”). She says there is nothing in the 203
record about “scope” [How could the similar quarterly meetings and overlapping years be missed here?]. “Geography” is also different. She does not address the “common purpose” or methods points at all except to say that “. . . Andreas and Wilson might have learned some tricks from past conduct . . .” and used them for the lysine conspiracy. The key factors are that Cox’s testimony was introduced for the purpose of proving intent by A&W, not to prove they were parts of a common scheme. Cox’s testimony is not corroborated, and he said that he had no first-hand knowledge of Andreas’ participation [What about Wilson?]. So the upward adjustment for citric acid is denied. A&W say that they deserve a downward adjustment because ADM “withdrew” from the conspiracy by the very fact that it cheated on the price agreement. However, Manning rejects this because cheating is normal in any criminal group and because ADM never communicated its decision to the other conspirators. Whitacre did withdraw from the conspiracy on 11/4/92. Sales of lysine from 6/23/92 to 11/4/92 were $18,738,188.54, so there is an upward adjustment for MW to level 15. Andreas wants downward departure because lysine was not a typical price fix, because MW entrapped him, because the government’s investigation went on too long, and because the lysine market was so competitive that it was less harmful than most conspiracies. This is just another example of the “let’s blame Whitacre” defense, says Manning. “Whitacre never pressured Andreas” and besides the tapes show that Andreas is not easily intimidated by others, especially an underling like MW. A&W said they never had the chance to deal with the government and get reduced sentences [like MW and Cox! But they did, on 6/27/95] which introduces unfair disparity in sentences. This is rejected summarily by Manning. Andreas says his “we don’t make deals” comment shows he was a minimal participant (-4 points), but Manning says the Irvine tape shows him making a deal. Manning rejects the government’s PSI for +4 points on A&W because they were “managers” (of 5+ conspirators) and leaders among the conspirators. They did not manage 5+ employees, and the sales people don’t count because they were “unwilling participants.” She rejects the idea that A&W were “kingpins,” “masterminds,” or “brains” behind the scheme because in terms of participation, planning, and degree of control or authority they were merely the equals of Ikeda, Yamada, Crouy, Chaudret, and Yamamoto. [Maybe this is true of Andreas, but it was Wilson that initiated contact with Ajinomoto and Kyowa, who designed several of its mechanisms -- quarterly meetings, fake association, volume allocation --, and who did everything with Andreas’ approval. Andreas came up with the Great Compromise in Irvine]. ADM could not coerce Ajinomoto, despite threats to flood the market. She admits the tapes show Wilson taking a “prominent role,” but not leadership. Wilson asked for downward and departure on the basis of poor health, family considerations, and “accepting responsibility.” This is astonishing, because the law clearly states that the 204
“acceptance” must come during the trial. She rejects all three requests for downward adjustments. A&W are in the 24 to 30 months range. Whitacre gets the last 3 pages. He has a prior felony conviction. But the most persuasive thing is that MW and his counsel made no objections to the PSI! He gets no downward adjustment for “acceptance” or for “cooperation.” His points total 17, which under “criminal history” brings the required sentence to 27-33 months. She gives 30 months, of which 10 are concurrent. July 13, 1999: Kurt Eichenwald writes an analysis of the lysine sentencing, attributing the long sentence to Whitacre to the complex federal sentencing guidelines. He was a “repeat offender,” which raises the culpability score or “offense level.” But Manning’s ruling that Whitacre alone managed the conspiracy at ADM “stumped legal experts,” who called it “bizarre” and “pretty silly.” Said Columbia Law School’s John Coffee, “I could not have imagined a whistle-blower . . . being turned on this harshly by the Government. It doesn’t bode well for future whistle-blowers.” Scott Lassar considers Whitacre’s case so unique that it will not be seen as a precedent. (NYT 7/13/99:C2) [See Manning’s opinion of 7/13/99]. July 14, 1999: Kyowa Hakko announces an important scientific advance by its R&D lab that may improve lysine fermentation techniques. They have decoded almost all the DNA base sequences of the genome for Corynebacterium Glutamicum (CG), the microbe used for many amino acids. Genetic manipulation of CG could raise lysine or glutamic acid productivity. CG was first screened by Kyowa Hakko in 1956 to produce glutamic acid. Last June, Degussa revealed its plan to begin the same science project (Japan Chemical Week 7/8/99:8). July 14, 1999: The UK’s Office of Fair Trading (OFT) announced today that it was bringing a court action against Cheil Jedang Corp. and ADM for price fixing in lysine. It will ask the court to issue a consent decree to forbid further price fixing. The OFT will not have the authority to levy fines (up to 10% of sales) until 3/1/00. These two are being singled out because the other three conspirators have no businesses in the UK (Chem. News & Intelligence 7/14/99). August 5, 1999: Judge Michael McCuskey of the U.S. District Court in Urbana, Illinois granted a summary judgment in favor of most counts citied by ADM in its civil case against Mark Whitacre. Whitacre was appointed vice-president of ADM’s Bioproducts Division on 11/13/89, president 5/90, and corporate VP of ADM 11/92. He was fired for cause 8/7/95. ADM originally filed suit against Whitacre for theft, fraud, and other crimes 9/19/96. On 11/22/96, Whitacre sued ADM for retaliatory discharge, breach of contract, defamation, and other damages. On 10/10/97, Whitacre pleaded guilty to 37 counts of wire fraud, conspiracy to defraud the U.S., money laundering, and tax evasion. Judge Baker in Urbana District Court sentenced him to 108 months and ordered $11.4 million restitution to be paid to ADM. 205
Whitacre took 3 months to reply to the ADM motion to dismiss, but his reply was totally inadequate. Based on ADM’s facts and Whitacre’s guilty plea of 10/97, the Court granted summary judgment on most counts to ADM. For his breach of duty, fraud, and theft Whitacre must pay $6.3 million to ADM. [It is doubtful that Whitacre will ever pay any of this]. However, ADM’s attempt to extend Whitacre’s non-disclosure agreement in perpetuity was rejected “with prejudice” by the Judge. He also let Whitacre keep his stock options [ADM’s own contract made them irrevocable]. [It appears that ADM got back only $6.2 million of the $11.4 restitution. So this award is all his compensation of $1.2 million and the uncollected $5.2 million.] (McCuskey 8/5/99). August 10, 1999: Federal Judge Michael McCuskey of the Central District of Illinois ruled that whistle-blower Mark Whitacre owed ADM $1.17 million because he did not “faithfully perform his job” while he was cooperating with the FBI. The amount represents Whitacre’s pay and benefits for the four-year period from 1991 to August 1995 during which he embezzled from ADM; it is part of a $6.3 million judgment. [What the $5.2 million difference is for the article does not explain]. He cannot pay the fine. Whitacre’s lawyer, Bill T. Walker, said that the ruling would have an adverse effect on corporate whistle blowers in the future. “It opens the door.” (AP 8/11/99). September 1999: Two journalists compiled a list of the 100 greatest corporate criminals of the 1990s based on guilty pleas and fines paid. Antitrust and food companies were prominent on the list: Roche, BASF, ADM, Pfizer, Ajinomoto, etc. (Corporate Crime Reporter 9/99). September 4, 1999: Japanese and European lysine manufacturers are rushing into Asian JVs, especially in China. Ajinomoto is operating Chuanhua Ajinomoto Co. at 10 Kt, soon to be 20 Kt. Kyowa Hakko and Taiwan’s Vedan Enterprise Corp. have completed a 10 Kt plant in Vietnam. BASF has the former Sewon 70 Kt plant in South Korea. A Chinese-owned company, Guanxi Lysine will soon be at 10 Kt and expects 30 Kt by 2000. Demand in China now is 30 Kt, but will reach 45 Kt by 2000. (Japan Chem. Week 8/27/98:6). September 17, 1999: The Chicago Tribune profiles the three guilty ADM managers. Michael “Mick” Andreas seemed born to command. He joined ADM in 1971 and began his apprenticeship by learning commodity trading. He moved to soybean processing, rising to president of that division, group vice president, and executive vice president. He joined the ADM Board in 1985 and became its vice chairman, clearly anointing him as heir to his father Dwayne. Terrance S. Wilson was a trusted lieutenant to the Andreas family, a tough ex-Marine with no formal education beyond high school who rose to become ADM’s President of the cornproducts division. “He owed his position to the Andreas family . . . In return, Wilson was ‘utterly loyal to ADM’ and proud of his association with the Andreas clan,” his attorney said. 206
A serious heart problem and alcoholism aged the pallid, silver-haired Wilson beyond his 60 years. “Mark Whitacre has streaked across the business world like a meteor -- spectacular and mysterious but ultimately crashing and burning.” He often boasted about honors he had not received and lied about many simple personal facts. Gifted and intelligent he might have become ADM’s president by the time he was 40. But his real role at ADM (1) Naive and out of his depth; (2) frightened when drawn by others into a web of dishonesty; or (3) planning to score big by defrauding ADM from the beginning. He may have been all three (Chicago Tribune 9/17/99). September 22, 1999: ADM filed its fiscal 1999 annual report 10-K to the SEC. Discussion of its antitrust legal matters occupies pages 21 to 29 of the report, or about 25% of the report’s total pages. From 1995 to 1999, ADM spent almost $1 billion per year on new or expanded plants and transportation equipment. ADM had launched many new, high value added products recently, many of them “health and nutrition” products: vitamins B2, C, and E; soy meat and dairy analogs; isofavones, sterols, lecithin, astaxathin, distilled monoglycerides, and xanthan gum; and antioxidants (beta carotene, tocotrienols). Promotions: G. Allen Andreas CEO 7/97, President 7/97, and Chairman 1/99; Charles Bayless replaced T. Wilson in 10/96; Mark Cheviron was made VP 7/97; Brian Peterson replaced M. Whitacre in 1995, made VP 1/96. All are long term ADM employees Litigation. The lysine and HFCS grand juries are closed, but citric acid continues. In Europe, the EC Commission (CEC) began its lysine investigation 6/97, initiated formal proceedings 10/29/98, held a hearing 3/1/99, and expanded the charges 8/8/99. The CEC began a citric acid investigation 9/97 and a sodium gluconate investigation 11/98. The Mexican Federal Competition Commission began a citric acid investigation 2/11/99. In the area of private antitrust suits, the following were disposed of or still pending: HFCS 30 class actions and 1 other; lysine 22 class actions (including 1 Canadian); citric acid 11 class, 2 non-class actions; 5 class actions that combine citric acid with HFCS; 6 class actions that combine lysine, citric, and HFCS; and 1 MSG class action. ADM settled 3 federal class actions in sodium gluconate, transferred 4/98 for consolidation to San Francisco, on 10/29/98 for a payment of $69,600. No provision has been made for any unsettled antitrust actions. In its discussion of sales growth, ADM blames lower amino acid prices for declines in its corn products division’s sales in FY 1998 and FY 1999; it also cites excess production capacity and low soy meal prices for causing amino-acid prices to fall in FY 1998 and again in FY 1999 “to historically low levels.” 207
The total provisions made for lysine- and citric-related fines, settlements, and “related expenses” for FY 1996 to FY 1999 are $300 million (p. 27). However, it is unclear if the costs of defending Andreas and Wilson, or the company for HFCS, gluconate, MSG, or foreign actions are included in these provisions. [I think the total is closer to $400 million]. (ADM 1999). October 5, 1999: Sentencing appeals for M. Andreas and T. Wilson were denied by the U.S. Court of Appeals, Seventh Circuit on 9/23/99. On this day Andreas was scheduled to report to federal prison in Greenville, Illinois and Wilson to a prison in Oxford, Wisconsin (AP 10/5/99). October 18, 1999: ADM and NTEC, Inc. have formed a strategic alliance to make and sell ethyl lactate, a high-performance, environmentally friendly solvent for degreasing, paint removal, and other applications. The compound decomposes into water and carbon dioxide, it is approved by the U.S. FDA for food, drug, and cosmetic use. It is fermented from corn and could replace huge amounts of petroleum-based, toxic solvents. (PR Newswire 10/18/99). October 19, 1999: Stockholders expressed dissatisfaction about ADM’s performance at its annual meeting, a weakening in evidence since the price-fixing probe in 1995. Its stock price was now near $12, close to a 52-week low. Standard & Poors was threatening to lower ADM’s bond rating because of excess asset investments (an increase of almost $4 billion in the last 4 years). Soybean prices are low and the cocoa business is a money-loser. One wellknown stock analyst thinks that ADM’s problems are structural, not just cyclical. Allen Andreas does not agree. ADM’s basic strategy is to expand into high value added product lines such at neutraceuticals and animal-feed and food ingredients from biotech processes. But the problem is that ADM promised a biotech boom ten years ago, and it failed to materialize. (Chicago Tribune 10/22/99). October 22, 1999: A publication fairly consistently critical of big agribusinesses notes that the DOJ has not yet acted publicly to accusations made by M. Whitacre that ADM routinely violated EPA regulations by spraying used genetic organisms on corn gluten. David Hoech, persistent critic of ADM, even suggested in a letter to Janet Reno that this practice might have caused BSE (mad-cow disease) in the UK. Another Whitacre charge concerning the sale of cottonseed cake containing toxic “free gossypol” was settled by ADM by paying the owner of 86 calves that died $105,000. Hoech also wrote in that letter that the DOJ helped ADM “cover up” many crimes by ADM and its officers. He claims that Joel Klein was transferred from the White House staff to oversee Jamie Gorelick’s handling of the case from late spring 1995 to October 18, 1996 when Bingaman left the DOJ. 208
Whitacre and his lawyer continue to assert that Whitacre made tapes that verify that the illegal bonuses were approved by one of his ADM bosses. In April 1998, ADM’s law firm, Williams & Connelly alleged that $2.5 million of Whitacre’s fraudulently obtained money was missing and might be in an account of David Hoech’s. However, later the DOJ’s fraud division said that the Department couldn’t confirm if the account was used for that purpose. Many other of Whitacre’s accusations have not been acted on as far as is known (bribes to politicians, kickbacks, more bonuses, etc.). (Agribus. Examiner 10/22/99). •
December 1999: ADM, Cargill, Staley, and Roquette are fighting the release of about 200 tapes made by Whitacre for the lysine investigation, but not already released during the 1998 Chicago trial to the HFCS plaintiffs. They oppose the release of non-defendant documents used in the HFCS investigation as well [see 1998 and 1999 entries in Appendix C and D].
•
January 26, 2000: Ajinomoto announced that its global lysine capacity will rise to 200,000 mt. by the end of 2000 by expanding six plants in France, Italy, and the U.S. It plans on 300,000 mt. by 12/05 It is also expecting to build a new threonine plant in Brazil or the U.S. The only (major) threonine plant is in France (Chemical Week 1.26.00:25).
•
June 7, 2000: The five members of the lysine cartel were fined 109.9 million euros (U.S. $105.4 million) by the Commission of the European Communities for price fixing. The figures were based on 10 percent of lysine sales either global of in the European Economic Area in either 1989 or 1991 (reduced for cooperation under the EC’s Leniency Notice of 7/18/96): Archer Daniels Midland Ajinomoto Kyowa Hakko Cheil Jedang Sewon Group Total
mil. euros 47.3 28.3 13.2 12.2 8.9 109.9
$ mil. 45.4 27.1 12.7 11.7 8.5 105.4
discount 10% 50% 30% 30% 50% 33%
Ajinomoto was the first to cooperate (in July 1996) with the EC concerning the 6/92-6/95 conspiracy, but Sewon first informed about another lysine cartel (Ajinomoto, Kyowa, and Sewon) that began “at least as early as July 1990.” “Archer Daniels Midland did not cooperate with the Commission during the investigation. However, it did not contest the facts . . .” (RAPID 6/7/00). Ajinomoto did not inform the EC about the earlier conspiracy, yet it got the maximum allowable leniency discount. Thus, the both received 50% discounts. Cheil and Kyowa confirmed the illegal activity. 209
[From the information provided, the total turnover implied in the year prior to the formation of the cartel (as calculated by the EC) was 1,632 million euros ($1,566 million): ADM $504 million (32%), Ajinomoto $543 million (35%), Kyowa $181 million (12%), Cheil $167 million (11$), and Sewon $171 million (11%). The large market share of Cheil compared to Sewon’s suggests that these sales are European, not global, and refer to the conspiracy period rather than a year prior to one of the cartels. However, the large total sales implied by the fines suggest that the $1,566 million are the accumulated 1991-1994 European lysine sales that were the bases of the fine. ADM’s fine is much lower than 10% of its global sales in 1991, whereas Cheil’s fine is larger than 10% of sales of its lysine subsidiary (CSA). Perhaps CSA parent’s sales were used to justify the later fine. In short, the EC fines are difficult to reconcile with the 10%-of-sales rule]. •
June 19, 2000: The appeals court of the U.S. 7th Circuit, Richard Posner Chief Judge, decided in favor of the plaintiffs in the case of In re: High Fructose Corn Syrup Litigation. Tape recordings presented in court in U.S. v. Michael Andreas et al. will be released to the plaintiffs because Mark Whitacre was making them for the FBI (“under the color of the law”), not for fraudulent reasons (Legal Intelligencer 6/23/00:4).
•
June 19, 2000: A survey by McKinsey & Co. of 200 institutional investors around the world shows that they are willing to pay 18% more for a U.S. company with good corporate governance policies: a majority of directors independent, get most of their pay in stock or options, and a formal evaluation process for director’s performance. Good governance rates equally with financial returns when ranking potential investments. The premiums were higher (25-28%) in East Asia and Latin America (WSJ 6/19/00).
•
July 24, 2000: Fiscal year fourth quarter net income rose significantly for the first time since 1995 for ADM. Despite large special charges for closing 5 soybean plants, 2 cocoa plants, and an MSG plant, profits rose because of a 40% rise in the price of ethanol. Excluding extraordinary items, earnings per share were one-third lower than consensus estimates (Wall Street Journal 7/24/00:B8).
•
June 30, 2000: ADM has a large roster of new corporate officers since 1995. G. Allen Andreas became CEO and President in July 1997 (replacing Randall); became Chairman 1/99. John McNamera was promoted to President 2/99. There were 5 Senior VPs appointed in 1989, 2/2000, 6/2000, 7/99, and 12/99. The oldest is Martin L. Andreas (Asst. to CEO). There were also 4 Group VPs appointed 7/97, 1/93, 4/00, and 10/99. Finally, there were 9 VPs appointed 6/00, 5/97, 5/00, 4/99, 1991, 2/00, 7/96, 11/99, and 10/94. Among them are a new minority woman for human resources, Mark Cheviron for security, a new “technical services” VP, and a new R&D VP. Controller Steven Mills was promoted to VP in 2/00. Claudia Manning remains Executive Assistant to the Chairman and to the Chairman Emeritus (D. Andreas). 210
Terrance Wilson apparently resigned in October 1996. Mark Whitacre’s replacement from 1995-1999, Brian Peterson, is now a Group VP (ADM 2000). [10 of the report’s 36 pages dwell on antitrust matters]. •
September 22, 2000: Under an order from the 7th Circuit Court of Appeals, Judge Blanche Manning increased the prison sentences of Michael Andreas to 36 months and Terry Wilson to 33 months. Both men listened by speakerphone from their federal prison camp in Greenville, Illinois where they have been held for a year but remained silent. Their lawyers said that the decision would be appealed to the Supreme Court.
•
November 13, 2000: The Supreme Court denied certiorari in the appeal of James Randall and ADM to the decision of the 7th Circuit Court of Appeals made on June 19, 2000 (See above) (2000 Lexis 7513).
211
Table A1. Financial Results for Archer Daniels Midland, 1992-1998.
Fiscal Year Ending June 30 Item
1992
1993
1994
1995
1996
1997
1998
1999
Million dollars a
Consolidated net sales
9231
9811
11374
12671
13240
13853
16109
14283
Pre-tax income
760
746
738
1182
1054
644
610
420
Net income
504
568
484
796
696
377
404
266
Selling, gen. & admin expenses
295
325
371
429
473
675
661
701
Provisions for fines & settlements
0
0
0
0
31
200
48
21
Est. Antitrust legal expenses
0
0
0
0
40-52
200-250
50-70
20-40
Research & development
--
--
--
--
12
12
17
22
Ratios in percent Pre-tax income/sales
8.23
7.60
6.49
9.33
7.96
4.65
3.79
2.94
Net income/sales
5.46
5.79
4.26
6.28
5.26
2.72
2.51
1.86
Pre-tax income/equity
16.9 2
15.27
14.63
20.19
17.15
10.64
9.38
6.83
Net income/equity
11.2 2
11.63
9.59
13.60
11.33
6.23
6.21
4.26
SG&A/sales
3.20
3.31
3.26
3.39
3.57
4.87
4.10
4.91
Antitrust expenses/SG&A
--
--
--
--
7-18
30-37
8-11
3-6
R&D/sales
--
--
--
--
0.09
0.09
0.12
0.15
-- = Not available a A significant portion of increases in sales is due to consolidation of sales by recently acquired operations. For example, in 1999 sales from continuing operations declined by 16.6% (a combination of 7% reduced volume of sales and 11% price reductions), but $825 million of 1999 sales was added because of acquisitions made after June 1998. Excludes sales of unconsolidated affiliates of $12.7, $13.7, and $14.6 billion in 1997-1999, respectively.
212
1.32 P 1.19 1.15 1.08 1.01 0.99 T 0.99 T 1.00 1.06 1.15 1.24PN 1.23
1.19 P 1.17 1.13 1.09 1.04 1.03 1.01 T 1.08 1.11 1.12PN 1.07 0.97
0.91 0.84 0.82 0.80 0.78 0.69
1990: January February March April May June July August September October November December
1991: January February March April May June July August September October November December
1992: January February March April May June
0.91 0.81 0.83 0.82 0.79 0.72
------------0.98 1.03 0.99 1.06 1.03 0.97
-------------------------
0.91 0.85 0.83 0.81 0.80 0.70
------------0.96T 1.05 1.05 1.10P 1.06 0.97
-------------------------
0.83 0.73 0.76 0.76 0.74 0.67
------------0.95 0.98 0.82 0.89 0.95 0.91
-------------------------
Dollars per pound
0.97 0.89 0.93 0.89 0.84T 0.90
------------1.07 1.08 1.11 1.17P 1.06 1.03
-------------------------
213
0.90 0.75 0.78 0.78 0.76 0.65
------------1.00 0.97T 0.99 0.99 1.02P 0.95
-------------------------
Appendix Table A2. U.S. Lysine Prices and Volumes, January 1991 - June 1996. IntraDry Liquid Trade All U.S. Lysine firm U.S. U.S. Export, Export, Lysine, lysine, ADM’s Month Average ADM’s ADM’s ADM’s ADM’s Priceb a b b b Price Price Priceb Price Price
1.44 1.41 1.39T 1.45 1.60 1.58
--1.37 1.35T 1.41 1.45 1.51 1.48 1.61 1.83P 1.64 1.58 1.46
-------------------------
CornSoybean as Ceiling Pricec
4189 3857 3826T´ 4975 5724 3620
0 184E 470E 888E 1330E 1289E 1686 3457 3462 4053P 3617 3971
0 0 0 0 0 0 0 0 0 0 0 0
3109 2839 3070 2127 2486 4835
8046 7941 6841 6497 6228 7166 6769 5083 6219 5727 6258 6003
7241 7313 6511 6647 6713 7610 7610 7686 8713 8800 8888 8977
Thousand pounds
7298 6696T 6896 7102 8210 8455
8046 8125 7311T 7385 7558 8455 8455 8540 9681 9777 9875 9974P
7241 7313 6511 T 6647 6713 7610 7610 7686 8713 8800 8888 8977P
U.S. Volume Soldd Rest of ADM Top Top Four Four
57 58 55 70 70 43
0 2 6 12 18 15 20 40 36 41 37 40
0 0 0 0 0 0 0 0 0 0 0 0
Percent
ADM’s U.S. Sharee
IntraFirm
1325 963 1609 1819 2298 1628
0 ----------317 256 559 695 438 861
3975 2046 2549 3029 3186 3413
0 ----------37 444 666 646 1623 1752
Thousand pounds 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Third Party
ADM’s Exports
0.64T 0.70 0.82 0.92 0.98 P 0.98 P
0.98PN 0.94 0.89 0.78 0.66 0.62T 0.76 0.88 0.98 1.08 1.10 1.13 P
1.12 1.11 1.11 1.11 1.11 1.11 1.09 T 1.11 1.16 1.20 1.22 P 1.22 P
1993: January February March April May June July August September October November December
1994: January February March April May June July August September October November December
Average Pricea
July August September October November December
Month
1.14 1.15 1.12 1.12 1.10 1.11 1.10 1.12 1.17 1.21 1.22 1.19
1.00 0.98 0.93 0.82 0.67 0.62 0.68 0.80 0.92 1.06 1.13 1.14
0.67 0.68 0.80 0.92 1.01 1.01
ADM’s Priceb
All U.S. Lysine
Liquid U.S. lysine, ADM’s Priceb
1.17 1.17 1.14 1.16 1.15 1.15 1.13 1.15 1.20 1.28 1.27 1.25
1.01 0.98 0.93 0.83 0.68 0.62T 0.69 0.82 0.97 1.13P 1.17 1.17 0.91 1.02 0.98 0.97 0.96 0.95 0.95 0.96 0.97 0.98 0.97 0.95
0.93 0.92 0.86 0.75 0.62 0.57 0.61 0.62 0.64 0.74 0.88 0.94
0.61 0.61 0.75 0.86 0.96 0.96
0.97 1.01 1.00 0.93 1.05 1.11 1.06 1.45 1.14 1.11 1.02 1.06
0.92 0.89 0.91 0.81 0.73T 0.67 0.68 0.71 0.75 0.85P 0.89 0.86
0.79 0.77 0.82 0.86 0.90P 0.88
Trade Export, ADM’s Priceb
Dollars per pound 0.63T 0.68 0.81 0.93 1.01 1.02P
Dry U.S. Lysine, ADM’s Priceb
214
0.97 1.01 1.01 0.95 0.94 0.93 0.94 0.95 0.98 1.07 1.02 1.00
0.86 0.79 0.76 0.66 0.62 0.47 0.52T 0.52 0.60 0.61 0.70 0.95
0.54T 0.58 0.67 0.79 0.82 0.82P
Intrafirm Export, ADM’s Priceb
1.43 1.44 1.44 1.44 1.52 1.56P 1.54 1.54 1.51 1.48 1.34 1.18 T
1.72 1.61T´ 1.62 1.84 1.77 1.82 2.32 P 2.15 1.86 1.72 1.78 1.60T
1.57 1.65 1.67 1.68P 1.66 1.76
CornSoybean as Ceiling Pricec
4752 4768 6208 5755 5345T´ 6360 6383 7621P 5276 4758 5527 4548T
4881 3357T 4270 4700 6781 8628P 6062 6764 5963 3745 4526 5377
6782 6995P 5623 4446 3591T 5154
9146 9216 6328 6857 7345 7971 7948 6798 11008 11626 10958 12038
8093 9697 7432 7073 5065 4750 7316 6696 9238 11549 10862 10186
1673 1713 4443 5920 7085 5840
Thousand pounds
13898 13984 12536 T 12612 12690 14331 14331 14419 16284 16384 16485 16586 P
12974 13054 11702T 11773 11846 13378 13378 13460 15201 15294 15388 15483 P
8455 8708 10066 10366 10676 10994P
U.S. Volume Soldd Rest of ADM Top Top Four Four
34 34 50 46 42 44 45 53 32 29 34 27
38 26 36 40 57 64 45 50 39 24 29 35
80 80 56 43 34 47
Percent
ADM’s U.S. Sharee
IntraFirm
4486 4012 3463 2205 2347 2259 5539 5458 4292 3982 3453 3559
2110 3667 3087 2955 4283 5523 5402 3869 4670 4720 5676 2746
3969 3145 5383 3918 3525 5563 3874 1652 3976 5808 6540 7911
2737 2337 3244 2804 2374 3455 3565 4194 3706 3417 2648 3768
Thousand pounds 5385 2482 3578 2258 3720 1695 3288 2963 3805 2696 4822 3483
Third Party
ADM’s Exports
1.06 1.08 1.13 1.11 1.15 1.11
1996: January February March April May June
-------------
1.19 1.15 1.14 1.08 0.97 0.94 -------------
ADM’s Priceb
-------------
Liquid U.S. lysine, ADM’s Priceb
-------------
0.97 0.96 0.95 0.95 0.85 0.79 -------------------------
1.02 1.07 1.07 1.11 1.15 1.14 -------------
Trade Export, ADM’s Priceb
Dollars per pound 1.25 1.21 1.19 1.12 1.00 0.98 -------------
Dry U.S. Lysine, ADM’s Priceb
-------------
1.04 0.97 0.95 0.92 1.01 0.86 -------------
Intrafirm Export, ADM’s Priceb
-------------
1.14 1.03 T 1.06 1.11 1.03T 0.95 1.06 1.08 1.23 1.26 1.38 1.62P
CornSoybean as Ceiling Pricec
-------------
5159 4760 5257 5238 5641 7312 -------------------------
9542 10211 8037 8138 7818 7850 -------------
Thousand pounds
15717 15868 14279 T 14422 14566 16513
14701 14791 13294 T 13376 13459 15162 15162 15256 16936 17041 17147 17253 P
U.S. Volume Soldd Rest of ADM Top Top Four Four
-------------
37 34 42 52 44 51 -------------
Percent
ADM’s U.S. Sharee
IntraFirm
-------------
3131 1994 5281 3283 3601 3163 -------------
-------------
9596 4263 6678 4436 4087 4829 -------------
Thousand pounds
Third Party
ADM’s Exports
215
--- = Not available T=Annual price or quantity through (and T′ a close secondary trough). P=Annual price or quantity peak (and P′ a close secondary peak). a The average of the four largest U.S. sellers’ prices. Which type of “average” is not specified. These prices include the dry, feed-grade prices of all four sellers and may include ADM’s liquid lysine sales, which became increasingly important from 1992 to 1995. Liquid lysine was priced several cents lower on a dry-substance-equivalent basis and about onethird lower in aqueous solution. A DOJ price series that excluded liquid lysine shows price generally 1 to 2 cents higher in 1992, 2 to 4 cents higher in 1993, and 4 to 8 cents higher in 1994. See 3rd and 4th columns of this Table. b These price data are from the “Operations Statistical Reports” of ADM’s Bioproducts division for fiscal years 1992-1995 (Transcript, Government Exhibits 61, 63, 65, and 67). All data net of volume discounts. Liquid prices are converted to dry-substance (100% lysine) basis. Domestic trade sales only. c The shadow price of lysine from natural grain and oilseed sources. It is assumed that 97 lbs. of corn and 3 lb. of lysine is equivalent to 100 lb. of soybeans in lysine content. Soybean and corn prices are from central Illinois cash prices.
1.21 P 1.18 1.12 1.08 0.98 0.96 0.94 0.92 0.89T 0.90 0.98 1.03PN
Average Pricea
1995: January February March April May June July August September October November December
Month
All U.S. Lysine
216
These columns are derived from ADM’s known monthly volume of dry and liquid (DS-equivalent) lysine; also the monthly prices and volumes of annual sales of the top four companies. Monthly volume growth is assumed to be 1% in 1990, 1991, and 1996 and is calculated to be 2.99% in 1992 and 0.62% in 1993-1995. Annual volume is calculated from annual sales divided by the average annual price; then monthly volume is calculated with the monthly growth rates mentioned above. Finally, an adjustment is made for seasonal quantity using the average of four years of ADM’s monthly volumes (1992-1995). The four peak months (Sept.-Dec.) averaged 24.47% higher volume demand than the three trough months (March-May). Thus, the three trough months are 12.2% lower than their trend, and the four peak months are 12.2% above. These volumes include ADM’s considerable (and unique) U.S. sales of liquid lysine, aggregated using the dry-substance (100% lysine) content of liquid lysine. While conspiring on the price of liquid lysine was not alleged in the plea bargain agreement, because the active content of liquid lysine was a perfect substitute for dry lysine, the prices and price changes of the two forms were doubtless closely positively correlated. Therefore, it is legitimate to include the quantities of both when calculating overcharges. e ADM’s share of sales from the three U.S. plants plus any U.S. imports by Ajinomoto, Kyowa, and Sewon. Does not include Cheil’s imports nor adjust for U.S. exports. Sources: Exhibit C to Plaintiff’s Interim Report No. 1 (April 29, 1996 and 1996 supplement), In re Amino Acid Lysine federal class-action suit. Exhibits 61, 63, 65, and 67 in U.S. v. Michael Andreas et al.
d
Appendix Table A3. U.S. Overcharge Estimates, Lysine Cartel, Before-and-After Approach,1992-1995. But-for Price = $0.65 But-for Price = $0.70 Period Constant Annual Seasonally Constant Annual Seasonally Volumea Adjustedb Volumea Adjustedb Million dollars 1992: August 0.60 0.44 0.60 0.00 September 2.05 0.81 1.44 0.30 October 3.25 1.87 2.65 1.35 November 3.97 2.56 3.37 2.03 December 3.97 2.64 3.37 2.09 1993: January 4.41 4.28 3.75 3.63 February 3.88 3.79 3.21 3.13 March 3.21 2.81 2.54 3.39 April 1.74 1.53 1.07 0.94 May 0.13 0.12 -0.54 -0.47 June -0.40 -0.40 -1.07 -1.07 July 1.47 1.47 0.80 0.80 August 3.08 3.10 2.41 2.42 September 4.41 3.65 3.75 2.89 October 5.75 5.20 5.08 4.44 November 6.02 5.54 5.35 4.77 December 6.42 6.04 5.75 5.26 1994: January 6.73 6.53 6.02 5.84 February 6.59 6.43 5.88 5.73 March 6.59 5.77 5.88 5.14 April 6.59 5.80 5.88 5.17 May 6.59 5.84 5.88 5.20 June 6.59 6.59 5.88 5.88 July 6.31 6.31 5.59 5.59 August 6.59 6.63 5.88 5.91 September 7.31 6.84 6.59 6.03 October 7.88 7.54 7.17 6.72 November 8.17 7.91 7.45 7.09 December 8.17 7.96 7.45 7.13 1995: January 8.41 7.78 7.66 7.09 February 7.96 7.41 7.21 6.71 March 7.06 6.57 6.30 5.87 April 6.46 5.42 5.70 4.79 May 4.95 4.19 4.20 3.55 June 4.95 4.44 3.90 3.73 July 4.35 4.16 3.60 3.44 August 4.05 3.89 3.30 3.17 September 3.60 2.44 2.85 1.63 October 3.75 2.26 3.00 1.80 November 4.95 3.96 4.20 3.13 December 5.70 4.81 4.95 3.98 Total 8/92-7/95 178.26 161.49 155.66 140.61 Total 8/92-12/95 204.66 183.37 177.56 157.76 Sources: Appendix Table A2 a From known U.S. sales and average monthly prices, the volume can be derived for the year. Each month is onetwelfth of the annual estimate. Negative overcharges are not totaled.
217
b
Seasonally adjusted volume is shown in the 5th column of Appendix Table A2. Seasonal peak demand for animal feeds is believe to be September-December (for farm use December-February). ADM’s lysine demand also peaks at the same time. Thus the difference between average prices in September-December and the rest of the year is subtracted from peak-month prices. In the two quasi-normal years 1994 and 1995, the absolute price differences were 9.1 cents and -9.9 cents. The latter year was affected by a drop in the ceiling price, and in both 1992 and 1993 the cartel formed (and reformed) later in the year. Thus, the prices are reduced by 9 cents in Sept.-Dec. of each year because 1994 seems like the only normal year.
218
ADM: *Michael Andreasb *Terrance Wilson *Mark Whitacre James Randall Ajinomoto: *Kazutoshi Yamadac *Kanji Mimoto *Hirozaku Ikeda *Alain Crouy *Philippe Rollier *Jacques Chaudret Hisao Shinohara Kyowa: *Masaru Yamamotod Takaaki Sato/Seiji Hasumi Sewon: *Jhom-Su Kime *Heon-Kang Park Cheil: *Jun-Mo Suhf Tae-Hong Choi Jae-Eui Kim Jung-Jin Kim Jin-Hyun Kim
Subject Matter and Participants Lysine Association Agreement on prices Discussion of volumes Agreement on volumes Monitoring of volumes Citric acid conspiracy discussed Other
X
X X X
X X
Tokyo 4/14/92 X X
X X
X X
Maui, HI 4/16-17/92 X X
Appendix Table A4. Anatomy of an Antitrust Conspiracy.
X
Plant tour X X X X
X X
X X
219
X X
X X X
X X
X X
General Meeting Places and Datesa Mexico Decatur Seoul City 6/19/92 6/19/92 6/23/92 X X X X X X X
X
X
X
X
X
X
X X X
X
X
X
X X
X X
X
X X
Chicago 4/15/93
Paris 10/1/92
Seoul 8/27/92
X X X
X X X
X
Tokyo 5/27/93
X
X X
X X
Tokyo 6/18/93 X X X X
X
X
X X
Tokyo 11/30/93 X
Subject Matter and Participants Lysine Association Agreement on prices Discussion of volumes Agreement on volumes Monitoring of volumes Citric acid conspiracy Other ADM: *Michael Andreasb *Terrance Wilson *Mark Whitacre James Randall Ajinomoto: *Kazotoshi Yamadac *Kanji Mimoto *Hirozaku Ikeda *Alain Crouy *Philippe Rollier *Jacques Chaudret Hisao Shinohara Kyowa: *Masaru Yamamotod Takaaki Sato Sewon: *Jhom-Su Kime *Heon-Kang Park Cheil: *Jun-Mo Suhf Tae-Hong Choi Jae-Eui Kim Jung-Jin Kim Jin-Hyun Kim Plant tour X X X X X
X X
X
X X
X X
X X
Decatur 4/30/93
Chicago 4/28/93
220
X
X X X
X
X
X
X
X X X X
X X
X X X X
X
X X
X
Paris 10/5/93
X
X X
X X
X X Market size
X
X X
X
General Meeting Places and Datesa Tokyo Vancouver 5/14/93 6/24/93
Appendix Table A4. Anatomy of an Antitrust Conspiracy (cont’d).
X
X
X
Market size X
X X X X
Irvine, CA 10/25/93
X
X X X
X X
X
X
X
X X
X
X X
X
X X
X X
X
X
X
X X
X
X X X
X
Cheil boycott
X
first qtrly. meeting
Tokyo 12/8/93 X X X X X
X
X
JV proposal X X X
X X
Chicago 10/13/94
X
X
X X
X
X
Sewon boycott
Zurich 10/24/94 X X X X X
X X
X
X X X
X
X
Atlanta 1/18/95 X X X X X
X
X
X
X
X
Hong Kong 4/21/95 X X X X X
canceled
Cayman Islands 7/95
221
Source: Lassar and Griffin (1998). *’ Principal co-conspirators a This list of meetings does not include some smaller bilateral meetings, many meetings of regional sales managers, and many telephone conversations. Smaller conspiracy meetings occurred on 11/10/93, 8/7/92, 5/27/93, 5/27/93. Meetings after March 1994 were “maintenance meetings.” Participants from 5/94 to 5/95 are estimates by the author, except Chicago and Atlanta. The FBI videotaped the meetings of 4/16/92, 4/15/93, 10/25/93, and 1/18/95. b Other employees of Archer Daniels Midland Co. who conspired on lysine prices include John Ashley, Alfred Jansen, Shuji Tani, Martin Allison, and Sidney Hulse. James Randall was not indicted. c Ajinomoto Company, Inc. owned a U.S. production subsidiary Heartland Lysine, Inc. and a French production subsidiary Eurolysine, SA. Both subsidiaries were joint ventures with a French company Orsan, which was not indicted. Other conspirators include Kazuhiro Uozumi, Sam Wada, Masao Horiuchi, Alain Vrillon, Christian Sacchetti, Henri Vetter, and Fumihaso Sago. d Kyowa Hakko Kogyu Company, Ltd. owned a U.S. production subsidiary, BioKyowa, Inc. Other conspirators include Michinobu Inoue, Seiji Hasumi, Sadao Akita.
ADM: *Michael Andreasb *Terrance Wilson *Mark Whitacre James Randall Ajinomoto: *Kazotoshi Yamadac *Kanji Mimoto *Hirokazu Ikeda *Alain Crouy *Philippe Rollier *Jacques Chaudret Hisao Shinohara Kyowa: *Masaru Yamamotod Takaaki Sato Sewon: *Jhom-Su Kime *Heon-Kang Park Cheil: *Jun-Mo Suhf Tae-Hong Choi Jae-Eui Kim Jung-Jin Kim Jin-Hyun Kim
Lysine Association (AAMIA) Agreement on prices Discussion of volumes Agreement on volumes Monitoring of volumes Citric acid conspiracy Other
Subject Matter and Participants
General Meeting Places and Datesa Makaha, Decatur Saporro Paris HI 9/94 8/94 5/94 3/10/94 X X X X X X X X X X X X X X X X
Appendix Table A4. Anatomy of an Antitrust Conspiracy (cont’d).
f
e
222
Sewon Company, Inc. (formerly Miwon Foods Company, Ltd.) owned U.S. lysine distributor Sewon American, Inc. Additional conspirators were K.N.Kim, Jae-Moon Yun, Hwan Lim, Edward Kim, Hoon Lim. Cheil Sugar Co. (Cheil Foods) owned a production subsidiary in Indonesia but had no U.S. affiliates. Additional conspirators were S.F. Park.
9.1 36.2
Kyushu, Japan
Amiens, France
4.5
Hungary
0
Degussa: Slovakia
0
0
9.1
70c
36.2
52.0
107.0
June 1992, Asianb
Dec. 1988e
Dec. 1990e
0
0
9
60-100
36
52
107
129
0
0
0
0
10
0
6
8
10
34
0
0
0
7
3
40
27
77
223
166
0
0
0
0
30
0
9
13
20
41
0
0
0
12
5
40
30
87
Thousand metric tonnes
June 1993, Asiand
TOTAL 262.0 274.3 264-304 E = Estimated. -- = Not available. a ADM’s estimate (Tr. Ex. 4T) made in June 1992 in Mexico City.
0
9.1
113.4c
AECI: South Africa
Indonesia
Cheil Jedang:
Decatur, ILc
ADM:
Kunsan, Korea
36.2
9.1
Veracruz, Mexico
MIWON (SEWON)
12.7
9.1
Cape Giradeau, MO
Hofu, Japan
35.4
0
China
KYOWA HAKKO:
0
B
18.1
Brazil
Italy
g
Eddyville, IA
4.5
67.9
AJINOMOTO:
Thailand
Dec. 1991, ADMa
Company: Plant
Appendix Table A5. Lysine Manufacturing Capacities, 1988-1996.
378
0
0
20E
113
40E
5
12
15
40E
72
0
0
10
g
40
5
45
25E
125
Dec. 1992e
15 40
j
269
0
0
15
80
36
8
12
15
15
50
0
0
0
g
18
10
471h 374
6 h
11
30
113
80
10
20
20
20
70
6
0
20
60
15
50
0
151
Dec. 1996f
3
0
20
113
50
8
15
20
20
63
0
0
15
45
j
40
g
10
j
20E
125
j
Dec. 1994f
88j
Dec. 1992f
Meeting in Tokyo 6/19/93 (Tr. Ex. 131) by top three Asian producers. From Connor (1998) who used public announcements and growth trends. Combined information from Connor (1998) and trial exhibits. Ajinomoto’s plant in Italy was reportedly purchased from a company called “Biyako” (probably Biocor) for $50 million in 1991 or 1992 (Ex. 126T). The plant made MSG but was converted to lysine capacity of 10,000 tonnes by October 1992 or very early in 1993 “for the purpose of reducing the volume [of MSG] to maintain the MSG price in [the] European market.” Given Ajinomoto’s dominance in MSG, this acquisition violated the EU’s competition laws.
Ajinomoto and Kyowa’s companies’ own estimates (Tr. Ex. 4T) made in June 1992 in Mexico city. In a June 1992 visit from Sewon officials, ADM claimed only 70Kt/year capacity, but possible 113Kt by September 1992 (Tr. Ex. 140-T). This seems to be an optimistic claim. The best guess is that ADM’s installed finishing capacity reached 47,000-tonnes capacity in mid 1991; 70,000 tonnes by the third or fourth quarter of 1991; and its full 113,000 tonnes by the second or third quarter of 1992.
j
224
Includes capacity in Eastern Europe. Alain Crouy testified that in the first half of 1992, Ajinomoto’s total sales volume was 80 to 85 Kt, of which Eurolysine sold 40K, Heartland 15-20 K, and the two Asian plants 20-30 K. Thus, total capacity of 88Kt is reasonable, if a little low. By December, the French and Thai plants may have expanded by 5 Kt each. Sources: Above footnotes and Connor (1998) from public construction announcements.
h
g
f
e
d
c
b
269.4
18.2
71.8
37.1
49.2
90.0
12/95d
a
225
E = Estimated when others known. Tr. Ex. 4-T. Estimate made by two largest Asian manufacturers in June 1992 in Mexico City. A one-year forecast. b Tr. Ex. 16. Sales are for first 11 months, projected to the full year. Reported by four sellers and summarized at 1/95 cartel meeting.
Appendix Table A6. Global Sales Volume of Dry, Feed-Grade Lysine Manufacturers, by Region, 1992-1995. Sales in the Year Ending f j e g Company: Region 12/91 8/92 12/92 12/92 9/93a 12/93i 6/94h 12/94b 12/94c Thousand metric tonnes/year AJINIMOTO: 80 81-82 79 84 66 87.4 84 84.0 84.2 No. America 20 18.9 Latin America 3E 4.6 Europe 35.5 Asia 20E 25.1 KYOWA HAKKO: 40 45 40 46 34 47.8 46 47.0 47.6 No. America 16 17.4 Latin America 12E 11.7 Europe 8 10.3 Asia 8E 7.7 MIWON (SEWON): 30 35 34 33-34 18 35.4 34 36.4 36.4E No. America 8 7.2 Latin America 1E 1.1 Europe 10.1 Asia 16E 17.7 ADM: 13 60 45 45-46 48 46.8 54 67.3 68.3 No. America 9 32.0 Latin America 1 7.2 Europe 3 13.8 Asia 0 14.2 CHEIL JEDANG: 5 6-7 10 10-14 6 14.5 14 17.7 18.0 No. America 0 0.2 Latin America 0E 0 Europe 2 9.2 Asia 3E 8.3 TOTAL SALES 170 227-229 208 218-222 172 232 232 252.5 254.2
k
j
i
h
g
f
e
d
c
226
Tr. Ex. 17-T. Actual results reported among all five cartel members at 1/95 Atlanta meeting. Tr. Ex. 17-T. Assumes 7% global volume growth and 3Kt for new entrant AECI. Consensus of five cartel members meeting in 1/95. Tr. Ex. 27. Estimates by Miwon in November 1993. Tr. Ex. 125-T. Estimates made by top three Asian producers in June 1992 in Seoul, South Korea. Tr. Ex. 131. Lower estimates by Japanese firms, higher by Korean. Later, lower figures are accepted by cartel. June 1993 meeting of 5 producers. Tr. Ex. 132-T. Sales reported by all four Asian producers in Tokyo, June 1993. Tr. Ex. 134-T. Sales reported by all five cartel members, June 1993 meeting. Tr. Ex. 126-T. Ajinomoto senior manager’s view, which was 5Kt too low for Sewon’s true output. Meeting in Seoul, South Korea 8/27/92. Does not include some minor production.
Appendix Table A6 continued
Global Consumption/Capacity Source: Tables A5 and A6.
Sales/Capacities (%):
Sales Volume (Kt):
Production Capacity (Kt):
Item
227
75 83 22 56
Kyowa Sewon ADM Cheil
67
91
Ajinomoto
5
Cheil
69
13
ADM
Cartel
30
Sewon
9
Cheil
40
60
ADM
Kyowa
36
Sewon
80
53
Kyowa
Ajinomoto
88
Ajinomoto
170
246
Cartel total
Cartel total
254
World
1991
Appendix Table A7. Comparisons of Global Lysine Sales, Capacities, and Consumption, 1991-1995.
1992
77
80
56
92
84
84
77
12
45
33
46
84
220
15
80
36
55
100
286
294
63
75
42
70
83
70
63
Percent
15
47
35
48
87
232
20
113
50
58
125
366
366
Thousand tonnes
1993
1994
66
90
60
72
76
67
68
18
68
36
48
84
254
20
113
50
63
125
371
386
1995
61
72
64
46
70
69
64
18
72
37
49
90
269
25
113
80
70
130
418
443
NT$32 ------
Taiwan
Malaysia
Philippines
Thailand
Indonesia
Japan
--
--
--
--
--
NT$34
A$1.68
A$1.68
$1.13
--
$1.13
$1.18
DM1.8
B
B
$1.05
11/92
b
China ---- = Not available a Mexico City agreement 6/92 (Tr. Ex. 4-T). b Paris meeting agreement of 10/92 (Tr. Ex. 10-T and 128-T). c Vancouver meeting agreement of 6/93 (Tr. Ex. 134-T and 45). d Paris meeting agreement of 10/93 (Tr. Ex. 135-T). e Tokyo meeting agreement of 12/93 (Tr. Ex. 142-T). f Hawaii meeting agreement of 3/94 (Tr. Ex. 137-T).
