September/October 2001
Several scrap firms recently paid large fines and had company officials jailed over alleged price-fixing and other antitrust conspiracies. Here’s a look at how to avoid antitrust problems—and what to do if the Justice Department comes after you.
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
If the word “antitrust” only makes you think about Bill Gates and Microsoft—or John D. Rockefeller and Standard Oil, for you history buffs—it’s time to think again: The antitrust division of the U.S. Department of Justice says it is looking into “collusive, anticompetitive practices in the scrap metal industry.”
Consider these two scrap-related cases:
In February 1999, a Florida jury convicted four high-ranking executives at two scrap companies of conspiracy to fix prices in a case that ultimately sent each man to federal prison for nearly six months. In addition, the executives and their companies were ordered to pay large fines.
In March 2000, an Ohio scrap metal firm pled guilty to price-fixing, paid an $850,000 fine, and agreed to cooperate with the Justice Department in its “ongoing investigation” of the scrap industry.
While those punishments might seem stiff, the penalties could have been worse. Individuals convicted of violating the Sherman Antitrust Act can face as much as three years in jail plus fines that could exceed $350,000, while corporations can be fined more than $10 million. Indeed, one of the companies in those recent cases reportedly faced as much as $26 million in fines. Prosecutors dropped that idea only after a review of the company’s books revealed it didn’t have that kind of money. (For more on these cases, see “Scrap Under Scrutiny” on page 46.)
Aggressive Justice
The Justice Department’s ongoing investigation of the scrap industry is part of its larger, more aggressive stance toward antitrust issues in general.
Two newspaper articles sum it up. In June, the New York Times reported that the Justice Department’s antitrust division—once considered “a small and sleepy backwater”—has now become “a power center against white-collar crime.” A month later, a Washington Post article declared, “Antitrust enforcement is alive and well,” noting that even certain critics of previous antitrust actions “acknowledge that antitrust may have an increasingly important role in the future.”
The Justice Department is primarily interested in finding and stopping “conspiracies, agreements, or understandings” between competitors that can lead to anticompetitive effects such as charging higher prices to customers, paying lower prices to suppliers, reducing output, reducing capacity, or lowering quality, explains Robert W. Doyle Jr., an antitrust partner at Powell, Goldstein, Frazer & Murphy L.L.P. (Washington, D.C.).
Unfortunately, scrap dealers are particularly at risk of Justice Department antitrust scrutiny because of the unique nature and history of the industry, Doyle notes.
“It’s common for two scrap dealers to buy and sell scrap from each other in addition to competing with each other for the business of a third party,” he explains. The dual nature of their relationship—customer one day, competitor the next—poses potential risks of violating antitrust laws. For example, while it’s perfectly legal for Scrap Dealer A to talk about price and output when Scrap Dealer B is his customer, it’s illegal for A and B to talk about price and output when it involves a transaction in which they’re competitors, such as buying scrap from a stamping plant or a third scrap firm, Doyle notes.
“The transactions in which they act as buyers and sellers may facilitate an opportunity for them to perhaps overstep their legitimate independent business interests,” he states. “So scrap dealers have got to be careful because, given their particular status at any particular time, the types of information competing scrap dealers can talk about are limited.”
The recent consolidation of the scrap industry only amplifies these problems, Doyle adds, noting that “as the number of competitors diminishes, the likelihood of potential anticompetitive problems may rise.” In markets that are rapidly consolidating—as the scrap industry has done—“the government typically may take notice,” he says.
And don’t think the potential problem areas are limited to prices and output. Discussions about credit terms can, under the wrong circumstances, violate antitrust laws, as can changes in a company’s behavior while it’s in merger or acquisition negotiations (such as suddenly refusing to bid for material against the firm that’s trying to become its corporate parent). “Until an acquisition is complete,” Doyle says, “the two companies must independently and vigorously compete.”
Indeed, companies can even end up in trouble similar to Microsoft if they use their dominant market position in selling one type of product to force a customer to also buy another type of product, Doyle adds.