A$1.54
New Zealand
$1.04 A$1.54
--
--
Australia
Asia/Oceania:
Mexico
$1.05
Latin America:
--
b
DM1.8
B
B
$1.05
10/92
$1.04
a
South Africa
$1.05
B
Canada
Europe/Middle East/Africa:
B
$1.05
10/92
USA
North America:
Area
--
--
--
--
--
--
--
--
--
228
$1.15
--
--
B
$1.18
B
B
$1.20
12/92
a
10/93d
RNB19
--
Rp4500
B57
--
--
NT$28
NZ$1.63
A$1.36
$0.85
P2.95
$0.85
$0.85
DM1.45
$0.85
$0.85
--
--
--
--
--
--
--
--
--
A$1.90
$1.22
--
$1.22
--
DM2.4
--
--
$1.20
Currency unit/poundh
7/93c
Effective Date
Appendix Table A8. Agreed Lysine Target Prices, by Region, Delivered or CIF, Selected Meetings, 1992-1995.
--
--
--
--
--
--
--
--
--
$1.22
--
$1.22
B
DM2.4
--
--
$1.20
1/94e
--
$1.43
$1.47
B36
$1.59
$1.33
$1.54
--
$1.35
$1.22
$1.20
$1.18
DM2.4
--
--
$1.16
4/94f
$1.27
$1.56
$1.40
B36
$1.59
$1.33
NT$42
B
A$1.86
--
$0.99
$1.22
--
DM2.2
C$1.75
$1.30
--
1/95g
h
229
Atlanta meeting agreement of 1/95 (Tr. Ex. 17-T and 138-T). U.S. dollar unless otherwise specified. Note: This is not an exhaustive list of price agreements and dates. Many agreements were made in subsequent telephone calls. This is a complete list of agreed prices shown in the trial exhibits.
g
APPENDIX B Citric Acid Chronology
230
Early History: One source states that the U.S. citric acid industry began with Pfizer, Inc. manufacture in 1880. Pfizer is also credited with developing the Ashallow pan, deep tank fermentation process@ that became the industry standard by the 1980s. (CMR 7/9/90). According to another source, commercial manufacturing of citric acid began in 1826 in Selby, Yorkshire, UK by John and Edmund Sturge. They treated calcium citrate chemically. Shortly after 1900, citric acid production in Europe became an Italian monopoly, because calcium citrate was extracted from Italian lemons and limes. World War I interfered with Italian citrus production, leading to very high citric acid prices through the early 1920s. In the late 19th century, it was discovered that the Penicillium mold grown in sugar solutions produced citric acid, but amounts were too small to justify commercial production. However, in 1917, J.N. Currie published a paper in the Journal of Biological Chemistry that reported on research with the mold Aspergillus niger. This mold produced relatively large amounts of citric acid when grown in a liquid of sucrose, salts, and iron. Charles Pfizer, Inc. worked with Currie to scale up the process and began commercial production in its Brooklyn plant in 1923, thus breaking the Italian monopoly. In the UK, John & E. Sturge, Ltd. Implemented Currie=s process in 1930. Production spread to Germany, Belgium, and Czechoslovakia using beet sugar molasses as the base. After 1945, a few improvements occurred (submerged cultures, improved yeast strains, and glucose bases). In the 1960s, a new technology applying yeasts to petroleum-derived n-alkanes was proved to be technologically feasible, but was never commercially successful. (The Independent 3/9/92). Miles Laboratories of Elkhart, Indiana was manufacturing citric acid in the early 1970s and probably earlier (Chemical Week 12/3/75). In 1975, Miles formed a marketing joint venture with Liquichemica Biosintensi, a subsidiary of Italy=s Liquigas. The Liquigas plant built in Reggio Calabria, Italy was to produce 50,000 mt of citric salts from petroleum-based carbohydrates= fermentation. (Chemical Week 11/12/75). [The JV soon failed]. Early 1970s: Citric acid production began in China in the early 1970s. Most factories fermented sweet potatoes on a small scale. Some use cassava. (Agri Pulse 9/16/97). 1978: Bayer AG acquires Miles Laboratories, Inc. and merges it with its holding company Rhinechem Laboratories, Inc. in February 1979 (www.fisonline.com). October 1982: China=s largest citric acid plant doubles its annual output to 4,000 mt/yr. The plant, Nantong Fermentation Factory in Nanjing, expects to reach 7,000 mt in a few years; it exports 30% of production (Xinhua New Service 10/28/82). February 1986: La Citrique Belge, a subsidiary of Hoffman La Roche, will spend Bfr. 800 million expanding its citric acid plant in Tienen, Belgium (Reuters 2/12/86). November 1987: Cargill announces plans to build a citric acid plant at a cost of $25 million or more next to its existing Eddyville, Iowa corn refining plant. The plant will produce 60 mil. lb. with 25 to 30 new employees added to the 100 already employed. (UPI 11/2/97). 231
January 1988: In 1987, China=s citric acid production reached 45,000 mt (Xinhua News Service 1/15/88). World production capacity reported to be 550,000 tons. June 1988: Construction begins on Cargill=s plant now to cost $40 million. Capacity will be 25,000 mt of liquid citric acid made from liquid dextrose (UPI 3/17/88). Production scheduled to begin in 1990. Late 1980s: Barrie Cox of ADM testifies that Pfizer was engaged in price fixing of citric acid during the time he was employed at Pfizer, but he was not aware of it until he met the three European manufacturers in Basel on March 6, 1991 (see below). He did not learn of the size or length of time of the earlier conspiracy, but believes that it had ceased by December 1990. [This would explain why the 1991-1995 conspiracy could be put together so quickly and why it worked so smoothly at the beginning.] (U.S. vs. M. Andreas Tr. 2654). March 1990: Biocor, Italy=s sole citric acid producer (25,000 mt), is sold by UK=s Sturge Biochemicals to Cremonini, a unit of Consorgio Imprenditoriale Ligure Padano (C.I.L.P.) (Reuters 3/7/90). In October, 1991, Biocor is sold again to the Cerestar subsidiary of Ferruzzi-Montedison of Milan. Biocor has about 10% of the European citric acid market of 200,000 mt (Chemical Week 10/2/91). Biocor=s plant is in Casei Gerola, Italy, near Pavia. Ferruzzi is now named Eridania. August 1990: Bayer AG buys the citric acid business and assets of Sturge in Selby, UK for 56 million pounds (www.fisonline.com). August 1990: ADM agreed to buy Pfizer=s citric acid business. The transaction, completed in December 1990, includes Pfizer=s technology and two plants: Southport, NC (100 mil. lbs.) and Ringaskiddy, Cork, Ireland (20 mil. lbs.). In addition, Pfizer=s plant in Groton, CT will supply up to 40 mil. lbs. to ADM until 1993. Pfizer=s 1989 citric acid sales were $180 million. In late August, Bayer AG bought the Selby, Yorkshire, UK citric acid plant of RhônePoulenc (Lyons, France) for $100 million. The UK plant has 46 mil. lbs. capacity, but with Aminor adjustments@ can be raised to 72 mil. lbs. Bayer=s Miles Labs subsidiary (now part of Haarmann & Reimer Corporation of Springfield, NJ) owns 2 U.S. plants (Elkhart, IN and Dayton, OH) with 140 mil. lbs. capacity. In addition, Bayer=s joint ventures in Mexico, Columbia, and Brazil give it a total of 300 mil. lbs. capacity or 30% of global consumption. (Chem. Wk. 8/90). Cargill=s Eddyville, IA plant has 55 mil. lbs. capacity. Production began in the spring; added 17% to U.S. capacity. The Montana AG subsidiary of Jungbunzlauer Spiritus und Chemische Fabrik AG of Vienna operates a citric acid plant in Ladenburg, Germany and plans a new French plant of 45, 000 mt.
232
World consumption is growing 4% p.a., but was growing faster in the early 1980s (Chem. Wk. 8/90) December 1990: With the completion of the Pfizer citric acid business by ADM, Barrie Cox becomes VP in charge. In this first month on the job, Wilson asks Cox to set up meetings with the three largest European manufacturers (Roche, Jungbunzlauer, and Bayer). (U.S. vs. M. Andreas Tr. 2624). 1990: Citric acid accounts for 75% of total U.S. acidulate volume consumed and 83% of value. Total U.S. capacity (including Cargill) is about 325 mil. lbs. In late 1990, Cargill=s plant was near capacity, so prices firmed. In 1989, citric acid was priced at 754 - 854/lb., but in 1990 fell to 604 - 654/lb., which was unprofitable for all producers. [ However, see the later CMR article for July 1991 which contradicts this statement]. In June, 1990 prices were about 684/lb. Imports fell from 65 mil. lb. in 1989 to 61 mil. lb. In 1990, while exports increased from 16.5 to 21.3 mil. lb. The total U.S. market for all acidulates is about 450 mil. lb. Citric acid growth in the 1980s was fueled by soft drinks and detergents (phosphorus replacement). Phosphoric acid accounts for 48 mil. lb. of acidulate use, mostly in soft drinks. Processed foods utilize about 33% of all acidulates, most citric and lactic acids. Lactic acid is useful in frozen foods and is growing 8-10% p.a. ADM will join Sterling as the only lactic acid producers in late 1991. ADM=s will be the first fermented, Anatural@ product. Malic acid made solely by Haarmann & Reimer, accounts for 4% of demand; its flavor profile makes it popular in candy and tea mixes. Fumaric acid, with 2% of U.S. consumption, is mostly used in nonfood products. H&R and Pfizer are the sole U.S. producers. Adipic and tartaric acids sales are only $5 mil. (and 5 mil. lb .) (CMR 6/3/91). January 1991: Wilson & Cox meet Mr. Huari of Hoffmann-La Roche in Basel; Hans Hartmann of H & R in Hanover; and Bichlbauer, Lutz, and Kahane of Jungbunzlauer in Vienna. These were simply introductory, get-acquainted meetings (U.S. vs. M. Andreas Tr. 2625). 1991: A consultant=s report provides the following estimates of citric acid demand: about 50% for food and beverages (of which 30% soft drinks, 20% fruit drinks, and 25% beverage powders) and 50% in the pharmaceutical and chemical industries. [The food-industry use is much lower than other sources]. U.S. production is estimated to be 388 million lb. in 1991. The following estimates of 1991 and 1995 (projected) finishing capacities and sales for citric acid are given in millions of pounds:
233
Supplier
Capacity 1991
Sales
1995
1991
1995
ADM
200
200
170
175
H&R
125
125
110
110
Cargill
80
160
66
150
Imports
42
20
42
20
447
505
388
455
TOTAL
(HRA The North American Corn Wet Milling Industry 1992). March 6, 1991: Representatives of the four largest manufacturers meet to fix prices in Basel, Switzerland: Wilson and Cox (ADM); Hartmann and Yamashita (H & R); Huari & Marti (Roche); and Hummer & Bichlbauer (Jungbunzlauer). Wilson had arranged the meeting two weeks before. Cox learns for the first time that his former employer, Pfizer, was part of a global cartel in the late 1980s. The meeting covered many general topics: poor prices, Chinese competition, etc. Mr. Huari congratulated ADM on its unilateral price increase in the U.S. from $0.65 to $0.68/lb. They agreed to raise prices globally, except for a 3% discount for the five largest buyers. Moreover, they agreed to fix market shares at the average shares of 1988-1990. A buy-back system was established, as was monthly reporting of sales to Huari. Finally, they decided to meet secretly at ECAMA meetings as a cover (Eur. Citric Acid Manufacturers' Association) twice a year. The sales volumes were organized by North America, Europe, and ROW. Allocations were in tonnes based on assumed consumption growth. H & R requested a larger share at the meeting, but ADM and Roche gave up small shares to satisfy H & R two weeks later (U.S. vs. M. Andreas Tr. 2626-2642). It was Wilson who handled the compromise with H & R (Tr. 2764). May 1991-June 1995: List prices of U.S. anhydrous citric acid rose from 65 cents per pound to 68 to 73 to 76 to 79 to 82 and to 85 cents, testifies Barrie Cox (U.S. vs. M. Andreas Tr. 2679-2685). The first price increase announced in February 1991 effective March 1991, was a unilateral ADM action; except for one Cargill-led increase, all others were led by members of G-4 or G-5 by agreement. [Trade press said the 2/91 increase was led by Cargill, not ADM]. May 14, 1991: The four citric acid conspirators meet in Vienna for the second time to fix prices the day before the regular ECAMA meeting. Present were Wilson and Cox (ADM); Bichlbauer and Heumer (Junglbunzlauer); Hartmann and Schaller (H & R/Bayer); and Huari, Hummer, and Marti (Roche). They discussed the citric acid market generally, Chinese competition, price changes, and the cartel quota system. The quota system was changed from absolute tonnage per company to a percentage basis: H & R got 34%, ADM 27.5%, 234
Jungbunzlauer 24%, and Hoffmann-La Roche 14.5% of cartel sales volume (U.S. vs. M. Andreas Tr. 2642-2645). July 1991: Cargill announces a price increase from $0.68 to $0.73/lb., effective 8/15/91 for truckloads delivered; below 24,000 lbs. $0.77 and below 9,600 lb. $0.81. Cargill introduced its new production in 7/90 at $0.63/lb., $0.10 below industry list at the time. By 11/90, transaction prices fell to about $0.55 --slightly above production costs. Prices began rising throughout early 1991. Buyers say that prices will take another year (to mid 1992) to reach $0.73; contracts are usually signed in September or October at a discount of 3 to 5 cents from list. Jungbunzlauer has 3 European plants; a 50,000 mt citrates plant in Ludenburg; a recently expanded citric plant near Vienna; and a 45,000 mt plant being built near Strasbourg, France. ADM is Afollowing@ market prices, avoiding aggressive pricing. Imports are down. U.S. citric demand is 335 - 340 mil. lbs./yr. With 3% growth; Canada demands 20 - 22 mil. lbs. more. (CMR 7/22/91). October 1991: Jungbunzlauer of Vienna and Sungai Budi group (Jarkarta) agreed to build a 10,000 mt citric acid plant in Sumatra, Indonesia. (Chem. Wk. 10/16/91) November 1991: The Austrian government is lending China $50 million for 5 citric plants, each about 3,000 mt, using technology from Vogelbusch Company of Austria (Xinhua 11/29/91). November 14, 1991: The third meeting of the cartel occurs in Brussels (U.S. vs. M. Andreas Tr. 2664). December 1991: Cargill and the U.S. import agent for Gadot Israel raised list prices for anhydrous citric acid from $0.73 to $0.76 as of early January for full truckloads delivered ($0.80 and $0.84 for smaller loads). Earlier, Cargill added a 3 cent premium for deliveries west of Denver. This price increase was led by H&R on 12/1/91 and followed by ADM (12/31/91), Roche (1/1/92) and Jungbunzlauer (1/1/92). Citric growth is about 5% p.a. this year. ADM appears to be expanding its NC plant, to Awean itself@ from Pfizer=s Groton, CT plant. (CMR 12/23/91). o March 1992: Cargill plans IA expansion from present 80 mil. lb. to 160 mil. lb.; will add citrates to the liquid acid now made. Jungbunzlauer is building an integrated starch/citric acid plant of 88 mil. lb. capacity in Marckolsheim, France, to begin production fall of 1993. Its Pernhofen, Austria plant will be expanded to 220 mil. lb., and Ludenburg will be at 133 mil. lb. by the summer, up from 44 mil. lb. at present. 235
Prices are to rise in U.S. to $0.79/lb. effective 4/92, for all major sellers. Citrate will rise to $1.08/lb. Exports in 1991 doubled to 22,000 mt. (CMR 3/30/92). May 20, 1992: The cartel meets in Jerusalem, Israel (U.S. vs. M. Andreas Tr. 2658). ADM had failed to reach its quota but H & R had exceeded it, so H & R eventually agreed to buy citric acid from ADM by way of compensation (Tr. 2666). The cartel called itself G-4 (Tr. 2669). June 23, 1992: At the first general meeting of the lysine cartel in Mexico City, T. Wilson, who had management responsibilities for sales of citric acid at ADM, explained that the ongoing citric acid association used both formal and informal methods for tracking sales figures. These sales data were then used to allocate quantity market shares among participants in the citric acid cartel. Wilson explained that these shares were the way that the cartel instilled cooperation and discipline among its members. (Lassar and Griffin: 22-23). November 18, 1992: The cartel meets in Brussels (U.S. vs. M. Andreas Tr. 2658). Cerester joins the cartel and is granted a 5% quota based on past sales (Tr. 2668). The cartel was renamed G-5 (Tr. 2669). December 1992: A new citric acid plant of 35,000 mt. capacity will start production in Calitri, Italy in 1/93, owned by the Palma Group. The world market is about 500,000 mt; Europe’s is 200,000 mt., with 3% to 5% growth p.a. The only other Italian producer is Biacor (Padova) with one 24,000 mt. plant. (Reuters 12/11/92, Chem. Wk. 12/23/92). December 10, 1992: The FBI is first informed by Whitacre about ADM’s involvement in citric acid price fixing. He tapes ADM manager Wayne Brasser on 12/21/92 to prove it to the FBI. On the tape Brasser says that Wilson said that Brasser should not worry about going to jail. Brasser was fired when he refused to fix prices (Tr. 2868-2873). January 1993: List prices reached $0.82/lb., large orders $0.80. Exports in 1992 were steady at 22,000 mt. U.S. consumption is 35 mil. lb. (CMR 1/11/93). May 14, 1993: In a meeting in Tokyo, Wilson explains to the nascent lysine association how the citric acid cartel works. ADM reports its citric volume each month to the citric acid association. Every year, Swiss accountants audited those figures. Volume and shares are then reported to each citric producer (but the Areporting must be very confidential@). Members could agree on percentage shares rather than volume [because of uncertainty about total market size]. Wilson Aconcluded that this plan worked well with citric C citric prices had been as low as $0.58/lb. but had moved to $0.82/lb.@ (Lassar and Griffin:32). [Wilson seems to be referring to U.S. list prices which did rise to $0.82/lb. in 1993, but list prices of $0.58/lb. had not been seen since 1977. When the citric acid cartel began its agreement in July 1991, U.S. list prices were about $0.68 and contract prices averaged $0.62/lb. So, Wilson seems to have been exaggerating about the price impact of the cartel]. June 1, 1993: The cartel meets on Kildare Island, Ireland (U.S. vs. M. Andreas Tr. 2658). 236
July 1993: Total acidulents market in U.S. is about $225 million to $260 million. U.S. citric capacity estimated to be 460 mil. lb. In 1993; demand is 415 mil. lb. up from 400 in 1992, of which beverages take 45% and foods 23%. U.S. capacities are ADM 180 mil. lb., Cargill 130, H&R 150. Global growth about 4% p.a. In France, Jungbunzlauer will get to 40,000 mt. capacity with Austria & Germany adding 120,000 mt more; its Indonesian JV will come on line in late 1993. An unknown Czech. facility has 30,000 mt capacity. Current U.S. list prices $0.82. (CMR 7/12/93). Cargill plans to build a 20, 000 mt. citric acid plant in India for $30 million (Asian WSJ 7/19/93). September 1993: Effective 10/93, ADM, Cargill, and H&R will increase posted prices on acid and citrate to $0.85/lb for a truckload, delivered. U.S. growth is 4% p.a. and global 56%. Cargill will increase capacity to 160 mil. lb.; Jungbunzlauer=s French plant (88 mil. lb.) will be in production 10/93; H&R has 150 mil. lb. capacity ; ADM got its NC plant up to 180 mil. lb. last year. Chinese supplies sell at 10 cents lower. Total U.S. demand is 450-500 mil. lb. In 1993. (CMR 9/20/93). September 1993: The success of the citric acid cartel was an inspiration for the price fixers in vitamins. Just before meeting with ADM officers on citric acid, Kuno Sommer of Roche wrote a memorandum that said in part: “Good experience with citric acid. Next opportunity B2.” (Barboza 1999). October 12, 1993: In a taped conversation, M. Andreas states his view that Cargill was not a member of the citric acid “club” (cartel) but would want to join in the future (Tr. 5614). October 27, 1993: The cartel meets in Bruges, Belgium (U.S. vs. M. Andreas Tr. 2658). Again ADM is under quota, so it sold citric acid to Hoffmann-La Roche and Jungbunzlauer in 1994 as compensation (Tr. 2672). May 1994: Cargill spokesperson estimates U.S. consumption at 400 mil. lb. in 1993, with growth at 3% p.a. Imports rose to 59 mil. lb, in 1992 to 91 mil. lb. in 1993. Capacity is 460 mil. lb. U.S. list prices are $0.82 - $0.85/lb. today. Pfizer closed its CT plant when ADM expanded its NC plant to 180 mil. lb. Cargill has 130 mil. lb. capacity; Roche has 70,000 mt in Belgium. Jungbunzlauer recently added 40,000 mt. to its existing 80,000 mt. plant capacity; has 20% of world demand. (CMR 5/?/94). May 18, 1994: The cartel meets in London (U.S. vs. M. Andreas Tr. 2658). August 1994: The Chinese government news agency claims that China produced 163,000 mt. of citric acid in 1993, of which 110,000 mt. was exported. Country s now second in world after U.S. (Xinhua 8/9/94).
237
November 2, 1994: The G-5 cartel meets in Brussels (U.S. vs. M. Andreas Tr. 2673-2674). [This is Wilson's last meeting with G-5]. Late 1994 - Early 1995: Barrie Cox testifies that beginning in late 1994, the market price in the U.S. began a severe decline as all members of the cartel began to cheat on price, including ADM itself. The reporting of market shares through Huari's office in Basel continued through May 1995, when it stopped. The last prearranged conspiracy meeting occurred in Brussels in November 1994 (U.S. vs. M. Andreas Tr. 2646-2652). [see May 1995]. January 1995: Barrie Cox and Rolf Soiron (CEO of Jungbunzlauer and at the time Chairman of ECAMA) went to China and spoke with the National Fermentation Association, warning it that an EEC anti-dumping action was possible (U.S. vs. M. Andreas Tr 2675-2676). February 4, 1995: The U.S. government announced prohibitive tariffs on $1.1 billion of Chinese imports, including citric acid, in retaliation for failure to protect U.S. intellectual property rights. (Reuters 2/4/95). To become effective 2/26/95. Why citric acid? Some suggest that the 50% increase in Chinese imports from 1992 to 1994; others claim that ADM or Cargill pressured the U.S. Trade Representative through Congress. Price increases are predicted if tariff is imposed. (CMR 2/27/95). Last minute Chinese concessions and citric production problems meant that the tariffs were never implemented. Among the concessions (see March 1997) are the elimination of government subsidies to citric acid exporters. May 1995: The cartel meets for the last time in Brittenau, Switzerland (U.S. vs. M. Andreas Tr. 2658). This meeting was unplanned. June 1995: Citric acid first mentioned as target of federal grand jury after FBI raid on ADM headquarters. Documents on prices and volumes of citric acid producers worldwide are found in ADM files. [WSJ 7/28/95:A1]. July 24, 1995: Price wars preceded the entrance of Cargill into citric in 1990 and ADM's entrance into lysine in 1990-91. Pfizer pioneered citric acid manufacturing but lacked the backward integration of Cargill and ADM. The price wars A. . . may well have played a role in Pfizer's ultimate decision to sell rather than stay in a . . . crowded market@ (CMR 7/24/95:3). [In what sense was this a crowded market?] September 1995: CMR reports that citric demand is strong despite the antitrust probe! [CMR=s economic literacy often leaves much to be desired]. Business as usual is the watchword. No price reductions are being offered by manufacturers. A. . . large customers in this business tend to be loyal [to] suppliers@ (p. 16). Chinese production problems and reduced government subsidies have forced import prices to rise 10% since January 1995. However, some large customers say that domestic prices are as low as $0.80/lb. – lower than 238
imported prices and 5 cents below list. In 1994, Chinese imports of 34 mil. lb. accounted for about 7% of the U.S. market=s 475 mil. lb. consumption. Production was about 490 mil. lb., some of it exported. U.S. capacities are 180 mil. lb. (ADM), Cargill 160, and H&R 150. (CMR 9/4/95). November 1995: ADM faces four private price-fixing suits; rises to seven by February 1996. [WSJ 11/17/95]. January 1996: Japan=s Fuso Chemical Company is building a 20,000 mt citric plant in Qingdao, China to begin operations 2/96. Fuso has been importing citric for 10 years, refining it in Japan. (COMLINE 1/31/96). March 1996: DOJ investigation, centered in U.S. Attorney=s San Francisco office, said to be moving slowly. No videotapes of price-fixing meetings exist. Documents in ADM offices show that ADM shared detailed sales figures with several European and Asian producers, but ADM will argue that conspiracy arose outside USA without ADM=s participation. [WSJ 3/27/96:A1]. April 5, 1996: Barrie Cox was transferred from his Decatur office to ADM=s office in Erith, Kent, England by Andreas and Wilson. Ostensibly, Cox was to continue to be responsible for sales and marketing of citric acid worldwide for ADM and to take on other duties as well to help ADM Ato be more active in Europe.@ The increased duties were few. Cox received a raise when he moved and every year since then (1997 and 1998) (U.S. vs. M. Andreas Tr. 2652-2654). June 1996: Tate & Lyle, through its A.E. Staley subsidiary, is acquiring 20% of India=s Bharat Starch Industries Ltd. (BSIL). The investment will expand BSIL=s existing citric acid plant from 30,000 to 50,000 mt and upgrade starch and sweetener production. The Indian citric market is growing 5% p.a. (Developing World 6/1/96). Sept. 27, 1996: With surprising suddenness, ADM offers to settle the class-action suit for $35 million. Plaintiffs had not yet received class-action status in the San Francisco District Court. ADM did not admit guilt in price fixing, but it signals intent to settle the DOJ cases as well. [WSJ 9/30/96:A3]. October 1996: Cargill will build a plant in Brazil for $50 million for start-up in early 1999. (Chem. Wk. 10/30/96). October 1-12, 1996: Aubrey Daniel of Williams & Connelly was the chief negotiator with Griffin, Spratling, Klein, etc. of the DOJ concerning ADM's guilty plea. He arranged the interrogation of Barrie Cox with the FBI in 10/12/96 so that the DOJ could be sure that Cox's future testimony would be worth the huge fine discounts on citric acid—a proffer. It was. In his 25-page 302 form that records the interview, nearly all the interview deals with antitrust. However, Cox did say that he had seen some "strange payments" concerning MSG 239
technology and in August 1995 told M. Andreas about them. Andreas said he would look into it, but he later told Cox that they were legitimate. Not so. They were off-the-books payments to Reinhard Richter's consulting company for services never rendered! (Lieber 2000) 316-317). October 15, 1996: During ADM's sentencing hearing, which lasted 20 minutes, Phillip Warren, the DOJ's lead prosecutor for citric acid in San Francisco, stated that the affected U.S. sales were $350 million and that the USSG range was $112-224 for ADM (Lieber 2000: 37). [a 73 to 86% discount]. October 15, 1996: It is revealed that a committee of 7 Aoutside@ ADM directors was authorized to make any plea agreements necessary with the DOJ as early as October 1995. On October 15th, ADM announces a guilty plea agreement with the DOJ in the lysine and citric acid cases. Fines of $100 million are seven times larger than ever previously paid. ADM also agrees to help prosecute its own managers, Michael Andreas and Terrance Wilson. In return, DOJ agrees not to prosecute ADM for price-fixing in corn fructose (which has $3 billion in world sales vs. $1.5 billion for the other two). In addition, Barrie Cox, VP for citric acid is given immunity if he will testify for the prosecution against Haarman and Reimer (U.S. subsidiary of Bayer) and Hoffmann-La Roche. The DOJ states that ADM and Barrie Cox, VP for citric acid, Adid cooperate@ in its citric acid case and Ait is substantial.@ This cooperation led to a lower fine for ADM. In it=s plea agreement, filed in Chicago District Court, ADM admitted for the first time that its Arepresentatives@ attended meetings in the U.S. and overseas in which A. . . agreements were reached as to the prices the firms would charge for citric acid. . . and the volume of citric acid each firm would sell.@ ADM=s Comptroller Steven Mills states for the legal record that AThe Company does not dispute the facts as presented.@ The names of the co-conspirators were not revealed at this time. All criminal charges against ADM as a company are resolved, but criminal indictments against M. Andreas and T. Wilson are still pending as are scores of civil injury suits. [WSJ 10/15/96:A3]. November 28, 1996: Kenneth Adams, a lawyer with the Washington law firm of Dickstein Shapiro, paid the law firms representing ADM a compliment while slamming the DOJ=s actions for hurting the victims of the citric acid cartel=s price fixing. ADM, Adams argued, avoided paying for the full cost of its illegal activities because of disagreements over the dates of the conspiracy as well as the Abut-for@ competitive price for citric acid. Adams represented Quaker Oats Co., Pepsico Inc., and Kraft Foods Inc., large buyers of citric acid who were at the time members of the class of plaintiffs in the federal civil suit against ADM et al. Mark Whitacre has stated that the government had a video tape of T. Wilson meeting with lysine co-conspirators in Paris in November 1992. [The actual date of the Paris meeting is October 1, 1992]. Wilson presented a flip chart that showed how ADM was already 240
conspiring to fix prices and quantities in the citric acid market. However, in ADM=s guilty plea presented to the District court in October 1996 (with the consent of the DOJ), the company was allowed to admit raising citric prices from Aat least as early as January 1993" until June 1995. The quantity sold during this 30-month period (1.3 bil. lb.) and the preconspiracy price from CMR was $0.79/lb., implies an overcharge of only $39 million. [However, if the conspiracy actually raised prices from early 1992, then sales volume was 2.0 bil. lb. And the price increase was from $0.68 to $0.82/lb., implying overcharges of $200 million! The effects of the conspiracy could have lingered well beyond the June 1995 FBI raid as well]. ADM made its civil settlement offer of $35 million in September 1996 (30% of the lower estimate of the treble damages of $3 x 39=$117 million; ADM=s share of the U.S. citric market was 28-29%). Most of the class later accepted its offer because there was no evidence available that the conspiracy began earlier. Legal procedures do not require the DOJ to reveal any facts about the conspiracy beyond what is contained in the plea agreement. The DOJ=s files cannot be used as evidence in any subsequent civil action. Said Adams: AThe Justice Department has allowed the facts to be covered up... It is clear what ADM and DOJ got out of the (criminal) deal C reduced civil liability for Archer Daniels and a record settlement for the Justice Department.@ (Bloomberg Bus. News 11/28/96). [For later developments see entries below for July 1997, March 1998, and March 4, 1998]. Dec. 9, 1996: Haarmann & Reimer Corp., based in Springfield NJ, becomes the fourth company to file a proposed settlement agreement in the citric acid class-action civil suit. H & R, a wholly-owned subsidiary of Bayer, AG of Basel, Switzerland, offers to pay $46 million to citric acid buyers. A federal judge in San Francisco must approve the proposed settlement. The first offer from ADM of $35 million came in October. Later in October, two citric acid importers also made offers to settle: Hoffmann-La Roche of Basel, Switzerland offered $5.68 million, and Jungbunzlauer AG of Vienna Austria offered $7.57 million. The fifth defendant in this case, Cargill Inc., refuses to negotiate with plaintiffs. Attorneys representing plaintiffs in the citric acid class-action suit state that damages in this market could be as high as $400 million, yet they settle for $94 million. Of the total $117.5 million settlement, 25 percent represents proposed legal fees. The DOJ is continuing its criminal investigation of citric acid producers with the cooperation of ADM. The investigation is focusing on the coordination of restrictions in output by U.S. and European manufacturers as the method for lifting citric acid prices in major markets. [WSJ 12/10/96:B12]. January 29, 1997: Based on information provided by ADM and its officers (except M. Andreas and T. Wilson), the DOJ files an indictment and announces a signed guilty plea agreement with Bayer=s U.S. subsidiary. The defendants are Haarmann & Reimer Corp., a Delaware corporation, and Hans Hartmann, its former director. H&R produces citric acid at 241
its Food Ingredients Division, headquartered in Elkhart, Indiana. The conspiracy dates from about July 1991 to June 27, 1995. Bayer is not indicted, but is cited in the DOJ press release. H&R agreed to pay a $50 million fine. The citric acid sold by H&R came from three plants: Elkhart, IN; Dayton, OH; and Selby, UK. Hartmann is cooperating. [No fine is mentioned for him]. [www.usdoj.gov/atr/...]. January 29, 1997: Haarmann & Reimer GmbH, the New Jersey subsidiary of Bayer AG pleaded guilty to criminal price fixing in the world citric acid market. The company will pay a fine of $50 million, the second-largest antitrust fine ever assessed. The DOJ stated that the conspiracy was Aone of the largest, if not the largest, conspiracies ever prosecuted by the Department of Justice.@ Officials repeated their assertion that the ADM and Bayer fines would have been much larger had the firms not cooperated with investigators, but they declined to state the size of the overcharges. Private lawyers call the new fine structures Aa staggering development for business.@ In addition to fines, a senior executive of Haarmann & Reimer, Hans Hartmann, a German citizen, was arraigned in U.S. District Court in San Francisco for criminal conspiracy charges. He can be sentenced up to 3 years and $375,000. The DOJ will not seek civil penalties against Bayer because of the likely class-action settlement, but investigations continue in lysine and citric acid in Asia, Europe, and the United States. [WSJ 1/30/97:B6]. January 29, 1997: The plea agreement in U.S. vs. Hans Hartmann is filed in U.S. Court in San Francisco. The federal sentencing guidelines place a base level of 10 for price fixing. The volume of commerce affected by Haarmann & Reimer was over $100MM, so seven points added (10+7=17). As a leader in the conspiracy, 3 more points were added (17+3=20), but his acceptance of responsibility was a mitigating factor worth -3 points. Thus, net points = 17 => prison for 24-30 months. An individual's maximum fine is 1% to 5% of volume of affected commerce up to $350,000, which the government said was $350 MM for U.S. total and H&R had about 24% U.S. share, so volume was either $85 MM or $350 MM. Maximum fine is therefore $0.8 to $4.3 MM or $3.5 to $17.5 MM. In other cases (i.e., U.S. vs. M. Andreas et al.) latter was used. Hartmann got a Adownward adjustment@ requested by the DOJ to $150,000, no restitution, no jail time, no probation, no home detention C nothing but the modest fine discounted by 57% from Guideline levels. [Hartmann=s sentence was much lower than the Guidelines envisioned: In the great majority of cases, sentences of 6 months or more would be required; in very few cases will no confinement be imposed]. March, 1997: Plaintiffs= attorneys in the civil class-action case claim that damages from overcharging may be as high as $400 million. They are asking the judge to approve legal fees of 25% (i.e., $23.5 million of the $94 million in payments to plaintiffs). The case against Cargill continues. 242
Cuts in Chinese government subsidies have reduced citric exports to the U.S. for all but the most efficient manufacturers. Exports to U.S. are sporadic and 30-40% lower in 1996 than in 1995. Prices have slid to $0.80 list, with large customers getting $0.76-$0.78/lb. Observers say that vertically integrated manufacturers (ADM, Cargill) have cost advantages over nonintegrated (H&R). Bayer (H&R) moved its citric acid headquarters from NJ to the UK and removed several executives. There is speculation that A.E. Staley might buy H&R=s citric business. Staley has greatly expanded capacity for polydextrose and announced plans for a large lactic acid plant. [CMR 3/17/97]. March 1997: Hans Hartmann was allowed to retire gracefully from Bayer AG. The only article announcing his retirement simply noted that he had been an employee of Bayer for more than 40 years and served as executive VP and later president of Haarmann & Reimer for more than 10 years. No mention of his ignominious last year. (European Cosmetic Markets 4/1/97). [Bayer had declared itself innocent of all charges in 1996 and later promised to punish those responsible]. March 26, 1997: The two largest U.S. importers of citric acid, Jungbunzlauer and HoffmannLa Roche, plead guilty to criminal price-fixing and pay fines of $25 million. These fines bring the total U.S. corporate criminal fines for lysine and citric acid to $195 million, several times the previous highest fines. Two executives of these companies also plead guilty and pay fines of $150,000 each. [WSJ 3/27/97:A5]. March 26, 1997: The third and fourth members of the citric acid cartel are indicted and sign guilty pleas. The defendants are: (1) F. Hoffmann-La Roche, Ltd., organized under the laws of Switzerland, and Udo Haas, former managing director of SA Citrique Belge NV, a Roche subsidiary located in Tienen, Belgium; and (2) Jungbunzlauer International AG, a Swiss corporation, and Rainer Bichlbauer, whole title is Präsident des Verwaltungsrates (roughly, Chairman and President). As part of the plea agreement, Roche and Jungbunzlauer will pay $14 and $11 million respectively, in fines. Haas and Bichlbauer each will pay $150,000; they are German and Austrian citizens. Roche and Jungbunzlauer both are headquartered in Basel, as are their respective holding companies, Roche Holding AG and Jungbunzlauer Holding, AG. [www.usdoj.gov/atr/...]. June 4, 1998: Citric supply in U.S.: ADM (180 mil. lb.), Cargill (130, Tate & Lyle (150). Chinese imports several years ago peaked at 170,000 tonnes, most recently dropped to 135,000 tonnes; usually prices 20% below domestic. (Purchasing Mag. 6/4/98:36C19). June 10, 1997: Four large buyers of citric acid filed a lawsuit in San Francisco charging that ADM conspired with others to fix the price of citric acid. (See the March 1998 entry below for more information). [Des Moines Register, 6/12/97:8]. 243
June 1997: Fuso Chemical=s Qingdao plant is completed and is running at 10,000 mt., using sweet potatoes as the feedstock. High purity filtration is being used. (COMLINE 6/30/97). Haarmann & Reimer division of Bayer announces its intention to sell its citric acid business. The unit employed 1,310 people and sold $293 million of acid in 1996 from seven plant sites: 3 in U.S., 1 in UK, 1 in Brazil, and 2 majority-owned subsidiaries in Mexico and Columbia. The article claims that H&R is the only U.S. manufacturer that is not integrated into corn refining [Chem. Marketing Reporter (6/9/97):1]. July, 1997: Judge Smith in Federal District Court in San Francisco gives final approval to the (slightly reduced) citric acid class action suit for $86.2 million (ADM $35 million, Bayer $38, Jungbunzlauer $7.6, and Roche $5.7). Settlement reduced because four large buyers opted out and are seeking $1 billion or more in damages (incl. P&G, Kraft, Quaker, Unilever, Schreiber Foods). Opt-outs bought $350 million from 1991 to 1995. Cargill still fighting suit. Pepsi and Coca Cola have joined neither suit. The DOJ ordered the FBI to turn over tape recordings to plaintiffs suing ADM et al. in Peoria for price fixing in fructose. [Chicago Tribune 7/6/97]. The FBI and Whitacre made 14001600 audio or video tapes of the price conspiracies, according to one source [Ag Biz 4/7/97]. A January 28th DOJ memo written by James Griffin, Chicago field office chief, says that 237 tapes were made and will be turned over to defense attorneys [Corporate Crime Reporter 3/17/97]. The 237 tapes appear to be audio tapes only made by Mark Whitacre. September 1997: ADM reported that the EU antitrust authorities begin investigating ADM et al. for citric acid price fixing [ADM]. September 1997: Official statistics show that China=s current citric capacity is about 300,000 mt.; in 1994 production hit 200,000 mt., Athe highest in the world.@ Exports grew by 33.7% p.a. from 1977 to 1994. However most of China=s 103 factories are small: 74% are 3,000 mt. or less. Only 6 factories are 10,000 mt. or more. Small scale producers make lower quality acid, that sells for 30-40% lower prices than major companies in the West. (Asia Pulse 9/16/97). September 1997: The Commission of the European Communities began to investigate price fixing by ADM and others in the market for citric acid [five years after the FBI began the U.S. investigation and 11 months after ADM had pleaded guilty to it]. (ADM 1999). December 1997: Bajrai International of Yanbu, Saudi Arabia will spend $140 million to build a citric plant using “Lurgi technology.” (Chem. Wk. 12/3/97). Roche Holding (60%) formed a joint venture with Wuxi Chemical Company (40%) to produce citric acid at 20,000 mt., 80% exported. (AFX News 12/16/97). January 23, 1998: Judge Fern Smith grants favorable summary judgment for Cargill in the citric acid class action litigation. 244
In antitrust cases, if a plaintiff's case is entirely circumstantial, then a defendant must be released if its conduct is entirely consistent with other plausible explanations (in some circuits, this rule only applies to price-cutting cases). Evidence that Cargill was not a conspirator comes from testimony of Hans Hartmann, who said Cargill never attended pricefixing meetings. Also, no written or taped evidence of Cargill=s participation. Plaintiff's evidence is voluminous but weak and circumstantial. In concentrated markets, parallel pricing is common, and citric was concentrated. Cargill was at full capacity, selling all it made, so price-cutting would have been irrational. ECAMA was a legitimate association so Cargill's membership was not proof of its intent to conspire. At four meetings, Cargill discussed prices with conspirators, but maybe not to conspire. Cargill failed to expand 100% in 1992 as announced, only 50%. It kept its U.S. share nearly constant 199395. Many conspirators took the 5th when asked about Cargill's participation (Smith). January 24, 1998: Cargill was dismissed from the federal, civil, class-action suit in U.S. District Court in San Francisco. Testimony by the former Bayer official who was convicted of criminal price fixing exonerated Cargill. [Omaha World Herald 1/25/98:8M). January 28, 1998: U.S. Judge Fern Smith in San Francisco ruled that no reasonable jury could find that Cargill was a participant in the citric acid conspiracy. Cargill was dismissed from the federal class-action lawsuit. (PR Newswire 1/28/98). [Judge Fern=s decision seems to have been based on the fact that Cargill did not send representatives to the face-to-face meetings held to fix prices. Cargill did cooperate with the citric acid association by sending monthly reports of its production for auditing purposes and it did take the lead in raising prices once or twice in 1991.] March 4, 1998: Whitacre holds fast to his story that the money he got from ADM was a bonus scheme. Bill Walker, his lawyer, said to Judge Baker that the FBI has a tape confirming that such a plan was in effect at ADM. The DOJ=s attorney Donald Mackay denounced the suggestion. Sources inside Whitacre=s defense team think that the FBI might have been doing D. Andreas= bidding (he said, AMark Whitacre will regret the day he was born@ when he learned Whitacre was a mole). They believe ADM manufactured the evidence of his embezzlement. Also suspicious is why the DOJ pulled the Whitacre prosecution from the U.S. Attorney=s office in Central Illinois to the DOJ=s fraud division in D.C., a decision requested by ADM=s counsel Williams & Connelly. (The Pantograph 3/15/98: E3). March 4, 1998: Kenneth Adams, lawyer for P&G, Kraft, Quaker, and Schreiber, announces that ADM is the last of four companies to settle with his clients. Bayer, Jungbunzlauer, and Roche Holdings settled earlier for amounts that must remain confidential. [Chicago Tribune 3/5/98: business p.1]. March 1998: ADM stated that it had agreed to pay $36 million to four citric acid customers that had opted out of the July 1997 civil class-action antitrust settlement. The four recipients 245
are Procter & Gamble Co., Quaker Oats Co., the Kraft Food unit of Philip Morris Companies, and Schreiber Foods, Inc., a cheese company located in Green Bay, Wisconsin. Although not reported, it is highly likely that Bayer, Jungbunzlauer, and Roche paid an additional $52.7 million to the four buyers (an amount proportional to their market shares during the conspiracy). [ADM]. [It appears that on the basis of Unilever=s size in the U.S. (See July 1997 above) market that the four sellers probably paid Unilever about $25 million. Because the five opt-out firms accounted for 19% to 24% of citric acid sales by the four defendants, the total civil settlement of $113.7 million is considerably more advantageous than the March 1997 classaction settlement (measured as a percentage of sales). The two largest U.S. buyers of citric acid (Coca-Cola and Pepsico) declined to sue, perhaps because the defendants sold citric acid to these two companies on a preferential basis (i.e., with little or no overcharge). If Coke and Pepsi account for 30% to 40% of citric acid purchases, then the class held about 36% to 51% of the U.S. market. The class settlement of $86.2 million represented an assumed overcharge of $1.7 to $2.4 million per percentage point of the market. However, the opt-out firms received $4.7 to $6.0 million per percentage point, or from 2 to 3.5 times more than the federal class]. May 1998: Bayer AG will sell its world citric acid business to Tate & Lyle for $219 million. Haarmann & Reimer will focus on flavors and fragrances. Tate & Lyle will get plants in Dayton, OH; Duluth, MN; Selby, UK; and joint ventures in Sucromiles (Columbia); Mexama de CV (Mexico); and Mercocitrico Fermentacos (Brazil). Sales in 1997 were $298 million. H&R=s Indiana plant will close. (CMR 5/11/98). Sources say that H&R=s operations have been low in profitability, even though its 150 mil. lb. U.S. capacity gives it a 33% share of U.S. capacity. Pre tax profits were $8.3 mil. (or 2.8% of sales) on book assets of $203 mil. A.E. Staley already supplies H&R with its feedstocks, molasses and dextrose. Now all 3 U.S. citric producers will be fully integrated operations. (Chem. Wk. 5/13/98, European Report 5/21/98). May 20, 1998: In an interview concerning Hoffmann-La Roche=s guilty plea in vitamins, Roche Holding=s CEO, Franz B. Humer, stated that his company paid $10 million to settle civil U.S. antitrust suits in citric acid. This is new information. Of the $10 million, $5.7 million was paid to members of the federal class, leaving $4.3 million for the five opt-out firms (or about 5.1% of the total opt-out-firms= settlements). (Lexis-Nexis). May 28, 1998: ADM was fined a record $16 million (Canadian) or U.S. $11.04 for its role in fixing the prices of lysine and citric acid exports to Canada during 1992-1995. Of the $16 million, $2 million was directly related to citric acid and $9 million a general fine (of which $2.6 million could be prorated for citric acid). ADM sold $17.3 million of citric acid out of a total of $104.6 million sold. [Thus, the citric-related portion of the fine represents 26.6% of ADM= sales, as compared to 23.8% for lysine]. The Canadian Federal Competition Bureau said that ADM is cooperating in its continuing investigation of co-conspirator in the citric-products market, viz., Hoffman-La Roche (and its 246
Canadian distribution subsidiary), Bayer (and its New Jersey subsidiary Haarmann & Reimer), and Jungbunzlauer International AG (and its subsidiary of the same name incorporated in New Jersey). [If the three co-conspirators pay fines in proportion to their sales, additional fines of Canadian $28 million will be assessed]. (J. Commerce 5/29/98: 3A). [see 10/28/98 below]. June 1998: Tate & Lyle's acquisition of H & R's citric acid business is expected to be finalized late this month. H & R sold its citric assets partly because it was not vertically integrated into dextrose, said an H & R representative, which accounts for 40-50% of total manufacturing costs. Tate got six plants; Elkhart, IN machinery being moved to Dayton, OH plant to keep capacity high. World demand is 540 kt, of which U.S. 230 kt, Europe 190 kt, Japan 60 kt in 1998. At current prices, sales $1.5 billion. Chinese supply 10-15% world demand (CMR 6/22/98:22). June 23, 1998: A fifth company pleaded guilty to citric acid price fixing. Cerestar Bioproducts NV, a Dutch subsidiary of the large French agribusiness firm, Eridania BeghinSay SA, paid a fine of $400,000 to cover price fixing from 11/92 to 4/94. Cerestar's managing director, Silvio Kluzer, an Italian citizen, also pleaded guilty and paid a personal criminal fine of $40,000. Cerestar and Kluzer agreed to cooperate with the DOJ's on-going investigation (www.usdoj.gov/atr/public/press_releases/1998). June 23, 1998: The DOJ announced that a surprise fifth conspirator has pleaded guilty to criminal price fixing behavior. Cerestar Bioproducts BV is a Netherlands-based subsidiary of the giant French agricultural - commodities company Eridania Beghin-Say SA. [Eridania owns the U.S. company Central Soya among other assets]. Cerestar conspired on the prices of citric acid from November 1992 to April 1994 in meetings in the U.S. and elsewhere. It also agreed to allocate market shares, exchange sales information, and monitor prices and volumes of citric acid in the U.S. and worldwide. Cerestar will pay a fine of $400,000, and its managing director, Silvio Kluzer, will also plead guilty and pay a fine of $40,000. Cerestar and Kluzer have Aagreed to cooperate in the ongoing investigation.@ [This suggests new developments may follow]. (www.usdoj.gov/atr/public/press_releases/1998). June 24, 1998: Citric supply in U.S.: ADM (180 Mil. Lb.), Cargill (130), Tate & Lyle (150). Chinese imports several years ago peaked at 170,000 tons, most recently dropped to 135,000 tons; usually priced 20% below domestic. (Purchasing Magazine 6/4/98: 36C19). August 1998: U.S. “production” (capacity?) is 445 MM lb. by ADM (220), Cargill (160), and Staley (65). Up to 25 MM lb. supplied by Roche from Tienen, Belgium plant. U.S. demand 1997 435 MM lb.; 450 MM predicted for 1998, 535 MM for 2000. (CMR 8/18/98). August 12, 1998: Barrie Cox testifies for most of the day in the Chicago trial, U.S. v. Michael Andreas et al. [see Appendix A]. 247
August 13, 1998: Barrie Cox=s testimony is reported in some detail in the press. Wilson assiduously avoided looking at Cox during the testimony (Reuters 8/12/98). An article by Kurt Eichenwald notes its importance in rebutting defense arguments that ADM adhered to the antitrust laws. The citric and lysine methods were quite similar. The testimony was quite detailed (NYT 8/13/98: D2). September 20, 1998: Journalists who witnessed Barrie Cox=s testimony on citric acid found the story credible and amazing. The lysine conspiracy was largely modeled on the citric acid arrangements. The antitrust lawyers interviewed consider the lysine and citric cases very influential in private business. They show that the law Ahas teeth again.@ The criminal fines are strong indicators of prosecutorial toughness in the price-fixing arena. Prosecutors confirmed that the grand jury in San Francisco is still reviewing the citric acid case. (Chicago Tribune 9/20/98). October 15, 1998: Exactly two years after ADM=s guilty plea, Barrie R. Cox, president of ADM's food-additives division resigned, effective today. His testimony was a key element in the government's prosecution of Andreas and Wilson. He is 51 (WSJ 10/15/98:B11). October 21, 1998: For price fixing of citric acid in Canada ($C 104 MM 1991-95 sales), Haarmann & Reimer paid a $4.7 million fine and Jungbunzlauer $C 2MM and pleaded guilty in Toronto federal court (Toronto Sun 10/22/98:69). [$C 1 = US $0.70]. October 26, 1998: Jungbunzlauer and Haarmann & Reimer pleaded guilty to price fixing in the Canadian market for citric acid. They will pay fines of C$1.9 million and C$4.7 million, respectively. Canadian sales of citric acid during the conspiracy were C$104 ($67) million. (Journal of Commerce 10/26/98). November 1998: ADM announced a price increase in citric acid in Europe from 2.17 DM/kg. ($0.59/lb.) in 10/98 to 2.50 DM/kg. ($0.74/lb.) effective 11/98 (Food Manufacture 11/98:17). November 2, 1998: Cargill is building a new $50-million citric acid plant next to its wet corn milling facility in Uberlandia, Brazil. (CMR 11/2/98:7). December 16, 1998: Mitsubishi Corp. will manufacture citric acid in Thailand from tapioca meal beginning 1/99. Plant cost $10.2 MM, has capacity of 6.7 kt. Expects to export most citric acid to Europe, Japan, U.S. at price of about $0.58/lb. [This provides interesting information on full costs of production]. World demand is 800 kt p.a. Plant ferments a byproduct, tapioca meal. (Asia Pulse 12/16/98).
248
February 11, 1999: The Mexican Federal Competition Commission began an investigation of ADM and others for price fixing in the market for citric acid [seven years after the U.S. began to investigate and 25 to 29 months after the four main conspirators pleaded guilty in the U.S. courts]. (ADM 1999). June 10, 1999: Startling new information on the citric acid cartel is uncovered. Two FBI interview forms (A302s@) are discovered by enterprising reporter and syndicated columnist Alan Guebert. In the October 12, 1996 interview of Barrie Cox, he states that he had engaged in more than a dozen conversations with this counter-part at Cargill, William Gruber, about Cargill=s plants to raise prices and rig bids. The ADM manager indicated that his company would Ago along@ with those price increases and restrain its sales volume. Cox informed Wilson of his conversations and Wilson expressed no surprise at the news. By the time of this interview, Cox had received immunity from prosecution by the DOJ and, therefore, had every incentive to be completely candid with the FBI. The impact of these facts concerns Cargill=s frequent statements of its innocence. Moreover, Cargill had steadfastly refused to negotiate with plaintiffs in civil antitrust suits. The company was dismissed from the federal class action by the judge on the basis of testimony by Hans Hartmann, president of Haarmann & Reimer, who said that Cargill was not involved in the G-4's negotiations. Cox also testified that Cargill was not part of the cartel, which is literally true but misleading. Cox and Cargill had a back-channel secret bilateral agreement that facilitated the G-4 conspiracy without three of its members knowing anything about it. In a second FBI interview in December 1998, Cox told them that he was moving back to the Decatur, Illinois area. He revealed that since he resigned from ADM he has been retained by ADM as a Aconsultant@ for $17,000 per month. Moreover, he has become a sales agent for ADM=s zanthan gum, an ADM production monopoly in the U.S. (Alan Guebert 6/8/99). June 11, 1999: Cargill lawyer Richard Favretto of Mayer Brown & Platt called Cox=s statements A... innuendo, an unsubstantiated version of one person=s ideas ... Those conversations never happened ...@ Favretto noted that Cox testified in Chicago under oath that Cargill did not join the citric acid conspiracy. AIn fact, later in the trial, the government all but held Cargill up as a poster child for good corporate citizenship.@ [This was in closing arguments. Great quote]. In 1992 or 1993, Cargill was discussed at the G-4's meetings. Said Cox: AThere was a discussion of how to get messages to Cargill, now to control them, and whether or not Cargill should be given the message to back off ...@ Terry Wilson volunteered to undertake the task of contacting Cargill and informed M. Andreas about it. The FBI 302 forms became public documents in January when they were filed by the DOJ as part of its sentencing memorandum in January 1999 in U.S. vs. M. Andreas et al. Favretto claims that the DOJ has informed both Cargill and Gruber are not under investigation, but no one at the DOJ would confirm or deny this. (Guebert 6/11/99). 249
June 17, 1999: The NYT reports on the Cox interviews also. It has no qualms about calling the ADM-Cargill secret talks bid-rigging. Cox said Gruber, former head of national citric acid sales, might have been acting alone. The Justice Department confirms that Gruber and Cargill are not targets. The federal class-action suit in San Francisco is currently under appeal. Plaintiffs just filed a motion to include the record of the Cox interviews as evidence. Cox describes his role as a Aconduit@ between the G-4 and Cargill. Cox suggested to Gruber that they operate outside the G-4 structure. However, G-4 members were aware of the discussions. (NYT 6/17/99: C6). June 17, 1999: ADM is diversifying into the meat packing industry. In mid-1997, it purchased 10% of IBP=s stock, up to 13.3% in 1999. In September, it bought all of Morman=s, a large animal-feed manufacturer. By 1999, ADM owned half of Consolidated Nutrition of Omaha, which has 14,000 sows in production (Agribus. Examiner 6/17/99). June 25, 1999: The Alabama Supreme Court in ADM Co. et al. Seven Up Bottling Co. of Jasper, Inc. decided that plaintiffs have no right to seek antitrust damages in citric acid because the state=s antitrust law applies only to intrastate commerce. The decision was not based on the language of the law but rather on the intent of the Alabama legislature in the late 19th century (Antitrust Litigation Reporter August 1999:16). June 29, 1999: Jungbunzlauer raise citric prices by more than 10% and ADM followed. List prices for truck loads of USP anhydrous delivered east of the Rockies were raised to 76 cents per pound (CMR 6/29/99). July 2, 1999: ADM and most of the other defendants paid $3 million to indirect buyers of citric acid in California. Most were small food processors that bought product through chemical wholesalers. The settlement was approved by San Francisco Superior Court last week. Buyers got back 27% of their purchases; the plaintiffs= lawyer (who will get part of the recovery) said that the overcharge was 10 to 17% of sales. (Modesto Bee 7/2/99). September 1, 1999: The U.S. Court of Appeals for the 9th Circuit refused to reinstate a damage suit by citric acid buyers against Cargill. It said there was no evidence of a conspiracy with the other four firms that have admitted their guilt. [Does this allow for the possibility of a direct, separate ADM-Cargill conspiracy?] (Natl. Law J. 9/13/99:B4). October 1999: The 9th Circuit affirmed the dismissal of Cargill from the citric acid class action. The evidence of its participation in the cartel was circumstantial: (1) participation in ECAMA activities, (2) its failure to expand capacity rapidly during the conspiracy, and (3) its possession of rivals= price lists. No mention made of Cox=s allegations. (NY Law Journal 10/28/99:3).
250
October 5, 1999: A consumer class-action suit was filed in Ontario against four citric acid manufacturers asking for $30 million in general and $30 million in punitive damages. (Toronto Star 10/5/99). December 16, 1999: U.S. citric acid prices remain low because of ample supplies of feedstocks and large overseas supplies. Jungbunzlauer estimates that 1999 production worldwide reached 887,000 tonnes and that demand will be 904,000-915,000 tonnes in 2000 (+3%). Moreover, Ashland Chemical severed a marketing agreement with ADM in 1999 that accounted for a Asubstantial quantity@ of ADM=s output. Ashland now sources mainly Chinese product. U.S. capacities 1999 were: ADM (200 mil. lb.), Cargill (165), and Tate & Lyle (125). It is not clear if Tate & Lyle=s Dayton capacity includes 20kt of equipment relocated there from its shuttered Elkhart, IN plant and now operating. Jungbunzlauer predicts 3.5-4% growth 2000-2010. Beverage industry consumes 45%, food 25%, detergents 20%, the rest chemical and pharmaceutical uses. Contract prices average 63.5 cents/lb., spot prices 70 cents. (Purchasing Mag. 12/16/99:32C5). December 1999: Monthly surveys of 500 purchasing agents revealed the following U.S. spot and large contract prices for USP anhydrous citric acid (tanker loads, FOB producer basis): Contract
Spot Cents/lb. 1996
1997
1998
1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-79 74 73 68 72 69 69 71 71 70 70 65 65 65 75
(Purchasing Magazine June 4, 1998 to December 16, 1999). 251
72 72 73 71 71 71 69 69 69 69 69 69 63 72 64 64
January 17, 2000: Three U.S. producers of citric acid (ADM, Cargill, and Tate & Lyle Citric Acid Inc./A.E. Staley Manufacturing Company) petitioned the U.S. Department of Commerce to impose import duties of more that 350% on Chinese imports of citric acid and sodium citrates. The DOC has launched a preliminary investigation. The 12/15/99 petition alleges that Chinese imports have tripled since 1996 but prices have declined, causing harm to the U.S. industry. The U.S. International Trade Commission will make a preliminary determination 1/28/00. Counsel for the petitioners, Warren Connelly of Akin Gump, charges Aaggressive pricing tactics@ and dumping by the Chinese. Average U.S. citric transaction prices are about $0.63 - 0.66/lb., said one UK consultant, compared to $0.50 - $0.54/lb in Europe (L. Hepner and Associates). One citric distributor reports Chinese sales at about $0.53/lb. To U.S. customers. Global demand is growing by 4 to 5% p.a. Jungbunzlauer of Basel Switzerland is building a new citric acid plant in Port Colborne, Ontario that will increase the company=s global capacity by about 30%. Its Pernhofen, Austria plant is the world=s largest, with capacity above 300 mil. lb. The plant in Canada will be adjacent to a corn wet milling plant operated in Casco, Inc. which will supply the feedstock to make citric acid by fermentation. Production begins late 2001 or early 2002. U.S. demand of anhydrous citric acid in 1999 was roughly 250,000 mt (Hepner). (CMR 1/17/00:4). June 4, 1998: Citric supply in U.S.: ADM (180 mil. lb.), Cargill (130), Tate & Lyle (150). Chinese imports several years ago peaked at 170,000 tons, most recently dropped to 135,000 tons; usually priced 20% below domestic. (Purchasing Magazine 6/4/98: 36C19). June 28, 2000: The European Chemical Industry Council (CEFIC), to which ECAMA is affiliated, is investigating the allegation by James Griffin (dep. asst. AG, DOJ) that ECAMA was a cover organization for an illegal cartel. The CEFIC secretary-general said that ECAMA was previously investigated and cleared, but if the allegations are true the link with the CEFIC may be broken (Chemical Week 6/28/00: 6).
252
APPENDIX C Corn Sweeteners Chronology
253
C
1971: High fructose corn syrups (HFCS) begins to be produced commercially in the USA.
C
1971-1985: Period of very rapid growth and numerous improvements in technology of production. Real growth 1970-1980 is 39% p.a.; during 1980-85 it is 19% p.a.
C
1981-1991: DOJ (civil) antitrust merger case in Des Moines federal court filed against ADM in 1981 but dismissed in 1991. [See 12/15/98 below].
C
1990-1995: Market enters mature phase, growth slows to about 4% per year. There are 25 to 30 U.S. producers of wet-corn products but only 6 or 7 manufacturers of HFCS.
C
July 1995: DOJ reveals that a federal grand jury in Chicago is investigating ADM, Cargill, CPC International, and Tate & Lyle s A.E. Staley subsidiary, for price fixing.
C
November 1995: more than 20 private antitrust suits against ADM by HFCS users. CocaCola and Pepsico hold back. [WSJ 11/17/95].
C
February 1996: Number of price-fixing suits vs. ADM reaches 28.
C
February 26, 1996: ADM, Cargill, CPC, and Staley were named as defendants in a consumer class-action suit for price fixing in HFCS and citric acid in Ingham County Court, Michigan. Edwin M. Bladen is the lawyer representing plaintiff Kent Wilcox. (National Law Journal 3/11/96: B2).
C
March 1996: DOJ leaks indicate that HFCS prices are discussed during video taped meetings, but no tapes of meetings among HFCS producers exist. Prosecutors consider HFCS the weakest of their cases. Coke and Pepsi, which now own many of the bottling operations that buy HFCS and account for 73% of HFCS sales, have not sued ADM. [WSJ 3/27/96:A1].
C
June 18, 1996: Survey of HFCS market on occasion of the 1995 annual CRA report. Shows 1990-1995 volume growth by product and surveys early history of industry. Claims that basic enzyme research at CPC in early 1950s led to a famous paper in Science by two CPC scientists, Marshall and Kooi. Later improvements by Japanese scientists were purchased by Clinton Corn Processing in 1965, which began HFCS-42 production in 1968 or 1969. Many improvements in making HFCS as well as new fermentation products. (Milling and Baking News 6/18/96).
C
September 1996: CPC International pays $7 million to settle a private civil suit by HFCS buyers. [WSJ 9/23/96]. In 1997, CPC announces that it will sell its fructose business.
C
October 1996: As part of a plea agreement with the DOJ, ADM agrees to plead guilty to price fixing in lysine and citric acid and to pay $100 million in fines. In return, the DOJ agrees to grant ADM immunity from further prosecution for price-fixing in the corn sweeteners markets. However, the DOJ says that its Joliet, Illinois grand-jury investigation 254
of price-fixing by other companies in corn sweeteners will continue, but little is heard of this matter through early 1997. [WSJ 10/14/96:A2 and 10/16/96:A4]. C
December, 1996: The DOJ said that its investigation into price fixing in HFCS will continue, despite its indictment of three persons for lysine price fixing and ADM s immunity. (Washington Beverage Insight 12/6/96).
C
February 1997: Whitacre quotes M. Andreas as saying that Cargill would not conspire on HFCS prices as a matter of company policy. [Whitacre].
C
March 10, 1997: Plaintiffs in the HFCS antitrust class action in the Central District of Illinois will have access to some of the audio and video tapes made by Mark Whitacre for the FBI, ruled Judge Michael Mihm. (Food Chem. News 3/10/97).
C
November 25, 1997: A sworn deposition by James House, director of procurement at Kraft Foods, says that in the late summer of 1994, Dwayne Andreas met with Joseph Famalette, the CEO of American Crystal Sugar, one of three investors in a ProGold HFCS plant (the others were Red River Valley coop, Minn-Dak and Golden Growers). Dwayne offered Famalette to discuss payments to American Crystal to not build the new plant. (Peoria Star Journal 11/25/97: C2).
C
December 15, 1998: The 8th Circuit Court reversed and remanded an appeal of dismissal by the U.S. District Court for the Southern District Court of Iowa of the government s merger case against ADM. The Circuit Court decided that sugar and HFCS are not in the same market because the U.S. sugar program keeps the price of sugar 20-30% above HFCS, whereas the District Court said they were in the same market (Lexis-Nexis).
C
February 1999: Speculation that Corn Products Intl. Inc. (CPI) will be acquired by A.E. Staley or even ADM or Cargill (latter less likely). Suitors like CPI s extensive network of corn refineries in Mexico, Brazil, Asia, and Africa, which comprise more than half of CPIs total of $1.5 billion in sales. Fructose prices better than a year ago, and CPI holds 60% of Mexican market where bottlers are just ready to switch from sucrose to fructose. CPI was spun off a CPC International (now Best Foods) in 12/97. HQ near its big Argo plant in Bedford Park, IL, built in 1908; now has 400 employees, down from peak of 3000. Corn Products Refining formed from merger in 1906, dominated the industry until the 1950s. Many antitrust actions. Purchased Best Foods, Inc. in 1958. CPI now is 4th in U.S. market, became 2nd in 1970s when surpassed by ADM. Makes no ethanol; HFCS is 40% U.S. sales. In 12/98, CPI bought remaining 51% ownership of its Mexican JV, Arancia-CPC SA (amount paid unknown) and spent $60 MM to buy Korean corn refiner Bank-Il. (Crain s Chicago Business 2/1/99:4).
C
March 29, 1999: A ruling by Judge Mihm made last week bonds over most tapes made by Mark Whitacre to the plaintiffs in the HFCS civil case in Peoria, IL. 255
C
April 1999: ADM and several employees or former employees attempted to quash the release of certain tapes made by Mark Whitacre for its cartel investigation in 1992-1995 to plaintiffs in the class-action suit In re High Fructose Corn Syrup Antitrust Litigation (MDL 1087) and the Atag-along@ suit Gray & Co. v. ADM et al. Defendants are ADM, Cargill, A.E. Staley, American Maize, and Hubinger/Roquette America. Plaintiffs have received the audio and video tapes that were played in the trial in U.S. v Michael Andreas et al. In 10/96 plaintiffs subpoenaed the DOJ to produce all 270 tapes held by the DOJ after unsuccessful negotiations with the DOJ. In February, 1997 Judge Mihm ruled that most of those tapes should be turned over to the plaintiffs, but he was overruled on appeal to the 7th Circuit Court for Ainvading the law enforcement investigatory privilege.@ In November 1998 after the Chicago trial ended, plaintiffs again subpoenaed the DOJ s remaining 200 tapes not played at trial, which ADM moved to quash or modify in February 1999. ADM claimed that the tapes were not made Aunder color of law@ and had a criminal or tortions purpose. James Randall also moved to quash as Aan aggrieved person@ the tapes that contain about 20 of his conversations. (William Webbe, an unindicted co-conspirator, and 5 others previously unsuccessfully tried to quash release). Mihm finds that the law is ambiguous, but because Whitacre=s recordings of face-to-face conversations do not meet the legal definition of Aoral communication,@ these tapes should be turned over to the plaintiffs. But tapes of telephone conversations should not. ADM further requested that if tapes are to be released, a Aspecial master@ should review them and decide which are releaseable. This was denied. (Mihm April 27, 1999). July 2, 1999: Class-action indirect suits against ADM et al. for lysine and citric acid have been settled in California, but cases involving HFCS are pending. (Modesto Bee 7/2/99). August 25, 1999: Sometime during the first half of 1999, the DOJ closed its criminal investigation of price fixing in the U.S. market for HFCS. Criminal convictions would have helped plaintiffs in the class-action treble-damages civil suit still being litigated in Peoria, Illinois federal court. Cargill, A.E. Staley, ADM, and American Maize (owned by Eridania Beghin-Say) are defendants in the civil case. Cargill was delighted it was not charged. Spokesperson Allan Hobbert said AWe=re proud of our reputation for integrity. Our commitment to ethical behavior paid off with the conclusion of the sweetener investigation.@ People Afamiliar with the case@ said that during their civil depositions in the corn syrup case, M. Andreas and T. Wilson exercised their right against self-incrimination. (Minneapolis Star-Tribune 8/25/99:1D).
C
December 28, 1999: On June 29, 1999, the DOJ announced that the HFCS grand jury sitting in Atlanta had been closed. It wants to surrender business documents held to defendants, who have already agreed to allow access to those belonging to the defendants, but don=t want to 256
give access to 3rd party documents (those belonging to non-defendants); neither does the DOJ. Mihm passes this decision to the court supervising the grand jury in HFCS. [The strong effort being made by ADM et al. may be an effort to wear down the plaintiffs, but it does suggest they think the tapes and documents contain incriminating information]. (Mihm 12/28/99).
257
APPENDIX D Chronology of Vitamins and Other Related Cases and Events
258
December 1982 - 1991: The U.S. DOJ filed a civil Sherman Act suit in U.S. District Court in Des Moines, Iowa charging the ADM, a major manufacturer of high fructose corn syrup (HFCS), with monopolizing the market. At issue is ADM’s lease of two plants from Nabisco Brands, Inc., in Clinton, Iowa and Montezuma, NY. The government claims that ADM controls 40% of U.S. fructose production when the two plants are included. ADM claims 10% of the U.S. sweetener market [UPI, 1/27/83]. 1984: Stanley Adams a British employee of Hoffman-La Roche wrote a book mainly about his company’s price fixing of tranquillizers in the late 1960s and early 1970s: “Meetings were held, often in Basel. The manufacturers discussed world prices for different vitamins and chemicals and set a price which they all agreed to keep.” (Adams 1984). Adams was convicted in 1994 of plotting to murder his wife for the insurance money (Barboza 1999). 1989: Late in the year, Hoffmann-La Roche and BASF began meeting to fix prices on vitamins and divide market territories around the world (Barboza 1999). [The vitamins probably included A and E, markets the two dominated; these are the two vitamins they both make with the earliest conspiracy dates in the DOJ indictments, January 1990]. In 1990, the U.S. Congress passes the Antitrust Improvements Act, which raises corporate price-fixing fines from $1 to $10 million and individual fines from $100,000 to $350,000. Later, Sentencing Guidelines permit criminal fines up to double the illegal profits made or overcharges to buyers. [Bingaman]. May 1990: The Journal of Commerce began to report spot chemical prices nearly every week in its Friday edition. The prices are either list prices or spot -basis price quotations of the most common grade or type of chemical from bulk suppliers. The prices refer either to shipments of bulk product for New York delivery or to the producers’ f.o.b. shipping points (plants or ports of importation). The quotations come from a survey of unknown size of both sellers and buyers. The fine chemicals reported include MSG, citric acid, calcium citrate, gluconic acid, gluconates, lactic acid, lysine, niacinamide, sorbitol, folic acid, most other vitamins (A, B-1, B-2, B-5, B-6, B-12, C, D-3, and E, and scores of other organic chemicals, food ingredients and feed ingredients. (Lexis Nexis). Late 1990: Rhône-Poulenc and several Japanese manufacturers join Roche and BASF in fixing prices of bulk vitamins. Some more join in early 1991. (Barboza 1999). 1993: Class-action plaintiffs against the vitamin cartel claim to have a BASF planning document that shows its intent to acquire up to 90% of the market for blended vitamin concentrates, also called vitamin premixes. [A smoking gun obtained during discovery?]. (Barboza 1999). December 5, 1994: The DOJ’s criminal price-fixing case against GE in the U.S. District Court in Columbus, Ohio ended with dismissal today. The judge said there was not enough evidence to send the case to a jury. GE’s internal memos were inconclusive, the 259
government’s star witness (Edward Russell, head of GE’s plastics division) lost credibility during cross-examination, and the other GE employees who testified helped the prosecution’s case but said they did not agree that price fixing occurred. The missing link in the case was Phillipe Lotier, a French customer of GE’s industrial diamonds department was alleged to have passed GE’s price “information” (or proposals) to De Beers of South Africa from 1991 to 1992. Judge Smith ruled that the government had neither proved that Lotier was working for De Beers nor fed De Beers prices to GE. The trial lasted 5 weeks, the investigation 3 years and cost GE $20 million in legal fees. (NYT 12/7/94:D2). January 1995: A long analysis of how Winston & Strawn’s Dan Webb won the industrial diamond case for GE. Prosecutors were outspent, outnumbered, and outlawyered. GE had 25 top litigators and dozens of other employees from W&S, Arnold & Porter, and Porter Wright (1100 + lawyers in three firms). Prosecutors were less prepared, less cohesive. GE & De Beers controlled 80% of the $600 million market. GE Super abrasives division had $280 million in sales. GE also hired 6 more top law firms to defend ca. 40 employees. GE spent $20-$60 million in legal defense costs. DOJ had one experienced trial lawyer, 2 who knew the facts well, 4 junior lawyers. Two defendants (De Beers, Lozier, and GE employee Franz) refused to appear. Moreover, 3 prosecution witnesses were barred from testifying. In fact, the prosecution was consistently overruled on evidentiary rules decisions, the crux of the case. The government’s chief witness didn’t hold up well under cross-examination. (American Lawyer January 1995:57). Summer 1995: A law review article contrasts the major issues of international antitrust in 1958 with attitudes today. Extraterritoriality had faded in importance because the U.S. government and courts have become more restrained and because the rest of the world has come to accept it as legitimate. “. . . extraterritoriality can be said to be nearly universal enough to be considered a rule of customary international law” (p. 1276). The issue of whether to have different substantive antitrust rules for domestic and intl. cases is now settled in the negative. The Webb-Pomerene Act is an embarrassment for U.S. antitrust & reeks of hypocrisy for the U.S. to prosecute foreign export cartels. Many intl. bus. groups see antitrust as an ally aiding entry into countries with cartel traditions (e.g. Japan). (DePaul Law Review 44, Summer 1995: 1251-1288).
260
July 1995: As it was expanding into lysine 1991-1995, ADM also considered many other feed-additives options. In 1/93, rumors that ADM would build a Mexican methionine plant circulated. Instead, ADM formed a joint venture with Rhône-Poulenc to make it in RhônePoulenc’s new $44 million, 50 mil. lb. Institute, WV plant. ADM got 25% of the plant. Rhône-Poulenc is the world leader, with 300 mil. lb. global capacity. ADM added theronine and tryptophan production at its Decatur plant in the early 1990s. ADM also built 100 mil. lb. capacity in sorbitol in 1990, now much larger, displacing in 1994 Pfizer. In all cases, ADM dropped prices temporarily upon entry. ADM announced entry into lactic acid in 1990, but 40 mil. lb. capacity only available in 1993, beating a ConAgra-Dupont JV to that market. In 1994, the JV was put up for sale. Speculation that ADM may be producing only 10 mil. lb. of lactic in 1993, the only “natural” lactic source in U.S. In 1994, ADM began “hoarding” supplies of deodorized distillates, the primary feedstock for vitamin E, forcing Eastman Chemicals to stop production and agree to market ADM’s natural vitamin E on an exclusive basis! ADM entered production of monosodium glutamate (MSG) and distilled monoglycerides in Decatur in 1994, but this is one case where prices failed to fall and rivals exit. Ajinomoto opened a new 20,000 mt. MSG plant in Eddyville, Iowa in the spring of 1993 and world demand stayed high. ADM may enter production of biotin, ascorbic acid, and gluconates (CMR 7/24/95). Terrance Wilson reported to have met European conspirators in London and Paris hotels. Bayer AG makes citric acid in Europe and in Miles Labs’, Elkhart, Indiana plant; says it is cooperating with DOJ. Hoffman-La Roche is a big importer into the USA from European plants. [WSJ 7/28/95:A1). October 22, 1995: A long profile of Anne K. Bingaman (DAGA) and the Antitrust Division. Started at DOJ 8/92. Perceived as a populist, activist. Critics see GE case as overreaching. She says she wants to restore respect for the antitrust laws. No question that activity is up from Baxer’s time, a continuation of trends during the James Rill (Bush administration) period. DOJ faces tough opposition from many in Congress, especially telecommunications, computers, other fast changing industries. Increased globalization a challenge. Whitacre’s problems like those of in GE case. Division has so far avoided big, draining cases like AT&T & IBM.. Big problem in international cases is getting documents and informants abroad. William F. Baxter is quoted as saying about cartel behavior: “They started off with unrealistic ambitions [and a] crusading notion that there’s lots and lots of violations . . . The larger companies are well counseled and don’t get into the kind of trouble that the Antitrust Division is looking for. So, instead, they go after the little companies. . .” 261
Most others interviewed disagreed, calling Bingaman’s administration commonsensical, tough but pragmatic. The number of complaints is up because of perceived vigor of the division and because of the new leniency policy she instituted. (NYT 10/22/95: Sect. 3, pg. 1). December 1995: U.S. Asst. Attorney General for Antitrust Anne K. Bingaman stated that “The Antitrust Division is . . . substantially expanding investigations and cases with significant international aspects.” Earlier, in a March 1995 progress report, the Division listed six major accomplishments (from 10/92), of which three were aggressive prosecution of criminal price fixing, of global price fixing, and of intl. cooperation in enforcement. (www.usdoj.gov). December 13, 1995: Five companies (and the U.S. subsidiary of one of them) and three persons have pled guilty to price fixing in the U.S. and Canadian markets for Thermal Fax Paper, which had U.S. sales of $120 million. The price fixing took place periodically from February 1990 to February 1992. Meetings were held in Japan by the Japanese conspirators, and telephone calls were used to complete the agreements with the U.S. participants. The conspirators, their 1990 or 1991 U.S. sales, and fines paid are:
1. Mitsubishi Corp., Tokyo (and Mitsubishi Intl. Corp., NY) 2. Kanzaki Specialty Papers, Mass (and Pres. Kazuhiko Watanabe) 3. Elof Hansson paper & Board, NY (subsidiary of Elof Hansson AB, Sweden 4. Appleton papers Inc., Wis. (and Jerry A. Wallace, Vice Pres.) 5. Nippon Paper Industries Co., Tokyo 6. Mitsubishi Paper Mills, Tokyo (and Hininori Ichida) 7. New Oji Paper Co., Tokyo [see April 24, 1996 below]
Million dollars $4.80 $1.26 B 0.540 B 4.50 0.165 B 0.200 $45.00
indict. indict. $6.10 indict. B 1.80 indict. B 1.75 (www.usdoj.gov)
March 15, 1996: A lengthy analysis of antitrust by Ralf Boscheck, professor of economics and management strategy at IMD, focusing on strategic options of private companies. As a rule competition law and enforcement is becoming more rigorous in the major industrial countries. Markets are becoming increasingly narrowly defined [agree] with lower concentration thresholds for enforcement [disagree]. Agencies are trying to “automate” antitrust rules by specifying more per se prohibitions and “block exemptions” and less use of rule of reason. 262
More companies need antitrust compliance programs that are clearly supported by top management, are used for performance evaluation, are clearly spelled out by “do and do not” rules that are company- and industry-specific (discounts, communications on prices or shares, uses of associations, retention of records, industrial espionage). (Financial Times 5/15/96). March 27, 1996: In an annual progress report issued by the U.S. DOJ covering 1993-1996 events, global cartel enforcement was highlighted as the first priority of the Antitrust Division. Two cases were identified as “prominent successes” in prosecution: Thermal Fax Paper and Plastic Dinnerware. The fax paper case was the result of a two-year joint U.S.Canadian investigation [see 12/13/95 entry above]. It was still being litigated in 1996 against four defendants. Plastic Dinnerware was investigated by the DOJ, Canada, and Minnesota and resulted in ten guilty pleas (see 6/26/96 below). (www.usdoj.gov). April 1996: Vitamin C prices plunged from $16.75/kg. to as low as $10/kg. in past six months, due to increases in U.S. imports from China (3200 t 11/94 to 4800 t 11/95). BASF cut its workforce at its Danish plant (3000 t cap.) by 25% in 2/96. Chinese cap. went from 9000 t 1990 to 18,000 t in late 1995, of which 80-90% exported. Largest is Hebei-Welcome with 2000 t cap., up to 4000 t by 1997. ADM makes major feedstock for vitamin C, sorbitol, but plant not in production (possible technical problems). Also has yet to make its technically most ambitious product to date, xanthan gum (CMR 4/8/96:5). April 24, 1996: Indictments were returned for three Japanese executives accused of fixing the prices of Thermal Fax Paper. They are Yoshihiro Kurachi of Kanzaki Paper Manufacturing Co. of Tokyo, and Noburu Kurushsna of Mitsubishi Paper Mills of Tokyo. Koichi Tano of Kanzaki Paper was indicted separately (for a different type of fax paper product). (www.usdoj.gov). May 1996: The U.S. antitrust legal system of enforcement by both federal and state governments is called “concurrent enforcement.” In the EC the principle of “subsidiary” delegates virtually no role to the Member States in the enforcement of EU competition laws. As federal enforcement of antitrust shrank in the 1980s, the state attorneys general (AGs) expanded considerably, a trend that continued in the 1990s. This federal system is made possible by a common body of law. The state AGs have greater incentives to follow local market concerns and are little affected by ideological changes at the national level. There are differences. The DOJ can and does pursue criminal sanctions for price fixing, but the majority of the states do not have criminal antitrust statutes. The AGs can seek civil single damages for their state agencies and citizens, but unlike the federal government, they may also seek treble damages in federal courts as parens partriae. Also, 16 or so states can seek indirect-purchaser damages or will permit private parties to do so in their state courts. The AGs often try prosecutions under innovative legal theories that percolate up to the federal agencies. There are strong incentives for the AGs to operate under federal antitrust statutes; even when using state laws, they are interpreted in close conformity to substantive 263
federal law (though remedies sometimes differ). (Kevin O’Connor in Antitrust Report May/June 1996). June 26, 1996: The DOJ announced four indictments for price fixing in the market for Disposable Plastic Dinnerware, a $100-million per year industry. The defendants are Amcel Corp of Massachusetts, and its President Lloyd Gordon, and Dispoz-O Plastics Inc. of So. Carolina and its President Peter Iacovelli. Previously, in four other cases, the government convicted three corporations (Comet Products, Inc. and Plastics, Inc. paid fines totaling $8.36 million in 1994; Polar Plastics pleaded guilty in 1994) and seven executives (six received sentences of 4 to 15 months and fines totaling more than $200,000; in 1995 one company president was fined $90,000 and 21 months in prison for a single count B perhaps the stiffest ever meted out). Two of the individuals sentenced were Canadian citizens, thus making this case in a small way an international cartel (www.usdoj.gov). [The two Canadians were the first foreigners ever to serve in U.S. prisons a sentence under the Sherman Act]. C
July 18, 1996: The Commission of the European Communities issues a Notice instituting a leniency program for corporate whistle-blowers in cartel cases. The first firm to alert DG-IV will, if not a leader and fully cooperative, get a 75-100% fine reduction. Later cooperative conspirators will get a 50-75% discount. Leaders or enforcers can still get 10-50% of they cooperate. (Official Journal C207 18/07/1996). October 1996: A few days before ADM pleads guilty to price fixing in lysine, ADM lawyers quickly settled a damages case brought by a group of Missouri ranchers who claimed that ADM feed had killed 86 calves. A new process for extracting cottonseed oil developed by ADM had apparently created toxic levels of “free gossypol” in cottonseed cake. The farmers were paid double their original claim of $105,000. [Hollis]. In an unrelated food-safety issue, Whitacre reportedly claimed in an affidavit that ADM routinely sold toxic animal feed ingredients. For example, ADM sprayed biomass waste on corn gluten for export, a step that would fraudulently increase measurable protein levels. October 16, 1996: A New York Times editorial called ADM’s actions “. . . the shameful crime of victimizing customers.” “Price fixing is a way of life for ADM. The only difference is that most of its price gouging is legal, achieved by buying influence with political contributions. Mr. Andreas has contributed mightily to the coffers of political leaders on Capitol Hill for decades.” Sugar and ethanol are mentioned. The whole tone is that ADM got its comeuppance, but the legal gouging continues. (NYT 10/16/96:A16). October 21, 1996: The patent infringement case Ajinomoto v. ADM in U.S. District Court in Delaware was decided by Judge Sue Robinson. Partial summary judgment was granted to ADM concerning the use of bacterial strains patented by Ajinomoto for making threonine. This patent was assigned to Ajinomoto by a USSR organization known as Genetika in October 1991. Theonine is made by Eurolysine, which was 50% owned by Ajinomoto in 1973 (year formed), 75% owned in 1994. But because Orsan is in turn 10% owned by Ajinomoto, 264
Eurolysine was effectively 60% owned and 80% owned, respectively. However, by prior agreement with Orsan, Ajinomoto cannot exercise management control of Eurolysine. (Robinson 1996). December 2, 1996: Jungbunzlauer acquired its line of sodium gluconate in 1988 along with the plant that made it in Ladenburg, Germany. In 1996, the company decided to move production to its Marckolsheim, France plant that makes the glucose base. The vertical integration in that plant will lower costs. (CMR 12/2/96:7). December 1996: Roche is expanding its synthetic vitamin E plants in Switzerland and Nutley, NJ. ADM’s new Decatur plant had 1200 tonnes cap. when built; expansion to 1800 tonnes just completed. Natural E is 20-25% of total vitamin E market, going to 35% in future (CMR 12/9/96:8). January 1997: The USDA informed that ADM will be allowed to continue to participate in federal food contracts despite ADM’s lysine guilty plea. In 1996, Sun-Diamond Growers were barred from contracts for making illegal gifts to Agriculture Secretary Mike Espy. [Ag Biz 4/7/97]. January 1997: Eugene Reed, manager of a now-defunct vitamin premix company in Little Rock, Arkansas, said that BASF threatened a U.S. premix company in a meeting in Atlanta. A BASF executive said, “You need to remove yourself [from the industry] or you’ll be forced out of the business.” Plaintiffs in the class action against BASF et al. claim that predatory pricing was used to cause exit: animal-feed users were sold vitamins at below cost while charging much higher prices to premix companies. (Barboza 1999). February 1997: DOJ prosecutors allege that international price fixing is becoming increasingly common. There are now 22 federal grand jury investigations of alleged international price fixing conspiracies. The 1995 dynamite case resulted in criminal price fixing pleas and fines of $25 million on two companies (U.S. subsidiaries of Norway’s Dyno Industries and UK’s ICI PLC). The 1996 lysine/citric acid cases involved criminal fines of $170 million against six companies. However, there are many difficulties in prosecuting such cases. A 1992 conspiracy by Japanese fax paper makers is held up in the courts because one defendant, Nippon Paper Industries, challenges the extraterritorial reach of U.S. laws. (All the other companies pleaded guilty). Moreover, because Japan’s market was not affected, the Japanese government will not cooperate. The Japanese government considers the case a violation of international admiralty law and of Japanese sovereignty. Finally, some conservative U.S. economists think that such prosecutions will injure the free flow of foreign direct investment because subsidiaries are often held “hostage” until fines are paid. In a March 18, 1997 ruling, a federal appeals court made price fixing illegal even if solely foreign companies conspire outside U.S. territory (see below).
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In 1994, the OECD member states signed a draft agreement on greater antitrust coordination and enforcement. Despite good intentions of JFTC, Japanese business practices generally foster price coordination. [WSJ 2/5/97:A1 and 3/19/97:B5]. March, 1997: ADM case is part of an explosion of international criminal antitrust cases. In 1991, 10% of all corporate antitrust defendants in the U.S. were foreign companies; in 1996, 20% of all corporations charged and 27% of all individuals charged were foreigners [Howard Adler, Jr. and David J. Laing. “Explosion of International Criminal Antitrust Enforcement.” The Corporate Counselor (3/97):1]. March 12, 1997: Dr. Kuno Sommer, a top executive of Hoffmann-La Roche, is interviewed by the FBI concerning Roche’s involvement in price fixing. He admitted a conspiracy existed in citric acid [Roche pleaded guilty 3/27/99], but denied any involvement, personal or corporate, in vitamin price fixing. However, in Sommer’s 1999 guilty plea, prosecutors discovered that just before its interview, he had “met separately with at least two other highlevel Roche executives. At the end of those meetings, it was understood by the individuals that if Sommer was asked about Roche’s participation in a vitamins cartel, Sommer would lie and deny that there was any price fixing in vitamins.” (Barboza 1999). March 18, 1997: For several years, U.S. and Canadian antitrust authorities jointly investigated alleged price fixing in the $120 million North American market for Thermal Fax Paper. Between 1990 and 1992, five Japanese paper companies conspired to raise prices on exports to North America. Several of the companies and their managers pleaded guilty, paid fines of more than $10 million, and agreed to cooperate with prosecutors. However, in September 1996, one defendant, Nippon Paper Industries, was dismissed from the case because none of the conspiratorial acts occurred within U.S. jurisdiction. In March, this decision was overturned, re-affirming the extraterritorial reach of the Sherman Act (Daniel et al. 1997). Later, the U.S. Supreme Court let the Appeals Court decision stand. March 30, 1997: Eleanor Fox, professor at NYU law school, identifies global antitrust enforcement as the main direction of change for antitrust in the 1990s. Cartel enforcement is consistent with the 1980’s emphasis on efficiency-enhancement as the main goal of antitrust. Successive heads of the Antitrust Division (James Rill, Anne Bingaman, and Joel Klein) have intensified this shift. More transnational cooperation likely. The WTO has launched a new antitrust initiative. (Washington Post 3/30/97:C1). April 1997: The Industrial Diamonds (1994) and Appleton Papers (1997) cases “. . . point up a persistent weakness at the Antitrust Division -- its performance at trial.” During the three years 1994-1996, the Division has won at least 80 percent (the DOJ says 86 percent) of its antitrust cases. But that figure lumps together guilty plea agreements as well as litigated convictions at trial. However, of the 25 defendants brought to trial, the conviction rate was only 20%! The biggest problem in proving price-fixing cases is that prosecutors must rely on insiders to the conspiracy, most of them convicted of the same crime or the beneficiaries of “handsome 266
plea bargains.” Juries view them the same as “mob enforcers turned stool pigeon.” (The American Lawyer April 1997: 66). July, 1997: The federal subsidy for ethanol was expected to be extended by the Congress for a few more years. Begun in 1978, the subsidy has cost the U.S. Highway Trust Fund $7.1 billion to date and will cost $3.8 billion more if extended to 2007. ADM is the principal recipient of this subsidy. [Ag Biz 9/9/97] August, 1997: Igene Biotechnology files a $300 million federal lawsuit against ADM for theft of a trade secret, a chemical process that turns farm-raised salmon pink. [Ag Biz 9/9/97]. August 1997: Low vitamin C prices ($4.50-$5.50/kg. in U.S.) have forced many Chinese manufacturers out of business. There are now only about three larger efficient producers left exporting; sale of inventory of failed firms accounts for low prices. Largest is HebeiWelcome Pharmaceutical Co. (5000 tonnes) established in 1993; fairly high quality (USP XXIII and kosher-certified). Jiangxi Ganjiang Pharmaceutical announced expansion to 7000 tonnes in 1996 to be ready 1997. C
September 1997: Another international price-fixing cartel is revealed by the Department of Justice. The product is sodium gluconate, an industrial cleaner widely utilized for glass bottles and steel parts of food machinery. The world market for sodium gluconate in 1996 was about $50 million, of which $4 million was in the USA. Sodium gluconate is derived from potato starch by three companies: Fujisawa Pharmaceutical Co. of Japan, Roquette Frères of France, and a joint venture of two Dutch firms, Akzo Nobel and Avebe. (www.usdoj.gov ) [ADM is apparently an un-indicated co-conspirator].
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September 9, 1997: In an essay by University of London professor of competition law Valentine Korah, the secretiveness of the standards used by the EC’s DG-IV is criticized. The fines assessed infringers are determined subjectively by the Commissioner for DG-IV, a politician appointed by the member states. The fines, she claims, are not reviewable by the European courts [though they have reduced them on appeals]. The upper limit, 10% of annual turnover of a convicted corporate group globally, is set but not amounts below that. These are no published guidelines and no announcements of the factors used to set submaximum fines. [But see 1/14/98 below]. Over the years, the EC has used several factors to set fines: global turnover, EU turnover, or EU sales of the affected line business; profits made from the violation; the awareness of a company’s actions being illegal; “gravity” of the conduct; recidivism; and degree of cooperation. An unstated factor is nationality: non-EU companies get higher fines because there is no Commission member to defend it (The 75 million euro fine on Tetra Pak in 1995 is an example). Korah suggests that the USSG is a model the EC could adopt that would aid in deterrence (Financial Times 9/9/97:30). 267
September 24, 1997: The DOJ indicts the first company in the sodium gluconate conspiracy. The defendants are Akzo Nobel Chemicals BV, a Dutch corporation; its manufacturing subsidiary Glucona v.o.f., a Dutch partnership owned jointly by the Dutch firm Avebe BA; and Glucona America, a U.S. distribution affiliate of Glucona. During the conspiracy period, Glucona was sold entirely to Avebe and is now called Glucona BV. Akzo Nobel BV and Glucona America agreed to pay a $10 million statutory fine. In addition, Cornelius R. Nederveen and Marcel L. van Eekhout, former managing directors of Glucona v.o.f. and Glucona BV, respectively, were fined $100,000 each. The conspiracy lasted from August 1993 to June 1995. Global sales are $50 million per year. [www.usdoj.gov/atr/. . .]. These three companies conspired to fix prices from August 1993 to June 1995. The Dutch and French producers pled guilty in September and paid corporate fines of $10 million and $2.5 million respectively. In February 1998, Fujisawa also pleaded guilty and paid a $20 million fine. Finally one Japanese, two Dutch, and one French executive paid personal fines of $200k, $100k, $100k, respectively. The total fines of $32.95 million represent a truly extraordinary 410% of total U.S. sales! (Antitrust Report 9/97:19). It appears that Fujisawa was the leader of the cartel and that it was resisting cooperation with the DOJ. Because the fine exceeded $10 million, the DOJ clearly applied the “two-times” felony rule in assessing Fujisawa’s fine. (see 2/25/98 entry below) [If the DOJ applied that rule to U.S. sales only, it implies that the percentage overcharge on sodium gluconate sales was from 125% (if Fujisawa’s U.S. market share was 100%) to 250% (a 50% share). If applied to world sales the percentage overcharge was probably in the range of 15 to 30%.] October 1997: The two-times-harm rule for imposing fines requires a higher burden of proof for prosecutors than the $10 million “statutory” fine of $10 million. The amount of the overcharges must be proven with reasonable certainty. In FY 1996, corporate fines were the largest ever recorded ($205 million) for antitrust, but sanctions on individuals were among the lowest. In FY 1996, only 5 persons got prison time for price fixing, the lowest number since 1980. However, the 5 got the longest average prison time (15 months) since 1980. Individuals can in principle be fined more than the $350,000 statutory fine by using the two-times rule, but no applications of this rule yet. [National Law Journal, 10/20/97]. October 13, 1997: Prices for xanthan gum have declined for years, but November price hikes were announced by NutraSweet Kelco Co., part of Monsanto, the leading producer with a 60% world share. The first list price hike in five years, 10%, will probably be followed by the other major producers. Jungbunzlauer, Rhône-Poulenc, and SBI. Demand growth of 5-7% p.a. has driven world demand to 27 Kt p.a. Shares for the four suppliers are 62%, 11%, 21%, and 6%, respectively. Current prices are $4.50-$5.00/lb. Food grade, $4.00 technical grade, and less for oil recovery customers. Price decreases partly due to ADM’s entry two years ago. It makes industrial grade only and does not seem to be ready to sell food-grade. 268
Kelco, acquired by Monsanto from Merck, has plants in Danville, PA (recently expanded); San Diego, CA; Okmulgee, OK; and Merseyside, UK. The last 3 are being expanded 10%. Jungbunzlauer is debottlenecking its Austrian Plant. (CMR 10/13/97). November 1997: The Justice Department has convened a grand jury in Dallas, Texas to examine possible price-fixing in the market for human and animal vitamins, a $3 billion industry world-wide. The industry is dominated by a small number of manufacturers: Roche Holding, Ltd. (Switzerland), BASF AG (Germany), and Rhône-Poulenc SA (France) are the largest. Roche controls 45%-50% of the world market for 14 major vitamins. Recently, ADM and Cargill have begun to manufacture vitamins C and E using corn fermentation technology. The last major vitamin manufacturing plant in the United States closed in the 1960s, so most U.S. supplies now are imported from Europe. Prices for most vitamins have increased by 2% to 3% per year in recent years. However, wholesale prices of “natural” vitamin E have recently been increasing by 10% to 12% per year. Consumer demand for vitamin E is strong because of studies that indicate that the vitamin may reduce the risk of heart disease and cancer. DOJ investigators have interviewed officers of animal-feeds companies in recent months asking about suspected price irregularities. No formal action is expected soon. [WSJ 11/20/97:B10]. November 5, 1997: The U.S. Supreme Court 9-0 reversed a 1968 ruling and will now allow manufacturers or wholesalers to set maximum retail prices. Minimum vertical price fixing is still illegal. The DOJ argued in favor of the decision. A victory for franchisers, but many retailer organizations are upset. The Court’s decision was based on “the great weight of scholarly criticism” of its 1968 ruling. (Los Angeles Times 11/5/97:A1). December 2, 1997: The first of three private federal class action suits was filed concerning sodium gluconate. The suits (in San Francisco, Boston, and Chicago) have yet to be consolidated (ADM) [see 4/9/98]. December 1997: The third corporate defendant in the sodium gluconate (also gluconic acid) conspiracy is indicted. The firm is Roquette Frères, a French corporation, and Betrand Dufour, its Commercial Director. The product was sold through its U.S. subsidiary Roquette America, Inc. Roquette agreed to pay a $2.5 million fine and Dufour $50,000. [www.usdoj.gov/atr/. . .]. January 1998: Three firms were charged in two related cases of international bid-rigging in markets for marine services. The three agreed to pay a total of $65 million in fines for criminal violations of the Sherman Act. In the first case, HeereMac v.o.f. of the Netherlands and its commercial director Jan Meek were charged with conspiracy (with unindicted co-conspirators) to rig bids for heavy-lift marine construction services from 1993 to May 1997. HeereMac has agreed to pay a $49 269
million fine and Meek $100,000. Heavy lift derrick barges are used to construct offshore oil and gas drilling platforms. In the second case, Dockwise N.V. of Belgium and Dockwise U.S.A. of Texas conspired with unnamed co-conspirators to rig bids for heavy-lift semi-submersible marine transport services from 1990 to May 1995. World revenues in this market were more than $200 million in 1996. Dockwise and Dockwise U.S.A. paid fines of $15 million and $1 million, respectively; Christiaan Bernardus van der Zwan and Bastiaan Albertus de Jong, former officers of Dockwise paid fines of $150,000 and $75,000, respectively. In addition, Dockwise has agreed to pay $4 million in civil damages to the U.S. Navy. [Business Crimes Bulletin, Vol. 4, No. 12:10] C
January 9, 1998: The Commerce Ministry of the New Zealand government proposed raising the maximum penalty for price fixing under the 11-year-old “Commerce Act” from $NZ 5 million ($US 2.8 million) to a higher amount closer to U.S. and Australian ($A 10 million ‘ $6.4 million U.S.) levels. The proposal also suggests that the ADM et al. case should imply that fines should be based on a percentage of the illegal gains as well. The country’s manufacturers’ association, citing high industrial concentration, agreed with the proposal. [Wellington Evening Post, 1/9/98:11]. January 14, 1998: The Commission of the European Communities published its first guidelines on setting fines for competition law violations. Two basic criteria are gravity (three categories, 1000-1,000,000 euros, 1-20 million euros, and 20+ million euros) and duration (1-5 years 50% more, 5 years 100% more). Naked cartels are considered most serious. Within each of the gravity categories, the size of consumer harm will guide the amounts, which will be large enough to have a deterrent effect [i.e., larger than the single overcharge] but will be proportional to the individual participant’s harm. After determining a basic fine, it will be increased by aggravating factors (recidivision, noncooperation, leadership, and threatening co-conspirators) and decreased by attenuating factors (non implementation of an agreement, cooperation, early termination, doubt about whether the conduct is an infringement). Leniency discounts may then be applied (see 7/18/96 above). Ability to pay is a consideration (CEC Official Journal C9 14/01/1998).