And remember that under antitrust laws the conspiracy itself is the crime, regardless of whether you actually commit any anticompetitive acts, says John McCaffrey of McLaughlin & McCaffrey L.L.P. (Cleveland), an attorney who has represented recyclers in antitrust cases. So if you sit down with your competitors and agree to fix prices or allocate customers but never carry through with the plan, you could still end up in trouble if the government learns of the plan, he notes.
Understanding Conspiracies
What exactly is the government looking for in an antitrust investigation?
To prove its case, the government must show that a “conspiracy, agreement, or understanding” to affect prices or output “was knowingly formed and was existing at or about the time alleged,” and that the companies or individuals accused “knowingly became members of the conspiracy, agreement, or understanding,” Doyle says.
The antitrust conspiracy need not have been formal, written, or involve an actual exchange of words. It could literally stem from a nod of the head or a wink of an eye since “there are informal ways to convey to your competitors whether you’re willing to go along with a price-fixing scheme,” Doyle notes.
The type of evidence the government seeks includes testimony from witnesses such as customers, competitors, and suppliers who feel they’ve been injured by anticompetitive behavior, as well as business partners, current and former employees, and disgruntled employees. Under the Justice Department’s controversial “amnesty” program, even members of the antitrust conspiracy can blow the whistle on their fellow conspirators in return for leniency.
Plus, while the conspiracy itself need not be written down, written material is a vital source of evidence, Doyle notes. These documents can range from internal company memos and e-mails to phone and travel records, credit card receipts, meeting notes, diaries, and even “written material reflecting your mental impressions.”
Document retention, however, may be a double-edged sword. As Doyle notes, “In many cases, written documents are useful because they can explain what otherwise may appear to be anticompetitive behavior as perfectly legitimate and independently pursued business conduct.” In other cases, however, documents can seal an alleged defendant’s fate, Doyle says.
That’s why it’s important to avoid being a “pack rat” who saves every piece of paper, notes McCaffrey. Instead, scrap companies should establish and follow a record-retention policy that regularly discards documents that aren’t needed to run the business.
Be sure to follow your own rules, he suggests. If antitrust investigators see that your official policy is to keep all records for five years but you can only produce the records for the past two years, “there’s going to be a lot of questions asked,” McCaffrey says. Moreover, be careful about suddenly discarding records you had been keeping.
“Let’s say there’s an industrywide grand jury investigation of scrap metal dealers in a particular region,” McCaffrey says. You’re aware of the investigation, but you haven’t yet received a subpoena to provide any documents. If you start dumping all your scale tickets for the past 10 years, “the government could try to establish that you had knowledge that information was being requested and that you were likely to be subpoenaed, but that you threw the stuff out before they got to you.”
Thus, the government might accuse you of tampering with evidence that it hadn’t even sought.
Often, McCaffrey adds, the government looks for just that sort of thing—tampering with evidence or witnesses or some sort of obstruction—to “liven up” an otherwise mundane antitrust violation. So scrap dealers have to be careful when they find themselves being investigated.
Auditing Antitrust
To help avoid antitrust trouble in the first place, scrap dealers should establish, implement, and enforce an antitrust policy, Doyle notes. This is true even for ReMA members who have access to the association’s policy—which is distributed at all ReMA meetings and events—because creating your own plan allows you to conduct an antitrust audit of your policies and practices and thereby help identify problem areas. Moreover, with the proper compliance safeguards and internal antitrust education programs in place, scrap dealers should be able to grow their businesses significantly while complying with the antitrust laws, Doyle says.
The audit should be conducted by an independent third party—most likely an antitrust attorney—and should examine all company documents and communications as well as the activities of key employees such as sales and marketing people “who are in the field interacting with competitors on a daily basis, to make sure they know what to say and what not to say,” Doyle explains.
The policy should also include a companywide statement so that employees at all levels know that it’s the firm’s policy to observe all antitrust laws. Employees should then be required to read and certify that they have read and understand this policy.