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February 1998: Approximately early this month, Carbide/Graphite Group of Pittsburgh, PA applies for and is granted amnesty for its role in the global graphite electrode cartel. February 2, 1998: ADM’s SEC Form 10-Q for the quarter ending 12/31/97 contains the first company reference to antitrust litigation in sodium gluconate. ADM and other companies are defendants in two federal class action suits by direct purchasers. The first, file 12/7/97 in U.S. District Court in San Francisco is Chemical Distribution, Inc. vs. Akzo Nobel Chemicals BV et al. The second was filed 12/31/97 in U.S. District Court in Massachusetts as Stetson Chemicals, Inc. vs. Akzo Nobel Chemicals BV et al. (ADM) February 23, 1998: ADM has threatened for years to come on line with a large vitamin C plant, but little product has been seen on the market, if any. Plant may have been mothballed 270
because of low prices in mid 1990s (CMR 2/23/98:12). [ADM’s 1996 annual report featured its new world class vitamin C plant.] February 23, 1998: The first indictment of global price fixing in graphite electrodes is announced. The defendant is Showa Denko Carbon, Inc., a U.S. subsidiary of Showa Financing KK, a Japanese firm. SDC pleaded guilty and will pay a fine of $29 million for price fixing from 1993 to January 1997 in this $500/yr. market (1996), or $1.5 billion for the period charged. SDC manufactures electrodes in Ridgeville, SC. [www.usdoj.gov/atr/. . .]. February 25, 1998: The fourth company is indicted and pleads guilty to price fixing of sodium gluconate. The company is Fujisawa Pharmaceutical Co., Ltd., of Japan, and its U.S. subsidiary PMP Fermentation Products, Inc. Fujisawa agreed to pay a fine of $20 million, and Akira Nakao, Associate Exec. Director if its Chemicals Division, will pay $200,000. They are cooperating, as are unnamed, unindicted corporate co-conspirators. [www.usdoj.gov/atr/. . .]. February 26, 1998: Joel I. Klein, Assistant Attorney General for Antitrust, testified about the importance of international price fixing cartels for the DOJ. Enforcement is more difficult because of globalization, rapid technological advances, deregulation, and the need for international cooperation. Record numbers of large mergers in 1997 and 1996. In FY1996, criminal fines of $205 million were secured -- more than 5 times higher than any previous year. In the first half of FY97 the total would be $445 million. Cartels for lysine, citric acid, sodium gluconate, graphite electrodes, marine construction, and marine transportation uncovered from 1996 on. Overcharges in these industries are costing business and consumers hundreds of millions of dollars each year. The lysine conspiracy raised prices by 70% in three months “. . .during its first year” [Klein appears to refer to prices in 10/93 compared to 7/93]. In a second price fixing case (apparently graphite electrodes) prices increased over 60% during the conspiracy. The uncovered international cartels “have been governed by precise and elaborate arrangements among the conspirators. . .”: fixed prices, fixed world volumes, fixed market shares in each country, exchanges among participants of trade secrets (e.g., monthly sales by geographic area, prices charged to customers in each geographic areas, prices to be charged to individual customers), and sophisticated methods to monitor the effects of the agreements. In the citric-acid cartel a “compensation system” was in force: if a company sold more than its allotted share in year 1, it had to buy that amount from another company in year 2! Since the beginning of FY97, over 90% of all fines secured by the Antitrust Division of DOJ came from prosecution of international cartels. In 1987-90 no antitrust defendants were foreign. To date, the only domestic company to pay fines above the statutory $10 million is ADM (but UCAR was added in March) -- all 7 others have been foreign! [After graphite electrodes is complete, it will be 2 U.S., 8 fgn.].
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As of 2/98, 25+ grand juries are focused on international cartels, or 1/3 of all the Division’s criminal investigations currently on-going. Targets are located in 20 countries on five continents; more than half of the international cartels are in $100 million + markets. The DOJ proposed more mutual assistance agreements at the OECD’s Committee on Competition Law 2/98. The DOJ recently set up an “International Competition Policy Advisory Committee” to make recommendations on dealing with international cartels, international coordination of merger reviews, and possible anti-competitive effects of free trade agreements. The Antitrust Division in FY98 has 831 positions and a budget of $93 million – lower than in 1980 (982 pos.). The President’s request for FY99 is $98 million. The Division has used the “2X” rule for fines (18 U.S.C. 3571(d)) eight times up to 2/98. They would have liked to have used it six more times, but had to settle for $10 million. He proposed raising the “statutory” maximum to $100 million. [Klein 1998]. C
March 1998: Takeda Chemical holds about 23% of the bulk vitamin C U.S. market, Chinese imports about 29% (1997). Takeda lost $18 million on its U.S. vitamin business in FY 1997 (Jap. Chem. Wk. 3/19/98:12).
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March 1998: A civil suit was filed against Roche, BASF, and Rhône-Poulenc for price fixing the markets for bulk vitamins. [see June 7, 1999 below]. (Dow Jones 5/21/99).
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March 2, 1998: Antitrust officials agreed on an OECD policy encouraging member countries to develop mutual assistance agreements to cooperate on prosecution of global cartels. The statement is expected to be adopted at the May 1998 ministerial meeting of the OECD. (Financial Times 3/2/98). March 16, 1998: A Delaware federal court ruled that ADM had infringed on a patent for a process to make the amino acid threonine, ADM reported in its quarterly report. The U.S. patent was owned by Ajinomoto, which acquired it from a Russian company. According to Ajinomoto, the technology was illegally licensed later to a Swedish company, which later licensed it to ADM. ADM must pay damages of about $12 million plus interest (at a royalty rate of $1.23 per kg., implying ADM’s threonine production has been 21.5 million pounds). ADM may appeal. [WSJ 3/17/98:A4]. March 23, 1998: The Supreme Court, without comment, let stand a decision of the U.S. Federal Appeals Court in Chicago that will allow a civil, class-action, price-fixing case against pharmaceutical companies to go to trial in early December. The plaintiffs are about 40,000 independent retail drugstores; defendants now include many leading drug manufacturers (Abbott Labs vs. HJB) and at least seven drug wholesalers (Amerisource vs. HJB). In June 1996, eleven drug manufacturers (Merck, Eli Lilly, SmithKline Beecham, etc.) reached a settlement totaling $351 million. The retailers alleged that they were harmed by a 272
price-discrimination conspiracy that began in the 1980s that awarded lower prices to HMOs and other managed-care organizations. Manufacturers claim that the dual prices were a response to pressure by HMOs for discounts; wholesalers deny conspiring. [This settlement is one of the few class actions larger than the ADM-related price-fixing cases]. C
Spring 1998: A speech by A. Paul Victor of Weil, Gotshal & Manges surveys the DOJ rising global price fixing enforcement efforts. [Sort of from defendant’s point of view]. Considers the ADM agreement a key event. Thinks that Yamada’s failure to respond to subpoenas makes him a fugitive and is “obviously on the INS watch list,” but U.S. will not seek extradition (“It’s never happened before”). Although several types of antitrust violations are in theory criminalized (e.g., RobinsonPatman violations), in practice the DOJ pursues a criminal indictments only for hard-core cartels. Foreign companies and persons are equally liable with U.S. parties. Mechanics of antitrust investigation: (1) preliminary inquiries of allegations of wrongdoing, (2) request by attorneys in DOJ to AAJA for grand jury authority, (3) grand jury empanelled with attorneys in a team with FBI and frequently the local U.S. attorney, (4) grand jury subpoenas are issued, but restricted to U.S. residents and U.S. subsidiaries or agents of foreign companies, that allow recipients to collect and submit requested information, (5) obtaining a search warrant from a “neutral and detached magistrate” upon a DOJ sworn statement that the materials sought are seizeable and “probable cause” of criminal activity exists (use of warrants used to be exceptional in antitrust, but now becoming a commonly used tool), (6) DOJ may seek voluntary compliance from foreign company or subsidiary, (7) may use mutual assistance protocols or treaties (not used much in practice), (8) may conduct joint criminal investigations with Canada, Australia. A client faced with damaging evidence of antitrust violations may wish to enter the DOJ’s amnesty program or negotiate a plea agreement. The latter route holds several advantages: lower litigation costs when a guilty decision in court seems likely, more favorable DOJ terms (lower fines or prison sentences), and advantageous descriptions in the plea on “the scope and duration of the alleged conspiracy” (p. 501). By limiting the scope or period, civil plaintiffs may find the size of their recovered damages curtailed [relative to the true size of those damages, he means]. Signing an agreement will reduce culpability scores under U.S. Sentencing Guidelines. A novel feature in the ADM case was the Government’s use of the “alternative fine statute” to fine ADM $100 million. From now on, “That . . . is what the government is going to be pushing in every case.” (P. 502). [Victor refers to 18USC ‘3571(a) and (d)]. The DOJ’s recent successes are due to increased criminal antitrust enforcement resources, corporation amnesty program, and international agency cooperation.
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To arrive at a mutually acceptable plea agreement, the government needs to know in advance what quantity and quality of cooperation can be expected from the guilty party. This is formalized in pre-plea negotiations through a proffer letter which details the purpose and conditions of DOJ/FBI interviews and immunities to be given. (George Mason Law Review Spring 1998:493-503). April 1, 1998: A speech by DAAG of the DOJ, Gary Spratling, clarifies the Department’s leniency policy for corporations. In two recent international cartel cases (marine construction services and graphite electrodes) the first corporation to approach the DOJ got complete amnesties. The second corporations were fined $49 and $29 million, respectively, even though they cooperated and got discounts. The amnestied electrode maker was liable for $75 million even though its share was less than 20%. [www.usdoj.gov. . .]. April 7, 1998: The second indictment was filed in the graphite electrode price-fixing case. The defendant is UCAR International, Inc., headquartered in Danbury, CT with a plant in Clarksville, TN. Prices and volumes were fixed at meetings in the U.S., Europe, and East Asia during “at least as early as” July 1992 up to June 1997. In its guilty plea, UCAR agreed to pay a $110 million fine and is cooperating. No officers are indicted. The whistle blower was apparently Carbide/Graphite Group of Pittsburgh, PA, which was “accepted into the Antitrust Division’s Corporate Leniency Program.” A third conspirator is very likely SGL Carbon AG of Wiesbaden, Germany (along with UCAR, the two largest producers) which had its SGL Carbon Corp. subsidiary’s offices raided on June 5, 1997 in Charlotte, NC. [www.usdoj.gov/atr/. . .]. April 9, 1998: The three sodium gluconate private suits were consolidated in U.S. District Court in San Francisco. On October 29, 1998 ADM offered a settlement of $69,600 to plaintiffs, and as of 2/99 was seeking court approval of the settlement (ADM). April 12, 1998: Yet another international price-fixing cartel is uncovered, this one in the $500 million/year world market for graphite electrodes, devices used in the making of steel. The conspiracy was active from July 1992 to June 1997 – about five years – during which sales totaled $1.75 billion. The first company charged, Showa Denko Carbon, Inc., the U.S. subsidiary of a Japanese company, pleaded guilty and agreed to pay a criminal fine of $29 million. In late March, the CEO and CFO of UCAR International of Danbury, Connecticut suddenly resigned. On April 12, 1998 UCAR pleaded guilty to price fixing and agreed to pay a fine of $110 million, numerically the highest ever paid. (The fine will be paid over a six-year period, so at an 8% discount rate the net present value in 1998 is about $91.5 million). The DOJ announced that UCAR is “cooperating,” thus implying that the fine represents less than double the overcharge. Two other companies are under investigation: Carbide/Graphite Group of Pittsburgh, Pa. And SGL, AG of Germany. UCAR and SGL are the two largest manufacturers of graphite electrodes. 274
On April 16, 1998 a class-action civil suit was launched against UCAR, which has set aside $350 million as a contingency. (Conn. Law Tribune 4/13/98). April 20, 1998: In an SEC filing, UCAR International, Inc. said that the $340 million that it has put in a reserve for antitrust-related expenses ($110 million fine) for price fixing in the graphite electrodes market may drive it to bankruptcy. An investigation by Canadian antitrust authorities may result in more fines and probes in other jurisdictions as well. The plea agreement with the DOJ last week “. . .makes it difficult to defend against antitrust civil lawsuits.” [WSJ 4/20/98:A6]). May 4, 1998: A legal overview of the graphite electrode cartel case, the seventh global conspiracy prosecuted by the DOJ since 1995. Most of the participants have been foreign companies or their U.S. affiliates. The global industry consists of seven companies: UCAR International (41% U.S. share, 31% world share), SGL Carbon AG of Germany (28%, 23%), Carbide/Graphite Group, Inc., Showa Denko Carbon, Inc., and three more Japanese companies. In June 1997, federal grand jury subpoenas were served on all companies with U.S. operations; simultaneously, UCAR’s Paris office and SGL’s German offices were searched by EU authorities. Carbide/Graphite was granted amnesty. Showa Denko’s guilty plea included the usual activities: price fixing, allocating volume, restricting cartel production, exchanging sales information, and concealing information. In addition, the cartel designated one cartel member to fix regional prices for all cartel members and agreed to restrict non-cartel members’ access to new technology. A speech by the DOJ’s Gary Spratling said that Showa Denko agreed to pay only $29 million fine but could have been liable for $75 million. UCAR also got a discount. [Using the $75 million figure, the total cartel overcharge in the U.S. was in the range of $115 to $200 million, assuming that all sellers in the market sold at the cartel price and that Showa had a 10% to 15% market share]. Spratling also said that non-U.S. overcharges were used in the marine-services case to adjust the fine upward. [Legal Times 5/4/98:S44]. [This speech shows that the DOJ has three options when calculating the “alternative fine”: a firm’s U.S. overcharges, a cartel’s non-U.S. overcharges, and a cartel’s global affected sales. Gives leverage in plea-bargaining. See also 3/4/99]. C
May 4, 1998: A review of DOJ fines and the Leniency Program, illustrated by the graphite electrodes cartel. The market of $3 billion has seven suppliers: UCAR (31% world share), SGL Carbon (23%), Carbide/Graphite Group, and four Japanese manufacturers (46% remainder). Carbide was accepted into the leniency/amnesty program.
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Acceptance is automatic if the firm (1) comes to DOJ before an investigation is started, (2) has stopped colluding, (3) was not the originator or coercer, (4) confesses to corporate guilt, and (5) agrees to full cooperation. Leniency may be negotiated if the company is the first to confess and meets (2) - (5) above. If not accepted, the company must negotiate a plea or go to court (Legal Times 5/4/98:S44). May 6, 1998: House Speaker Newt Gingrich took the highly unusual step of rebuking Ways & means Chairman Bill Archer by packing the House-Senate conference committee that will decide the future of the ethanol subsidy with supporters of the subsidy, even though the House had voted to oppose its continuance. Archer has been a foe of the $600 million/year ethanol subsidy, the majority of which flows to ADM, contained in the $215 billion highway appropriations bill. Archer and many House colleagues have opposed ethanol as an egregious example of “corporate welfare.” Supporters include Albert Gore, Richard Gephardt, Trent Lott, Tom Harkin, and many members of Congress from major corn-growing states. (Washington Post, 5/7/98:A4). [Former Senator Robert Dole, a major sponsor of the ethanol subsidy and now a lobbyist, gave a $300,000 loan to Gingrich last year. Is there a connection?]. May 7, 1998: A Wall St. Journal editorial excoriates Gingrich for forcing through the ethanol subsidy on May 6th (WSJ 5/7/98). May 11, 1998: The Commodity Futures Trading Commission (CFTC) announced a record civil penalty on Sumitomo Corporation for manipulation of copper prices in 1995 and early 1996. A Sumitomo trader, Yasuo Hamanaka, accumulated large amounts of copper to disguise his trading losses and drive up the price. At one time Sumitomo’s secret stocks of copper accounted for more than 90% of the London Metal Exchange’s deliverable warehouse stocks. Hamanaka was fired in June 1996 and was sentenced to 8 years in prison. The CFTC fine was $150 million, $125 million going to the U.S. Treasury and $25 million to compensate victims. The $150 million is the largest civil fine ever imposed by a U.S. government agency, and is 7.5 times largest CFTC fine previously imposed (a $20 million fine on the Hunt Brothers in the early 1980s for cornering the silver market). Sumitomo was fined for failure to heed signs of Mr. Hamanaka’s misconduct. The UK’s Financial Services Authority also fined Sumitomo $8 million to cover the cost of its investigation. Sumitomo incurred losses of $2.6 billion for the unauthorized trading and it is a defendant in two federal class-action suits (futures traders in New York and copper buyers in California). June 1998: Global vitamin market was about $3.3 billion in 1995, expected $3.7 billion by 2000, of which $1.7B feed, $688 million pharmaceutical, $575 food, $334 MM cosmetics. Fastest growth (67%) expected for cosmetics (1995-2000), slowest (2%) for feeds, says report by BCC, Inc. Global volume is about 25,000 tonnes, of which 80% is vitamin E, and is growing at 10-20% p.a. [implies large price declines expected].
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Natural vitamin E has about 2000 t demand, 1000 in U.S. Major producers are ADM, Henkel, and Eisai. U.S. dollar sales rose 24% 1996-97 in food and drug stores. Studies show natural vitamin E (d-alpha-tocopherol) is 36% more potent than the synthetic racemic. Natural vitamin E is 20% of total vitamin E market. Supply is constrained. ADM entered production with 1200t Decatur plant in 1995; third expansion to be completed late 1998. Henkel’s Kankakee, IL plant expanded 10% this year, plans 30% more over next three years. Cargill and Hoffmann-La Roche have new JV in Eddyville, IA that is same size as ADM’s plant and will begin production this year. Cargill makes the major feedstock, deodorized distillates, as does ADM. Rhône-Poulenc spent $70MM in new plants and debottlenecking in last five years. Around 1990, vitamin C market dominated by Roche, Takeda, and BASF and price was $13$16/kg. In the early 1990s up to 22 Chinese factories came on stream, and sold C as low as $4.50/kg., forcing major producers to sell as low as $10/kg. Roche’s largest factory at Dalry, Scotland will spend $200MM 1998-2002 to improve efficiency. BASF, Merck, and Cerestar have a new alliance to make ketogulonic, a key intermediate. Chinese have not yet developed sales forces and services that customers in West take for granted (CMR 6/22/98:11). July 1998: Sodium gluconate (SG) is made by three major producers C Glucona America (sub. of Avebe BA), Jungbunzlauer, and PMP Fermentation Products, Inc. Sold in four forms 100% dry SG, 100% gluconic acid, and 40% and 60% liquid SG. Effective August 100% SG is up 34 per lb., first increase since 1994. Made from dextrose and glucose, PMP, a subsidiary of Fujiwara Pharmaceutical Co., holds 50% U.S. market (CMR 7/20/98:5). PMP makes SG in its Peoria, IL plant from dextrose and caustic soda. In 1997 opened a $55 mil. addition to make sodium erythorbate. Glucona holds about 25% U.S. market, just doubled its fermentation cap. At Janesville, WI plant; its other plant is in Ter Apelkanaal, Netherlands. Jungbunzlauer has 25 kt cap. of SG at its new Marckolsheim, France plant that makes the glucose feedstock. Relocated its production from Ladenburg, Germany last year, where it still makes potassium gluconate. Global demand estimated to be 45 kt, of which U.S. is 15-17 kt. World growth 3% p.a., U.S. growth 4-7% (CMR 7/20/98:5). July 1998: Rumors continue to circulate concerning the identity of the products and companies that are the subjects of grand jury probes into global price fixing. Among the products that are likely to be under investigation by the DOJ are the amino acid methionine and vitamins A, C, E, and riboflavin. ADM is a manufacturer of methionine and vitamins C and E. All four of the vitamins mentioned tend to have production dominated by the European chemical firms BASF and Hoffman La Roche [anonymous].
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July 4, 1998: The development of multilateral antitrust rules is fraught with difficulties. Many countries with agencies want to avoid bilateral blow-ups like the diamond cartel case, fax paper case, McDonald Douglas-Boeing merger, and others. Smaller countries often feel left out on major merger decisions and would like multilateral arrangements (perhaps in the WTO) to reduce anti-dumping actions. Bilateral agreements have limitations. However, there are serious differences in legal principles over cartels, vertical restraints, price discrimination, and merger standards. Half of the WTO’s 132 members have no competition laws at all. There are also many procedural differences: in the U.S., cases are tried in court (EU more like FTC), states and injured parties can sue for civil penalties, and use criminal sanctions (rare outside U.S.). (Economist 7/4/98:69).
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July 20, 1998: A rare long article about sodium gluconate appears. Dry SG prices will rise 3 cents (and liquid 60%-active SG 1.5 cents) per pound, said Glucona America Inc., a subsidiary of Avebe BA of the Netherlands. Its two competitors, Jungbunzlauer and PMP Fermentation Products, are following, effective July. Increase is blamed on rising costs. The last list price increase was in 1994. The raw material is corn dextrose. PMP (Sub. of Fujisawa Pharma. Co.) holds the majority of the U.S. dry market from its plant in Peoria, IL. Glucona doubled its capacity at its Jamesville, WI plant in 1997; Avebe has a plant in the Netherlands. Jungbunzlauer has 25 Kt capacity in France; made from corn glucose. Global demand is 45 Kt and is growing 3% p.a.; U.S. demand is 15-17 Kt but is growing 4 to 7% p.a. Pharmaceutical consumption of gluconates is $10 MM p.a. (CMR 7/20/98). July 27, 1998: UCAR International announced agreements with about 75% of the private antitrust plaintiffs in the graphite electrode case. The settlement of $80 million covers three groups: the federal class (action filed in Philadelphia federal court), 27 more steel companies that are plaintiffs in a separate suit filed in the same court, and some companies that did not join either suit. A small number of larger steel makers have not settled, including Nucor Corp., which bought more than $150 million of electrodes from UCAR during the conspiracy. (WSJ 7/28/98: A6).
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July 27, 1998: Business Week provides a broad overview of the DOJ’s enforcement of global cartels. Their activities sound like the plot of a cheap paperback thriller-mystery: clandestine meetings in glitzy world capitals by executives from all over the industrial world, negotiations as complex and difficult as a nonproliferation treaty, the use of code names and other practices to keep their activities secret. The DOJ enforcement effort results from increasing numbers of complaints its received and the belief that global price fixing is on the rise. International cooperation is limited, a source of frustration for the DOJ. Many other countries do not view price fixing as a serious crime or not a crime at all. Japan’s FTC has rarely cooperated in the past, but on May 27, 1998, it conducted a coordinated raid on four Japanese graphite electrodes producers (same day as in 278
U.S. is implied; Germany also?). A leading U.S. antitrust lawyer called this a “stunning development.” (Business Week 7/27/98:50). August 1998: Eisai Co. began production of synthetic vitamin E plant at its new 1,500tonnes-per-year plant in Pasadena, TX. Makes mostly bulk (feed or industrial) product. Its other plant in Kawashima, Japan has 2500 tonne capacity. Demand is strong (Japan Chem. Week 8/6/98:11). C
September 1998: On September 8, Showa Denko was fined $32.5 million for its guilty plea in graphite electrodes. Joel Klein made an unusual appearance in U.S. district court in Philadelphia to argue why Showa deserved such a large downward departure. The judge had complained that the $29 million that the DOJ had agreed to ask for was too far below the $65 to $135 million called for by the Sentencing Guidelines. Klein cited Showa’s extraordinary cooperation in making available witnesses and documents residing in Japan. About the same time, Showa Denko settled a civil class-action suit brought by Kentucky Electric Steel et al. It will pay 25% of sales to class members from 1992 to 1997, which were $100 to $150 million. (Legal Intelligencer 10/1/98:4).
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September 1998: In the first such case, Lonza became the first company to plead guilty in the U.S. to global price fixing in vitamins, but the plea was kept secret. See March 2, 1999 below (www.usdoj.gov). September 1998: ADM built a new plant to extract isoflavone from soy meal, 30,000 lb. Per month, the only one in the world. Product is a nutritional supplement, sells at $500/kg., a plant hormone similar to estrogen.
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September 4, 1998: See entry same date in Appendix A on Cargill’s lactic acid and erythricol ventures.
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September 10, 1998: A Chicago federal court judge approved the second major federal antitrust class-action settlement involving drug stores that sued several major drug makers. This second payment of $34 million now makes the total settlements reach more than $700 million. The four defendants who agreed to pay were Abbott Laboratories, Pharmacia & Upjohn, Hoechst Marion Roussel (Hoechst AG), and Rhône-Poulenc Rorer (Rhône-Poulenc SA). Four manufacturers refused to settle and will go to trial (Chicago Tribune 9/10/98).
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October 1, 1998: An interesting conflict developed between the DOJ’s criminal investigation in the carbide graphite case and a civil case. Four companies are being sued (UCAR, Showa Denko, SGL Carbon, and Carbide Graphite Group) by mini-steel makers. The DOJ asked the supervising judge to delay the taking of depositions by civil plaintiffs for three and one-half months so as not to interfere with the grand jury investigation. It is worried that witnesses will be able to tailor their subsequent criminal testimony to evidence revealed during the civil depositions. Trial was set to start 12/1/98. (Legal Intelligencer 10/1/98:4).
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October 1, 1998: Another food-additives global cartel exposed – Eastman Chem. Co. agreed to plead guilty to price fixing in the U.S. market for sorbates, a food preservative with $200 MM global sales. ECC agreed to cooperate and pay $11 mil. fine. Dates are 1/95-6/97 (NYT 10/1/98:C23). Criminal case filed in San Francisco District Court. ECC is Tennessee’s largest pvt. Employer (10,000 workers).
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October 5, 1998: World xanthan demand is 70 to 80 million pounds p.a., of which food uses (65-70%) is growing by 8-10% p.a. ADM’s 22 mil. lb. food-grade plant has not materialized. Prices went up about 7% last September. The average price of food-grade rose 19% in last 12 months, up to $5.40/lb. The biggest customers pay about $5, small ones $6. (CMR 10/5/98). October 7, 1998: Eastman’s sorbate plant is at Chocolate Bayou, TX; accounts for less than 1% of company sales. Other major producers are Hoechst’s Nutrinova subsidiary (Frankfurt, Germany), Daicel (Japan), Nippon Synthetic Chemical, and other Japanese makers (Chem. Wk. 10/7/98:14). October 15, 1998: The Eur. Commission fined four firms for sugar price fixing – Brit. Sugar (‹ 27.7MM), Tate & Lyle (‹ 5MM), Napier Brown (‹ 1.26MM), and James Budgett (‹ 1.26MM). Brit. Sugar’s fine was doubled to 0.53% of turnover because it was the leader of the cartel and because it reneged on its 1988 promise in a previous European monopolies case. Tate & Lyle got a 65% reduction from the “guideline fines” for its cooperation (The Guardian 10/15/98:20). The two manufacturers control 90% of the UK sugar market. Conspiracy meetings began in June 1986 and continued for four years. Tate & Lyle wrote to the UK Office of Fair Trading about the conspiracy in December 1996. Penalties are far below the maximum 10% of turnover, but the EC is getting tougher. In September 1998, it fined 16 transatlantic container shippers ‹ 191 million for operating a cartel, the largest competition fine ever (The Independent 10/15/98:2).
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October 15, 1998: A Statement of Facts sheds light on the global price fixing conspiracy in sodium gluconate (SG) made by fermentation from complex proprietary technology, used mainly as a retardant in concrete and for cleaning metal and glass. Sales in Canada during conspiracy (4/87-6/95) were C$6.6 million (about $4.5 million). Agreement on both prices and shares. There were five suppliers during the conspiracy: (1) Jungbunzlauer (12% share), which made SG at Ladenburg, Germany since 1988 and until 1997; (2) ADM (12%) acquired the SG business of Finnish Sugar Co. Ltd. in 1991, but exited in 1995; (3) Roquette Freres (28%) made SG in plants in France and Italy; (4) Fujisawa Pharmaceuticals Co. Ltd. (20%) made SG in an Illinois plant operated by PMP Fermentation Products, Inc.; and (5) Akzo Nobel Chemicals BV (28%) made SG in a Dutch plant operated by its joint venture Glucona v.o.f. with minority partner Avebe B.A. These five companies were fined $100,000; $0; 70,000; $36,000; and $35,000, respectively. 280
This information suggests that the SG conspiracy was started by JBL’s predecessor (Joh. Benckiser Gmbh of Ladenburg, Germany) and ADM’s predecessor Finnish Sugar Co., probably with the early involvement of Roquette and Akzo. Jungbunzlauer and ADM cooperated early and received discounts on their fines (Canada, Ministry of Justice 10/15/98). C
October 26, 1998: Jungbunzlauer paid a fine of C$100,000 for its part in the Canadian price fixing conspiracy in sodium gluconate, which had C $6.6 million ($4.3 million) in Canadian sales during the conspiracy. It is used in concrete and metal cleaning. (Journal of Commerce 10/26/98:12A). November 1998: ADM’s European subsidiary was contacted by the EC concerning price fixing in the EU market for sodium gluconate (ADM). November 1998: The DOJ’s crusade against international price fixing is one of the Antitrust Division’s highest priorities, perhaps the highest. The number of grand juries empanelled in such cases rose from “over 20” in 2/97, to 25 by 3/98, to 30 by 9/98. Prosecutions against “foreign cartels” constituted 1% of all Division actions in 1991, in 1998 it was 64%. Total fines collected for international cartels 10/96-9/98 is now above $400MM ($110 UCAR counted, but this actually an installment plan). A big turnaround since its 1994 defeat in U.S. vs. General Electric Co. et al. Now international cooperation with other antitrust units increasing, and U.S. grand jury evidence can now be shared with overseas competition law agencies. Has a 1997 broad mutual assistance agreement with Australia (the first) on antitrust; in addition, there are mutual assist. agreements on general criminal matters (some of which are antitrust); in addition, Europe and Canada antitrust investigation agreements exist. OECD committee urged positive comity on hard-core cartels. However, many general co-op. agreements do not allow compulsory evidence-taking in antitrust cases (National Law J. 11/9/98:B5).
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November 1998: A suit entitled John Doe v. U.S. was filed in the U.S. Court of Federal Claims in San Francisco on behalf of 9000 current and 3000 former government lawyers alleging that the U.S. DOJ has illegally withheld overtime pay required by federal law. In one U.S. Attorney’s office, the average lawyer put in 49 hours per week on cases, but attendance records always show 40 hours worked per employee. [Ironically, the suit is being brought by a partner of Williams & Connelly – ADM’s law firm]. (Legal Intelligencer 2/22/99). The most experienced, senior DOJ attorneys earned $105,000 annually in 1999. The DOJ, SEC, and IRS almost never grant overtime to their lawyers, whereas the Dept. of Labor and NLRB policies are generous toward overtime. Dept. of Labor lawyers are unionized and SEC lawyers are considering the issue. Attorneys are also unionized at the FDA, FEC, and the FCC. Comp time is widely granted automatically in many other agencies (DOE, EPA, Treasury. . .). The FTC allows overtime but it is rarely granted. At the DOJ there is a widespread culture that requesting overtime is unprofessional. 281
The 11/98 suit was certified as a federal class action on an opt-out basis on 12/14/99. It is no longer a “John Doe” suit (as it was earlier because plaintiffs did not want to be identified). (Legal Times 1/10/00:17). November 9, 1998: Degussa expanding its Slovakia plant’s threonine capacity from 4.5kt to 8.0 kt+. The only other producer of feed-grade threonine in Europe is Eurolysine. Other world leaders are ADM and Kyowa (CMR 11/9/98:7). November 9, 1998: Robert W. Sweet, U.S. Judge in the Southern District of New York, approved a negotiated settlement in the treble-damages, class-action antitrust suit In re NASDAQ Market Makers Antitrust Litigation. Plaintiffs include more than 1 million investors. Defendants were 37 major securities firms that colluded on the spread between the prices bid and asked for 1,659 securities from May 1989 to May 1994. The total settlement is a record $1.27 billion, of which legal fees and costs are $147 million or 11.6%. There were 65 law firms representing plaintiffs and four co-lead counsel. Sweet said that the fees were justified by the complexity of the case: large numbers of defendants, products, and time periods. Proof was difficult, as shown by the decision of the DOJ to file a civil complaint asking only for a remedial consent decree. Judge Sweet agreed to base the fees on a simple 14% recovery rather than the more complicated “loadstar” method (hours and rates) or a sliding scale method. Plaintiffs’ counsel had requested 17.5% of recovery. (Antitrust Litigation Reporter Dec. 1998, p. 3). C
Winter 1998: “The most significant and enduring antitrust enforcement initiative of this era will be the aggressive criminal enforcement of international cartels by the Antitrust Division.” (Klawiter 1998: 201). December 22, 1998: The FTC is seeking a record civil antitrust penalty from Mylan Laboratories, Inc., for raising the wholesale price on two generic anxiety drugs (clorazepate and lorazepam) by 3,219% and 2,503%, respectively! It did so by signing an exclusive 1997 supply contract with Profarmaco SRL of Milan, Italy, a subsidiary of Cambrex Corp. of NJ, for the raw materials needed to make the drugs. Mylan raised its prices 1/98, and consumers complained. If awarded, the fine will compensate buyers. (WSJ 12/22/98). [see 7/13/00 below].
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December 31, 1998: The OECD Council recommends that members adopt effective sanctions and enforcement procedures for “hard-core” cartels. (Other cartels include those organized to improve industry efficiency, are exempt from legal coverage, or are authorized specifically by a country’s laws. All such cartels should be transparent and reviewed periodically by governments). Members should explore antitrust cooperation under the principle of positive comity, including gathering and sharing of documents and frequent consultation (www.usdoj.gov.).
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1999: The current U.S. market shares for all bulk vitamins (a $1 billion market) are reported to be: Roche (60%), BASF (28%), Rhône-Poulenc (7%), and others (5%). (Barboza 1999). 282
[These data imply that Rhône avoided a fine of about $56 million because it was given amnesty by the DOJ]. C
January 14, 1999: Methionine global demand is about 300 Kt, of which 100 Kt is North America, 80 Kt Europe, 80 Kt Asia and Oceania. Growth 4-5% p.a., faster in Europe and SE Asia. Major manufacturers are Degussa (adding 80Kt by 2000), Novus (88Kt by 1999), RhônePoulenc, Nippon Soda, Sumitomo Chem., and Nippon Kayaku. Threonine demand is 13Kt and is growing faster than lysine (11-15% p.a.). (Japan Chemical Week 1/7/99: 6). March 2, 1999: The DOJ announces that five U.S.-based executives and three companies pleaded guilty to international price fixing of vitamin B3 (niacin or niacinamide). The Swiss vitamin manufacturer Lonza pleaded guilty in September 1998 and agreed to pay a $10.5 million fine. Its plea was kept under seal until today when the pleas of five individuals were received. Three executives were employed by DuCoa LP, a U.S. firm (former Pres. Lindell Hilling, div. Pres. J.L. Fischer, and div. V.P. Antonio Felix) and two by the Canadian company, Chinook Group Ltd. (V.P. of sales John Kennedy and U.S. sales manager Robert Samuelson). DuCoa is a bulk buyer of vitamins originally established as a joint venture of DuPont Co. and ConAgra Inc. but now is a division of the specialty chemicals firms DCV Inc. of Wilmington, Delaware. DuCoa’s place of business is Highland, Illinois, where it also manufactures choline chloride. Chinook Group, Inc. is wholly owned subsidiary (operating in White Bear Lake, Minnesota) of the Canadian partnership Chinook Group Ltd., which manufactures choline chloride in Toronto, Canada. Kennedy was formerly Product Manager for choline chloride for Bioproducts, Inc., a U.S. corporation in Fairlawn, Ohio. A federal grand jury in Dallas is continuing to hear evidence on price fixing in vitamins A, B, C, and E. Targets of subpoenas include the U.S. operations of BASF, Rhône-Poulenc, Degussa, Roche Holdings, Nepera (a unit of Cambrex Corp. of E. Rutherford, NJ), and two Japanese vitamin manufacturers. Lonza has and continues to cooperate with the DOJ investigation. DuCoa and Chinook pleaded guilty to global price fixing in the market for vitamin B4 (choline chloride), both pharmaceutical- and feed-grade. Gary Spratling, DAAG, said that information from the three companies is helping with the ongoing investigation of international cartels in the vitamin industry.
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March 2, 1999: Lonza AG, a Swiss vitamin maker, and 5 U.S. executives pleaded guilty to criminal price fixing of niacin (B3) from January 1992 to March 1998 (exact dates not known) and choline chloride (B4) from January 1988 to September 29, 1998. Lonza’s unsealed plea agreement was filed secretly on September 30, 1998. The executives are employees of Chinook Group Ltd. (1), Chinook Group Inc. (1), and DuCoa L.P. (3). Lonza will pay a $10.5 million fine. More indictments will follow. The niacin case will cover a conspiracy from January 1992 to March 1998, exact dates not known. Individual fines not announced (www.usdoj.gov). DuCoa’s place of business is Highland, Illinois. 283
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March 4, 1999: Gary Spratling, DAAG for Antitrust, gives a speech to the ABA’s National Institute on White Collar Crime of plea agreements in international cartels. Certain features are to be included to ensure DOJ benefits with respect to documents and testimony, including that of employees outside the U.S. Sometimes, foreign witnesses may be guaranteed no prison time in advance and safe passage into and out of the U.S. In calculating fines, the Division normally uses only the U.S. volume of commerce, but if the U.S. volume understates the seriousness of the crime, global sales will be used. Global sales first used in 12/97 in HeereMac and Roquette Frères cases. If a foreign company and its U.S. subsidiary participated in a cartel, the Division strongly prefers indicting the most culpable party. Since October 1, 1996, the DOJ has successfully prosecuted international cartels affecting more than $10 billion in U.S. commerce and overcharging U.S. buyers many hundreds of millions of dollars [this before the vitamin cases were announced; these added sales of at least $7 billion]. In FY 1991, only 1% of all antitrust corporate defendants were foreign (in FY 1987-1990 it was 0%), but in FY 97 32% of the corporate defendants were foreign-based and in FY98 50%! Moreover 76% of the A$10-million Club” were foreign as of 6/99. (Spratling www.usdoj.gov).
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April 29, 1999: Tokai Carbon pleaded guilty in the graphite electrode conspiracy (see 5/4/99 below).
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May 2, 1999: Joel Klein, AAGAD, testified before the Senate Antitrust subcommittee that the global conspiracies often have (unprecedently?) sophisticated methods of assuring compliance in the cartel. Two examples: the citric cartel had a buy-back compensation system, and the marine transportation cartel pooled their revenues, which were later divided up using a complex formula. These devices reduce the cheating problem.
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May 3, 1999: The U.S. and Japan reached substantive agreement on an antitrust cooperation agreement, similar to the Canadian and EU protocols (www.usdoj.gov). May 4, 1999: SGL Carbon AG agreed to plead guilty to price fixing of graphite electrodes and pay a record criminal fine of $135 million. Its CEO, Robert J. Koehler, also will plead guilty and pay $10 million, by far the largest antitrust fine ever paid by an individual. SGL’s U.S. subsidiary, SGL Carbon Corp., was not charged. SGL is the fourth graphite electrode firm to plead guilty, the others being UCAR International (paid $110 million), and Tokai Carbon Co. ($6 million). Thus, total fines are now almost $300 million. (WSJ 5/5/99: B12).
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May 4, 1999: SGL Carbon AG agreed to pay a $135 million fine for criminal price fixing in Philadelphia District Court, the largest on record. Moreover, CEO Robert J. Koehler agreed to pay a personal fine of $10 million, also the largest ever for an individual. SGL is the fourth company to be fined on the graphite electrode conspiracy. The others are Showa Denko ($32.5 million), UCAR ($110 million), and Tokai Carbon ($6 million). More will be indicted. The parent company of Wiesbaden, Germany was guilty, but not its U.S. subsidiary in North Carolina, SGL Carbon Corp. Koehler’s fine may be the first above the $350,000 statutory maximum (www.usdoj.gov).
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May 4, 1999: Joel Klein testifies before the Senate Antitrust Subcommittee. In March, the U.S. signed an EU-like antitrust-cooperation agreement with Israel. Mentions unprecedented price fixing fines. Global cartel enforcement mentioned as one of three highest priorities of the Division. Global cartels are more harmful to Americas than typical domestic conspiracies because they are hard to discover and because of the size of the overcharges. [He fails to mention that fining foreign companies is politically easier and more popular than domestic ones]. The conviction of 3 ADM officers was a “tremendously important victory” because of its strong deterrence effect. There are 30 antitrust grand juries in session, 1/3 of all the Division’s criminal investigations; all are looking into international cartel activity (www.usdoj.gov).
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May 5, 1999: The German chemical company Hoechst AG agreed to plead guilty for criminal price-fixing in the sorbates market and pay a $36 million fine in U.S. District Court in San Francisco. Bernd Romahn, former marketing manager of Hoechst’s Food Ingredients unit, will pay a $250,000 fine. The conspiracy lasted from 1979 to 1996 and affected almost $1 billion in U.S. commerce; global sales of potassium sorbate and sorbic acid are about $200 million per year. Eastman Chemical was fined $11 million for the same crime in October 1998 (www.usdoj.gov).
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May 11, 1999: The 1998-1999 editorials of the Wall Street Journal are uniformly critical of the DOJ’s suit against Microsoft, mainly because of the alleged chilling effect it will have on technological change. These editorials contain many general comments about the evil of antitrust, such as: “. . . antitrust law is far less lawful than it is a theory-du-jour looking for a chance to exact tribute from the private sector.” (WSJ 5/11/99).
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May 19, 1999: The Wall Street Journal was the first to announce the impending guilty pleas in vitamins, which was announced at a DOJ press conference the next morning, 5/20/99. (Wall Street Journal 5/19/99).
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May 20, 1999: Joel I. Klein: “The vitamin cartel is the most pervasive and harmful criminal antitrust conspiracy ever uncovered.” “The enormous effort that went into maintaining the conspiracy reflects the magnitude of the illegal revenues it generated . . .” “These cartels . . . are powerful and sophisticated and, without intervention by antitrust authorities , will often go on indefinitely.” The $900 million + in fines in FY99 is more than the entire history of U.S. [world] antitrust enforcement. These fines and prison sentences should cause would-be conspirators to think twice. (www.usdoj.gov). 285
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May 20, 1999: F. Hoffmann-La Roche and BASF both agree to submit guilty pleas negotiated with the U.S. DOJ. Their fines are downward departures from the USSG guidelines (double the loss, 20% of sales). The DOJ will bring indictments (if it can) against 4 Roche officers (Kuno Sommer, President of flavors and fragrances division; Roland Brönnimann, Pres., Vitamins and Fine Chemicals Division; Andreas Hauri, Head Global Marketing; and a former Roche Executive whose name is secret) and against 4 BASF executives (Reinhard Steinmetz, Head, Fine Chemical Division; Dieter Suter, Head, Fine Chemical Division; Dietz Kaminski, Head of Marketing; and Hugo Strotmann, Head of Marketing). In addition, 10 managers are listed by name as unindicted conspirators cooperating with the government [this seems to be a new practice]. The 8-member Executive Directors Board of BASF approved its guilty plea at a 7.5-hour meeting in Ludwigshafen on 5/18/99. (U.S. DOJ Plea Agreement 5/20/99).
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May 20, 1999: Rhône-Poulenc issued a press release saying that it had violated U.S. antitrust laws but had been admitted into the DOJ’s corporate leniency program and expected no fines to be levied on itself or its employees (PR Newswire 5/20/99). Joe Klein, in a CNBC interview, emphasized the elaborate system used by the vitamin price fixers. He estimated U.S. sales of (the six companies) vitamins at about $5 billion (probably affected sales in the U.S.), but wouldn’t say precisely what the overcharge might have been – “hundreds of millions of dollars.” (Dow Jones 5/20/99). In an earlier news conference, he called the cartel “. . .the most pervasive and harmful criminal antitrust conspiracy ever uncovered . . . contrary to what some have suggested these kinds of cartels are by no means transient or unstable. They are powerful and sophisticated, and without intervention by the antitrust authorities will often go on indefinitely.” (www.usdoj.gov/atr/public/pressreleases). For the first time in history a European will plead guilty to price fixing and will serve four months in prison.
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May 20, 1999: Indictments are filed against BASF AG and F. Hoffmann-La Roche, Ltd., of Ludwigshafen, Germany and Basel, Switzerland, respectively, for one count of criminal price fixing in seven product markets: Vitamin A Vitamin E Vitamin B2 Vitamin B5 Vitamin C Beta carotene Vitamin premixes
1/90-2/99 1/90-2/99 1/91-fall 1995 1/91-12/98 1/91-fall 1995 1/91-12/98 1/91-12/97
The violations include fixing prices, allocating volume (in the U.S. and elsewhere), exchange of sales and customer information for monitoring, issuing prices, and selling at those prices. For premixes, the violations concerned bid rigging. Both were carried out, in part, in Texas. (www.usdoj.gov/atr/cases). 286
In addition, Dr. Kuno Sommer of Roche was charged with both price fixing and making false statements to U.S. DOJ officials in 3/97. He will plead guilty, pay $100K, and go to prison for 4 months. The first European citizen to serve time for price fixing [misreported as first non-U.S. citizen]. Roche Holding CEO Franz Humer admitted that the $500 million fine will “wipe out” Roche’s profits on vitamins this year, there will be no long term effects on investment or market share, he predicted. He was “shocked” at the illegal actions and is installing a new auditing for antitrust and giving new training to employees. (Dow Jones News). C
May 20, 1999: Hoffmann-La Roche, a subsidiary of Swiss drug giant Roche Holding AG, the huge German chemical maker BASF AG, and French chemical firm Rhône-Poulenc agreed to plead guilty to a massive global price-fixing conspiracy in vitamins for a ten-year period. Roche will pay a $500 million criminal fine and BASF $225 million; Rhône-Poulenc will pay no fine (15% world market share) because it was accepted into an amnesty program a few months ago. Since the beginning of 1998, antitrust fines levied amount to $1,023 million. Joel Klein called the vitamin cartel “. . . the most pervasive and harmful criminal antitrust conspiracy ever uncovered.” He noted that the $14 million fine on Hoffmann-La Roche in 1997 was not sufficient to stop it from fixing prices, indicating the need for larger fines. Janet Reno said that corporate executives “. . . engaged in or contemplating similar conduct should take note of the high cost of getting caught.” Several smaller companies are still under investigation. All three companies say that they have overhauled the management of their vitamin divisions and instituted changes to ensure future compliance with antitrust laws. Roche fired two top executives: Roland Bronnimann, head of vitamins and fine chemicals division, and Dr. Kuno Sommer, former director of vitamin marketing and recent head of its Givaudan Roure unit. Sommer will pay $100,000 and spend four months in a U.S. prison for lying to federal investigators and other crimes, the first foreigner to be prosecuted for a U.S. criminal antitrust violation [is this true?]. BASF said that a new group of managers were in place for vitamins world wide. There are 25 private lawsuits against the vitamin makers by livestock farmers and feed manufacturers, the first filed in Washington, D.C. in March 1998. Roche and BASF have begun negotiations with EU antitrust authorities, who were not involved in the probe. Roche gets about 15% of its revenues from vitamins (about $2.5 billion for vitamins and fine chemicals in 1998). The $500 million fine is a big share of earnings, but a tiny fraction of its $110 billion market capitalization. Roche’s CEO, Franz B. Humer said, “I am personally absolutely shocked at what has happened.” Humer said that Roche paid $10 million in civil fines in 1996-97 for citric acid. (WSJ 5/21/99:A2). 287
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May 20, 1999: At a sentencing hearing, the DOJ calculates the fine range required under the Sentencing Guidelines for Hoffmann-La Roche to be $1.3 to $2.6 billion, but requests a downward departure to $500 million because of mitigating circumstances (anonymous).
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May 20, 1999: The DOJ holds a press conference to announce the vitamins guilty pleas. Janet Reno, Joel Klein, and Gary Spratling have opening statements that are widely reported in the press on 5/21/99. Reno said that the $500 million fine was “the highest fine the Justice Department has ever obtained in any criminal case. We mean business.” Klein: vitamin cartel the most harmful ever uncovered. Spratling, “simply put, the vitamin cartel was as bad as they get.” There were three types of price-fixing meetings. In August or September for 2 or 3 days, managers would work on next year’s “budget” (prices, volume shares). Called “top-notch” or “summit” conferences. In December or January, the division presidents and global marketing managers would meet to adopt the budget and review profitability for the previous year. Finally, regional managers would meet quarterly to monitor progress and compliance with the budget and confer constantly by telephone. Enormous managerial resources were expended on colluding rather than competing. Three Roche and four BASF executives were not given immunity under the plea agreements. Rhône is exempt from criminal charges by the U.S., but is not immune from civil damages suits. Why did the cartel go undetected for 9+ years? Spratling attributes it to stepped-up enforcement by the DOJ starting in 1995-96, to the leniency program, and to the zeal with which conspirators covered up. He avoids mentioning the huge “downward departure” from the Sentencing Guidelines given to Roche and BASF, and claims that Roche was penalized for being a “repeat offender!” [Based on market shares, Roche & BASF were fined proportionately it seems.] No EC/EU cooperation. The DOJ is continuing its vitamins investigation, but would not reveal if the 7 executives, other firms were being investigated. Avoids a question whether Rhône may have taped one of the meetings, say in February 1999. (Fed. News Service 5/20/99).
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May 20, 1999: Hoffmann-La Roche pleaded guilty to criminal price fixing in seven vitamin products markets in U.S. District Court in Dallas, Texas, (Fed News Service 5/20/99).
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May 20, 1999: In an interview concerning Hoffmann-La Roche’s guilty plea in vitamins, Roche Holding’s CEO, Franz B. Humer, stated that his company paid $10 million to settle civil U.S. antitrust suits in citric acid. This is new information. Of the $10 million, $5.7 million was paid to members of the federal class, leaving $4.3 million for the five opt-out firms (or about 5.1% of the total opt-out-firms’ settlement). (Dow Jones 5/21/99)
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May 21, 1999: The vitamin cartel was highly organized, almost a ritual. First, at the “topshot” meeting, company heads of marketing and product managers set prices and sales volumes for the coming year. A few months later, the most senior executives (division 288
presidents, global marketing heads) would approve the proposed “budget” for the coming year and review the past year’s profitability. Months later, a third group of executives would meet to monitor compliance to the budget. All paper evidence was ordered destroyed. Most surprising, collusion continued until 2/99, more than a year after the DOJ convened its Dallas grand jury (source?). C
May 21, 1999: Roche’s CEO Franz Humer explained steps to be taken to repair the company’s broken image. He learned of the conspiracy in late February 1999. Two internal investigations (1997 and early 1998) had failed to discover evidence of price fixing, he said. The 1997 search was a result of the citric acid episode; the 1998 came after civil suits were brought in vitamins in March 1998. Huber will write to key Roche managers outlining Roche’s corporate principle of adhering to local laws in all countries and giving guidelines for meeting with competing companies. “We take responsibility [for the price fixing] as leaders of this company,” Humer said. (Dow Jones News 5/21/99).
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May 21, 1999: The Financial Times (London) said that, “The fine is a severe blow to the reputation of Roche, one of the world’s oldest and most conservative pharmaceutical companies” (Financial Times 5/21/99:1). According to the Hartman Group, retail sales of vitamins to consumers are $5.8 billion per year (Chicago Tribune 5/21/99). Roche officials said that the company will not make provisions to cover future civil damages payments, because this would signal its intentions to plaintiffs in advance (Dow Jones News 5/21/99).
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May 22, 1999: The Canadian Competition Bureau is investigating price fixing in vitamins, with the cooperation of the U.S. DOJ. Both Roche and BASF have Canadian operations that employ 1550 people. Chinook Group Ltd. is also cooperating with the Bureau. (National Post (Canada) 5/22/99:D6).
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May 22, 1999: The DOJ is showing “newfound vigor” in its prosecutions of Microsoft, American Airlines, and global cartels. “The aggressive posture has been driven by a mix of political opportunism, frustration with past missteps, attractive inducements to whistleblowers and other factors.” The most ambitious agenda in 20 years. It is aided by the lameduck status of the Clinton administration, as is often the case. Joel Klein is open to new economic concepts and is closely supported by Reno. The new campaign has its roots in the 1994 dismissal of the diamond case. The corporate leniency program is helping. Antitrust has bipartisan support in Congress. Booming trade and global deregulation are other factors (Los Angeles Times 5/22/99:A1).
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May 22, 1999: The vitamins conspiracy was called “Vitamins, Inc.” because members treated it like a subsidiary of the dozen or more conspiring companies. Cartel members fixed prices “to the penny” and volume shares to the nearest 0.5 percentage point. Top executives met at luxury hotels in France, Germany or Switzerland at 2-3 day “summit” meetings every August 289
or September. In addition, regional managers would meet every quarter to report on prices and sales volumes. Intense communications on sales and prices took place between meetings. Finally, global marketing managers met (in the winter?) at an annual “Shareholders’ meeting” to review sales and profits of the past year and enforce purchases among members to redress imbalances. Most paper records were destroyed and the cartel avoided meeting on U.S. soil (Financial Times 5/22/99:5). In a biting article by Edmund Andrews, the response of Roche officials is treated with derision: “. . . the chairman and chief executive of Roche Holding AG pronounced themselves blameless and clueless. . .” “You will understand that this was not part of our responsibility” said Franz Humer. The same executives embroiled in the citric acid conspiracy were involved in vitamins as well. “We really don’t know what they did” said Humer, “They” being a small group of secretive employees. The two major villains, Roland Brönnimann and Kuno Sommer, have been fired without severance packages. Brönnimann was head of the Vitamins and Fine Chemicals Division since 1989. Sommer was a star performer as global head of vitamin marketing 1994-1997, so he was placed on Roche’s Corporate Executive Committee in 1997. In 1976, Roche paid “huge fines” to the EU for illegal pricing practices. (New York Times: 5/22/99 C1). C
May 22, 1999: A list of possible plaintiffs in the vitamin class-action suits would include the following largest sellers of consumer vitamins (prepared by Adams, Harkness & Hill): Company
Sales Last 9 Years
1.
Leiner Health Products
$700
million
2.
Pharmavite
$490
million
3.
General Nutrition
$350
million
4.
NBTY Vitamins
$325
million
5.
Rexall Sundown
$132
million
6.
Perrigo
$120
million
7.
Twinlab
$ 80
million
8.
Weider
$ 65
million
9.
Natural Alternatives
$ 35
million
10.
Natrol
$ 20
million
TOTAL
$2,317
million
[The news article erroneously identifies these companies as the ones likely to gain the most from settlements in price fixing] (NYT 5/22/99:C1). C
May 24, 1999: The Financial Times recalls that Roche was caught rigging the price of vitamins 25 years ago. The whistle-blower, Roche executive Stanley Adams, was promptly jailed by Swiss authorities. “Little seems to have changed. Europe’s chemical industry, in 290
particular, has a recidivist habit of price fixing, and has been repeatedly caught and fined by the competition authorities on both sides of the Atlantic.” The paper suggests that either Boards be held personally responsible or companies be fined enough to rile up shareholders against the Board or top management. (Financial Times 5/24/99:17). C
May 24, 1999: Peter Wullschleger, spokesperson for Roche, did not deny that fines and settlements in vitamins price fixing could cost $1 billion, calling it “pure speculation.” He denied that the scandal might cause Roche to spin off its fine chemicals division. It is not under consideration, he said. (Agence Prance Press 5/25/99).
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May 25, 1999: Dickstein Shapiro filed a civil antitrust suit in federal court in Arkansas on behalf of 12 companies (including Tyson) against vitamin manufacturers, on a contingency basis. Covers choline chloride only. DSMO’s head of civil litigation, Ken Adams, will handle the case (Legal Times 5/31/99:3).
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May 25, 1999: The EU’s antitrust chief, Karel van Miert, said that Roche, BASF, and RhônePoulenc are cooperating in its investigation of the vitamins industry, that they may be fined, but that jail sentences will not be imposed. The EC will not launch its “official probe” until next fall. (WSJ 5/26/99:A17).
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May 25, 1999: A quick check of industry/analysts and investment bankers drew estimates of $1 billion at the cost of settlements in the vitamins industry for Roche Holdings, i.e., $500 million for civil damages. That would reduce projected 1999 profits by 30%. The vitamin division in 1998 accounted for 15% of company total sales of $3.98 billion and had a profit margin of 19% of sales (almost as high as its drug division’s 21% of sales). Some speculate that Roche may sell the division. The two fired executives were members of the 8-person executive management committee of Roche. The flavors and fragrances unit is also a candidate for divestiture. (WSJ 5/25/99:A20).
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May 25, 1999: Roquette Frères of Lestrem, France pleaded guilty and agreed to pay a C$700,000 fine for sodium gluconate price fixing 1987-1995. Its sales were C$2.5 of $10.2 million during the affected period (CCB New Release 5/25/00).
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May 27, 1999: An article focusing on the reactions of some large vitamin supplements manufacturers demonstrates the remarkably ambiguous feelings that many vitamin buyers have concerning joining treble damages Sherman Act suits. One manager, expressed shock at the news of the Roche-BASF guilty pleas. The size of the fines made it clear that the impact on their business was a serious one. Two firms were not sure they would join a class of plaintiffs. They do anticipate renegotiating their current contracts (probably signed in late 1998). One company was concerned about upsetting their “relationship with a good supplier” and would prefer a “friendlier solution” to a law suit. (Salt Lake Tribune 5/27/99).
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May 31, 1999: Earlier in the week, attorneys representing plaintiffs in 25 vitamin price-fixing suits filed in U.S. District Court in D.C. consolidated their claims into one class action. Lead 291
counsel will be “litigation heavyweights” David Boies (Boies & Schiller, NYC), Michael Hausfeld (Cohen, Millstein, D.C.), and Stephen Susman (Susman Godfrey, Dallas). (Legal Times 5/31/99:3). C
May 31, 1999: Already 27 law firms have filed suits for buyers of vitamins, the start of massive haggling over damages. The central question is the but-for price of the vitamins. Plaintiffs’ counsel are estimating damages of as much as $1.5 billion. Article cites Ken Adams of DSMO. David Boies II is given credit for engineering a plan and consensus for consolidating the suits at a May 17th meeting in the Mayflower Hotel in D.C. His son, David III (Bainbridge & Straus, Alabama) filed the first suit. Other major law firms representing plaintiffs are Cohen Milstein and Stein Mitchell. Roche is being defended by Bruce Montgomery of Arnold & Porter (D.C.) and by Scott Muller (Davis Polk). Rhône is represented by George Manning and Joe Sims (Jones Day). The federal panel or MDL will meet on June 21, 1999 to decide on location. (Washington Post 5/31/99:F9).
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May 31, 1999: Although Roche says that it will reform its vitamins business, there is speculation that it may divest the division instead, as was previously reported. Same for Rhône-Poulenc. They and BASF refuse to estimate future antitrust liability. Many expect EC to be lenient. Vitamin profits will be low this year, mainly because of the low prices after the cartel broke up, but also because of Chinese/Korean production and alleged over capacity. Is it a good time to get out? Evidence that large MNC buyers of vitamins are already getting large discounts, (and were before also?). At BASF, Peter Suter (head of fine chemicals) and Hugo Strotmann (global marketing director for vitamins) are “leaving the company.” Hoffmann-La Roche is largely controlled by the Sacher and Oeri families. (CMR 5/31/99:7).
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May 31, 1999: Dickstein Shapiro filed suit on 5/25/99 in U.S. District Court in Arkansas for 12 U.S. companies, including Tyson Foods, Inc. alleging price fixing in choline chloride at BASF et al. DSMO represents on a contingency basis more than 30 buyers of bulk vitamins. Kenneth Adams predicts the settlement will be for $1 billion (Legal Times 5/31/99:3).
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June 1999: The Commission of the EC informed ADM and others in the spring of 1999 that it was investigating price fixing in Europe in sodium gluconate (ADM 1999).
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June 2, 1999: Magazine reports that at least nine companies are targets of vitamins pricefixing investigations by the DOJ: includes Merck KGaA, Takeda Chemical, Eisai, and Degussa-Hüls. Moreover, investigations have begun in Canada, EU, and Australia. Luke Froeb, professor at Vanderbilt and former antitrust official in the Reagan & Bush administrations, says that the prominence of foreign firms the global cartel cases is expected because European and Japanese antitrust laws are more tolerant of cartels. Most U.S. companies have strong internal safeguards to prevent collusion. Bilateral agreements will make prosecution easier in the future. Industry analysts are now estimating fines and settlements of at least $2 billion. Tony Cox of Dresdner Kleinwort Benson says that Roche alone will face liabilities of $1 billion or more; he suggests Roche will sell the fine chemicals division to focus on pharmaceuticals (Chem. Week 6/2/99:9).
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June 7, 1999: The 25 class actions against vitamin manufacturers are consolidated in the D.C. District Court. Defendant firms include so far, Roche, Rhône-Poulenc, BASF, Lonza, Degussa, DuCoa, DCV, Chinook, Takeda, Eisai, Bioproducts, and Merck.
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June 7, 1999: The vitamins plaintiffs’ lawyers began organizing before the guilty pleas were entered (May 20). On May 17, 80 lawyers met at the Mayflower Hotel, led by Boies & Schiller, the first firm to file charges. Schiller “discovered” the conspiracy in late 1997, when a patent-infringement counter claim by Roche was dropped; soon after, he got many calls alleging price fixing. Buyers reported odd behavior: Roche customers could not get competing quotes from BASF and vice versa. Vitamin C buyers were warned not to resell product (National Law Journal 6/7/99: A5).
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June 8, 1999: An opinion piece by Ralph Nader decries the small resources available to the DOJ and FTC. Real GDP rose 112% from 1977 to 1997, but the combined budgets of the two agencies decreased 7% in real terms. Yet, the Antitrust Division collected $913 million in fines from 10/98 to 5/99, or nine times the Division’s annual budget. The number of mergers tripled from 1991 to 1998. (Kansas City Star 6/8/99:D16).
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June 10, 1999: Roche, BASF, and Rhône-Poulenc are nearing a settlement of civil charges in vitamins of about $500, $250, and $85 million, respectively. They are eager to settle quickly. Plaintiffs’ lawyers claim overcharges in the 20% to 40% range for vitamins covering periods up to 10 years. There are “dozens” of plaintiffs in the suits. The DOJ is continuing its vitamins investigation, and investigators said that there could be more indictments. The big 3 makers continue to cooperate with the DOJ. Roche has begun negotiations with the EC (NYT 6/11/99:C1).
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June 11, 1999: Plaintiffs lawyers say that an agreement in principle may be reached in two weeks to settle civil charges against Roche, BASF, and Rhône-Poulenc in vitamin price fixing. Prices were raised 24-40% on average, as high as 50% for some. Plaintiffs offered to settle for $950 million. If it goes too low, plaintiffs may opt-out, but the class settlement may 293
include a clause that defendants would not pay opt-outs more than class members [is this enforceable?]. So far, the range of vitamins to be included in any agreement is an issue unresolved. (WSJ 9/11/99:B6). C
June 11, 1999: Roche shares fell 3% as news revealed that it was settling civil liabilities for amounts up to $500 million. Fines and settlements of $1 billion would equal 34% of Roche’s net income in FY 1998 (SF 4.4 billion or $2.9 billion). (Financial Times 6/11/99:27).
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June 14, 1999: Roche’s vitamin and fine chemical division had 1998 sales of $2.3 billion (14.6% of company sales); holds 40% global market of vitamins. It is building a 3 Kt plant to produce B2 by fermentation, ready in 2000. Repeats speculation that it may sell the division, which experienced a 5% decline in sales 1997-98 (vs. 19% gain by whole company). An annual decline of 9.3% occurred in the first quarter of 1999, due mainly to fall in vitamin prices, especially A and E. The DOJ investigation began in late 1997; a class action suit in Dallas was filed in early 1998 (CMR 6/14/99:14).
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June 15, 1999: Great Lakes Chemical Corp of West Lafayette, Indiana announced that it has been accepted into the DOJ’s amnesty program after informing the DOJ about price fixing in the world bromine industry. It’s new president Mark Bulriss, discovered the violations soon after becoming president in April 1998 and reported them shortly afterwards. A similar exemption is being sought from the EU. Annual production of 700Kt ($800 million) per year is dominated by Great Lakes (33%), Dead Sea Bromine Group of Israel (29%), and Albermarle Corp. of Richmond, VA. (21%). Bromine and bromine derivatives account for one-third of Great Lake’s $1.39 billion in sales. Burliss, 47, succeeded veteran employee Robert B. McDonald, who was 61 when he resigned in 1998 after 4 years as president. McDonald was a director of Great Lakes until May 1999 when he declined to stand for re-election. [This passage hints that McDonald was involved or knowledgeable; the lack of information on dates could extend the period back to the Kampen period]. Bromine is mined from subterranean salt water in Arkansas (GL) and the Dead Sea. (Albermarle extracts from the Jordanian side). The latter source is closer to fast-growing Asian markets. Recent declines in prices may be due to Albermarle’s recent entry (has JV with Jordanian company) and Dead Sea’s price-cutting (WSJ 6/16/99: A3).
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June 17, 1999: USA Today breaks the news that the DOJ is weighing indictments against 10 small vitamin makers for price fixing, with action expected this summer. Targets are: Takeda and Easai (C&E) which could face $100 MM in fines; Nepera and Vitachem (B3); Bioproducts, Chinook, and DuCoa (B4); and others. The private class action lawyers may now demand a $950 million settlement against the big 3. (USA Today 6/17/99:1B).
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June 17, 1999: Ten more vitamin manufacturers are likely to be indicated (in addition to Roche, BASF, Rhône): Takeda, Eisai, Nepera, Vitachem, Bioproducts, Chinook, and DuCoa are named. Fines may top $1 billion. (AFX 6/17/99).
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June 18, 1999: In September a new South African competition law and judicial structure will be initiated. Covers cartels, mergers, market dominance. Fines will rise from a maximum of 100,000 Rand to 10% of company sales per year. Civil damages can be sought in the ordinary courts by injured parties. (Financial Mail 6/18/99:18).
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June 19, 1999: Two Canadian consumers have launched a class-action damages suit against Roche, BASF, and Rhône-Poulenc for $2 billion (Gazette 6/19/99: C4).
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June 21, 1999: A New Mexico lawyer filed an antitrust consumer class action in state district court in Santa Fe against BASF and 12 other vitamin manufacturers (AP 6/21/99).
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June 22, 1999: The Swiss cartel office is probing Roche, BASF, and Rhône-Poulenc for price fixing in vitamins A, B2, B5, C, E, and beta carotene. (WSJ 6/22/99: interactive).
C
June 23, 1999: Great Lakes Chemical Co. and Dead Sea Bromine (Beer Sheva, Israel) are both cooperating with the U.S. DOJ and EC investigations into bromine price fixing. The two and Albermarle control 80% of global supply. Albermarle has not been contacted. GL is in the amnesty program. GL and DS have a joint venture formed in 1994 to operate a 25,000 mt plant in Israel to make tetrabro-mobisphenol-A (TBBA). (Chem. Week 6/23/99:9).
C
June 25, 1999: The German pharmaceutical firm Merck KGaA is conducting an internal investigation of alleged vitamin price fixing during 1987-1995. Merck is a defendant in at least one civil antitrust suit, but is not yet indicted by the DOJ. (WSJ 6/25/99:interactive).
C
June 29, 1999: Plaintiffs lawyers are now seeking more than $1 billion from the big 3 vitamin makers; just one month previously they believed $500 million was likely, but more damaging evidence about the cartel has surfaced from former employees of the vitamin makers. Cartel executives are believed to have ignored warnings from their own lawyers that it was illegal. The perpetrators transferred their meetings from the U.S. to offshore locations to avoid antitrust repercussions. Expectations of a swift settlement in the U.S. have faded. Consumers in Canada filed a class action last week. The EC investigation began last month and a Swiss investigation last week. The DOJ is now believed to be weighing charges against 10 smaller vitamin makers. (Financial Times 6/29/99:7).
C
June 30, 1999: Half-way through the 1999 fiscal year, criminal antitrust fines reached $913 million, up from $267 million in 1998, and $206 million in FY 97. From 1987 to 1996, these fines ranged from $20 to $42 million per year (www.usdoj.gov).
295
C
July 1999: The DOJ obtained a $21 million fine and guilty plea agreement from Nippon Gohsei for a 1979-1996 cartel in sorbates, the 3rd firm to plead. The fines now total $68 million for this $200-million-per-year global market. In addition, Hiromi Ito pleaded guilty and paid a $350,000 fine. (WSJ: interactive).
C
July 7, 1999: Judge Thomas Hogan of the D.C. Circuit Court ruled in the FTC’s favor by allowing it to seek disgorgement of $120 million in illicit profits in FTC v. Mylan Laboratories, Inc., a suit alleging monopolization and price-fixing of two generic anxiety drugs. Although legally authorized to do so since 1975, the FTC has only imposed injunctive relief in the past. Pro-business organizations were strongly opposed in amicus briefs. Mylan increased the prices of the two drugs by 1,935 to 3,200 percent shortly after signing exclusive supply contracts for the active ingredients with Cambrex Corp. and Gyma Laboratories; the suppliers were to receive a share of Mylan’s profits. (Corporate Legal Times January 2000: 74; Legal Times June 21, 1999).
C
July 9, 1999: A class-action vitamins suit is being launched in Australia by Maurice Blackburn Cashman, which says sales are $650 million per year and that the overcharge “could be” 10% of sales. The Australian Competition and Consumer Commission is already investigating (Chem. News & Intelligence 7/9/99).
C
July 12, 1999: BASF spokesperson Eggert Voscherau says that vitamin price-fixing investigations have begun in Mexico and Brazil, as well as Europe and Australia. (AFX 7/12/99) He and new Fine Chemicals President Christian Dudeck sought to reassure the industry that the Division was healthy. Capital spending 1999-2004 was set at 800 million DM ($418 million), and it has 40 new chemicals set to be launched soon. Staff bonuses will not be reduced because of damages settlements. BASF has set up a team of auditors with authority to conduct surprise audits (Chem. News & Intelligence 7/12/99).
C
July 14, 1999: Nippon Gohsei is the third company to plead guilty in the 17-year sorbate conspiracy and will pay a $21 million fine. Hiromi Ito will pay $350,000. Almost $1 billion sales affected from 12/79 - 3/96. Total fines now $68 million. More to come. (www.usdoj.gov). July 19, 1999: Pfizer will plead guilty to price fixing in the U.S. market for sodium erythorbate (a preservative that protects color and flavor of processed foods) from 1992 to 1994 and for maltol (a food flavoring used in fruits, candies, and beverages) from 1989 to 1995. Sales affected were $65 million. (www.usdoj.gov). July 19, 1999: BASF is facing cartel investigations in U.S., EU, Canada, Australia, Switzerland, Brazil and Mexico. Eggert Voscherau talked up the company’s prospects: an 11% increase in life-sciences R&D spending 1998-99 to $750 million, about half the total 296
company R&D, and large-scale entry into “neutraceuticals.” Fine chemicals division is expecting a 60% increase in sales 1998-2005! (Marketletter 7/19/99). July 19, 1999: BASF press conference. Voscherau and Dudeck say that customer loyalty will allow BASF to keep its 20% world share of vitamins, now worth DM 5 billion per year ($2.6 billion) and sales growth of 5% p.a. Expects its sales of fine chemicals to double in next 5 years (vs. 33% last 5 years). Hans-Jürgen Loose, group VP for nutrition and cosmetics at BASF Corp. in NJ, said, “We have not lost any customers following the revelation of the cartel.” BASF has decentralized sales and prices to regional sales managers. “Before the exposure of the cartel, prices and sales volumes were laid down centrally in Europe through Peter Suter, head of fine chemicals, and Hugo Strotmann, global marketing director for vitamins . . .” BASF has about 30% of each of the global markets for vitamins A, B2, and E, but is weaker in vitamin C. Has now only 4,000 kt of vitamin C capacity. Chinese and other entrants (ADM, Cargill?) a problem, latter because of vertical integration from agricultural raw materials. BASF, Cerestar, and Merck of Germany have a new joint venture to make from fermentation ketoglulonic acid, the major intermediate for vitamin C. (CMR 7/19/99: 8). [N.B. At another point in this sloppily written article, global sales are said to be DM 3 billion and DM 5 billion -- the larger seems right]. July 20, 1999: Pfizer announced that it had been fined $20 million by the DOJ for price fixing in two food-additives markets. The unit involved was sold in 1996, and none of the company’s current employees were involved (WSJ 7/20/99:B7). The products involved are sodium erythorbate, a food preservative, and maltol, a food flavoring. The period of price fixing is 1989-1995. No executives will receive sentences. (Boston Globe 7/20/99:D2). Pfizer’s food-science unit was sold to Cultor Oy, a Finnish company, for $350 million in January 1996 (NYT 7/20/99:C9). Pfizer, Inc. of New York City is the 4th largest drug company in the U.S., 6th in the world. Pfizer conspired with one other firm, as yet unnamed. The size of the two U.S. markets during 1980-1995 was $65 million. July 20, 1999: Maltol is a flavor-enhancer that can potentate sweetness, increase creamy mouth feel, and mask bitterness or acidity (Food Ingredient News 9/95). Pfizer is the only U.S. manufacturer mentioned in the U.S. trade press. It had developed a synthetic chemical process for making maltol around 1975-1978; its process patent was to expire in April 1995. In 1993, Pfizer sued Aceto Chemical of Lake Success, NY and Anhui Hefei Flavor Factory of China for patent infringement (Intellectual Property 6/8/94, Chem. Week 11/17/93:41). In early 1996, Pfizer launched a new “all-natural” version of maltol (Food Ingredient News 9/95). The new version is extracted from natural plant material rather than synthesized. 297
In 1996, Pfizer’s Food Science Group was sold to Cultor Oy of Finland. The group operated six factories, four in the U.S. and two in Europe. The FSG made maltol as well as lowcalorie bulking agents, fat replacers, flavors, and preservatives (Financial Times 12/15/95). In 1998, Cultor formed a joint venture in India to make maltol. In 1999, the Danish sugar company Danisco made a friendly offer for Cultor, which it accepted. July 20,1999: Sodium erythorbate is an antioxidant, a class of food additives increasingly popular in foods, especially cured meats, for increasing food safety. Apparently, the chemical is somewhat close in functional characteristics to ascorbic acid (Liquid Foods International May 1999:29). Sales of all antioxidants in Europe in 1997 were $75 million with growth expected to be 14 to 15 percent p.a. Natural extracted products are preferred to synthetic ones. Besides Pfizer, the only other company making sodium erythorbate mentioned in the trade press is PMP Fermentation Products Inc. of Peoria, Illinois (Japan Medical Rev. 7/96), a subsidiary of Fujisawa had fiscal 1996 sales of $2.2 billion. It built a new erythorbate plant in Illinois for $50 MM in 1996. Fujisawa has made the product since 1961 (Pharma Japan 5/15/95). Total 1993 sales of the product were 2 billion yen. July 20, 1999: A.L. Gilbert, a feed manufacturer in Oakdale, California, is the lead plaintiff in a class-action antitrust suit that alleges price fixing in methionine, a global market of more than $1 billion per year. Defendants (accounting for 88 percent of world supply) are RhônePoulenc, Degussa-Hüls, Mitsui & Co., Nippon Soda Co., and Novus International, Inc. “The lawsuit stems from federal investigations of price fixing of . . . lysine . . .” Plaintiff’s law firms are Damrell, Nelson (Modesto) and Cotchett, Pitre & Simon (Burlingame). (Modesto Bee 7/20/99). July 20, 1999: A U.S. district court judge in Boston dismissed the case (U.S. v. Nippon paper Industries) after the jury became deadlocked because the government had not proven “substantial effects” on U.S. commerce. Previously, 5 thermal fax companies in Japan had pleaded guilty to price fixing done entirely in Japan. The problem was that some paper prices fell or remained constant during 1990-1995. It is a new precedent. (Los Angeles Times 7/20/99:C3). July 21, 1999: Vitamin prices have collapsed since the DOJ probe was made public. The vast majority have dropped 50% since 1998, says an analyst with SRI Consulting. Margins have hit rock bottom. In 1993, vitamin C sold for DM 25/kg. ($13.50), but fell to DM 10 ($5.40) by 1998 solely on the strength of Chinese exporters (before the cartel revelations). Large vitamin companies are desperate to hold on to their market shares, so are cutting prices. (Chem. Week 7/21/99:46). July 22, 1999: Degussa-Hüls confirmed that it is a target of EU investigations into price fixing of both vitamins and methionine. It has also been contacted by the U.S. DOJ in vitamins but has not yet been served a writ by U.S. methionine customers. (Chem. News & Intelligence 7/22/99). 298
July 23, 1999: The two last members of sodium gluconate cartel were convicted in Canada. Akzo Nobel and Glucona each will pay C$350,000 for their roles in the 1987-1995 price fixing; their sales were C$2.6 out of the $10.2 million total during the affected period in Canada. Previous convictions were Jungbunzlauer Intl. AG (10/98), Fujisawa Pharmaceutical Co. (2/99), and Roquette Frères (5/99). (Canada Competition Bureau News Release 7/23/99). July 26, 1999: Degussa and Rhône-Poulenc are the leaders in methionine in Europe, with global capacities of 140 kt (Degussa at Wesseling, Antwerp, and Mobile) and Rhône at 230 kt by year 2001. Degussa admits EU investigation (CMR 7/26/99:8). July 28, 1999: Karel Van Miert will be retiring as competition-policy commissioner for the EU after seven years in the job, handing over leadership to Mario Monti. He is regarded as a relatively activist leader who successfully resisted pressure from the larger member states. His biggest task was the Boeing-McDonald Douglas merger showdown with the U.S. in 1997. Another high point was his aggressive investigations of anti-competitive state-aid cases in Germany (Deutsche Poste) and France (Credit Lyonaise bank). His launching of an abuse-of-dominant position case against Coca Cola in Europe is bold. Although a former socialist politician from Belgium, he had the zeal of a convert. Mario Monti is a former economics professor; expected to be more cautious (Financial Times 7/28/99:2). August 2, 1999: SGL Carbon of Frankfurt, Germany reported a large drop in first-half profits, mainly because of its DOJ fine in the graphite electrodes case. First-half operating profits fell from DM 211 million last year to about DM 70 million this year; its DM 125 mil. Fine will be further deducted from its second quarter earnings. SGL also raised its provision for all price-fixing costs to DM 535 mil. [Note that the DM 535 is a very high 48% of last year’s total sales of DM1102 million!]. Interestingly, demand for SGL’s electrodes had increased this year, but sales were projected to be much lower for SGL (DM 845-910 mil.) and the industry because: . . . the industry is still nervous of [sic] raising prices following the price-fixing allegations both in the U.S. and in Europe.” (AFX 8/2/99). August 5, 1999: A third civil suit was filed in Canada against 18 companies that allegedly fixed prices of bulk vitamins. The suit was filed by Ritchie-Smith Feeds, Inc. a farm-supply retailer in British Columbia Supreme Court. Two Ontario suits have also been filed claiming C$3 billion in damages (Calgary Sun 8/5/99:51). August 5, 1999: BASF’s first-half 1999 earnings were hit hard by the Euro 210 mil ($250 mil.) fine paid to the U.S. government for vitamin price fixing. First-half operating profits were also down by 30% compared to a year earlier for BASF. The fine represents about 40% of 1998’s operating profit for the Health & Nutrition division of BASF (AFX News 8/5/99). 299
August 10, 1999: Fines by national antitrust authorities vary for price fixing: Belgium, Italy, Finland, Sweden, and Spain follow the EU rule (10% of sales per one year); Greece 15%; Germany treble overcharge; Denmark unlimited; Austria single the overcharge. Only three countries have provisions for individual violators that includes prison time. (Financial Times 8/10/99:6). August 12, 1999: Starting March 2000, the UK OFT will be able to assess fines as high as 30% of sales for 3 years on price fixers. “The penalties will be on par with those in America.” (Daily Mail 8/12/99:22). August 14, 1999: In 1998, the UK increased the upper limit on fines for price fixers to 10% of UK sales over the previous three years. A new amnesty program was instituted, just like the DOJ’s. The EU has one already, but is little used. The UK record fine is ‹ 8 million. However, private damage suits are not permitted nor can authorities apply jail sentences. (Economist 8/14/99). August 19, 1999: Dr. Roland Brönnimann, a Swiss citizen and resident and former President of Roche’s Vitamin and Fine Chemicals Division, pleaded guilty to criminal price fixing charges. He will serve a 5-month prison sentence and pay $150,000 fine. He was Division President 1/90 to 5/99 and conspired on the prices of vitamins A, B2, B5, C, E and beta carotene from spring 1991 to 2/99. His is the 10th prosecution in the ever-widening vitamins cases (www.usdoj.gov). August 19, 1999: BP Amoco PLC has been subpoenaed with five other companies in the DOJ’s carbon-fiber probe. (EXTEL Examiner 8/19/99). August 20, 1999: Roche made accounting provision of SF 995 million ($656 million) for antitrust fines and settlements in the first half of its 1999 fiscal year. It is cooperating with the EC’s DG-IV on vitamin price fixing but has made no provision for EC fines as yet. Roche said that only Sommer and Brönnimann will be fired now that its internal probe in complete. An antitrust compliance program is being introduced (Chem. News & Intelligence 8/20/99). August 21, 1999: The DOJ has an investigation going on price fixing in the carbon fibers industry. A grand jury began sitting in Los Angeles in January. A private suit filed in LA alleged price fixing from 1993 to 1998 and predatory pricing in late 1998. Defendants include Hexcel Corp. (CT), Newport Adhesives (CA), Grafil Inc. (CA), and Mitsubishi Rayon, Toho Rayon, and Toray Industries (all Japan) and their three U.S. subsidiaries. (San Diego Union-Tribune 8/21/99: C-1). September 1999: The EC’s antitrust agency DG-IV had created a new anti-cartel unit and has asked for enhanced investigatory powers. (Klein 1999: 6). September 7, 1999: Sources close to the negotiations in the civil vitamins antitrust cases said that six companies have agreed to pay more than $1.1 billion to settle the price fixing 300
allegations. In about two weeks, the agreement will be presented to U.S. Judge Thomas F. Hogan in D.C. District court who will then hold hearings on fairness. [See 11/4/99 entry]. The six defendants are Roche, BASF, Rhône-Poulenc, Eisai Co., Daiichi Pharmaceutical, and Takeda Chemical. The 50 law firms propose fees of about $125 million or 11% of the settlement, a low figure pressed by the defendants. Plaintiffs want a clause that will give settling firms a guarantee that opt-out settlement rates will be applied retroactively to settling parties if higher. Weeks of haggling in August got an agreement to pay roughly 20 percent of purchases back to buyers (Washington Post 9/7/99:A1). September 8, 1999: Other papers pick up on the Washington Post scoop of 9/7/99. The tentative vitamins settlement will be the largest on record in the United States. The proposal to limit the lawyers’ fees is an unresolved issue. Kenneth Adams represents 63 large plaintiffs (Quaker Oats, Tyson Foods, former Continental Grain Co., and many feed companies). He believes the proposed settlement is far too small and that his clients will opt out. The damages justify a settlement 50% higher, he says. “I would be surprised if large purchasers participated in a settlement that returns less than single damages, particularly when the defendants have admitted to criminal liability.” (NYT 9/8/99:C2). Part of the settlement would invoke a (court?) injunction prohibiting the settling defendants from fixing prices and allocating customers in the future and from retaliating against plaintiffs in the future. (Financial Times 9/8/99:5). There are about 1000 buyers of vitamins who will receive a 20% recovery on their purchases under the proposed $1.1 billion settlement. One of the lead attorneys, Michael Hausfeld, says that the recovery is about equal to the overcharges. But Jim Blair, Tyson’s general counsel, estimates their overcharges at 30-40% and expects at least a 30% recovery by opting out. A Quaker Oats spokesperson confirms its intention to opt out. Kenneth Adams, who represents these companies and 63 others with more than 20% of the class’ sales, believes that most of his clients “will see it the same way.” (WSJ 9/13/99:A27). September 8, 1999: Six firms are close to settling civil damages in the vitamins case. The proposed amount is $1.1 billion, to be paid in proportion to market share: Roche about $660, BASF $220, Rhône $110, and 3 Japanese companies $110 million. Roche has made a $640 million provision for these civil suits, Rhône $165 million, and BASF none yet. The Japanese joined the settlement talks in early August. A Roche spokesperson cautioned that the deal is not finalized. (Bloomberg 9/8/99). September 8, 1999: In an interview Competition Law Commissioner (1992-1999) Karel van Miert said that EC fines are increasing up to U.S. levels and that eventually “the fines must be higher [than in the U.S.].” Higher fines are justified by the EU’s lack of personal criminal liability for competition law offenses. He hinted that the U.S. fines on Union Carbide, SGL Carbon, and other graphite electrode conspirators ($292 million) will be higher in the EU. [The EC raided the companies’ European offices in March 1998]. 301
He admitted that the EC was still studying the issue of guidelines for fines: “ The Commission is still gaining experience.” He rejected a simple percentage approach and specifically the USSG approach, which he considers “too transparent” (i.e. too predictable). The factors to be used for fining cartels will include length and “severity” of the cartel, ringleader status, and lack of cooperation with the investigation (Alchin 1999). September 9, 1999: Takeda Chemical Industries of Osaka will pay $72 million (for vitamins B2 and C), Eisai Co. of Tokyo $40 million (vitamin E), and Daiichi Pharmaceutical of Tokyo $25 million fine (for vitamin B6 and CalPan) for price fixing. Total of 13 prosecutions in vitamins. Periods are spring 1991 to late 1995 (Takeda) or to 2/99 (other two). (www.usdoj.gov). September 10, 1999: Takeda Chemical Industries announced rather harsh sanctions for all employees involved in the vitamins cartel. Its President Kunio Takeda will take a 15% pay cut for 3 months and all board members a 5% pay cut for 3 months. Takeda will resign his post as Chairman of the Federation of Pharmaceutical Manufacturers Association. New antitrust training for employees. At Eisai all board members will take a 10% cut and lose their winter bonuses. At Daiichi, board members will take 5% to 10% cuts for 3 months. Their presidents will resign as association presidents. (Jiji Press, Japan Economic Newswire 9/10/99). September 14, 1999: The “Agreed Statement of Facts” filed in Ontario Superior Court, Ottawa, Canada gives details on the vitamins B4 (choline chloride) global conspiracy. Russell E. Cosburn of Chinook (product or sales manager 1967-1992, then VP for Corporate Affairs 1992-1995) was the most culpable person. Beginning in January 1988, Cosburn and other senior managers of Chinook, Mitsui/Bioproducts, and DuCoa met in Toronto and agreed that each would have one-third of the North American B4 market and to raise the price. Customers were allocated or reallocated. In October 1992, Cosburn and executives of the three cartel members and of BASF, Akzo, and UCB met in Mexico City and discussed a worldwide market allocation and price increase. When the six parties met again at the BASF headquarters in Ludwigshafen, Germany in November 1992, the Europeans agreed to stop selling in North America, and the three original firms agreed to stop selling in Europe. Other regions were allocated among the six. They raised the price of vitamin B4 further in North America and elsewhere. The last meeting was in Toronto in April 1994, but the six continued to conspire bilaterally until June 1995 (document signed by Cosburn and Martin Low). September 22, 1999: The Federal Court of Canada imposed the largest criminal fines in Canadian legal history today on five vitamin manufacturers, upon the recommendation of the Canadian Competition Bureau (CCB). The fines totaled $C88.4 million from Roche (C$50.9), BASF (C$19), Rhône-Poulenc (C$14), Eisai Co. Ltd. (C$2.5), and Daiichi (C$2). 302
Products included vitamins A, B2, B5, C, and E with total sales of $C 650-700 million during the 1/90-2/99 conspiracy period. In addition, the Court imposed a consent decree or injunction (“prohibition order”) prohibiting price fixing for 10 years. Details: Roche’s vitamin fine was C$48 million and $C2.9 for citric acid (the fourth to be fined in citric). BASF’s fine included a C$1.0 million amount for its agreeing with other companies not to export choline chloride to Canada. Both Roche and BASF stated that their Canadian subsidiaries were not involved. (Chem News 9/23/99). [Note: C$1.47 ‘ U.S. $1.00]. Chinook was not included in the settlement, but on 9/17 Chinook’s former V.P. for sales, Russell Cosburn, was sentenced to 9 months of community service for price fixing in choline chloride (The Gazette 9/23/99). [The first for antitrust in Canada]. September 23, 1999: The C$88 million fines imposed on five vitamin makers were the largest criminal fines in Canadian history. Canadian sales of $668 million were affected by the cartel, pushing some prices as much as 30% above competitive levels. Covers A, E, C, B2, B4, B5, B6, beta carotene, and premixes. The fines (12.8% of sales), said the federal prosecutor, “were big enough to eliminate most illicit profit” but defendants were given a discount because the guilty pleas spared the Crown the expense of litigating under the Competition Act. “They still face huge legal fees and civil liability, and some individuals will go to jail here and elsewhere.” [Other than one Chinook executive, in Canada who?] (Toronto Star 9/23/99). September 23, 1999: Five vitamins and citric manufacturers were fined C$88.4 million for price fixing, the largest fines in Canadian legal history. Consumer advocates were critical of the Canadian Competition Bureau because it seems only to piggyback on U.S. DOJ actions. The CCB said it spent $1 million investigating the case. (Calgary Herald 9/23/99:A3). September 29, 1999: Chinook Group Ltd. of Canada became the 14th prosecution (the 7th company) in the vitamins scandal. It set prices, allocated customers, divided world markets geographically, and rigged bids for B4. It and five individuals from Chinook and DuCoa are cooperating in the investigation of unindicted co-conspirators. The conspiracy lasted for 10 years and 9 months (1/1/98-9/29/98). It will pay a $5 million criminal fine for choline chloride (B4). In March 1999, two Chinook executives and 3 others pleaded guilty for the same crime. Seven companies have now agreed to pay $877.5 million in fines (www.usdoj.gov). September 29, 1999: Robert Krass, 63, began his career in 1963 at the Union Carbide Corp., UCAR’s former parent (NYT 9/30/99: C12). September 29, 1999: Former President, CEO, and Chairman of the Board of UCAR, Robert Krass will plead guilty, pay $1.25 million and serve a 17-month sentence for price fixing. Last month, UCAR’s former COO Robert J. Hart agreed to a $1.0 million fine and 9-month sentence. Now three executives have been fined $12.25 million and 4 companies $283.50 million (www.usdoj.gov). 303
September 30, 1999: Chinook, Ltd. was fined C $2.25 million for vitamin B4 price fixing, a reduced fine for its cooperation. It paid U.S. $5 million in the U.S. a few days before (Vancouver Sun 9/30/99:F9). October 1999: Spokesperson for Roche Carolyn Glynn speaks about the vitamin conspiracy. “We can’t dispute the facts and we’ve decided it is of no value to unravel it. The situation is behind us. [At this date no civil settlements have been made, nor have non-U.S. fines been levied]. We’ve paid dearly for it” (Barboza 1999). October 1999: A source deeply involved in the U.S. class action in vitamins says that total U.S. sales of the affected vitamins and vitamin pre-mix during the relevant periods totaled $7 billion and that economists have estimated the average overcharges at 30% of sales ($2.1 billion). The percentage overcharge was higher for vitamins A and E, but lower for vitamins C and riboflavin. A large number of large buyers is ready to opt out, so their counsel are pressing for quick settlement by smaller firms in the class (Anonymous). October 1999: A class action price-fixing case, In re Brand Name Prescription Drugs, settled with several drug manufacturers for $723 million. Plaintiffs include mostly large pharmaceutical retailers (CVS, Walgreen, Wal-Mart etc.) that purchased brand name drugs from 10/15/89 to 2/9/95. Several thousand smaller independent drug stores opted out (Health Litigation Reporter 10/99:15). October 5, 1999: Procter & Gamble filed suit against six vitamin manufacturers in Cincinnati federal court for price-fixing damages (Chem Business Newsbase 10/5/99). October 7, 1999: Kellogg Co. filed suit against five vitamin companies for price-fixing damages (Chem. Business Newsbase 10/7/99). October 10, 1999: The New York Times publishes a major analysis of the vitamins cartels. Roche and BASF initiated price discussions in late 1989, and Roche joined about a year later. Roche is the ringleader. The DOJ says that the vitamin cartel was careful to raise its U.S. prices gradually so as to avoid attracting much notice. The DOJ estimates the affected U.S. commerce at $5 to $6 billion. The transaction price of one vitamin (A) rose by 71% from 2/90 to 11/98 [mostly due to the conspiracy]. In early 1991, Takeda, Eisai, and Daiichi joined the cartel (leaders in E, C, B2, B5, B6, B1). In 1992, Lonza, Chinook, and DuCoa joined (B3, B4). Most meetings occurred in Germany and Switzerland. Besides prices, they allocated regional shares, worked hard at preventing cheating. Corporate cultures (I.G. Farben etc.) and tolerance by many governments of cartels abetted the cartel. However, the attitudes in Europe are hardening. 304
BASF entered the premix market in 1986 and Roche a little later. In the late 1990s, they used predatory pricing to force many U.S. companies out of the business. Bidding prices became equal and refusals to deal more common. Prosecutors first got wind of possible vitamin price fixing by Roche around the time ADM began cooperating with the DOJ in late 1996 [from Cox?]. However, in a 3/97 interview, Sommer denied it. Later, private plaintiffs got a copy of a Sommer memo written in September 1993 that said: “Good experience with citric acid. Next opportunity [vitamin] B2. We think it’s worth that we explore all possibilities of cooperation. Let’s explore cooperation product-by-product.” In late 1997 or early 1998, company lawyers working at Roche discovered the vitamins conspiracy and directed that it stop. However, the cartel continued to operate. Meetings were moved from public places to the executives’ homes to avoid being detected. Rhône-Poulenc was admitted into the DOJ amnesty program in early 1999. Lawyers involved in the case say that Rhône was worried that knowledge of price fixing might impede its future, planned merger with Hoechst [itself guilty of price fixing in sorbates -- see May 5, 1999 and in vitamins -- see November 4, 1999]. Total fines so far are $862 million in the USA. Joel Klein says that the ADM lysine case “was not the iceberg; it was the tip.” Were the sanctions enough? Ken Adams said no: the extra profits were bigger than the fines and “That made it worthwhile. Their thinking was, A: You might not get caught. B: If you get caught, you pay the ticket. Is this simply an expensive license to keep stealing?” “The Justice Department could have imposed structural relief. . .” Klein disagrees. Divestitures of foreign assets are not legal. “The penalties coupled with the jail time I think is a far greater deterrent than structural relief. I’m confident that we’ve `nuked this cartel.” (Barboza 1999). October 12, 1999: New EU Competition Commissioner Mario Monti says that the U.S. should drop its opposition to discussing antitrust in the next world trade round to be held in 2000 (the “Millennium Round”). EU justice ministers added antitrust to the draft mandate this week for the WTO to enforce. The U.S. considers the idea “premature” because so many countries have no functioning antitrust agencies; it favors more international cooperation in global-cartel enforcement. Monti says that the approach would foster an antitrust “culture” worldwide and agreed the WTO was not ready to apply consistent rules yet. (WSJ 10/12/99: A23). October 14, 1999: Roche claims that it has regained “some of its previous market share” in vitamins [more honest than BASF -- see 7/19/99]. Prices continue to fall, especially on vitamins E and B2. Roche admits vitamin probes by authorities in EU, Brazil, Mexico, New Zealand, and Switzerland! (AFX News 10/14/99). 305
October 14, 1999: UCAR Intl. announced a settlement of shareholders’ derivative suits brought in connection with graphite electrodes price fixing. The class will receive $40.5 million, of which $29.5 million is from insurance policies. UCAR will pay $11 million plus $2 million in un-reimbursed legal costs. In addition UCAR agreed to have a representative from Florida’s state pension fund placed on the board of directors. (Business Wire 10/14/99). October 23, 1999: The FTC is being swamped by merger deals, especially mega-mergers. The no. of proposed deals has more than tripled since 1991, yet resources are fewer in both agencies. The FTC forced changes in only 30 proposed deals in 1998, 5 fewer than in 1990. Less attention is being paid to price-fixing or dominant firms (in spite of the Microsoft case). Monitoring consent degrees has suffered. (Wash. Post 10/23/99: E1). October 25, 1999: An essay by two lawyers argues that the sanctions for price fixing are now too high. Treble damages create incentives for plaintiffs to harass rivals. The double-theharm fines exacerbate the situation. Cite the vitamins fines as an example. More companies are seeking leniency [so what?], but these still must pay civil damages. Lawyers reaping millions. One firm (SGL Carbon Corp.) even had to go bankrupt! [This statement is premature, see 12/29/99 below]. The FTC can now seek restitution through disgorgement of profits plus interest in its civil cases if (1) the violation is a per se type and (2) the changes of a civil damages case is low. This means treble damages are duplicative (contrary to Illinois Brick). They propose allowing treble damages only if no fines have been or will be paid. [Major flaw: they accept treble damages as a legal theory but ignore the much lower actual damages] (Legal Times 10/25/99:27). October 25, 1999: Two lawyers propose that foreign buyers have legal standing to sue for overseas cartel sales in U.S. courts. Pfizer, Inc. v. Government of India (434 U.S. 308) (1978) is the precedent. India was overcharged by Pfizer et al. for pharmaceuticals, and the Supreme Court said that denying foreign buyers standing in global cartels would limit the deterrent effect, sometimes to zero. Example is the graphite electrodes case: illegal profits of $2 billion but U.S. affected commerce only 17% of total, so cartel will gain net $700 million even if treble damages of $1 billion added to fines paid of $340 million (Legal Times 10/25/99:36). October 25, 1999: Factoid: when Bill Clinton first returned to Arkansas in the early 1970s, he taught law at U. Ark., and his first course was antitrust law. Although not an issue in the 1992 Presidential campaign, Clinton has brought about a renaissance in antitrust enforcement, making many appointments that have been committed to enforcement. Seven major highlights. “In its greatest single antitrust achievement, the Clinton administration has dramatically refocused criminal enforcement . . . to international cartels.” Second, refined leniency program up from 1 to more than 20 per year (applications). Third, 306
more attention to winning a smaller number of merger cases with great deterrence power. Other areas mentioned, including more efficient processes. Perhaps the “most durable . . . achievement of the antitrust agencies under President Clinton has been the development of a bipartisan consensus on the value of antitrust enforcement . . .” By David Balto of the FTC. (Legal Times 10/15/99:25). October 25, 1999: the DOJ worked with 116 antitrust grand juries and filed 62 cases in 1998, In the first 5 months of 1999, 22 filings, 99 grand juries, and $913 million in criminal fines (vs. $267 mil. in all of 1998). The corporate leniency program has resulted in more than 20 convictions (Texas Lawyer 10/15/99:25). October 27, 1999: Hoechst AG and Eastman Chemical Co. were fined C$2.5 million and C$780,000, respectively, for price fixing of sorbate. Hoechst’s participation was from 1979 to 1996, Eastman’s 1995 to 1997 (Extel 10/27/99). November 1999: Plaintiffs lawyers in the vitamins case are deeply divided by the reverse “most favored nation” (MFN) clause in the settlement agreement. MFN clauses have been routinely included in settlements with early-settling defendants to offer rebates in the event that plaintiffs cut a cheaper deal with late-settling defendants. The clause helps negotiators to cut a deal quickly. However, the reverse MFN clause in the vitamins settlement rewards early-settling plaintiffs with a future premium should opt-outs settle at higher rates within two years of the class settlement being approved. Kenneth Adams, lawyer for at least 85 future opt-outs, was called the “chief agitator” opposing the reverse MFN clause, which he called ”highly unusual.” Lead class lawyers (from Boies & Schiller and Cohen Milstein) he said settled for less than possible (both recovery and fees) in order to get defendants to accept the clause. One legal expert described it as a “tax” on opt-outs because their legal costs will be used to reward the opt-ins in the class, which suggests a sweetheart deal for defendants. Robert Silver of Boies & Schiller, who designed the clause, defended it as necessary to get an early deal at a 20% rate because defendants wanted an overcharge rate of less than 10% to be accepted. John Coffee agreed that the opt-ins are going to be free riders on the opt-outs, but thought that Adams would not scuttle the settlement over the issue (Legal Intelligencer 11/15/99:4). November 4, 1999: Roche, BASF, Rhône-Poulenc, Hoechst, Takeda, Eisai, and Daiichi agreed to pay U.S. vitamin buyers $1.17 billion to settle the class action price-fixing suit against “Vitamins, Inc.” Attorneys’ fees will be $122.4 million (10.5%). The top three defendants will pay about 86% of the total; Rhône-Poulenc said that its share is $86.8 million (7.4%). The nominal amount is the largest in U.S. antitrust history. Robert Silver of Boies & Schiller said that recovery is about 20% of the value of class members’ purchases and that it “somewhat exceeds” the overcharge. The settlement amount may be reduced if firms opt out. Ken Adams, representing 87 clients with 20% of purchase values, said most of his clients will opt out. In recent weeks, most of 307
the negotiations focused on a “most favored-nation” clause that obligates defendants to pay the difference to class members of any larger settlement offered to opt-outs in the next 2 years. Adams will ask the judge to strike the clause. Adams says that vitamin overcharges averaged 33% of sales. For example, vitamin E sold for $4 per pound in 1990 at the beginning of the cartel, reached $9 in 1995, and has fallen today to less than $4. At least 3 more manufacturers will have to settle in the future. (WSJ 11/4/99:A3). November 10, 1999: The Swiss cartel authority (WEKO) is soon to start proceedings against Roche et al. for vitamin price fixing, but Swiss law does not allow fines to be imposed (Neue Zuercher Zeitung 11/10/99). November 11, 1999: The New Zealand Commerce Commission can fine vitamins manufacturers up to $5 million each for price fixing. Roche, BASF, and Rhône-Poulenc are under investigation (The Dominion 11/11/99). November 12, 1999: Special one-time charges of 334 million euros (82% for vitamin fines and settlements) caused BASF’s 3rd qtr. pre-tax profit to plunge 62%. Total set-aside for antitrust costs in FY 99 is 560 million euros (7.7% of sales). Although the Health & Nutrition Division experienced a 26% gain in sales, the 3rd qtr. operating loss was 404 million euros (WSJ 11/12/99). November 17, 1999: SEC Corp. of Hyogo, Japan and Nippon Carbon Co. Ltd. of Tokyo agreed to plead guilty and pay $4.8 and $2.5 million in U.S. fines, respectively, for graphite electrodes price fixing from at least 7/92 to 6/97 (www.usdoj.gov/atr/public). November 29, 1999: Premium Ingredients of the USA is suing eight firms in U.S. federal court for price-fixing of three flavor enhancers (MSG, DSG, and DSI), said the Fair Trade Commission (FTC). The firms are Cheil Jedang and Miwon (Korea), ADM, Ajinomoto and Ajinomoto USA, Takeda and Takeda USA, and Tung Hai of Taiwan. PI said the price of MSG rose 30% between 1993 and 1996 after the conspiracy started. Cheil and Miwon each export about $3 million of these products to the USA each year (Yonhap 11/29/99). November 30, 1999: The UK Restrictive Practices Court imposed sanctions on members of an international cartel for the first time. Cheil Jedang’s and ADM’s UK subsidiaries were enjoined never to fix prices again (Chem. News & Intelligence 11/30/99). $
December 2, 1999: At a lengthy hearing on November 22, 1999, Judge Thomas Hogan considered complaints from Kenneth L. Adams et al. about the “most favored nation” clause in the vitamins class action settlement. The next day he granted preliminary approval, subject to a final fairness hearing 3/28/00. He agreed that opt-out firms’ settlements might be delayed. As of November 23, defendants began paying $200,000 per day interest to the class.
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Adams says that the proposed settlement of $1.17 billion ($1.05 recovery) represents only 18% of affected U.S. sales ($6.50 billion). A future settlement for his own opt-outs alone (there are opt-outs represented by seven other firms) at an overcharge rate of 40% would cost defendants $374 million more after 11/23/01 or $1.43 billion more if settled before that date (Legal Intelligencer 12/2/99:4). [see 11/15/99 below]. December 3, 1999: Akzo Nobel is being sued for price fixing of vitamins A, C, E in U.S. civil courts. No criminal actions yet. Akzo’s products are manufactured by Chefaro. (Chemisch Weekblad 12/99). December 6, 1999: Merck KGaA is a defendant in U.S. civil price fixing suits for vitamins. Merck claims it prices were “below market” and that there is no injury. (Eur. Chem. News 12/6/99). December 7, 1999: Roche has decided to sell its flavors & fragrances division (1998 sales of FF 2 billion, or 10% of total sales), which is a global leader with about 17% of the market. It is part of a plan to focus on drugs and spin off non-core assets. Analysts believe that the vitamins division might be next (WSJ 12/7/99). December 7, 1999: SGL Carbon Corp. announced that it had resolved nearly all civil antitrust claims for graphite electrodes price fixing. It will pay $135 million over six years to plaintiffs (the same as its federal fine) and will record a charge of $39.2 million in FY 1999 for the legal fees from the settlement (Dow Jones 12/7/99). December 8, 1999: Five private price-fixing suits (and five more pending) were consolidated in the Northern District of California as MDL 1311 In re Methionine Antitrust Litigation. Animal feed and premix manufacturers are plaintiffs alleging price fixing by Novus International, Inc.; Rhône-Poulenc, SA; Degussa-Hüls, AG; Mitsui & Co.; Nippon Soda Company, Ltd.; and certain related subsidiaries and partners (such as ADM) (Opinion, Judicial Panel on Multidistrict Litigation). December 15, 1999: Rhône-Poulenc and Hoechst AG merged to form Aventis one year after their intention to do so was announced. Aventis is the global leader in manufacturing vitamin B12 and is third in Vitamins A, B2, and E. It also co-markets B1, B5, B6, B9, D3, H, and K3. Corporate headquarters is now Strasbourg, France (Aventis web page) December 29, 1999: The U.S. Court of Appeals for the Third Circuit overturned an April 1999 decision of the U.S. District Court for Delaware that had ruled that SGL Carbon Corp. had acted in good faith when it filed for bankruptcy in December 1998 in order to avoid paying civil price fixing penalties. SGL, the Appeals Court said, acted in bad faith because it faced no imminent danger of failure. Before SGL filed, it had net assets of $124 million. The 3rd circuit found that SGL had filed solely as a tactical move to force a quick, low civil antitrust settlement. In fact, all but three plaintiffs did settle before the appeals ruling (National Law Journal 1/17/2000). [see also 12/7/99 above].
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January 2000: A survey of experts on developments in global cartel prosecutions notes that the DOJ conference in DC 9/99 attracted prosecutors from 30 countries, who went away “imbued with anticartel fervor.” Canada levied antitrust fines of almost $100 mil. in 1999. “[A]ll the substantive [cartel] prosecutions in Canada have evolved from investigations and amnesty programs originating elsewhere in the world.” Has a leniency program that has helped. Japan’s FTC is becoming more aggressive in enforcing its Anti-Monopoly Law, which has criminal penalties of up to 3 years and - 100 mil ($950,000). At least 3 subsidiaries of No. Am. firms have been investigated for violations and 2 guilty in 1998-1999 (one is Microsoft Co. Ltd.). The EU’s laws are not criminal. Its leniency program is available to all defendants, not just the first, and allows fine discounts of from 10 to 100%. The biggest EU fine was for $110 million (on VW for preventing re-importation of cars from Italy). In 1998, the EU notified the U.S. of 52 cases, the U.S. 46 cases to EU, mostly mergers. In 11/99, Germany’s BKA fined a concrete cartel more than DM 300 million, its largest fine to date. In 1/98 Netherlands adopted a new Competition Act and set up a new agency that can impose fines up to 10% of global turnover. No criminal sanctions. Old blocking provisions were rejected; previously, Dutch companies could not comply with foreign competition-agency sanctions. (Business Crimes Law Report 1/2000). January 2000: A profile of attorney Michael Hausfeld of Cohen, Milstein, Hausfeld & Toll, one of the best known law firms in what he calls “social reform” class-action suits. These suits were encouraged by a 1996 change in federal court rules of procedure that allowed a class to be formed for all plaintiffs who fit a description of potentially injured persons unless they explicitly withdrew. Until 1996, only persons who affirmed their desire to be members of the class could be certified. Hausfeld has been involved in courtroom assaults on handgun manufacturers, HMOs, German companies that enslaved workers, Monsanto Corp. for attempting to monopolize genetically modified crops, Texaco Co. for racial bias, pollution caused by the Exxon Valdez oil spill, and Swiss banks for Holocaust victims’ assets. In antitrust, he has led efforts against Microsoft for monopolizing and the vitamins cartel for price fixing. The big tobacco case is another example. These are often cases where Congress has failed to act or regulatory agencies are helpless. A WSJ editorial called Hausfeld a “corporate shakedown artist.” (WSJ 1/4/00). January 7, 2000: Of the $1.17 billion to be paid to vitamin buyers, the Big Three manufacturers will owe about $900 million. The remaining $270 million will be paid by Takeda, Eisai, Daiichi, and Hoechst. The seven defendants controlled about 90% of the U.S. 310
and 70% of the global bulk vitamins markets. Recovery ($1.05 billion) is 18% of affected sales; fees of $122 million are about half of the usual rate in an antitrust civil action (10.4% vs. 20% of the settlement). Defendants still face penalties in Europe and indirect purchaser suits in a dozen states (Medical Devices Litigation Reporter 1/7/00: 10). January 10, 2000: The German pharmaceutical industry has declined in global importance since the turn of the 19th century, and this process accelerated since the early 1980s. The confiscation of Bayer’s and Merck’s U.S. assets in 1917 hurt, as did the exodus of Jewish scientists in the 1930s. More recently, popular campaigns against biotechnology in Germany caused many of the best young German biochemists to migrate to the U.S. The Green Party pressured German state governments to erect bureaucratic barriers to granting environmental permits for biotech facilities. In most German chemical companies, R&D remained chemistry-based and wedded to older analytical methods that were less productive of new drugs. As a result, rankings based on 1998 global ethical-drug sales place German companies quite low: Höchst (13), Bayer (16), Boeringer (20), Schering (22), BASF (27), Merck KGaA (33). Novartis and Merck are tied for #1, Roche #8. (WSJ 1/10/2000). January 19, 2000: A federal grand jury in Philadelphia indicted Mitsubishi Corp. of Tokyo and Georges Schwegler, a former executive of UCAR Intl., for graphite electrodes price fixing. This is the 7th corporation and 4th individual charged. Schwegler was Director of Electrodes European Export Sales. Mitsubishi owned 50% of UCAR from 2/25/91 to 1/26/95 and distributed electrodes. Total U.S. sales during the conspiracy were $1.7 billion. Conspirators and fines so far are: UCAR SGL Carbon Showa Denko Tokai Carbon SEC Corp. Nippon Carbon Mitsubishi Carbide/Graphite 3 executives 1 executive
$110 million $135 million $32.5 million $6.0 million $4.8 million $2.5 million pending 0.0 million $12.25 million pending
(www.usdoj.gov/atr). January 21, 2000: Eastman Chemical will exit the sorbates industry and dismantle its facility at Chocolate Bayou, Alvin, Texas. The plant and workers belong to a contract company. Sorbates sales were about $20 million in FY 1999, and the shut down will require a special charge of $17 million. Customers will buy from inventory over the next 6 to 9 months. A 311
spokesperson said that the 17-year price-fixing case played “no role” in the decision. The sorbate line had been “a low performer for Eastman for some time.” (Chem. News & Intelligence 1/21/00). January 21, 2000: Roche stated that it expects a “statement of objections” from DG-IV in March or April. A fine is expected, but of unknown size. Roche has agreed to pay $632 million out of the $1.05 billion civil settlement in the U.S. (60%?). No comment from DG-IV (Chemical News & Intelligence 1/21/00). January 24, 2000: Eastman Chemicals will close its Chocolate Bayou, Texas sorbate factory in June and take a $17 million special charge on its fourth quarter results. It is withdrawing from the industry because of “oversupply” [perhaps a euphemism for low prices and low profits since the cartel ended]. The product contributed $20 million in sales in FY 1999 (WSJ 1/24/00). February 14, 2000: Takeda Chemical Industries expects sales to reach Yen 920 billion in FY 2000 ending 3/31/00, a 9% increase. Pretax profits will be Yen 220 billion, an increase of 22% in one year, after a Yen 19.6 billion antitrust charge. Its U.S. subsidiary TAP increased its net profit by 46% to $780 million in 1999. (Nikkei Weekly 2/14/00: 17). February 17, 2000: Of the 4000 plaintiffs in the vitamins class action, 200 chose to opt-out of the class settlement. The opt-outs represent about 70% of vitamins purchased, so of the $1.17 billion settlement only $350-$400 million will be paid to the 3800 still in the class. Amazingly, the class attorneys will still get $122 million in fees, or a 30-35% of recovery. Some opt-outs think they may be able to settle more quickly than the class will be paid. Jim Blair, general counsel for Tyson Foods, said that the opt-outs willing to litigate will get more money. If they do, defendants must increase the payout pro-rata to the class. Ken Adams said, “for the large purchasers, the class is not an effective device” (WSJ 2/18/00:interactive). February 21, 2000: About 200 of the 4000 plaintiffs representing 70% of purchases will opt out of the vitamins class-action settlement (Chemical News & Intelligence, Singapore: 2/21/2000). February 23, 2000: UCAR Intl. announced that it is filing suit against its former parents, Union Carbide (and its former CEO) and Mitsubishi Corp. (and a former board member) to recover $1.5 billion in damages caused by their knowledge of and benefiting from price fixing, which started in 1992. UCAR was spun off in 1994 and went public in August 1995. UCAR said it is budgeting $10 to $20 million for legal costs. Union Carbide said that the suit was extortion and baseless (Bus. Wire 2/23/00, Chemical Week 3/1/00:5). March 1, 2000: Takeda Chemical Industries, Ltd. pleaded guilty to price fixing of vitamins C and B2 from 1991 to 1995. The fine of C $5.2 million represents 16.3% of its affected sales (Toronto Star 3/2/00). [Total Canadian vitamins fines now reach C$ 90 million]. 312
March 2, 2000: Six private antitrust price-fixing suits were consolidated in the Central District of Minnesota as MDL 1328 In re Monosodium Glutamate Antitrust Litigation. Plaintiffs are spice and seasoning companies that bought MSG and two related flavorings, disodium inosinate (DSI) and disodium guanylate (DSG), from ADM; Ajinomoto U.S.A., Inc., Takeda U.S.A., Inc.: and Takeda Vitamin & U.S.A., Inc. (Opinion, Judicial Panel on Multidistrict Litigation). March 13, 2000: Carbone of America Industries Corp., a NJ manufacturer of isostatic graphite, and its French-citizen President and CEO, Michel Coniglio, pleaded guilty to global price fixing in the U.S. and elsewhere. The fines are $7.15 and $0.10 million, respectively, for a conspiracy that began “as early as” July 1993 to “at least” February 1998. The defendants are cooperating in the DOJ’s investigation of unnamed co-conspirators, who fixed market shares, allocated customers, agreed to eliminate discounts, agreed to standardize grades of product, issued common prices, and exchanged information for monitoring and enforcement of the agreement. (www.usdoj.gov). March 15, 2000: BASF announced its FY 1999 results. Operating profits were up 15.6% from FY 1998, but U.S. antitrust payments of 941 mil. euros lowered these profits by 32%. After-tax profits fell from 6.1% of 1998 sales to 4.2% (pre-tax from 10.1% to 8.8%) after “extraordinary items” (AFX.com 3/15/00). March 20, 2000: More than 2,400 agricultural producers and rural businessmen spent two days in Washington lobbying Congress to alter farm programs and strengthen antitrust enforcement in the food system. The largest ag. demonstration since 1979. Once focus is on stronger enforcement of the 1921 P&S Act; another is concentration and mergers among agribusinesses and their impacts on rural communities (WSJ 3/21/00: A28). March 21, 2000: BASF showed its commitment to the agricultural chemicals industry by buying the Cyanamid Agricultural Products Division of American Home Products ($1.67 billion 1999 sales) to add to its own Agrochemicals Division ($1.70 billion). The acquisition will cost $3.9 billion after a six-week auction with bids from Bayer, DuPont, and Dow Chemical. The sale will make AHP more purely a pharmaceutical company and ready to merge with another big drug company. BASF currently is ninth in the global ag.-chem. industry; the merger will vault BASF to second place with about a 13% global share. In first place will be Syngenta, the proposed new entity spun off by Novartis and AstraZenaca, currently being vetted by the DG-IV (WSJ 3/4/00: A3). March 27, 2000: The vitamins treble-damages suits are bogged down in a procedural wrangle over Section 12 of the Clayton Act. There are differing opinions across Circuits as to whether plaintiffs in civil antitrust cases can take depositions in the location of the district court supervising the class (in this case D.C.) or only districts in which the defendants transacted business. Defendants argue the latter and because of a D.C. Circuit decision of 1/11/00, the supervising judge reluctantly agreed that the circuit’s decision was governing. He considered their assertions of lack of D.C. “personal jurisdiction” “highly suspect” given their guilty 313
pleas; he is “greatly concerned” that the “local contacts” test for personal jurisdiction will have negative repercussions on judicial oversight of class actions. So, plaintiffs must now serve summons in states with local contacts by the defendants. At this point in the civil case the plaintiffs were represented by lead counsel (Jonathan Schiller of Boies & Schiller) and 17 other firms (of which 100 by K. Adams). Defendants had hired 51 lawyers from 42 firms. Total 72 lawyers present! (Decision of Thomas F. Hogan, U.S. District Court of Dist. of Columbia). March 28, 2000: The class-action settlement in the vitamins price-fixing case received final approval in federal court today. About 4000 plaintiffs that opted to remain in the class will receive $242 million, or an average of $60,500 each. However, 225 plaintiffs opted out of the settlement that would have recovered $808 million ($3.6 million each on average). Instead they have filed separate suits. (Los Angeles Times 3/29/00: C2). Bayer AG announced that its U.S. subsidiary Bayer Corp. had filed for price-fixing damages in vitamins in the federal court for the Southern District of New York on 3/27/00. Other optouts include Tyson Food Inc. and Smithkline Beechham PLC. (AFX 3/30/00). March 30, 2000: Roche reported its annual financial results for fiscal 1999. Despite having to set aside $1.45 billion so far to settle vitamin price-fixing claims (and $206 million to cover alleged patent infringement by its Genentech subsidiary), Roche’s net income rose 31 percent in 1999 to $3.47 billion. Due to rapid increases in Pharma sales and profits (up 16%), its diagnostics division (up 29%), and the value of Genentech stock sold (Financial Times 3/31/00:25). March 30, 2000: Seven vitamins companies will pay $242 million to about 4000 smaller plaintiffs, or about 18 to 20 percent of their U.S. purchases. Judge Thomas Hogan gave final approval to the offer, which he called fair and reasonable. However, 224 companies with 77% of the value of purchased vitamins opted out (New York Times 3/31/00: C5). One of the 224 opt-outs is none other than Bayer Corp., Bayer’s U.S. subsidiary. They have filed suit in a Manhattan court (Chem. Business Newsbase 4/4/00). March 30, 2000: Roche reported a 31% increase in its net income in FY 1999, to SF 5.76 billion, and a 12% increase in sales to SF 27.57 billion. However, net income included a onetime extraordinary gain of SF 4.46 billion from the sale of 33% of Genentech stock in FY 1999 and a one-time loss of SF 2.42 billion from (a) vitamin price fixing payments and (b) costs of a patent-infringement settlement involving Genentech. Excluding both one-time items, net income rose 15% from FY 1998. Roche’s stock price fell 2.1% on 3/30, mainly because clinical trials on two promising drugs were halted ($1 = SF 1.6745). Voting shares of Roche are majority owned by the decedents of Hoffmann-La Roche, the Hoffmann and Oeri families, who have a secretive shareholders’ pact. The next largest shareholder, Martin Ebner, is pressuring for a seat on the board of directors (WSJ 3/31/00: B2). 314
Roche’s flavors and fragrances division, Givaudan, will be spun off and be listed on the Swiss Stock Exchange on 6/8/00. The company hold of 14% share of the global market of $8.8 billion (AP 3/30/00). April 2000: Gary Spratling, former DAAG for criminal investigations, describes the “race to be first” for amnesty for price fixing. Sometimes the difference between 1st and 2nd is less than one business day. However, even second in the race can get valuable prizes, much better than third place. The antitrust leniency program is the most successful in the DOJ, accounting for the majority of the Division’s major international cases. The new policy has generated 20 times more amnesty applications than the old policy. The DOJ keeps the identity of the applicant and its information confidential, but often companies reveal it. In vitamins, Roche and BASF were essentially “tied” for 2nd place. Both paid about 15% of affected commerce; Roche got a 62 to 81% discount, BASF 45 to 72% from the USSG range. Subsequent convictions paid more than 15%; how much more depends on: Timing of the offer to cooperate The relative size of the firm in the cartel The number of firms in the cartel Significance of the cooperation Seriousness of the firm’s conduct (size of overcharge, whether coercive leadership in cartel, tolerance of top management) Third firms typically pay 25-35% of volume of commerce affected. E.g., Daiichi paid 26%, but Takeda only 20% because it squealed on another cartel unknown at the time by the DOJ. In graphite electrodes, Showa was second to plea and got a 10% of sales fine; SGL Carbon was the last and paid 30% (too poor to pay more) (International Law Enforcement Reporter 4/00). April 2000: The vitamins opt-out plaintiffs’ experts have estimated the U.S. overcharges on the vitamins for which guilty pleas have been entered (A, C, E, B1, B2, B5, B6, B12, H/biotin, folic acid, beta carotene, and vitamin premixes) to be $3.0 billion. Affected U.S. sales during the admitted conspiracy periods (as long as January 1990-February 1998 or as short as January 1991-December 1994) was $8.37 billion, which implies an average overcharge of 36 percent. These dollar estimates are both much higher than statements by class counsel would suggest, and the affected sales figures are also higher than those stated by the DOJ (about $5 billion for the six largest defendants; see the entry for 5/20/99 above). [In September 1999 class lead counsel stated that the proposed $1.1 billion civil settlement represented 20% of affected sales of $5.5 billion and that 20% was the overcharge rate]. One major source of the higher opt-out’s estimate is the treatment of premixes made by the defendants. Some of the vitamins in the premixes were internal transfers of bulk vitamins made by a member of the cartel; other bulk vitamins were purchased from manufacturers outside the cartel. Both sources of bulk vitamins were then effectively raised in price in January 1990 when Roche and BASF 315
agreed to cut the size of their traditional premix discounts. The opt-outs may also be counting the affected sales of smaller vitamins manufacturers (those below the top six) in the cartel and products like B3 and B4 that were not part of the 9/99 class settlement (anonymous personal communication 4/19/00). April 3, 2000: A review of ICPAC (2000) concludes that its recommendations in the area of cartels are narrowly focused, modest, and timid. It seems to say that U.S. enforcement rules are adequate and that bilateral cooperation is sufficient. Eleanor Cox, in a dissent argues for a WTO-type multilateral approach (Legal Times 4/3/00). April 6, 2000: Judge Jackson found Microsoft guilty on nearly all the points charged by 19 states and the DOJ under the Sherman Act on 4/3/00. On 4/4 both parties agreed to an expedited process for the third and last penalty phase: the DOJ will propose sanctions by 4/28 and the judge will issue his order on remedies in June. Immediate appeal, possibly directly to the Supreme Court, will be permitted. Senate Majority Leader, Senator Trent Lott said that hearings will be held to determine if the DOJ was overzealous in its prosecution of Microsoft. Republican Party spokesperson, Rep. J.C. Watts charged that the “Clinton-Gore” prosecution had sent the world economy into disarray (Microsoft’s stock price had declined drastically on 4/4). Microsoft’s PAC has given $1.3 million to federal lawmakers in 1999-2000, of which 54% went to Democrats (WSJ 4/6/00). April 6, 2000: After 15 months of hard negotiations, the DOJ obtained guilty pleas from four former senior executives of BASF and Hoffmann-La Roche, bringing the total number of vitamins prosecutions to 18 (11 corporate and 7 individual). All seven executives who have pled guilty are foreign nationals from Switzerland and Germany; one other Roche executive has been indicted under court seal and are awaiting trial (see 3/2/99 above). Joel I. Klein stated that: “These cases represent a ‘clean sweep’ for the Division -- we will have obtained convictions and U.S. prison terms of the high-level BASF and Hoffmann-La Roche business executives responsible for the vitamin conspiracy. The prison sentences that will be imposed against these foreign executives sends the strongest possible deterrent message -- if you violate U.S. antitrust laws and victimize American businesses and consumers, we will hold you individually accountable and will seek tough sentences.” The four men who agreed to appear for sentencing in the near future are: 1. 2. 3.
Reinhardt Steinmetz, former President of BASF’s Fine Chemicals Division (3.5 months; $125,000 fine); Dieter Suter, also former President of BASF’s Fine Chemicals Division (3 months; $75,000); Hugo Strotmann, former BASF Group Vice President (3 months; $75,000); and 316
4.
Andreas Hauri, former Marketing Director of Hoffmann-La Roche’s Vitamin Division (4 months; $350,000).
Hauri is the third former senior manager of Hoffmann-La Roche to be charged with criminal price fixing. [His maximum fine probably represents the fact that he was intimately involved with Roche’s earlier conspiracy in citric acid]. Roche itself pleaded guilty on May 20, 1999. Dr. Kuno Sommer pleaded guilty and was sentenced (4 mo., $100,000) on July 23, 1999. Dr. Roland Brönnimann pleaded guilty and was sentenced (5 mo., $150,000) on October 29, 1999. The Roche executives and Suter are Swiss Nationals; Steinmetz and Strotmann are German. The DOJ vitamins investigation is continuing. (www.usdoj.gov). April 11, 2000: In his regular appearance before the U.S. House of Representatives’ Judiciary Committee, Joel Klein again cites cartel enforcement as a major accomplishment of the Antitrust Division. Fiscal 1999 produced yet another year of record fines ($1.1 billion) for price fixing, but Congress “. . . should not presume we will continue breaking records every year.” He dwells on the vitamin cartel success. “At resent, more than 35 sitting U.S. antitrust grand juries are looking into suspected international cartel activity.” The current Division budget of $110 million would increase to $134 million (22%) if the President’s budget is supported, and staffing levels will return to the same level as it was in 1980. [Conspicuously absent is the Administration’s former request for an increase in the Sherman Act fine cap to $100 million]. (Federal Document Clearing House 4/11/00). May 3, 2000: The Swiss Fair Trading Authority (WEKO) ruled that the global vitamins cartel did not affect the Swiss market, thus no Swiss fines are likely for Roche et al. (Chemical Business Newsbase 5/3/00). May 3, 2000: The Australian Competition and Consumer Commission (ACCC) expects to bring price-fixing charges against 12 vitamins companies by June (ABIX 5/3/00). May 5, 2000: Cambrex Corp., parent of Nepera, announced that Nepera will enter a guilty plea to one count of price fixing for vitamin B3 from 1992 to 1995 and will pay a $4 million fine. Cambrex has set aside $6 million for fines, civil settlements, and legal fees. During the conspiracy, Nepera’s sales were less than 2% of Cambrex’s sales. (PR Newswire 5/5/00). May 5, 2000: The U.S. DOJ announced that four more firms and two individuals agreed to plead guilty to criminal price fixing in markets for bulk vitamins. The six convictions bring the total number to 24: Merck KGaA of Darmstadt, Germany was convicted with other unnamed coconspirators located in the U.S. and elsewhere of fixing prices in the market for vitamin C. It will pay $14 million for the early 1991-Fall 1995 conspiracy with Roche, BASF, Takeda, and other unnamed firms. 317
Degussa-Hüls AG of Frankfurt am Main, Germany will pay $13 million for the conspiracy in vitamin B3 that lasted as early as January 1992 until July 1995. Nepera, Inc. of Harriman, New York was fined $4 million for its participation in the B3 conspiracy from 1/92 to 7/95. Reilly Industries, Inc. of Indianapolis, Indiana joined the B3 conspiracy in 9/94 and remained until it ended in March 1995. It will pay $2 million. David Purpi, former V.P. for Sales and Marketing for Nepera, participated in the B3 conspiracy 1/92-6/95, will serve 366 days in prison, and will pay a criminal fine of $100,000. Roger Noack, former President of Nepera, conspired in B3 from 7/92-7/95, will serve 8 months in prison, and will pay a criminal fine of $50,000. In the B3 conspiracy there were additional unnamed co-conspirators that (1) met to discuss prices, (2) agreed to prices, (3) agreed to volume shares, (4) agreed to allocate customers, (5) exchanged information to enforce the agreement, and (6) issued price announcements in accordance with the agreements. Nepera’s parent Cambrex, Corp., was not charged. (www.usdoj.gov). May 9, 2000: Vitamin defendants continued trying to delay settlement of In re Vitamins Antitrust Litigation (99-197 TFH) by claiming the 4-year statute of limitations interfered with the legitimacy of the charges. However, Judge Thomas Hogan ruled that they had engaged in “fraudulent concealment,” which tolls the statute of limitations because plaintiffs could not have uncovered the conspiracy earlier than they did. Defendants also tried to argue for dismissal on the basis that their conduct was not a per se violation of the Sherman Act; this also was denied. (Pharma Litigation Reporter July 2000: 16). May 15, 2000: Fogt and Levitt opine that the EU is not ready for American-style decentralized antitrust enforcement, though it will probably be enacted anyway (Legal Times 5/15/00: 41). May 23, 2000: Switzerland’s upper house of parliament supported a motion from its lower house to allow its competition law agency to impose fines for price fixing. Last month, WEKO said that the vitamins cartel had kept prices high in Switzerland and issued a decree for the cartel to cease colluding, but under present law only future violations will permit fines to be levied. (National Post (Toronto) 5/23/00: C13) June 7, 2000: Following the 1998 OECD “Recommendations for Effective Action Against Hard-Core Cartels,” Denmark, Netherlands, and UK significantly strengthened their antitrust laws. Nine OECD countries now permit criminal penalties for cartel behavior, and approval in a tenth, Sweden, is expected soon. In France, since 1998 the cartel office made its first convictions for cartel violations. Record fines have been imposed in Canada, Norway, and the U.S. Harm to consumers from global cartels is reaching billions of dollars. (European 318
Report 6/7/00). Lysine, vitamins, and graphite electrodes were cited as egregious examples of harmful cartels. A new report will be issued 6/27/00 urging greater international cooperation in fighting cartels. June 12, 2000: David Boies II is fast becoming the decade’s celebrity lawyer. In three years, he has built a new firm from 20 to 60 lawyers. His non-government rate is $700/hour. (Newsweek 6/12/00). June 15, 2000: In a luncheon speech honoring Joel Klein, AG Janet Reno spoke of her admiration of Klein and the antitrust laws. “I knew [about antitrust] before I came [to Washington], because I was raised by a mother [who] told me about the Sherman Act and how Roosevelt -- Teddy Roosevelt -- used it, and what the robber barons had done back at the turn of the century. “When news of our ADM investigation reached antitrust enforcers in other nations, some expressed skepticism that we would ever take action against such a powerful player in the U.S. market place . . . Not only were we never pressured to stop . . . but we fully prosecuted that case . . .” (Federal Document Clearing House 6/15/00). June 16, 2000: A paper by two senior members of the Canadian Competition Bureau (CCB) reviews price fixing enforcement in Canada since 1980. There have been 75 cases up to May 2000, most of them under 1889 conspiracy section (45) or bid-rigging (§47). Canada also has a special law for global cartels making decisions off shore (§46). Of the 75 cases, 51 resulted in convictions (68%) (of which 43 (84%) were the result of guilty pleas) that resulted in C$181 in fines. However, when the defendants contested the charges (went to trial), the Crown won only 32% of the trials; losses were due primarily to having to prove that the agreement unduly lessened competition. Cartels are for all practical purposes per se offenses; bid-rigging is per se illegal if it is convert. Price fixing cases brought by the CCB are increasingly transnational. The first global cartel case in recent years came in 1993, and the second in 1995. However, during 1997 – May 2000, 64% of its price fixing cases were international conspiracies (fax paper, lysine, sodium gluconate, choline chloride, citric acid, corbates, and bulk vitamins). (CCB News Release 6/16/00) July 4, 2000: The Australian subsidiaries of Roche, BASF, Aventis, etc. will be served writs on 7/5/00 in a $100 million civil class action (ABIX 7/4/00). July 4, 2000: A class action in Australia will proceed against Roche, BASF, and Aventis seeking A$100 million in damages for direct and indirect buyers (Chem. News and Intelligence 7/4/00). July 10, 2000: A long article (2,800 words) dwells in the extreme tactics now being employed by the FBI and DOJ to investigate global cartels, dwelling on the carbon-fibers, lysine, citric acid, and vitamins cases. Search warrants served by large FBI forces 319
simultaneously around the U.S.; international cooperation from Japan etc.; hidden cameras and recorders; undercover witnesses; amnesties for corporate whistle-blowers. Stock options, bonuses, and advancement based on division profits may explain why price fixers take the risk. Don Klawiter, an experienced antirust lawyer, said that colleagues were “shocked” by the ADM tape’s crudeness: “People literally could not believe how direct and brazen it all was.” (USA Today 7/10/00: 1B). July 10, 2000: The Justice Department has global cartel investigations on-going in at least six markets: carbon fiber, bromine, MSG, sausage casings, methionine, and sorbates (USA Today 7/10/00:3B). July 12, 2000: The European Commission sent legal warnings to 13 vitamin manufacturers that they are targets of a price-fixing probe. The companies now can respond to the EC’s preliminary findings and may request an oral hearing before the EC’s final decision. The companies are: Roche, BASF, Rhône-Poulenc (now Aventis), Lonza, Solvay Pharmaceuticals, Merck KGaA, Daiichi Pharmaceutical, Eisai, Takeda Chemical Industries, Surmitomo Chemical, Sumika Fine Chemicals, Tanabe Seiyaku, and Congo Chemical (WSJ 7/12/00: A21) July 13, 2000: De Beers Centenary AG announced that it is abandoning its monopoly of the rough gem diamond monopoly that began in 1934 (66 years). The Swiss-based, South African owned company had controlled more than 90% of supply up to the mid-1980s but saw its share drop to 63% in 1999 because of new supplies discovered in Australia, Russia, and North America. Its inventory reached $5 billion in 1999. The “blood diamonds” controversy contributed to its decision to become a market of De Beers branded diamonds (WSJ 7/13/00:A20). July 13, 2000: Mylan Laboratories agreed to pay $100 million to settle a civil price-fixing civil suit brought by the FTC and 33 U.S. states; in addition, it will pay up to $8 million in legal fees for the federal suit. It already settled some other class-action suits for $39 million (including $4 million in fees). Mylan had fiscal 2000 sales of $790 million and net revenues of $154 million. Co-defendants Cambrex Corp. and Gyma Labs have yet to settle (WSJ 7/13/00: A4) July 15, 2000: The antitrust revenues of major U.S. law firms are at historic highs. Demand for experienced lawyers is intense. One firm, Clifford Chance, has 120 lawyers in antitrust in NYC and D.C.; revenues for antitrust work alone are up from $5 million in 1992 to $65 million in 1999. Howrey Simon is the largest in the U.S. with 150 antitrust lawyers. Three or four others have 100+ antitrust lawyers. Most work in Washington, D.C. Most of the work is in mergers: almost 5000 U.S. filings in 1999 with the dollar value of 1999, deals ($1.7 trillion) ten times higher than 1990. Each filing generates law firm revenues of $1-5 million, and challenged deals cost at least $5 million more. The 320
aggressiveness of the Clinton administration’s antitrust agencies is the major source of business, but at some U.S. law firms international work is 25 %+ of revenues. FTC and DOJ lawyers who leave for the private sector triple their salaries. Antitrust had reached a level of public awareness not seen since the settlement of the AT&T case in 1981 said Burt Foer of the American Antitrust Institute, but mostly because of Microsoft (The National Journal 7/15/00). July 20, 2000: The EU and Japan signed an antitrust cooperation agreement (Financial Times 7/20/00). July 21, 2000: Venezuela’s long-dormant antitrust agency Pro-Competencia imposed two large fines in July, one for monopolization against the national telephone company for $2.74 million and another against American Airlines for $466,000. (Dow Jones 7/21/00). July 24, 2000: The Wall Street Journal editorial page continues to be nearly the sole source of critical comments of U.S. antitrust enforcement. Besides Al Gore’s speeches “There is one other place where business is still regarded as an enemy: The antitrust shop at Justice.” “Mr. Klein wasn’t elected by anybody . . .” [true but there was a vote of approval by the U.S. Senate]. He is motivated by “. . . media attention and career visibility.” “. . . government power is being used to muck capriciously with the rights of private companies and their shareholders.” The food-and-feed cartel prosecution are explicitly cited earlier as example (WSJ 7/24/00: A24). July 24, 2000: The first conviction in the DOJ’s bromine cartel investigation was announced by the Dead Sea Bromine Group, a unit of Israel Chemicals Ltd. It will pay a $7 million fine. A class action suit is being formed (Dow Jones 7/24/00). July 25, 2000: Daicel Chemical Industries, Ltd. of Tokyo agreed to plead guilty and pay a fine of $53 million for price fixing in the market for sorbates. Three of Daicel’s top executives also were charged for the 1979-1996 conspiracy. Daicel is the fourth company to be charges, but more convictions are expected (WSJ 7/26/00). July 27, 2000: Dead Sea Bromine Co., Ltd. agreed to plead guilty and pay a $7 million fine for price fixing in the global bromine market from July 1995 to April 1998. Dead Sea, of Beer Sheva, Israel is the world’s largest produce of elemental bromine. Israel makes the 15th country from which firms or persons have been prosecuted for criminal price fixing. Another co-conspirator may be fined (www.usdoj.gov). July 31, 2000: The Berliner Zeitung reported that Japan is going to bring charges against the global cartel in vitamins (AFX European Focus 7/31/00). July 31, 2000: A Philadelphia court ruled that Pennsylvania has no law giving indirect purchaser standing in antitrust cases. A class of vitamin buyers brought the suit (LexisNexis). 321
August 2, 2000: On 7/24/00 Takeda Chemical Industries announced its intention to sell its vitamins business to BASF. A Tokyo-based analyst said that Takeda has had operating losses on vitamins for five years (1995-2000), including a loss of 3 billion yen ($28 million) last year. Takeda defends the move as a step toward greater focus on its core pharmaceutical business. Antitrust approval of the merger is uncertain. (Chemical News and Intelligence 8/2/00). August 18, 2000: Shares of Roche Holding tumbled 3.5% in response to the company’s 2ndquarter financial report that indicated only a 2% increase in real pharmaceutical sales (adjusted for favorable Swiss frame exchange rates) and the retirement of the company’s highly successful CFO. Sales increases were higher in the company’s other divisions (diagnostics and vitamins), but profit changes were difficult to calculate because of divestitures and accounting-rules changes. (WSJ 8/18/00: B2). August 25, 2000: BASF has revealed a strategy to replicate Roche’s portfolio of bulk vitamins. It wants to make a complete range of vitamins for food, feed, and pharma customers (one-stop shopping) and reach a 30% global share. Its acquisition of Takeda’s vitamins business (some plants and technologies to make C, B1, B2, B5, B6, and folic acid) is part of a $600 million investment program to achieve lowest-cost production for key vitamins (A,E,C,B2, B5, B6). Expansion of plants in Europe, North America, and Asia. BASF’s global vitamins sales in 1999 were about $500 million and Takeda’s about $240 million. The FTC will not oppose the merger. (Business Wire 8/25/00). August 29, 2000: “. . . in recent years, trade federations, an age-old tool for corporate networking, have become implicated in an increasing number of cartel investigations conducted by the [European] Commission’s antitrust department” (p.A23). Some associations have so clearly facilitated cartels that the EC has fined them as well as the companies engaged in price fixing. Examples from the EU are the Product Group Paperboard (its members were fines $117 million in June 1994), ECAMA, the European Cement Assn., the Confederation of Belgian Breweries, the Europe Japan Club (for a steel tube cartel), and several national banking-associations. ECAMA’s parent organization, the official European Chemical Industry Council plans to have in-house antitrust lawyers and strict rules of conduct. (WSJ 8/29/00: A23). September 1, 2000: Aventis SA (Höchst + Rhône-Poulenc) reported good second-quarter financial performance results. The drug division experienced an 18% increase in sales from 1999 Q2 (of which half due to favorable currency rate changes), but sales of ag. products slumped. Quarterly net income reached $146 million, up 136%. The animal nutrition division had global sales of only $127 million. The animal-nutrition unit will be sold within 12 months. Industrial chemicals were sold earlier in 2000 (WSJ 9/1/00:B7). September 11, 2000: EU Competition Commissioner Mario Monte gave a major speech on “Fighting Cartels” in Stockholm, Sweden. This is a high priority for the EC. Cartels are “cancers on the open market economy” that have no benefit for an economy. The damage they cause is substantial and has long been 322
underestimated. Believes average price increase is 10%, but ranged as high as 50% for citric acid. Trade associations often play a facilitating role; nearly all cartels with 10 + members require one. The leniency policy combined with fines that are large enough to punish and deter are the main enforcement tools. Three new ones are proposed: decentralization of enforcement with free movement of evidence, abolition of the notification system, and strengthening the EC’s investigation powers (including more international cooperation) (RAPID 9/11/00). September 15, 2000: Kyowa Hakko announced that it was appealing its 13.2 million euro fine for lysine price fixing (Chemical Business Newsbase 9/15/00). September 18, 2000: Lawyers increasingly take note of the severe penalties for global price fixing violations. Criminal fines have escalated because of the “two-times” rule. Foreign companies have paid 24 of the 29 fines in excess of $10 million, with 35 grand juries looking at global cartels in early 2000. Since the 1997 Nippon Paper case, conspiracies wholly outside the U.S. can be criminal violations if there is an “intended and substantial” effect on the U.S. commerce. The practitioner is urged to warn clients about criminal penalties for even non-U.S. residents. That is a big change since 1998. Also, best to review corporate antitrust compliance programs (The National Law Journal 9/18/00: B11). September 19, 2000: Daicel Chemical agreed to pay Canada a fine of C$2.46 for sorbates price fixing; its former Director of Organic Chemicals was fined C$250,000. Total affected sales 1979-1996 were C$37 million, of which Daicel’s was C$8 million. Daicel is the third cartel member convicted (Canadian Corporate Newswire 9/19/00). September 19, 2000: Mario Monte, EU Competition Commissioner, is asking for more staff and greater powers to combat cartels – “cancers on the open market economy.” The Directorate has only 80 experts at present. He wants greater fines and powers to search private homes for evidence [vitamins case a reason?]. (The Guardian 9/19/00: 25). He also wants the right to question witnesses about the violation in general; at present, questions are limited to documents that have been discovered (Financial Times 9/12/00). September 20, 2000: Joel Klein, 53, announced his impending departure from the DOJ, to be effective 9/30/00. He will be best remembered for bringing aggressive cases against global cartels and Microsoft. A. Douglas Melamed will succeed Klein (WSJ 9/20/00: A3). October 1, 2000: Hoffmann-La Roche’s poor performance since early 1999 is attributed to two factors: the vitamins price-fixing fines and old-fashioned family control of the company. From first place in the later 1990s, Roche’s market value dropped to eighth-largest drug company in the world in late 2000. Investors criticized its former CEO, Henri B. Meier, for using “. . . Roche’s unusually large cash reserves . . . to generate profits [in 1999 and 2000].” Roche had revenues of about $20 323
billion in 1998, now still a high $17 billion. In the first nine months of 2000, Roche’s stock price declined 32% at a time when the S&P drug industry index rose 23%! (NYT 10/1/00:31). October 11, 2000: It is announced by several state attorneys general that the six largest members of the vitamins cartels agreed to a civil settlement of $340 million to the states as direct purchasers, $107 million for commercial indirect buyers in 24 states, and $198 million for consumers in 24 states. (WSJ 10/11/00: B10). The states are AZ, CA, FL, HI, ID, IL, KS, ME,MI, MN, NV, NM, NY, NC, ND, RI, SD, TN, VT, WA, WV, WI, DC, and PR. California will receive $80 million (AP 10/11/00) and New York $25 million of the indirect portion (NYT 10/11/00: C1). New York will give the consumer portion to nonprofits and local governments for programs related to prenatal care, child nutrition, and hunger. Commercial intermediates will file compensation claims with courts under procedures to be announced. California will get $85 million, of which $5 million is for direct state purchases. More than half of the $340 million will be paid by Roche (Reuters 10/11/00). BASF will pay $82 million (24%) (Agence France 10/11/00). The settlements are the largest ever received under state antitrust laws for indirect purchasers. Illinois will get over $15 million. State courts must approve each state settlement (AP 10/11/00). Roche’s share of the states’ settlement is $187 million (55%), BASF’s is $82 million (24%). (WSJ 10/12/00: B5). October 12, 2000: The EU issued is “statement of objections” to 13 vitamin cartel members in July. They must reply by the end of October. The $340-million states’ settlement of 10/11/00 pushed the total fines and settlements to $2.2 billion in the United Stated alone [I count $2.46B so far; Canada will add $65 U.S. million; Europe will be huge; four other countries]. A Roche spokesperson said that the U.S. civil cases are still being negotiated or litigated but “. . . we think we are getting close to the end [in North America]” (WSJ 10/12/00: B5). October 18, 2000: EC competition law chief Mario Monti has urged Europe’s consumerinterest groups to sue for compensation for price-fixing overcharges. There has never been a class-action suit for recovery of antitrust damages in Europe, he said, partly because plaintiffs bear the burden of proof about the cause and size of the injury. Consumer groups said that they were concerned that legal costs would outweigh the settlements. The Commission currently is investigating 30 possible cartels. (Financial Times 10/18/00:1). November, 2000: Sotherby’s Holdings and Christie’s International filed settlement papers in Manhattan U.S. District Court agreeing to pay $512 million to plaintiffs injured by price 324
fixing. Sotherby’s pleaded guilty to criminal price fixing earlier in the year and agreed to pay a fine of $45 million (WSJ 11/2/00). November 2, 2000: Roche shares have dropped 13% this year because nine new drugs have failed clinical trials in the last three years (WSJ 11/2/00: B4). November 29, 2000: The Commissioners of the FTC approved the $100-million Mylan Labs settlement, which awaits approval by 30 state attorneys general and D.C. Judge Thomas Hogan [see 7/13/2000 above] (AP 11/29/00).
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Appendix E Company Profiles: Ajinomoto Co., Inc. Archer Daniels Midland Co. BASF, AG Bayer AG Cargill, Inc. Cerestar/Eridania Cheil Food and Chemicals Co. Degussa AG Hoechst AG Jungbunzlauer International AG Kyowa Hakko Kogyu Co., Ltd. Rhône-Poulenc SA Roche Holdings, Ltd. Sewon and Miwon Companies Tate & Lyle PLC
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AJINOMOTO Co., Inc. The company’s name means “essence of flavor” and is a generic term for monosodium glutamate (MSG). Ajinomoto is the largest Japanese manufacturer of foods and seasonings. Besides MSG, the company makes several other fermentation products, including the amino acids lysine, threonine, and tryptophan. Ajinomoto developed the production technology for the popular lowcalorie sweetener aspartame, which is sold under the trademark NutraSweet in the United States (www.hoovers.com). Sales in fiscal year 1998 reached $6.4 billion. Ajinomoto operates 42 plants in 20 countries located in Asia, Europe, and the Americas. The company was founded in Japan in 1888 to extract iodine from seaweed. Until 1946, Ajinomoto was known as Suzuki Pharmacy, Ltd. The company became the first manufacturer of MSG in 1909, and it has held onto its leading position ever since (IDCH). MSG was first discovered by a scientist at the University of Tokyo in 1908. When the scientist joined Suzuki Pharmacy, the company began selling MSG under the trade name AJI-NO-MOTO (also translated as “essence of taste”). The company soon began marketing this new flavoring product all over the world. It opened a New York City sales office in 1917. This office was probably the fist U.S. presence by any Japanese company. Between the two world wars, many other foreign sales offices were established to market MSG, most of them in Asia. MSG was at first derived from soy protein, so Ajinomoto also began to sell soybean oil. By 1954, the company had reopened many sales offices in Asia, Europe, and the Americas to sell soybean oil, MSG, and other flavorings. Company research in the 1950s discovered a fermentation method for making lysine and other amino acids. By the late 1950s, Ajinomoto was manufacturing amino acids for the human pharmaceutical market. By 1960 the company had begun selling amino acids as an ingredient for animal feeds. Ajinomoto’s first foreign subsidiary was New York Ajinomoto, Inc. in 1956, now called Ajinomoto USA, Inc. The company extended its foreign investments to Thailand in 1960, Malaysia in 1961, Peru in 1968, Indonesia in 1969, France in 1974, Brazil in 1975, and China in 1993 (www.fisonline.com). Most of these foreign ventures involved the manufacturing of MSG from fermentation of various locally available starchy materials. However, Ajinomoto also began to extend manufacturing locations for lysine and other amino acids to foreign locations. Ajinomoto’s first overseas lysine plant was a joint venture in 1974 with the French company, ORSAN; the joint venture was named Eurolysine. In the early 1990s, Ajinomoto became the sole owner of Eurolysine which by that time had become Ajinomoto’s largest production site for lysine. Additional plants were built or modified to make lysine in Iowa (1982), Thailand (1994), Italy (1993), Brazil (1995) and China (1996). In the 1960s, Ajinomoto began forming several joint ventures to manufacture and market new food products in Japan. It formed a joint venture with CPC International in 1963 named Knorr Foods Co. to make dehydrated soups. (In 1987, Ajinomoto acquired CPC’s subsidiary Knorr Foods.) Ajinomoto also has the rights to make Kellogg’s breakfast cereals in Japan and has a joint venture with General Foods to make instant coffee and soft drinks. More recent joint ventures were created with Danone for dairy products and Calpis Foods of Japan. By 1978, Ajinomoto’s principal product, 327
seasonings, had shrunk to 22 percent of the company’s sales; processed food represented 31 percent of sales. However, the fast growth generated by its thrust into the processed food markets had slowed considerably in the 1980s. The Japanese domestic market for both MSG and most food products had become quite mature by the early 1980s, though both were still growing relatively fast abroad. To break this constraint on its growth prospects, Ajinomoto made two areas a priority for investments. The first was processed foods in markets outside Japan, especially in Asia. The second priority was pharmaceuticals and other life-sciences products like lysine, a product line that had become a major source of growth during the slow down in the 1980s. The basic idea was to use the cash flow from MSG and processed foods to finance the R & D and plant expansions necessary to become a major global player in certain fine-chemical lines with which it had some comparative advantage. To that end, Ajinomoto created a new life-sciences products division in 1987 and stepped up research expenditures. R & D now represents a relatively high 3.3 percent of sales for Ajinomoto. By the late 1990s, Ajinomoto had transformed itself to a large company with a broad product line in two main areas. In the area of prepared grocery products, Ajinomoto sells seasonings, desserts, salt, vegetable oils, frozen foods, coffee, beverages, seafood products, and pet foods. In the life-sciences area, it sells amino acids, nucleic acids, enzymes, and medical products for human and animal uses. Sales in fiscal 1998 were $6.4 billion, up 83 percent from sales in 1990. Sales growth in the 1990s was about 8.0 percent per year measured in U.S. dollars, but only about 5.7 percent when calculated in yen. Ajinomoto now has about 5,100 employees around the world. Operating income as a percentage of sales has been about 6 percent in the 1990s. Before-tax income has generally ranged between $200 and $300 million per year, or 2.4 to 4.6 percent of sales. These profit rates would be considered relatively high for comparable U.S. food processing companies but rather low for a pharmaceutical company. In fiscal year 1997, Ajinomoto reported paying a “penalty fee” of about $25 million. Apparently, this represented Ajinomoto’s costs relating to its U.S. criminal price-fixing fine of $10 million, its U.S. civil payments of $10 million to buyers in the federal class, and another $5 million to other U.S. buyers (see Table 7 of the text). This penalty fee represented about 9 percent of Ajinomoto’s before-tax income in 1997, but it does not include legal expenses nor fines and settlements in Canada or the European Union.
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ARCHER DANIELS MIDLAND COMPANY The predecessor of ADM was a flaxseed crushing company founded in Ohio in 1878 by John W. Daniels. The company moved to Minneapolis in 1902 and was renamed Daniels Linseed Co. George Archer joined the firm in 1903. The Archer family had been in the linseed business since the 1830s. The principal business goal of Archer and Daniels was “year round production at low margins” (IDCH). Until the early 1920s, Archer and Daniels were cautiously managed and grew rather slowly. However, more rapid growth occurred in the mid-1920s as the company began to acquire a large number of Midwestern oilseed-crushing companies. Its first major acquisition was the Midland Linseed Products Company in 1923, at which time the company incorporated under its present name. Research and development on new uses of linseed and soybean oils began in the 1920s. ADM’s corporate slogan became “Creating new Values from America’s Harvests.” In 1930, ADM entered the flour milling business by buying a major company. Unlike most agricultural processing firms, ADM continued to make positive profits throughout the 1930s. The company successfully extended the uses of linseed oil away from paints to soaps, drugs, brake fluids, and lubricants. ADM was the first company to extract lecithin from soybean meal, bringing the price of lecithin down during the 1930s from about $10 to $1 per pound. ADM grew dramatically from 1946 to 1949. In three years its sales tripled and its profits quadrupled. During this period, ADM secured its position as the number one seller of linseed and soybean products; it was fourth in flour. Most of ADM’s customers were in the food and feed manufacturing industries, but significant sales occurred to the paint, leather, printing, petroleum, paper, cosmetics, drugs, rubber, ceramics, munitions, and insecticide industries. By 1952, ADM made 700 products and had begun direct foreign investment in manufacturing. Most of ADM’s overseas investments were structured as join ventures with local partners. Although generally a decade of rapid growth and general prosperity, in the 1960s ADM stumbled badly. Fostered by unstable prices and problems with its chemical operations, ADM’s net earnings declined substantially in 1963 and 1964. In 1965, the company paid no dividend, the first time this had happened since 1926. In 1965, ADM President John Daniels hired Dwayne O. Andreas to be CEO. Andreas was lured to ADM in part because he was given a large block of Archer family stock. The IDCH states that “He...revolutionized ADM.” One of Dwayne Andreas’ first moves as CEO was to eliminate ADM’s 27-person public relations department. Andreas himself rarely spoke to reporters. Until the late 1990s ADM refused to issue quarterly financial results. Stock analysts generally viewed ADM as a secretive, mysterious company. Andreas made occasional public speeches marked by his blunt style and heterodox views. Almost alone among business leaders, Andreas favored raising the corporate income tax rate. Andreas believed that the best route to financial riches was to place a big bet on one new product with the best prospects for market acceptance. His first bold gamble was in the late 1960s 329
on textured vegetable protein (TVP) made from soybean meal. At that time ADM had a technological lead in the production of TVP. Most of ADM’s scientists and advisors advocated bringing a 100% protein TVP to market, but Andreas instead pushed for a 50% protein product that was much cheaper to manufacture. In 1968, Andreas solidified his power within ADM by becoming chair of the Board of Director’s executive committee. By 1969 a new TVP plant had been built in Decatur, Illinois that within a few years had exceeded expectations. During the 1970s, many TVP plants would be built by ADM in Europe and Latin America. ADM’s financial performance was also enhanced by the rapid replacement of other vegetable oils by soybean oil and by major restructuring of the company. In 1967, Andreas sold ADM’s troubled chemical subsidiary, Ashland Oil, for $35 million. Proceeds of this sale were used to purchase Fleischmann Malting Company. Another major strategic move was ADM’s purchase of Corn Sweeteners, Inc. in 1971. Corn Sweeteners was a leader in the production of high fructose corn sweetener (HFCS), a product that was about to experience explosive growth in the U.S. market for almost two decades. By the late 1980s, HFCS was to supply the largest single source of profits for ADM. From a low point of $50 million in 1965, ADM’s net earnings were $117 million by 1973. That rate of growth in profits continued throughout the 1970s and 1980s. By the late 1980s, ADM had become the leading U.S. manufacturer of soybean products, HFCS, and ethanol. Its grain milling operations further expanded when it purchased Growmark, a large grain merchandiser, in 1956. ADM also gained a leading market share in peanut shelling by acquisition in 1981. ADM generally avoided the production of consumer food products, but its ownership of a small pasta maker, Govch Foods, and Harvest Burger, a TVP product, was a small exception to the rule. Andreas called the development of TVP “the most important food development of this century” because of its potential to feed millions a high-protein product that required less land to produce than meat products. In fact, Harvest Burger has met with only modest success in the market, and ADM disposed of the product soon after Andreas retired in the late 1990s. In the early 1990s, most of ADM’s huge capital spending was pointed in two directions. ADM was investing in a number of grains and oilseed ventures in East and Central Europe. In the United States, its major capital projects were aimed at developing a large number of biochemicals to be sold as food and feed ingredients. The latter thrust was an outgrowth of corn fermentation technologies used in the manufacture of HFCS. Although one representative from the Archer family and one from the Daniels family continued to serve in high positions in ADM through the 1990s, Dwayne Andreas appointed many family members into the company’s management team. In the early 1990s, his son and two nephews were serving as ADM vice presidents. By 1988, nepotism was so evident that the magazine Financial World referred to ADM as having an Andreas “family dynasty.” (See Appendix Table A-1 for ADM’s financial information).
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BASF AG BASF, headquartered in Ludwigshafen, Germany, is Europe’s largest chemical company. While it is usually ranked second in the world behind Hoechst, in fiscal year 1997 its global sales of $31.0 billion were about 7 percent higher than Hoechst’s sales. BASF owns nearly 100 subsidiaries and ten joint ventures. The company is organized into five major divisions: plastics and synthetic fibers, colorants and finishing products, health and nutrition products, chemicals, and petroleum derivatives (www.hoovers.com). The company was founded as Badische Anilin-und Soda-Fabrik in 1865 (IDCH). Its first successful products were dyes derived from coal tar, a messy by-product of petroleum distillation. Synthetic indigo dye was developed in 1897. A BASF scientist synthesized ammonia in 1909, and within a few years BASF had begun producing nitrogenous fertilizer. In 1904, BASF joined one of two large German chemical cartels formed in that year. Bayer and many other smaller chemical companies joined BASF in one cartel, while the rest of the German chemical industry joined the other cartel anchored by Hoechst. By 1910, BASF employed 8,000 workers in its Ludwigshafen site near Hanover. By 1926, the Ludwigshafen plant covered 2,787 acres and employed 26,000 people. This plant was probably the largest chemical manufacturing site in the world at the time, and it still retains that title. BASF grew quickly during World War I, partly by supplying the German military with munitions and poison gas. The 1904 cartel formed by BASF and other companies did more than fix prices. It set production quotes for each of its member companies, used its market power to engage in predatory pricing and full-line forcing against companies outside Germany, and shared its pooled profits. During 1924 and 1925, the two German chemical cartels extended their dominance of the world’s chemical industry by merging into one giant cartel named I.G. Farben. This new cartel continued the monopolistic practices of its predecessor cartels. By combining the three huge leaders (Bayer, BASF, and Hoechst) with hundreds of smaller companies, I.G. Farben dwarfed DuPont, Imperial Chemical Industries, Rhône-Poulenc, and all the other major chemical entities in the world. Beginning in the early 1930s, I.G. Farben began secretly helping Germany to rearm, an activity that violated the terms of the Versailles Treaty that ended World War I. As early as 1931, Farben’s directors began to make secret contributions to the Nazi party, an activity that was repaid by the huge profits Farben was allowed to make during World War II. When Germany occupied Czechoslovakia, the chemical assets of the country were given to I.G. Farben. This scenario was repeated in Poland, Holland, Belgium, France, and other conquered nations during World War II. I.G. Farben built at least two chemical plants that were staffed with slave labor from concentration camps. As a result of their active cooperation with the German war effort, I.G. Farben directors were indicted, tried, and found guilty of war crimes at the Nuremberg trials held after World War II. Perhaps because their cases came late in this cleansing process, the directors received relatively light sentences (no more than four years in prison). In 1947, I.G. Farben was dismantled by the Allied 331
occupation authorities. BASF, Bayer, and Hoechst were essentially recreated in their pre-World War II images. Nine smaller chemical companies were also divested from I.G. Farben in 1947. Because so many of its physical assets were concentrated in an easily visible target at Ludwigshafen, BASF’s productive capacity was more than 60 percent destroyed by bombing during World War II. Nevertheless, BASF recovered quickly after 1947 and experienced a period of rapid growth and diversification for more than three decades. Besides its traditional positions in dyes and petrochemicals, BASF became a world leader in plastics, synthetic fibers, coating, and agricultural chemicals. By 1969, BASF had solidified its second position in the German chemical industry. BASF began foreign direct investment in the late 1950s. The United States was the largest destination of BASF’s overseas investments. By 1986, 20 percent of the company’s global sales were being made in the United States, and 90 percent of those sales came from BASF’s U.S. chemical facilities. By 1998, BASF operated plants in 40 countries. The year 1989 was one of peak performance for BASF. In that year, BASF earned net income after taxes of DM2.02 billion on sales of DM46.1 billion, a profit rate of 4.4 percent. However, the period of the early 1990s was financially stressful for the company. After 1989, global sales and net income fell each year for four years. Employment, which had reached 137,000 in 1989, fell to 104,000 by 1994. Besides many cost-cutting efforts, BASF divested itself of many of its businesses and restructured most of its operations. Higher profitability returned after 1993. During the early 1990s, BASF made most of its new capital investments in Asia. The company also targeted biotechnology as a higher priority. In 1994, a new biotechnology research center was opened in Worcester, Massachusetts. In 1995, it created a new health and nutrition division to combine pharmaceuticals, vitamins, agricultural chemicals, and other fine chemicals. In 1999, BASF became the fourth largest manufacturer of lysine in the world when it bought the lysine business of Daesang Corporation of South Korea for about $600 million. (Daesang was formerly named Sewon.) By 1997, BASF’s global sales had reached $31.0 billion. Net income was positive but a modest 5.8 percent of sales.
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Financial Data for BASF AG, 1989-1998 89 ‘90 ‘91 Item Sales Operating income Before tax income Net income Total assets Net assets
46.1 4.3 4.4 2.0 35.1 14.0
45.0 2.8 2.7 1.1 36.8 14.3
44.6 2.2 2.1 1.0 37.5 14.9
‘92 ‘93 ‘94 ‘95 Billion Deutsche Marks 41.9 40.6 43.7 46.2 1.3 1.0 2.1 4.0 1.2 1.1 2.1 4.1 0.6 0.8 1.3 2.5 39.0 40.4 39.9 42.0 14.5 14.9 15.9 17.9
‘96
‘97
‘98
48.8 4.3 4.4 2.8 43.7 20.5
55.8 5.3 5.3 3.2 48.0 23.5
54.1 5.1 5.4 3.3 52.2 25.9
107
108
106
107
5.3 14.0
5.8 13.7
5.8 13.6
6.1 12.7
Thousands No. of employees
137
136
130
126
117
108
Percent Net income/sales Return on equity
4.4 14.3
2.4 7.7
2.2 6.7
1.4 4.1
2.0 5.4
2.8 8.2
Note: In 1999, Bayer sold 65 percent of the shares of its photography division Agfa-Gavärt (and is expected to sell all but 20 percent by mid-2000) for almost 1 billion euros. Sources: Extel Cards, ELC International, Worldscope.
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BAYER AG Bayer was founded in Germany in 1865 and soon became a world leader in dyestuffs. In the early 20th century Bayer expanded into pharmaceuticals. Two very important discoveries gave Bayer large sales. First, around 1900 a Bayer scientist discovered aspirin, which soon became the world’s favorite painkiller. Second, Bayer was the first company to synthesize a sulfa drug, an important class of systemic antibiotics. These sulfa drugs, first synthesized in 1908, were not commercially released for many years later. During World War I Bayer was part of an organized program by German drug manufacturers to deprive the Allies of as many of its medicinal products as possible (IDCH). Bayer was a member of two German chemical cartels formed in the early 20th century. In 1904, Bayer joined BASF and some smaller chemical manufacturers in an elaborately organized cartel. (All other German chemical makers were organized into a second cartel in the same year). The Bayer-BASF cartel fixed prices, set plant and product production quotas, engaged in predatory pricing and full-line forcing, and had a profit-sharing formula. The dumping activities were directed at other European and North American chemical industries. In 1925, the I.G. Farben cartel was formed through hundreds of mergers of German chemical companies. The German chemical industry was essentially a monopoly from 1925 to 1947. As early as 1931, Farben’s directors began making secret contributions to the Nazi party. Farben was highly profitable during World War II and developed substitutes for rubber and other strategic materials that could no longer be imported. Farben’s directors were indicted and jailed for war crimes at the Nuremberg trials. I.G. Farben was broken up into three large and nine small chemical companies in 1947. Bayer was one of the large companies divested (Hoechst and BASF were the other two large ones). The Bayer assets had only been about 15 percent destroyed during World War II, so the company was able to make a fast recovery after it was released from the supervision of the occupation authorities in 1952. Bayer began reinvesting abroad in the late 1950s. Bayer’s U.S. assets were confiscated during World War I and were not returned because of its dumping directed at the U.S. dye industry before the war. These assets were given to Sterling Chemical Co. in 1919, including the venerable Bayer brand of aspirin. As a result, Bayer lost its right to use its own name as a trademark in the United States. Bayer began reinvesting in the U.S. market as early as 1954, but its major investment was acquisition of Miles Laboratories in 1978. Miles was a major U.S. manufacturer of pharmaceuticals and fine chemicals headquartered in Elkhart, Indiana. Among Miles’ assets were two citric acid plants, a smaller and older one in Elkhart and a newer, larger one in Dayton, Ohio. These plants gave Miles 50 percent of the productive capacity of citric acid in North America and about 40 percent of sales volume. Like its almost identical U.S. rival, Pfizer Company, Miles purchased dextrose from A.E. Staley, ADM, or one of the other large U.S. corn wet millers. During the 1980s, Miles and Pfizer were engaged in a pricefixing conspiracy in the North American market for citric acid; this conspiracy came to light in 1995 but was never prosecuted because of the four-year statute of limitations in prosecuting antitrust violations. 334
From the early 1950s until the mid 1980s, Bayer enjoyed rapid growth in sales, employment, and profits. But the lingering recession in Europe, falling prices of several drugs and fine chemicals, and other factors were responsible for a marked slowdown in the 1980s. From 1988 to 1993, Bayer’s global sales measured in Deutschmarks were stagnant. During this period Bayer took several steps to reverse its loss of dynamism. The company began a severe program of cost cutting, including large layoffs of employees from many of its European plants. Bayer also accelerated its rate of foreign direct investment outside of Europe, partly to relocate production in lower cost areas and partly to diversify its sales toward faster growing markets in Asia and the Americas. Bayer also restructured its holdings. In 1992, all of Bayer’s extensive U.S. assets were grouped under Miles, Inc. in Pittsburgh, Pennsylvania. One of the subsidiaries of Miles, Inc. was Haarmann & Reimer, which had the responsibility of marketing citric acid, lactic acid, and some other fine chemicals. In 1994, Bayer made its largest U.S. investment by purchasing the North American assets of Sterling Drug Co. for $1 billion. This acquisition gave Bayer entry into a large over-the-counter drug business, but more important, it restored Bayer’s right to use its own name everywhere in the world. Bayer’s principal North American subsidiary was renamed Bayer Corporation, of which Haarmann & Reimer is one of its six subsidiaries. Bayer’s slowdown in the late 1980s was serious. From 1988 to 1993, sales fluctuated within the narrow range of DM 40 to DM 43 billion, and profits were flat. Its businesses were affected by a combination of unfavorable developments. The worldwide recession in 1990 was more serious and lingered longer in Western Europe than in other parts of the world. Political changes in Eastern Europe disrupted long standing business ties and exports. A cyclical downturn hit chemical sales in general. Finally, sales of pharmaceuticals and agrochemicals were adversely affected by government policy changes in Western Europe. Government health plans began cost-cutting measures, including switches to generic drugs and away from Bayer’s many proprietary drugs. In 1993 alone, Bayer’s sales of pharmaceuticals in Germany fell by 20 percent. Agrochemical sales were dampened by reforms of the EU’s Common Agricultural Policy that took farmland out of production and by policies to reduce chemical use in farming. After 1993, sales began to rise slowly for Bayer and other European chemical manufacturers. By 1997, Bayer’s sales were up 34 percent and net income up 123 percent from 1993 levels. In 1994, Bayer had an enormous workforce of 154,000 people. They were organized into six broad product lines: health care, industrial chemicals (inorganic including polyurethane), polymers (fibers, plastics, and rubber), imaging technologies and photographic films, organic chemicals (dyes, pigments), and agrochemicals (crop protection and animal health). Recently, the two chemicals divisions were united into one division containing all chemicals except pharmaceuticals and agrochemicals. The five divisions accounted for 25, 16, 32, 16, and 11 percent of 1998 sales, respectively, and 29, 12, 34, 8, and 12 percent of operating income. Bayer’s Haarmann & Reimer subsidiary is one of three subsidiaries comprising the organic chemicals division. By 1998, Bayer’s employment stood at 145,000.
335
Financial Data on Bayer AG, 1990-1997 1990 1991 1992 1993 1994 1995 Item Billion Deutsche Marks Net sales 41.6 42.4 41.2 41.0 43.4 44.6 R&D 2.7 3.0 3.1 3.2 3.2 3.3 Operating income 3.6 3.2 2.8 2.3 3.2 4.1 Before-tax income 3.4 3.2 2.7 2.4 3.3 4.2 Net income 1.9 1.8 1.5 1.3 2.0 2.4
1996
1997
48.5 3.6 4.5 4.5 2.7
55.0 4.0 5.4 5.1 2.9
Divisions’ sales: Polymers Health care Chemicals Agfa photo Agrochemicals
17.6 13.8 8.8 8.8 6.1 Percent
Net income/sales
4.5
4.3
3.7
Sources: Extel Cards, ELC International, Worldscope.
336
3.2
4.5
5.4
5.6
5.3
CARGILL, INC. Cargill is probably the largest privately owned industrial corporation in the United States and the largest agribusiness in the world (IDCH). Sales in 1986 were $32 billion. By 1993, its U.S. sales of consumer food products ($22 billion) placed it third in rank after Phillip Morris and ConAgra. Until the 1970s, Cargill had focused on handling, transporting, processing, and selling bulk grains, oilseeds, meats, steel, and other bulk commodities. However, to reduce the cyclic effects of commodity price cycles, Cargill invested heavily in food and branded products in the 1980s. By 1999, the company employed 81,000 people at 1000 locations in 65 countries. The company was founded in 1865 as a grain trading firm. In 1890, Cargill Elevator Co. moved its operations to Minneapolis where its headquarters remain today. Around 1909, the Cargills were forced out of the management of the firm by the Macmillan family. The company was renamed Cargill, Inc. in 1930, but it continues to be owned by Macmillan family members and a small number of corporate officers. Cargill’s corporate philosophy emphasizes the importance of secrecy combined with an intricate network of worldwide intelligence. One journalist called it “secretive, inbred, and suspicious.” In 1941, the outbreak of war forced Cargill to lose 60 percent of its grain trading business, then its mainstay. As a result, the company pursued a strategy of diversification into vegetable oils and animal feeds after 1945. The company entered the salt and iron businesses because they were suitable as backhaul items for its shipments of grains from the Midwest. In terms of sales growth, the 1970s was the period of greatest growth for Cargill; sales rose by 1200 percent from 1971 to 1981. Over the longer period 1966-1991, the net worth of Cargill grew by an average of 16 percent per year. However, the period of the late 1980s to early 1990s were financially stressful for Cargill. One reason was the sharp slowdown in the growth of Cargill’s corn wet milling business, especially the saturation of the market for high fructose corn syrup (HFCS) around 1986. Cargill and ADM seem to have very similar commodity portfolios. More often than not, ADM makes a bold move into a new product line only to find Cargill replicating the move within a few years (e.g. HFCS, lysine, etc.). Occasionally it is Cargill that takes on the role of the first mover (as in citric acid) only to see ADM quickly imitate its thrust. A confidential debt prospectus fell into the hands of the Wall Street Journal (April 19, 1999:B12), providing a rare glimpse into Cargill’s finances. In the first fiscal quarter of 1999, the company earned $192 million, up 53% from the first quarter of 1998, which was depressed because of low grain and livestock prices. The WSJ considers this evidence that the company’s effort to stabilize earnings by diversifying seems to be working. However, Cargill’s financial unit lost $171 million during the first three quarters of FY 1999 (ending 2/28/99), mainly due to bad bets on Russian debt. Cargill’s net earnings were $779 million on sales of $34.43 billion (2.3%). Thus projected 1999 sales are $46 billion. In October 1998, Cargill sold its overseas seed units to Monsanto Corp. for $1.4 billion. The business gave Monsanto breeding operations in 24 countries and sales forces in 51 countries with 337
sales of about $300 million. However, in 1999 Pioneer Hi-Bred, which became a subsidiary or DuPont Co. in late 1999, sued Cargill and Monsanto for theft of patented seed technologies. Cargill admitted that an employee hired from Pioneer brought with him corn breeding material that ended up in some Cargill corn seeds. 2 October 1999, Cargill agreed to pay “hundreds of millions of dollars” to settle its suit to Monsanto, which in turn paid some of it to Pioneer for damages and agreed to destroy the affected corn seed varieties. (Pioneer also has suits for patent infringement against two companies recently acquired by Monsanto). The lawsuits prompted the German biotechnology concern AgrEvo Gmbh to drop its $650 million acquisition offer to Cargill for its remaining U.S. seed assets (WSJ 10/21/99). In 1999, Cargill acquired most of the grain-storage assets of Continental Grain Co., solidifying Cargill’s position as the world’s largest trader of grains and oilseeds. The U.S. Department of Justice required divestiture of many of the assets for the deal to go through.
338
CERESTAR/ERIDANIA Cerestar Holding, BV was the smallest of the five companies that pleaded guilty to price fixing in the U.S. market for bulk citric acid. Cerestar is a wholly owned Dutch subsidiary of the large French agribusiness company Eridania Beghin-Say SA. In 1998, Cerestar Holding owned ten European operating companies, including Cerestar Bioproducts BV in the Netherlands. Both Cerestar Holding and Cerestar Bioproducts have the same place of business, Sas van Gent, Netherlands (Hoppenstedt). Silvio Kluzer, born 1938, was still President of Cerestar Holding in July 1999 despite his conviction and fine for price fixing in 1997 (Elsevier Ondernemings Rapport). Cerestar Bioproducts manufacturers various food and feed ingredients and other organic chemicals from fermentation of glucose, mostly at a plant located in Italy. Eridania Beghin-Say SA traces its roots to the French company F. Beghin SA, which was established in 1821. Following its merger with Say in June 1973, the company was renamed BeghinSay (Extel Cards Database). Ste des Raffineries et Sucreries Say was an old sugar-refining and alcohol-distilling company. From 1988 to 1990, Beghin-Say divested itself of its paper and cardboard business to focus on sugar, sweeteners, and oilseed crushing. Around 1990, its vegetable oil businesses were grouped into a holding company, Cereol Holding, the predecessor of Cerestar. In the 1980s and up to 1992, Beghin-Say’s ultimate parent was the Italian agribusiness holding company Ferruzzi Finanziaria located in Genoa, Italy. In 1992, Ferruzzi also owned the Italian sugar company Eridania Zuccherifici Nationali, which was established in 1899. In that year Ferruzzi’s Finanziaria Agroindustriale combined its food and agribusiness assets with the similar assets of Beghin-Say. The new combined food and agribusiness group is now called Eridania Beghin-Say and is headquartered in Thumeries, France. After this French-Italian merger, Eridania Beghin-Say became one of the world’s largest food manufacturing enterprises. In fiscal 1993, the company had 19,300 employees and sales of $8.2 billion spread across four main divisions: sugar and distilled spirits, starch manufacturing and feed additives (including citric acid), animal feeds, and miscellaneous manufacturing and trading (vegetable oils, margarine, corn flour, cake mixes, puddings, sweets, soup, sauces, and condiments). Among scores of subsidiaries and joint ventures, Eridania has a controlling interest in the U.S. company Central Soya. Profits before taxes in 1993 were 8.5 percent of sales, but the company had significant debt (debt/asset ratio of 67 percent). By 1998, Eridania Beghin-Say had grown to have 23,500 employees and sales of $11.6 billion. Profits before taxes were still fairly high, 7.2 percent of sales (Extel Cards Database). Sales growth in dollars 1993-1998 was a steady 7.2 percent per year, and pretax profits grew even faster, about 11 percent per year. Although decreasing, the share of profits from sugar operations in 1998 was half. An increasing share of profits was derived from the oilseed processing and animal nutrition divisions (30 and 15 percent, respectively). These were the fastest-growing segments of Eridania’s business. Eridania’s involvement with citric acid began in 1991 when its legal predecessor, FerruzziMontedison, purchased Italy’s only manufacturer of citric acid, Biocor, through its Cerestar 339
subsidiary. Biocor’s 20Kt plant in Casai Gerola, Italy, made citric acid by fermentation (Chemical Week 10/2/91:7). At the time, Biocor supplied about 10 percent of Europe’s citric acid market.
340
CHEIL FOOD AND CHEMICALS CO. Cheil Food (also called Cheil Sugar or Cheil Jedang) was the smallest of the five members of the global lysine price-fixing cartel of 1992-1995 (Connor 1997). Cheil owned and operated an Indonesian MSG and lysine plant through a joint venture called Cheil Samsung Astra (CSA). Ownership of CSA was dominated by Cheil with minority participation by the huge South Korean conglomerate Samsung Group and a smaller Indonesian partner, Astra Group. Until 1993, Cheil Jedang was a unit of the Samsung Group (Asia Pulse, 5/21/99). Samsung, whose name means “three stars,” has its roots in a rice mill established in the Korean city of Taegu in 1936 by the Korean entrepreneur Byung-Chull Lee (IDCH). Lee was born in 1910, the year that Korea was occupied by Japanese troops and annexed by Japan as a colony called Chosen. The son of a rich landowner, Lee was educated at Waseda University in Japan. From his base in rice milling, Lee’s company expanded into general trading, specializing in textiles In 1938, the company was incorporated as Samsung Commercial Company. During World War II, Samsung grew rapidly and diversified into transportation, noodle making, brewing, and other businesses. After 1945, Samsung lost all its assets in North Korea. In 1950, it was forced to relocate to Pusan in the south but prospered as a supplier to United Nations troops. In 1953, Samsung started Cheil Sugar Co., the first of its many manufacturing ventures to come. Cheil was South Korea’s first sugar refiner, and it retained its monopoly position in sugar for many years after its founding. The strong demand for sugar in the post-war period generated huge profits, which were soon plowed back into starting a second manufacturing venture, Cheil Wool Textile Company. Sugar and wool were just the beginning. By the 1970s, Samsung had diversified into construction, banks, insurance, fertilizer, electronics (the Sanyo brand), petrochemicals, shipbuilding, heavy machinery (Daesang Heavy Industries), aircraft engines, military equipment, and semiconductors. Samsung had become a chaebol, Korean conglomerates with several specific institutional characteristics. The component companies of a chaebol are not owned by an overarching holding company as is common among Western conglomerates. Rather, in chaebols, each corporate entity holds minority shares in each other operating company that is part of the group. This complex web of ownership ties creates a loose confederation that obscures ultimate control and makes it possible for the chaebol to carry enormous amounts of debt to finance rapid expansion of assets with a minimum of stockholders’ equity. While the operating companies are legally and financially separated, they receive overall guidance from an “advisory board” consisting of the chairman of the various operating companies. In the late 1980s, Samsung Group consisted of 26 profit-making companies, plus some nonprofit entities like private universities. In 1975, the South Korean government decided to emphasize exports rather than importreplacement as the major economic development strategy. Thirteen large General Trading Firms were identified as the entities to receive government funds for this phase of development. Samsung was named the “number one” GTC. By the late 1980s Samsung had become South Korea’s largest chaebol.
341
In 1987, Samsung’s founder and chairman died. Byung-Chull Lee left his third son Kun-Hee Lee in charge of the company. Like most chaebol, a single family retained enough ownership of equity to control the management of the conglomerate. In terms of assets in 1998, Samsung was the second largest chaebol ($55 billion in assets controlled). Hyundai with $63 billion in assets was the largest. Like all the other South Korean conglomerates, financial stress had begun to develop during 1995-1997. Their emphasis on high rates of sales growth fed by huge debt loads had become obviously unsustainable. Cracks in the banking system, itself controlled by the chaebols, had caused the Korean won to drop in value by almost 50 percent from mid 1997 to 1998. The top 30 chaebols had in 1998 an average debt/asset ratio of 519 percent (Samsung’s was a more modest 371 percent, though this is still perilously high by Western accounting standards). Cheil Foods remained part of Samsung until 1993. In 1991, Cheil was still mainly specializing in sugar and other processed food products (Financial Times 12/3/91:30). In that year, Cheil’s sales were forecast to reach 1 trillion won ($1.3 billion) in 1992 and profits to reach 17 billion won ($22 million). Cheil had a strategy of diversification into pharmaceuticals, household chemicals, and other fine chemicals. Cheil changed its name from Cheil Sugar to Cheil Foods and Chemicals around this time to reflect its new aspirations. In 1989, a Japanese news service reported the establishment of PT Cheil Samsung Astra (CSA) in Indonesia (Jiji 8/10/89). CSA had secured $47 million from several large Japanese and Korean banks to finance the construction of its new manufacturing facility in East Java, Indonesia. The new plant would produce 10 Kt of MSG and 10 Kt of lysine per year. The participation of Japanese banks in the loan was something of a novelty at the time and probably signaled the financial worthiness of the project. By early 1991, CSA’s plant was in production, which is a very fast pace for construction of this type of plant. Apparently, CSA’s MSG-lysine plant was undergoing capacity expansions soon after it began production because in 1992 Cheil was successful in floating a $30 million bond issue in Europe to finance its Indonesian venture. This money was used to finance expanded capacity for its MSG/lysine plant. Lysine capacity was raised by 24 million pounds in 1992 to 44 million pounds by the end of 1994; MSG capacity probably expanded likewise. The tougher scrutiny that accompanies Eurobond issues probably indicates that CSA was reaching its sales goals and throwing off enough cash flow to repay the bonds. The continuing financial success of CSA is revealed by another large bond issue in 1999, this one for $83 million (Asia Pulse, 5/21/99). By this time the subsidiary had been slightly revamped as PT CJ Samsung Indonesia. This article noted that this joint venture (formerly Cheil Samsung Astra) had been formed in 1988 and begun sales in 1991. In 1998, it was reported to have sales of 215 billion won (about $154 million) and profits of 38 billion won ($27 million or 17.5 percent of sales). In 1999, the ownership structure was 83% Cheil, 16% Astra Group, and 2% Samsung Corp. This shows that Cheil itself was in fairly good financial shape; it is likely that Astra’s original ownership interest had been reduced since CSA was founded. By 1995, CSA itself had diversified into fertilizer and chicken production (COMLINE, 8/2/95). After splitting off from Samsung Group in 1993, Cheil Foods and Chemicals was becoming a chaebol in its own right. Although firmly anchored in food processing, Cheil was diversifying into 342
other somewhat related fields. In 1997, Cheil was Korea’s largest food manufacturer with sales of 2 trillion won ($2.1 billion). The second largest was Nong Shim, and the third largest was Daesang/Miwon ($857 million in food sales) (Korea Times, 9/7/98). In 1997, Cheil’s lines of business were reported to be: sugar, flour, and oils (36 percent of sales); frozen foods (31 percent); chemicals (17 percent); animal feeds (11 percent); and 5 percent other. Cheil has had sales growth averaging more than 15 percent per year in the 1990s. Returns have been modest but positive. Debts appear to be low by Korean standards. There has been some retrenchment in employment since 1995. Cheil Jedang/Cheil Foods and Chemicals Financial Results, 1992-1998 Item
1992
1993
1994
1995
1996
1997
1998
Sales (bil. won)
B
1306
1432
1588
1806
2037
2332
Sales ($ million)
B
1620
1816
2046
2280
2142
1666
Sales growth (% won)
21
3
10
15
19
19
14
Return on equity (%)
-0.7
1.7
4.6
11.9
2.1
2.8
--
Return on assets (%)
6.3
5.7
6.5
8.7
5.4
6.1
--
Debt/assets (%)
63
62
60
48
55
67
--
5310
5180
5260
6219
6095
5900
--
No. of employees
Sources: Extel Cards, ELC International, Worldscope.
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DEGUSSA AG Degussa was established in Frankfurt, Germany in 1873. Its original name was Deutsche Gold und Silber - Schneideanstalt or “German Gold and Silver Refinery.” When established, Degussa’s main business was the minting of precious coins. In the late 19th century, the company branched out into metallic decorations of ceramics. During the early 20th century Degussa expanded into the refining of other metals and into chemicals. Degussa first invested in the United States in 1882 (IDCH). Its present name was adopted in 1980. Degussa first entered organic chemicals in 1930 when it acquired two large German charcoal companies. Before World War II, Degussa had begun production of methanol, formaldehyde, pentaerythritol, and acrolein. Degussa discovered a method of synthesizing the amino acid methionine from these organic chemicals. Methionine was in great demand after World War II to treat human malnutrition in Europe. During World War II, virtually all of Degussa’s German plants were destroyed by bombing. After the war, as part of the decartelization program of the Allies, Degussa lost its patents and its overseas assets. Nevertheless, Degussa began reinvesting abroad as early as 1954 (in Brazil). Other foreign direct manufacturing investments quickly followed: Belgium (1970), United States (1974), France (1986), Scandinavia (1986), Spain (1986), the United States again (1988, 1990, 1992, and 1997), Japan (1992) Finland (1993), The Netherlands (1993), Thailand (1994), UK (1994), Slovakia (1997), South Korea (1998), Spain (1998), and India (1999). These subsidiaries were all acquired, and there are also five joint ventures abroad. By 1998, Degussa had 26,400 employees (www.fisonline.com) and sales of $9.5 billion, up only 14 percent since 1990. Its before tax income ranged from $110 to $440 million in the 1990s or 1.3 to 4.7 percent of sales. In 1999, the company was renamed Degussa-Hüls.
344
HOECHST AG From the time of its founding in 1863 to the early 20th century, Hoechst (Höchst in German) was specialized in the manufacture of dyes (IDCH). As early as 1883, its research led to the discovery of a number of powerful drugs that would make the company one of the world’s largest pharmaceutical concerns: antipyrin, novocain, salvarsan (to treat syphilis), adrenaline, and insulin (1923). Because it engaged in dumping activity against U.S. dye manufacturers, its U.S. assets were confiscated during World War I. From 1925 to 1947, Hoechst was a leading member of the I.G. Farben chemical monopoly (see BASF or Bayer profiles in this Appendix). Hoechst became independent of supervision by Allied occupation authorities in 1952 and grew rapidly for the next three decades, surpassing the other major German chemical companies (Bayer and BASF) in part because its plants had largely survived the bombing of World War II. Hoechst branched into polyester and other artificial fibers, petrochemicals, and many other chemical lines. By the late 1960s, the company was growing by 15 percent per year. In 1980, Hoechst became the world’s largest chemical company by surpassing Dupont in sales. Hoechst’s growth was aided by an ambitious program of foreign direct investments, many of the acquisitions in the pharmaceutical field and in the U.S. market. A major purchase was U.S.based Celanese Corporation in 1987. By 1995, the basic chemicals division, Hoechst Celanese, accounted for 25 percent of Hoechst’s global sales. In the late 1980s and early 1990s, Hoechst hit a sales and profit plateau. In 1995, sales had reached $37 billion and the number of employees 170,000 (down from 179,000 in 1990). By 1998, severe cost-cutting and divestitures had trimmed sales to $29 billion and its workforce to 118,000 people. At the same time, Hoechst stepped up its restructuring by making several major acquisitions in the hopes of achieving greater economies of scale and size. For example, it acquired Merrell Dow in 1995. These strategies did not work. Profits declined from a peak in 1989 for four consecutive years thereafter (1990-1993). Sales and profit growth began to resume after 1994, but by the late 1990s an even more radical restructuring plan was in place. Like AT&T and many other corporate behemoths, Hoechst plans on splitting itself up into more coherent, focused businesses. In 1998, Hoechst was planning on combining its basic chemicals division (Hoechst Celanese) and its technical polymers division (Ticona) into a new unit called Celanese AG to be spun off as a separate company. Hoechst’s paints and coatings business is to be sold to Dupont. After these spin-offs are complete, what will remain are its huge drug business (Hoechst Marion Roussel), its animal health unit (Hoechst Roussel Vet) and its plant-protection division (Schering AgrEvo which is 60-percent owned by Hoechst and 40-percent owned by Schering AG). The present plan is to merge into three life-sciences branches with Rhône-Poulenc SA to form the world’s largest life-sciences company, to be christened Aventis (www.hoovers.com). As part of its ambitious restructuring plan, Hoechst auctioned off its animal-health-products division, Hoechst Roussel Vet, in a deal announced August 11, 1999. Winner of the auction was Akzo Nobel NV, which agreed to pay DM 1.3 billion ($712 million) to buy the world’s third-largest animal health unit. Bidding was active; Switzerland’s Novartis was among the losers. Akzo will vault from 9th to 3rd place with combined sales of $1.1 billion in the industry. 345
Hoechst plans to merge with Rhône-Poulenc, which has a 50-percent stake in Meriel, the world’s largest animal-health-products company. The new Aventis combination will focus human pharmaceuticals and veterinary medicines. On August 10, 1999, the EC’s DG-IV approved the Hoechst-Rhône-Poulenc merger subject to these divestitures and a small number of overlapping pharmaceutical products and one cereal herbicide made by Hoechst. The U.S. FTC’s merger review is still pending. (WSJ 8/11/99:A14). Hoechst also sold its 52-percent share of Copley Pharmaceutical, Inc., a U.S. maker of generic drugs. Copley was sold to Teva Pharmaceutical Industries, Ltd. for $220 million on August 10, 1999. Hoechst will receive about $110 million for its ownership share for which it had paid $546 million in 1993. Hoechst originally had seen the Copley purchase as a springboard to becoming a major player in the generic-drug business, but Copley was plagued by major quality-control problems and had to plead guilty to violating FDA regulations. In 1995, Copley paid $150 million to settle a class-action suit by plaintiffs killed (up to 100) or injured by bacterial contamination of a Copley asthma drug. In 1997, Copley was fined $10.6 million by the FDA, the largest ever, for falsifying information about its manufacturing practices regarding several other drugs. In 1998, two of Copley’s independent directors resigned, charging that Hoechst had forced Copley to waste money on investment-bankers’ advice to sell the company. A short while ago, Hoechst had said that it was going to transfer its Copley stake to Celanese AG, which it will soon spin off to prepare for its merger with Rhône-Poulenc. Teva, with 1998 sales of $1.16 billion, is Israel’s largest pharmaceutical firm. (WSJ 8/11/99:B5). In 1997, because of its planned divestitures in preparation for the creation of Aventis, Hoechst’s global sales dipped to DM 52 billion ($29 billion). As a result, Hoechst slipped into third place among the big three German chemical companies. BASF and Bayer had 1997 sales of DM 56 and DM 55 billion, respectively. In terms of employment, Hoechst was in second place with 118,000 employees in 1998, compared to Bayer’s 145,000. “Hoechst” means “supreme” in German (from hoch => high => highest, topmost).
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JUNGBUNZLAUER INTERNATIONAL AG This company was established in Prague in 1895 as Actiengesellschaft Jungbunzlauer Spiritus- und Chemische- Fabrik. It originally was set up to operate an alcohol distillery in Jungbunzlau, Bohemia, but purchased another distillery at Pernhofen, Austria, which it still operates. From 1902 its registered office has been located in Vienna, Austria (Extel Data, 1/5/93). Jungbunzlauer diversified into the production of citric acid in 1962, originally produced only at its Pernhofen site. Soon afterwards, the company became heavily indebted. A capital infusion was made in 1967 by the Swiss holding company Montana AG, which is controlled by financier Karl Kahane. By the early 1990s, Montana had obtained a controlling interest in Jungbunzlauer. Kahane sits as chairman of its supervisory board. In 1985, Jungbunzlauer became the first Austrian company to issue international stock shares (Financial Times, 11/12/85). More than 40 percent of its stock was sold in London and Vienna. The prospectus issued at this time reported that Jungbunzlauer was making a respectable 10 percent profits after taxes on sales. However, from 1986 to 1991, Jungbunzlauer’s profits and its stock price were quite unstable. During that period, return on equity bounced around from -1 percent to 38 percent (Worldscope, loaded 1/13/99). Moreover, the trend in the five-year moving average of return on equity was downward: from 40 percent in 1988 to 18 percent in 1991. Even worse, the five-year average in total return to investors was negative in 1990 and 1991. Clearly, the company was experiencing marked financial reverses in the late 1980s and things looked bleak in 1990-1991. In its 1991 annual financial report, Jungbunzlauer said that it had 243 employees and sales of $95.5 million. Sales growth from 1988 to 1991 was zero and the debt-to-equity ratio was 1.13 in 1991. The company claimed to be Austria’s largest producer of ethyl alcohol. Its main products were citric acid, gluconates, and xanthan gum, all made by fermentation technologies (Extel Data, 1/5/93). Citric acid was said to be its fastest-growing product line. Despite its perilous financial condition (perhaps with the help of its parent holding company), Jungbunzlauer bought the organic acids division of J.A. Benckiser of Ludwigshofen, Germany. Its plant located in Ladenburg had a productive capacity of 44 million pounds of citrates and gluconates (J. Commerce, 4/11/98:9B). Together with its Pernhofen plant, that made Jungbunzlauer one of the world’s three largest manufacturers of citric acid. The purchased division of Benckiser was said to have sales in 1987 of $70 million. The Ladenburg plant made about 30 percent of the world’s gluconates. In 1990, Jungbunzlauer began to build its third citric acid plant in Markosheim, Alsace, France at a cost of $110 million (Chemical Week, 10/3/90). The new plant was located on a forested site right on the Rhine River. Construction was delayed because of environmental concerns, but the promise of 500 new jobs seems to have overcome these objections. The plant, with 88 million pounds of citric acid capacity, was a vertically integrated operation that also contained a wet corn milling refinery (450 million pounds capacity) that would supply all three of Jungbunzlauer’s plants with dextrose by 1993. A plant of this size would produce up to 250 to 300 million pounds of 347
glucose or dextrose. The new plant in Alsace was only one part of Jungbunzlauer’s ambitious expansion plans. Its plant at Pernhofen near Vienna would be de bottlenecked to reach 155 million pounds capacity by late 1990, and its Ladenburg plant near Heidelberg expanded to 66 million pounds of citric acid capacity. Those three projects would raise Jungbunzlauer’s total capacity to 310 million pounds by 1992-93, allowing the company to maintain its 20 percent world market share. Total consumption of citrates in 1990 was said to be 1.1 billion pounds. A few years later a trade magazine reported that Jungbunzlauer had accelerated its ambitious 1990 plant (Ford Engineering, 9/94). The company was reported to have expanded its Austrian plant to 220 million pounds in late 1992 and its German plant from 110 to 130 million pounds of citric capacity. The Ladenburg plant also could make up to 33 million pounds of sodium gluconate and glucono delta lactone. Around 1994, it appears that Jungbunzlauer’s main office was moved to Basel, Switzerland. Jungbunzlauer released some financial and operating information on its operating units in 1998 and 1999 (Hoppenstedt). In 1997, the Pernhofen plant employed 300 persons and sold $190 million of citric products; 30 more employees made $30 million of xanthan gum; the Ladenburg plant employed 98 and sold $75 million of citrates, gluconic acid, and xanthan. If the French plant was operating as planned, about 900-1000 persons worked for Jungbunzlauer in Europe. In 1996, the Alsace operation was reported to be exceptionally cost competitive (CMR, 12/2/96:7). In October 1998, Jungbunzlauer raised citric prices by 10 percent worldwide (CMR, 10/5/98). ADM followed to 76 cents per pound in the U.S. Jungbunzlauer was said to have 420 million pounds of citric capacity, not counting a small joint venture in Sumatra.
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KYOWA HAKKO KOGYU CO., LTD. The company has its origins in a joint research venture of three Japanese alcohol distillers called Kyowa Chemical Research Laboratory. From the beginning, Kyowa specialized in fermentation products such as ethyl alcohol, acetone, and butane (IDCH). Following World War II the company was restructured and renamed Kyowa Sangyo. It began manufacturing salt, gin, and a traditional liquor called shocku in Hofu, Japan. In 1947, Kyowa began manufacturing penicillin. In 1949, the company was incorporated as Kyowa Hakko (“harmonious fermentation”). Kyowa gained international recognition for the development of the anti cancer drug mitomycin-C. Another important innovation was to employ the metabolic process of a microorganism to produce an amino acid. This 1956 discovery reduced costs considerably compared to the conventional method of extraction from vegetable proteins. Kyowa used molasses as the primary feedstock. Soon afterward, Kyowa was making MSG from the amino acid gluconic acid. In 1958, Kyowa developed another commercial method to make feed-grade lysine by fermentation. Its method is cost effective and has since become the international standard. In 1961, Kyowa found a way to make organic fertilizer from the waste water produced by these fermentation processes. In 1983, it developed a genetic-engineering technique that improved the efficiency of amino-acid production. Since the 1960s, Kyowa has also brought to market many new pharmaceutical products. Kyowa is a world leader in research in biotechnologies and genetic engineering. Besides being a leader in manufacturing amino acids, Kyowa also makes foods, drugs, alcoholic beverages, and agricultural chemicals. More than 20 percent of its employees are involved in R & D. The company holds more than 1500 patents outside Japan. Kyowa’s first overseas subsidiary was Kyowa Hakko USA (1969), renamed Biokyowa in 1982 (www.fisonline.com). It also has subsidiaries in the UK (1991), Mexico (1975), Belgium (1976), and Hungary (1987). Kyowa makes lysine in Hofu, Japan (1958, ceased production 1997); Fermex in Orizaba, Mexico (1982); Biokyowa in Cape Girardeau, Missouri (1982); and Agroferm in Hungary (1990). Kyowa operates 8 plants in Japan. By 1998, Kyowa Hakko had 5,100 employees and sales had reached $3.1 billion annually, up from $2.3 billion in 1990. Pretax income in the 1990s ranged from $140 to $250 million, or 6.8 to 8.2 percent of sales. In the first quarter of 1996, Kyowa’s financial report shows that it paid a $10 million fine to the U.S. government for its role in the lysine price-fixing conspiracy, which constituted 23 percent of its quarterly before-tax income. Other antitrust costs and expenses are not shown.
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RHÔNE-POULENC S.A. The company traces its roots to two French companies. Ets. Poulenc-Frères was established in Paris in 1858 to make household cleaning chemicals but turned to making pharmaceuticals throughout the late 19th century (IDCH). Rhône was begun in Lyon in 1895 to manufacture dyes and fragrances. German domination of many of the chemical industries, dyestuffs in particular, forced Rhône to exit the dyestuffs industry. Some of Rhône’s successes in the early 20th century included aspirin, cellophane, and perfumes. The two firms merged and took their present name in 1928. Rhône-Poulenc’s UK subsidiary developed a sulfa drug that was an effective antibiotic before World War II. During the war input shortages forced Rhône-Poulenc to search for new product lines. Two successful products were nylon and penicillin. The company experienced rapid growth and diversification after the war. By 1969, Rhône-Poulenc had become France’s largest industrial company. The company made a number of poor decisions in the 1960s and 1970s. The poor performance of the French economy compounded its problems, and Rhône-Poulenc was nationalized in 1982. The government-appointed management sold off the company’s agricultural chemicals and petrochemical assets, but added foci by acquiring several lines of drugs and fine chemicals. RhônePoulenc became profitable by the end of 1983. In the late 1980s, the company made a series of large acquisitions of chemical companies in the U.S. market. Rhône-Poulenc reentered the agricultural chemicals industry by buying a division of Union Carbide for $502 million in 1986. Other large U.S. acquisitions included Stauffer Chemical (1987, $575 million) (www.fisonline.com). The total cost of Rhône-Poulenc’s U.S. foray was $7 billion from 1986 to 1992. Many subsidiaries were acquired in other countries as well: UK (1989); Canada (1989); Spain and Brazil (1991); Poland, Hungary, Italy, and Slovakia (1992); Turkey (1993); Germany, Japan, Austria, and Vietnam (1994); UK (1995); and Korea (1996). In addition, at least 26 foreign joint ventures were established. This foreign buying spree resulted in Rhône-Poulenc’s having 75 percent of its sales outside of France (20 percent in the United States) by 1992. Despite the large outlay of French government funds, a change in government policy resulted in privatization in 1993. In the late 1990s, Rhône-Poulenc was a big, diversified chemical manufacturer undergoing constant reorganization. The company employs 68,000 workers to operate more than 200 plants from its headquarters in Pourbevoire, France. Sales from 1990 to 1997 were virtually stagnant at $15.2 billion, though in French francs increased 15 percent. During that period, before-tax income ranged from $740 to $1175 million annually, or 4.8 to 7.2 percent of sales, except fiscal 1997 when it lost $470 million (-3.1 percent of sales). Among its major divisions, the life sciences division (pharmaceuticals, vaccines, herbicides, insecticides) has been fast growing. In 1998, Rhône-Poulenc spun off its Rhodia specialty chemicals division, though it still retains about 70 percent of Rhodia’s ownership. In the last few years, the company has been trying to merge with the huge German chemical concern, Hoechst, which would 350
then become the world’s largest life-sciences products manufacturer under the new corporate name Aventis. This merger was finalized in December 1999. At the end of 1996, Rhône recognized the growing importance of agrochemicals by creating a fourth division call Animal and Plant Health. The other three divisions are: Organic and Inorganic Intermediate Chemicals, Fibers and Polymers, and Pharmaceuticals.
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ROCHE HOLDINGS, LTD. The company began as a partnership named F. Hoffmann-La Roche in Basel, Switzerland that made pharmaceutical products. Incorporated in 1919, Roche had already developed a successful portfolio of products (cough medicines, heart treatments, and pain killers) that were sold on four continents. From the beginning, Roche was dedicated to intensive basic research in its own laboratories and to maintaining close ties with research universities (IDCH). During World War I suspicions by both the Germans and the Allies that Roche was helping the other side caused its sales to slump. It was forced to raise capital by selling shares to the public in 1919, but most of the company’s stock is held by the heirs of the five founding families. From 1930 to at least the late 1990s, the late Paul Sacher had 49 percent of the company’s stock. Roche established a U.S. branch in 1905. During the 1920s and 1930s, Roche moved away from its reliance on extraction of medicinals toward synthetic chemistry. The company was the first to synthesize several vitamins, starting with vitamin C in 1933 and later vitamins A and E. By the early 1970s, Roche controlled 50 to 70 percent of the world market for bulk vitamins. During World War II, most of Roche’s assets were transferred to a Canadian holding company called Sapac. Roche’s CEO moved to the company’s U.S. headquarters in Nutley, New Jersey to direct the company’s worldwide operations. In the 1960s, Roche began marketing two important tranquilizers, Librium and Valium. These were highly profitable products for Roche, but around 1973 its pricing practices came under attack by the UK Monopolies Commission. The UK subsidiary of Roche was required to pay $2,500 per kg. for Valium, but in Italy where there was no patent protection for drugs, a generic version of Valium was sold in bulk for $50 per kg. Despite Roche’s public arguments that such prices were necessary to support R & D, the Commission ordered Roche to reduce its UK price by 60 percent to $1,000 per kg. and to repay $30 million in excess profits to UK buyers of Valium. Other European countries held similar investigations that kept Roche tied up in litigation until 1980. Roche’s patents on the tranquilizers expired in 1985. The failure of Roche to find some exceptional new drugs in the 1980s put pressure on the company’s profits. In the 1990s Roche is placing great hopes for the future on biotechnological routes to lifesciences products. In 1995, Roche paid $5.3 billion for the Palo Alto, California biotech firm Syntex, now called Roche Bioscience. This acquisition made Roche the fourth largest drug company in the world as measured by sales. It is the world’s largest as measured by market capitalization. In 1997, Roche had global sales of $12.9 billion. Almost two-thirds of its sales are pharmaceuticals. Its Givaudin-Roure subsidiary makes flavors and fragrances. Other subsidiaries, Corange and Genentech make vitamins, carotenoids, and genetic-engineered products. The company’s 51,600 employees are directed from its Basel, Switzerland headquarters. In 1997, Roche was very profitable, earning $2.9 billion in net income or 22.8 percent of sales. Hoffmann-La Roche, Inc. is Roche’s major U.S. subsidiary, with 1995 sales of about $800 million spread across the same product lines as the parent company. 352
Roche distributed a very revealing 1998 annual report. The Vitamins and Fine Chemicals division generated sales of SF 3.6 billion, an increase of 3.2% p.a. from 1994; operating profit was 18.5% of sales. Sales were available for 3 lines of business: vitamins SF 1.96 bil. (54%), carotenoids SF 653 mil. (18%), and citric acid and enzymes SF 1.02 mil. (28%). Sales were adversely affected by the Asian financial crisis, esp. demand by the feed industry and food additives for high valued foods. Division sells to 4 demand segments: feeds (57%), food industry (19%), pharmaceutical firms (19%), and cosmetics makers (5%). The report has intriguing statements about investment plans and new technology. Roche has developed new fermentation processes for vitamins C and B2. Biotin “synthesis” methods also improved. Increased capacity for vitamin C at its Dalry, Scotland and Belvidere, NJ plants; for fermented B2 at Grenzach, Germany plant and more B1 capacity too; new vit. E plant in China and expanded citric, A, B6 capacity at its Chinese JV. On Roche’s corporate web site in 1999, its “Corporate Principles” were elucidated. Of the six, “Service to Customers” is listed first and says, “A prime objective of our company is to meet out customers’ needs for quality products and services.” The 4th is “Obligation to Stockholders and Employees” whose key objectives is “. . . to achieve above-average profitability in our industry.” The 5th principle is “Obligation to Society” which says “We want to maintain high ethical standards . . . We will maintain these standards in adhering to local, national, and international laws . . .” Noteworthy is the absence of low prices or efficiency as specific objectives; it is clear that aboveaverage profitability can conflict with customer satisfaction and ethical standards.
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SEWON AND MIWON Companies Sewon and Miwon are South Korean manufacturers that at times operated as independent companies and at other times were members of the same group or conglomerate. Both companies trace their origins to Miwang Industry, founded in Korea in 1958. Miwang changed its name to Seoul Miwon Co. in 1965, to Miwon Co. in February 1986, and to its present name of Daesang Corporation in November 1997. Daesang is the ultimate holding company for both Miwon and Sewon assets and is listed as one of the 30 largest industrial conglomerates in Korea that are called chaebols. Each change in name was accompanied by significant financial restructuring (Miwon Co. financial reports). Miwang Industry was established by Lim Dae-hong who led the Miwon group until about 1986 or 1987. Dae-hong’s eldest son, Chang-wook, became chairman of Miwon Group in 1987 but stepped down in mid 1997 to the post of honorary Chairman of Daesang, the successor to Miwon Group. Dae-hong’s second son, Lim Sung-wook, is now vice-chairman of Daesang Corp. By the early 1980s, Miwon had become the second or third largest food processing company in South Korea. Besides a wide array of consumer foods, Miwon manufactured animal feeds, synthetic resins, and starch-fermentation products. The principal starch products were seasonings (MSG) and lysine, which Miwon had been making in its sole Korean plant since 1972 under the Sewon subsidiary’s name. Sewon was the dominant starch manufacturer in Korea and the largest such company in Asia after two Japanese firms. Around 1994, Miwon Group’s assets were split into two large operating companies. Miwon Co. held most of the consumer-food assets and was run by the elder son, C.W. Lim. Sewon Co. held the animal-feeds and starch manufacturing businesses and was directed by the younger son, S.W. Lim, who owned 29% of Sewon’s shares in early 1997. Sewon was by that time a publicly traded company (it seems to have gone public in 1984), but it is likely that enough shares were held by family members to give the Lim family effective management control of Sewon. (In February, 1997, Miwon purchased 7.7% of Sewon’s shares to “protect” S.W. Lim’s “management rights.”) Meanwhile, the food-manufacturing branch of the Lim family’s interests, Miwon Co., transformed itself into a publicly traded company sometime during 1994-1997. It began issuing reports to its stockholders containing financial data going back to FY 1993. Sales of Miwon rose from $597 million in 1993 to $767 million in FY 1995. Profits were reported to be 2.3% of sales (1993), 7.6% (1994), and -1.4% (1995). Stockholders’ reports were delayed to one to two years after the end of the fiscal year. In its last annual report for the year ending 12/31/96, Miwon reported a 7% decline in revenues measured in won, or about 11% lower when converted to U.S. dollars. Profits further eroded, to -2.5% of sales in 1996. More disturbing, won-based assets began to decline in 1996, but equity declined even further. By the end of 1996, Miwon’s debt was seven times its equity, a dangerously high level by Western accounting standards. Miwon’s pretax profits from 1993 to 1996 were 11, 34, -32, and -18 billion won even though gross income was between 150 and 200 billion won. The main reason for the vast difference between the two was huge interest payments on debt of 40 to 70 billion won (even EBIT was halved 354
from 1994 to 1996). Miwon, in a low-risk industry, was clearly headed for serious financial trouble in 1995 and 1996. Sewon, the biotechnology arm of the Lim family’s holdings, was also deeply in debt. In 1995, Sewon was spending plenty on its huge lysine plant, which was expanded from 110 million pounds capacity to 175 million by the end of 1995. In May 1995, the company was expecting its global share to jump from 20% to 30% and its exports of lysine to rocket from $70 million in 1994 to $170 million in 1996 (COMLINE, 5/1/95). This rosy scenario was not to be, because the lysine cartel was to be unmasked in June 1995 and prices were to be far lower in 1996 than in 1994 before the conspiracy was dismantled. Even as late as early 1997, optimistic assessments of Miwon’s and Sewon’s prospects continued to be fed to the trade press. Sewon was rushing ahead into the brave world of biotechnology and medicines along with six other high-tech Korean conglomerates (Asia Pulse, 4/1/97). The big three Korean food processors (Cheil Jedang, Miwon, and Nong Shim with 1998 sales of about $2.1, $1.1, and $0.9 billion) were said to be stepping up their overseas sales of food products from affiliates in China, Indonesia, and Vietnam as well as exports (Asia Pulse, 8/15/97). Miwon’s MSG and other seasonings held 35% of the Indonesian market, and it was furiously expanding in Latin America and Africa as well. By late 1997, the broad Asian financial crisis was beginning to be felt. The Korean won would lose at least 40% of its value from 1996 to 1998. In August 1997, Miwon and Sewon underwent their latest restructuring as the full force of the Asian financial crisis was just being felt. The two branches of the Lim family empire were rejoined in the newly named Daesang Corporation (Asian Pulse, 8/13/97). More important, the Lim brothers gave up management control of Daesang by naming a non-family professional manager to the post of president, Ko Doo-mo. The three Lims, father and two brothers, remain major stockholders and form a new structural feature called the “management consulting committee.” C.W. Lim’s ten years as chairman was viewed as quite brief by Korean chaebol standards (Asian Pulse, 8/8/97). In late 1997, Daesang was ranked about 26th in terms of total assets ($2.4 billion) among Korea’s chaebols. (Hyundai, Korea’s largest, had $63 billion in total assets.) Daesang’s debt-toequity ratio of 650% was only slightly higher than the top 30’s average of 520%, according to a Korean Fair Trade Commission (KFTC) study (AAP, 4/16/98). Daesang’s new president Ko took bold action in 1998. Along with several other chaebols, he “cut off the arms and legs to save the body.” Daesang sold its crown jewel, its lysine plant and business for $600 million to Germany’s BASF in March 1998. It also sold its medicine and fertilizer business for another $400 million or so (Fin. Times, 3/19/98). The debt/equity ratio was to be reduced to about 1.5. Partly this action was due to government pressure to reduce intra-chaebol loan guarantees to less than 100% of the net worth of the entire conglomerate (Korean Econ. Weekly, 8/24/98). Daesang was one of the stars in the debt-reduction process (Korea Herald, 10/30/98). As of mid 1998, Daesang no longer sells lysine. However, it has held onto several of its starch-fermentation assets. It still makes MSG, gluconic acid, chorella, and aspartame and has high hopes for export growth (Korea Economic Daily, 1/13/98). The fine-chemical business of Daesang is now called Miwon Commercial (Korean Econ. Weekly, 6/8/98). This subsidiary’s exports rose 355
from 23% of sales 11/97 to 35% in the first half of 1998. Miwon is successfully battling Ajinomoto in the Asian market for MSG (Asian Pulse, 10/23/98). In the late 1990s, the food processing activities of Miwon Co. employed about 3500 people at its peak and about 3000 when it joined Daesang.
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TATE & LYLE PLC Tate & Lyle was formed in 1921 by the merger of two family-run sugar refiners. It is the biggest cane sugar refiner in Europe and operates in 30 countries. Around 1800 there were 120 UK sugar refiners, down to 26 in 1882 and 16 by 1900. Henry Tate & Sons began around 1870. Abram Lyle’s business started in 1881; he specialized in “golden syrup,” meant to imitate honey. Tate specialized in cube sugar. Both companies barely survived WWI. In 1935 the government dictated the formation of British Sugar Corp. as a monopoly for beet sugar, supervised by a Commission. In the 1950s the sugar industry became heavily regulated, and T & L almost was nationalized. As a result of domestic conditions, T & L branched out into related ventures and overseas investments. It bought beet and cane sugar refiners in Rhodesia (1953), Canada (1959), Belize (early 1960s), France (1967). In 1976, it bought the last independent sugar refiner in the UK, Amylum of Belgium, Refined Sugars (US), and later several beet sugar factories in the U.S. (now Western Sugar Co.). In 1988, T & L made a hostile acquisition for Staley Continental (now A.E. Staley) at a cost of $1.5 billion, which gave it 25% of the HFCS market. Staley’s foodservice assets were sold. The same year, T & L bought Amstar Sugar for $305 million. With Johnson & Johnson, T & L is developing a low-cal sweetener called sucralose (IDCH). Acquired ⅓ interest in Amylum SA of Belgium in 1976; Staley Intl. for 653 mil. pounds in June 1988; Western Sugar Co. 1985; Amstar Sugar Co. 9/88; many animal feed companies in U.S. and Europe 1990-1994; bought 80% of Orsan SA in 6/94 (same year Ajinomoto bought rest of Eurolysine). In 1997, T & L had 25,400 full-time employees, sales of 4651 mil. pounds ($7.48 bil.), op. profit of 4.2% sales, before-tax profit of 3.4% sales. Sales in pounds increased by 4.4% p.a. 19901997, but in U.S. $ by 2.1$ p.a. Range on before-tax profit was 7 to 3 % of sales.
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INDEX Antitrust 16, 22, 31, 42, 49, 53-55, 58, 60, 63, 67, 78, 80, 81, 94, 117, 120, 124, 125, 129, 135, 139, 140, 147-52, 160, 162, 171, 196-98, 203, 204, 212, 213, 216, 245-57, 262, 263, 267-71, 274, 276, 279-83, 286, 287, 289-304, 307-34, 358. See also Clayton Act or Sherman Act Fines 54, 55, 79, 319 Suits 48, 64, 65, 73 Violations 31, 55, 58, 60, 344 Antitrust Division 41, 50, 65, 152, 172, 269, 270, 271, 274, 280, 282, 289, 290-94, 298, 302, 317, 322-26 Antitrust Fines 319 Antitrust Laws 29, 67, 80, 107, 162, 255, 269, 294, 328, 333 Antitrust Suits 123, 128, 262 Appleton Papers 274 Archer Daniels Midland i, 4-7, 10-12, 15-21, 25-52, 56-58, 65-74, 78-82, 91-218, 22432, 239-90, 293, 301, 305, 314, 317, 318, 322, 328, 329, 338-39, 343, 346, 357 Profile of 10 Chronology of 90 Audio Tapes 16, 41, 46, 100, 113, 145, 147, 149, 153, 159, 160, 169, 182, 195, 251 Aventis 8, 54, 318, 329, 332, 354, 355, 360
A.E. Staley 7, 11, 15, 26, 52, 71, 117, 118, 119, 121, 246, 250, 253, 259, 262, 263, 264, 343, 366 Adams, Kenneth 247, 248, 253, 267, 298, 299, 300, 301, 310, 314, 316, 317, 318, 321, 323 ADM See Archer Daniels Midland Co. Affected Sales 284, 294, 320, 322, 325, 332 Agreement 22, 34, 37, 42-44, 48, 49, 52, 57, 59, 65, 73, 94, 97, 98, 100, 103-15, 128, 134, 142, 148, 154-63, 166, 168, 171-79, 182-95, 199, 204, 206, 209, 211, 241, 243, 248, 256, 258, 270, 273, 274, 278, 279, 280, 281, 282, 286, 289, 292, 293, 301, 302, 309, 316, 322, 327, 328, 330 Plea 46-49, 52, 55, 59, 69, 128, 129, 130, 132, 135, 136, 160, 170-72, 175, 179, 247-50, 262, 274, 281-83, 296, 304 Cartel 19, 21, 25, 27, 28, 33, 34, 35, 36, 50, 67 Volume 31, 33, 34, 36 Agroferm 25, 145, 358 Ajinomoto 4, 5, 12, 15, 17, 19, 21-23, 26-42, 45, 56, 68, 70, 73, 80, 91-119, 122-29, 133-35, 139, 141-44, 147-52, 155-62, 16780, 186-88, 192, 193, 199, 200, 202, 210, 211, 214, 215, 224-26, 232, 269, 272, 273, 280, 317, 322, 335-37, 365, 366 Akin Gump 117, 259 Amnesty See Leniency Program Amnesty Program 281, 282, 284, 295, 302, 304, 308, 314 Andreas, Dwayne O. 10, 11, 12, 42, 43, 46, 79, 81, 91, 95, 98, 99, 100, 106, 115-34, 137-41, 146-48, 151, 155, 166, 169, 170, 179, 180, 187, 196-203, 207, 212, 213, 216, 253, 263, 272, 338, 339 Andreas, G. Allen 44, 79, 138, 139, 140, 196, 198, 200-02, 205, 212, 213, 216 Andreas, Michael 12, 19, 21, 42-44, 48, 51, 52, 68, 79, 81, 97-102, 105-12, 115, 117, 122-124, 127, 130-39, 142-76, 179-96, 199-13, 216, 224, 244, 246, 247, 255, 257, 263, 265
Barrier to Entry 3, 5, 9, 15, 65, 74, 161 BASF 8, 9, 26, 53-59, 71, 95, 142, 148, 149, 151, 176, 180, 200, 211, 267, 271, 273, 277, 280, 285, 286, 291, 294-305, 308-17, 320-33, 339-43, 354, 355, 364 Baxter, William F. 269 Bayer 5, 46-51, 56, 70, 73, 79, 80, 117, 164, 238-241, 247-54, 269, 320, 322, 323, 34045, 354, 355 Before-and-after Method 64, 222 Bid-rigging. 51, 77, 256, 257, 278, 295, 328 Big Three 9, 55, 57, 319 Bingaman, Anne K. 41, 117, 214, 267, 269, 270, 274 BioKyowa 92-95, 98, 104, 128, 142, 146, 173-78, 192, 193 358
Cerestar/Eridania 239, 254, 255, 348-49 Cheating, Cartel 245, 293 Cheil 19, 21, 25, 26, 29-40, 56, 70, 81, 9499, 107, 111-16, 123, 134-38, 142, 143, 150, 173, 174, 192, 198, 210, 215, 224-28, 232, 217, 350-52, 364 Cheviron, Mark 102, 166-70, 187, 212, 216 Chicago Trial 197, 264 Chinook 291, 292, 298, 301, 303, 311-13 Choline Chloride 9, 53-55, 58, 291, 292, 299, 301, 311, 312, 329 Citric Acid i, 1, 2, 3, 5, 6, 10-17, 29, 30, 41, 46-59, 63, 68, 70, 73-81, 96, 100, 103, 107, 110-12, 119, 120, 126, 130-32, 138, 140, 141, 147, 150, 151, 154, 164-67, 170, 179, 186, 188, 189, 197, 199, 209, 212, 213, 238-59, 262, 264, 267, 269, 273, 274, 279, 296, 297, 311, 314, 326, 329, 332, 343, 344, 346, 348, 349, 356, 357, 362 Chronology of 237 Civil Suit 49, 57, 67, 118, 120, 125, 132, 146, 179, 262, 264 Class Action 120, 125, 126, 128, 131, 132, 137-41, 179, 198, 221, 246, 248-53, 263, 273, 277, 279, 281, 283, 285, 287, 290, 298, 303, 304, 307, 319, 321, 323, 330, 334, 290, 300-04, 313, 316, 317, 321, 329, 330 Class Action Suit 46, 49, 52, 69, 73, 78, 124, 126, 134, 137, 202, 251, 257, 258, 262, 264, 277, 279, 283 Clayton Act 49, 69, 322 Co-conspirator 25, 41, 47-51, 55, 68, 73, 80, 100, 101, 102, 129, 132, 152, 161, 182, 183, 186, 264, 275, 331 Asian 15, 31, 48 Citric Acid 48 European 48, 73 Collusion 1, 10, 16, 41, 74, 297, 301 Collusive Behavior 1, 2, 32 Commission of the European Communities See European Commission Competition Law 174, 270, 275, 278, 286, 289, 303
Bioproducts Division of ADM 17, 31, 92, 93, 101, 104, 137, 143, 145, 150, 159, 170, 177, 211 Board of Directors 43, 44, 48, 79, 118, 124, 132, 139, 140, 145, 147, 201, 339 Brasser, Wayne 103, 170, 243 Bray, John 153, 154, 158-62, 168-70, 179, 182, 184, 188, 190, 191, 194, 196, 208 Brönnimann, Roland 294, 298, 309, 326 Buffett, Howard 117, 118, 203 Buffett, Warren 118 But-for Price 47, 200, 222, 247, 300 Canadian Competition Bureau 47, 150, 157, 254, 298, 311, 312, 328 Capacity 4-7, 14, 15, 25-40, 64, 73, 92-95, 98, 99, 104, 109-13, 139, 141, 142, 14446, 149, 151, 161, 169, 173, 175, 177, 178, 180, 185, 186, 197, 198, 206, 213, 214, 239-44, 250-59, 269, 286, 287, 290, 301, 305 Citric Acid 240 U.S. 239, 240 Capacity Utilization 4, 28 Cargill 6, 7, 13, 15, 26, 28, 44, 46, 49-52, 57, 70, 71, 80, 93, 110, 117, 119, 137, 141, 149, 151, 164-66, 188, 197, 202, 204, 214, 238-52, 255-65, 277, 285, 287, 305, 346-47 Cartel i, 3, 6, 10-16, 19-37, 42-66, 73, 74, 79, 80, 99-107, 110, 111, 113, 116, 123, 126, 147, 148, 152-61, 164, 165, 167, 179, 181, 182, 184, 188, 191, 193, 194, 195, 197, 215, 241-45, 250, 256, 258, 260, 264, 268-98, 301-07, 310-21, 324-34, 343 Graphite Electrodes 278, 283, 284 Food-and-feed Ingredient 3 Vitamins 53, 54, 267, 296, 326, 333, 334 Citric Acid 46, 164, 243, 244, 247 Chemical 340 I.G. Farben 343 Lysine 13, 22, 36, 81, 100, 111-16, 128, 150-57, 187, 189, 214, 222, 243, 350 Ceiling Price 24, 36, 93, 179 359
320, 324, 329 Damages 8, 42, 49, 60, 63, 64, 69, 73, 80, 248, 250, 251, 257, 258, 271, 272, 278, 280, 282, 296, 298, 300, 303, 305, 308, 310, 313, 315, 321, 323, 329, 334 Civil 8, 46, 47, 49, 50 Private 73, 79 Dead Weight Loss 63, 64, 65 De Beers 268, 329 Decatur, Illinois 4, 11, 12, 15, 17, 26, 27, 29, 31, 33, 36, 44, 46, 58, 65, 106, 107, 109, 256, 339 Degussa 12, 17, 25, 26, 30, 54, 55, 57, 71, 92, 98, 109, 141, 145, 149, 175, 197-99, 210, 228, 290, 291, 301, 307, 318, 327, 353 Demand 3, 22-27, 34, 63-66, 240-45, 25459, 269, 277, 285-88, 291, 303, 308 Elasticity of 22, 23, 24 Lysine 3, 21, 23, 24, 36, 65 Vitamins 8 Department of Justice 16, 41-55, 58, 65, 67, 68, 73, 77, 79, 80, 94, 116, 117, 120, 12341, 144-48, 150, 152, 160, 161, 170-72, 183, 185, 198, 203, 205, 214, 246-57, 26098, 301-09, 312, 313, 314, 316, 319, 322, 324, 325, 326, 327, 329, 330, 333, 347 See also Antitrust Division DG-IV 126, 139, 272, 275, 309, 321, 355 Direct Purchaser 61, 63, 329 DOJ See Department of Justice Dowd, John 117 DuCoa 53, 55, 58, 71, 291, 292, 301, 303, 311-13 DuPont Co. 53, 151, 340, 347, 354
Non-U.S. 43 ConAgra 53, 346 Concentration 5, 7, 9, 13, 14, 37 Buyer 12, 13, 14, 16, 52, 65 Sales 12, 58, 74 Seller 3, 16, 64 Conspiracy 1, 2, 3, 5, 7, 13, 16, 17, 26-29, 36, 44-54, 58-60, 63, 64-68, 77, 79-81, 94, 100, 102, 112, 127-34, 143, 144, 148-54, 157, 158, 161, 164-68, 173, 174, 182-87, 192, 195, 201, 203, 207-11, 215, 224-26, 239, 245-49, 252-58, 267, 273-83, 286, 288, 289, 292-98, 301, 305, 311-14, 317, 320-28, 331, 343, 364 Choline Chloride 53, 55, 58 Citric Acid 30, 46, 50, 51, 68, 81, 343 Food-and-feed Ingredient 2 Lysine 17, 19, 44, 52, 68, 80, 81, 358 Vitamins 53, 54, 58 Conspirator i, 15, 16, 19, 22-26, 30, 42, 43, 47-51, 55, 57, 61-65, 68, 79, 80, 97, 10709, 114, 131, 144, 150, 155, 156, 158, 164, 175, 178, 179, 191, 203, 209, 210, 252, 254, 269, 270, 272, 278, 279, 294, 297, 310, 312, 322, 327 Citric Acid 241, 247, 248, 252, 254, 256 Corn Sweeteners 1, 3, 6-17, 29, 41, 47, 52, 63, 71, 74, 95, 118-22, 130, 131, 133, 141, 147, 154, 189, 200, 203, 212, 213, 214, 247, 251, 262-67, 339, 346, 366 Chronology of 261 Cost of Production 4, 6, 17, 27, 28, 33, 50, 64, 66, 128 Cournot Model 66, 67 Cox, Barrie 47-51, 100, 103, 117, 130, 152, 163, 164-71, 183-86, 190, 194, 196, 202, 209, 239-41, 245-47, 255-58 Crouy, Alain 29, 97, 98, 105-07, 156, 162, 163, 183, 186, 191-94, 210, 224-26 Customers 246, 250, 253, 259
EC 139, 204, 212, 215, 271, 275, 276, 288, 289, 297-304, 309, 310, 329, 331, 332, 334 See also EU ECAMA 29, 50, 96, 164, 166, 241, 245, 252, 258, 260, 331 EEC 245 Eichenwald, Kurt 255 Eisai 9, 53, 55, 56, 71, 285, 287, 301, 303,
Daesang 142, 148, 149, 151, 341, 350, 352, 363, 364, 365 See also Sewon Daiichi 9, 53, 55, 56, 71, 309, 310-13, 316, 360
73, 136, 239, 240-56, 344 Hartmann, Hans 46, 49, 50, 164, 240, 241, 249, 250, 252, 256 Hauri, Andreas 294, 326 Herfindahl Index 5, 116, 123 High Fructose Corn Syrup See Corn Sweeteners HFCS See Corn Sweeteners Hoech, David 123, 144, 149, 151, 176, 177, 193, 203, 204, 214 Hoechst 53, 54, 71, 288, 293, 314, 316, 318, 320, 340, 341, 343, 354-55, 360 Hoffmann-La Roche 1, 6, 8, 9, 46-49, 53-59, 70, 71, 80, 117, 164, 238 240-44, 247-55, 267, 269, 273, 274, 277, 280, 285, 286, 291, 294-303, 309-29, 331, 333, 334, 361, 362 Homogeneous 9, 10, 66, 74 Model 66, 67 Product 3, 5, 14 Huari, Andreas 240, 241, 245
309-13, 316, 320, 329 Elasticity of Demand 23, 62, 64, 66 Eridania See Cerestar Eurolysine 19, 29, 91, 96, 97, 98, 101, 103, 105, 106, 107, 109, 113, 114, 155, 162, 273, 290, 336, 366 European Commission 30, 43, 51, 56, 272, 278, 355 EU 43, 51, 53, 55, 59, 81, 93, 139, 141, 162, 251, 271, 275, 283, 286, 289, 293, 296310, 314, 319, 327, 330-34, 344 European Union See EU Excess Capacity 28, 36, 139, 154 Extraterritoriality 1, 81, 268, 273, 274 FBI 41, 42, 46-51, 65, 78, 99, 100-04, 110, 117, 118, 120, 127, 128, 131-37, 141-54, 157, 158, 161, 166-72, 180, 186-91, 194, 196, 198, 202, 203, 211, 215, 243, 245, 247, 248, 251-53, 256, 257, 263, 274, 281, 282, 329 Federal Trade Commission See FTC FEFANA 30, 175 Fine 1, 16, 43, 46-51, 54, 55, 58, 59, 68, 7074, 78-81, 123, 126-40, 144, 148, 150, 155, 157, 160, 161, 171, 173, 179, 185, 190, 194-200, 203-06, 210-17, 247, 249, 250, 254, 255, 267, 270-84, 288-305, 30822, 324-34 Food-and-feed Ingredients 2, 3 Fructose See Corn Sweeteners FTC 286, 290, 302, 304, 315, 316, 317, 329, 330, 331, 334, 355
I. G. Farben 54, 313, 340, 341, 343, 354 Ikeda, Hirozako 25, 30, 33, 91-97, 103, 10608, 111-14, 128, 155, 156, 159-63, 168, 171-77, 182, 183, 190-93, 210, 224-26 Illinois Brick 63, 315 Immunity 41, 48-52, 59, 104, 126, 130-38, 142, 144, 147, 149, 152, 158, 163, 170, 175, 183 Indirect Purchaser 46, 57, 61, 63, 76, 138, 198, 320, 329, 331, 333 Industrial Diamonds 274 Injury 16, 49, 52, 55, 59- 64, 68, 69 INS 148, 281
G-4 49, 50, 51, 241, 243, 256, 257 GE 267, 268, 269 Gorelick, Jamie 41, 117, 125, 214 Graphite Electrodes 279-84, 287, 293, 308, 315, 317, 318, 320, 324, 328 Griffin, James 94, 97, 100, 101, 108, 117, 120, 130, 131, 144, 152-56, 164, 172, 175, 176, 179, 207, 208, 243, 246, 251, 260
JFTC 274, 287, 319 Jungbunzlauer 6, 46, 48, 49, 56, 57, 70, 80, 164, 239-45, 248-59, 273, 276, 277, 285, 286, 289, 307, 356-57 Klein, Joel 41, 50, 58, 117, 131, 135, 203, 204, 214, 246, 274, 279, 287, 292-98, 314, 325, 326, 328, 330, 333
Haarmann & Reimer 5, 6, 46, 48, 49, 56, 70, 361
Microsoft 294, 298, 315, 319, 325, 330, 333 Mimoto, Kanji 21, 23, 31, 34, 91, 95-104, 107, 108, 113-16, 128, 155-63, 167, 17074, 177, 179, 181, 183, 186, 189, 191-93, 224, 225, 226 Miwon See Sewon Mole 41, 42, 82, 99, 100, 103, 104, 117, 127, 134, 135, 137, 148, 168, 187 Monopoly 143, 238, 256, 329 Monopoly 21, 61, 66, 343, 350, 354, 366 Monopoly Price 21, 62, 65-67 Monopoly Profit 52, 63, 78 Monosodium Glutamate 3, 10, 29, 31, 92, 107, 109, 213, 216, 247, 267, 269, 317, 322, 329, 336, 337, 350, 351, 358, 363, 364, 365 Monsanto Corp. 347 MSG See Monosodium Glutamate Mulroney, M. Brian 118, 119, 122, 124, 146, 147, 201
Kyowa Hakko Kogyu 4, 5, 15, 17, 21, 2527, 30-42, 45, 56, 70, 73, 80, 91, 92, 9599, 101, 105, 109, 111-13, 116-19, 123, 125, 128, 129, 133, 139, 144-50, 156, 158, 160, 172-80, 200, 206, 210, 211, 215, 22426, 232, 290, 332, 358 Lassar, Scott 41, 50, 51, 117, 120, 131, 15258, 162, 170, 172, 176, 184-95, 207, 210 Leniency 278, 281-84, 291, 304, 314, 319, 324, 332 Leniency Program 54, 58, 272, 282, 284, 294, 297, 298, 315, 316, 319, 324 List Price 5, 6, 7, 22, 23, 27, 33, 46, 47, 50, 53, 92, 93, 166, 173, 174, 179, 242, 243, 244 , 267, 276, 286 Citric Acid 241, 243, 257 Lonza 54, 55, 57, 58, 71, 287, 291, 292, 301, 313, 329 Lysine i, 1-5, 10-57, 61-82, 91-181, 184215, 218, 220, 221, 226-33, 243-50, 254, 255, 262-64, 267, 268, 272, 273, 279, 291, 307, 314, 328, 329, 332, 336, 337, 341, 346, 350, 351, 358, 363, 364 Chronology of 90 Lysine Association 29, 33, 35, 41, 46, 47, 96, 97, 100, 106, 112-14, 118, 156, 158, 174, 176, 190, 224, 225, 243
NASDAQ 290 Oligopoly 5, 10, 15, 65, 67, 200 Behavior 32 Model 64, 67 Opt-out 42, 49, 57, 69, 70, 73, 125, 126, 128, 141, 198, 251-54, 290, 297, 302, 309, 310, 313, 316-18, 321-25 Overcharge i, 8, 16, 42, 43, 47-55, 59-65, 68, 73, 79, 125, 130, 131, 198, 205, 248, 250, 253, 258, 267, 276, 278, 279, 283, 284, 293, 294, 302, 304, 308, 310, 313, 316-18, 324, 325, 334 Overt Collusion 66
Manning, Blanche 144-54, 162-65, 169, 172, 176, 179-85, 188, 190, 195, 199-10, 216 Market Power 15, 16, 26, 67, 182 Market Price 24, 25, 28, 100, 146, 242, 245 See also Transaction Prie Market Share 2, 6, 15, 19, 21, 30, 33, 35, 50, 54, 51, 59, 68, 78, 79, 96, 97, 105, 107, 111, 116, 123, 154, 155, 193, 215, 241, 243, 245, 253, 254, 276, 279, 283, 291, 295, 297, 307, 310, 314, 322 Market Size 14, 243 Mexico City 25, 27, 29, 32, 34, 53, 96-98, 102, 106, 142, 155, 158, 173, 177, 179, 186, 189-95, 224
Parens Patriae 271 Per Se Rule 124, 182, 194, 195, 201, 270, 315, 327, 328 Pfizer 6, 12, 164-66, 211, 238-45, 269, 305, 306, 315, 343 Price Fixer 2, 3, 51, 79, 80, 131, 135, 161, 190, 244, 294, 308, 329 Price Fixing i, 2, 3, 12, 15, 16, 25, 29, 30, 362
Sorbates 3, 77 Soybean 336, 338, 339 Spratling, Gary 131, 136, 148, 204, 246, 282, 283, 292, 296, 297, 324
31, 41-68, 73- 80, 91, 93, 94, 100-06, 113, 114, 118, 119, 127-47, 150-72, 175, 176, 179, 182-92, 194-203, 206, 208, 210, 213, 214, 239, 243, 246-56, 262, 263, 267-83, 286-93, 295-334, 337, 343, 348, 350, 358 Corn Sweeteners 262, 263, 264 Chronology 17 Conditions Facilitating 14 Price Wars 17, 67, 94, 98, 163, 171, 176, 177, 178, 181, 182, 188, 191, 245 Prima Facie 49
Tacit Collusion 32, 66, 67, 184, 185 Tacit Cooperation 15, 26, 36, 67 Takeda 9, 53, 55, 56, 71, 280, 285, 301, 303, 309-13, 316, 317, 320-24, 327, 329, 331 Tate & Lyle 7, 11, 15, 26, 109, 119, 122, 246, 251-55, 258-60, 262, 288, 366 Thermal Fax Paper 74, 135, 270, 271, 274 Trade Association 96, 186, 189, 190 Transaction Price 5, 6, 7, 15, 22-24, 33, 47, 53, 98, 108, 197, 242, 259, 313 Treble Damages 42, 43, 49, 57, 73, 79, 125, 131, 271, 290, 300, 315, 322 Twice the Harm 131, 197 Two-times Rule 48, 68, 73, 79, 131, 200, 276, 332
Randall, James 12, 81, 97, 100-06, 121-24, 127, 131-43, 146, 152, 153, 159, 160, 167, 169, 170, 171, 187, 196, 202, 216, 224-26, 264 Rhône-Poulenc8, 9, 17, 25, 26, 30, 53-58, 71, 98, 239, 267, 269, 276, 277, 280, 285, 288, 291, 294-303, 307-11, 314, 316-18, 329, 340, 354, 355, 359-60 Richter, Reinhard 142-46, 150 Roche See Hoffmann-La Roche Rule of Reason 124, 182, 270
UCAR Intl. 280-89, 293, 312-15, 320, 321 U.S. Sentencing Guidelines 59, 145, 200, 204, 208, 247, 250, 267, 276, 282, 287, 294-97, 310, 324 U.S. v. Michael Andreas et al. 28, 94, 98, 101, 154, 195, 202, 215, 255, 257, 264
Seasonality of Demand 21-24 Lysine 65 Sewon4, 5, 15, 17, 19, 21, 26-40, 45, 56, 70, 80, 92-101, 104-06, 109, 111-17, 123, 128, 129, 133, 142, 147, 150, 156-60, 17380, 189-94, 197, 198, 202, 211, 215, 22426, 232, 341, 352, 363-65 SG See Sodium Gluconate SGL AG 282-84, 288, 293, 308, 310, 315, 318, 320, 324 Shadow Price 23, 24 Shepard, Brian 99-104, 120, 136, 149, 154, 166-70, 180, 187, 194 Sherman Act 59, 134, 203-05, 267, 272, 274, 278, 300, 325-28 Sodium Gluconate 3, 57, 58, 77, 80, 119, 147, 148, 150, 170, 213, 273, 275-79, 282, 285-89, 300, 301, 307, 329 Sommer, Kuno 58, 164, 244, 274, 294-98, 309, 314, 326
Video Tapes 16, 41, 42, 46, 47, 100, 145, 153, 156-62, 168, 169, 175, 188, 193, 196, 200, 246, 248, 251, 262-64 Vitamins 1-3, 8, 9, 10, 12, 32, 52-59, 71- 77, 244, 254, 267, 269, 271-80, 285-87, 291333, 341, 361, 362 Chronology of 266 Vitamin A 8, 9, 10, 53, 295, 361 Vitamin C 8, 9, 10, 53, 59, 271, 275, 279, 280, 285, 295, 302, 305, 307, 327, 361, 362 Vitamin E 9, 10, 53, 58, 269, 273, 277, 28587, 310, 317, 361 Volume Allocation 112, 162, 163, 173, 174, 182, 184, 187, 193, 195, 199, 210 363
Walker, Bill 147, 153, 180, 182, 184, 191, 211, 252 Whitacre, Mark 4, 12, 17, 19, 23, 27-33, 36, 41-47, 52, 72, 81, 92-162, 165-77, 180-96, 202, 203, 206-16, 224-26, 243, 248, 25153, 263, 264, 269 Williams & Connolly 125, 148, 214, 246, 253, 290 Wilson, Terrance 17-25, 29-31, 42-48, 51,
68, 81, 94-100, 103-08, 112-17, 122-34, 138, 139, 143, 144, 147-96, 201-13, 216, 224-26, 240-49, 255-57, 265 Yamamoto, Masaru 35, 96, 97, 99, 100, 102, 103, 105, 106-15, 123, 128, 133, 134, 135, 152, 155, 160, 162, 167, 171-79, 183, 18694, 199-202, 208, 210, 224, 281
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