The key is to have all these critical employees acknowledging and understanding the importance of the antitrust laws so they can use this newly acquired antitrust sensitivity in their future dealings with other scrap recyclers, Doyle points out.
Scrap firms also need to develop a game plan for what to do if they come under federal scrutiny, McCaffrey suggests. In gathering evidence, federal investigators might come to your scrap plant to ask questions even before receiving a formal grand jury subpoena for documents. Or they might arrive with such a subpoena, asking for documents within a certain time frame. Or in the most drastic situation, they might show up suddenly, armed with search warrants and the power to immediately seize evidence and even take company officials into custody.
Leveling the Field
If antitrust investigators do come knocking, your first step is to “level the playing field,” McCaffrey says. By that he means to make sure you have legal counsel present when you talk with the investigators in order to take notes, record what information you’re asked to provide, and generally find out what the investigators want. One scrap executive under investigation initially sat down to talk with investigators on his own, McCaffrey explains, but then the man had second thoughts. The executive told the two investigators: “You’re a lawyer and you’re a lawyer—I’m not a lawyer, and I’d feel much better if I had my lawyer here.” So the investigators agreed to wait.
By contrast, McCaffrey knows of a business owner who talked with a federal investigator—and even gave him a tour of his facility—only to have that investigator and four more federal agents return a few days later with a warrant obtained largely from the information the owner had provided. Though that case involved health-care fraud, the same thing could happen in an antitrust situation, McCaffrey says.
Having counsel present at this point is especially useful because there are times during an antitrust investigation when you do not have the right to seek your attorney’s help—specifically, during grand-jury proceedings, which try to determine if an offense has been committed and if the person or company in question actually committed the offense. In such proceedings, a government attorney runs the show. Even though this grand jury may end up indicting you for an alleged crime, you do not have the right to be present to hear the accusations being leveled against you, nor do you have the right to have your counsel present when you or anyone else provides testimony, McCaffrey explains.
If the investigators do show up at your door, first make sure you obtain a copy of the warrant and affidavit if available, and identify the lead agent handling the search, McCaffrey says. Then hold the agents to the limits of the warrant. Never consent to let the agents search an area not identified in the warrant and never allow them to seize items not noted in the warrant.
At the same time, don’t interfere with their investigation, McCaffrey warns, or they might take you into custody. That means not preventing them from entering any area or removing any evidence—just make sure you’ve protested it. That way, your counsel can more easily seek to suppress the material improperly seized. But if you or an official with “actual or apparent authority to speak for the company” gives consent, the material is perfectly admissible as evidence, McCaffrey warns.
During a search of your facility, it’s quite possible that agents will attempt to interview some of your employees even though they’re only there to gather documents. In that case, it’s perfectly legal to send those employees home so they’re unavailable for questioning, McCaffrey notes.
Don’t tell employees to be uncooperative with investigators, he adds, but let them know that they don’t have to talk with investigators unless they’ve been subpoenaed. Plus, make sure you provide them with legal counsel independent from the company’s counsel to avoid issues concerning potential conflicts of interest.
McCaffrey, who has been an attorney on three scrap-related antitrust cases, says recyclers often seem more concerned with potential environmental problems than antitrust trouble. Now that the industry knows it’s being watched by the Justice Department, he hopes to see greater awareness.
After all, he says, once the government begins to investigate a particular industry for antitrust violations—as happened with scrap in Northern Ohio starting in 1996—it can get to understand the industry and decide that there’s the need for continued enforcement. When that happens, the government tends to move from region to region within the same industry.
In other words, McCaffrey warns, “they could take this show on the road.” •
Scrap Under Scrutiny
In November 1997, the Justice Department indicted two Miami-area scrap metal companies and four of their executives for an alleged price-fixing and customer-allocation scheme that involved scrap generated by Hurricane Andrew in 1992. The two companies—the Miami operations of Cleveland-based Atlas Iron Processors Inc. and Opa Locka-based Sunshine Metal Processing Inc.—and their executives—Anthony Giordano Sr., Atlas’s chairman, Anthony Giordano Jr., Atlas’s president and CEO, David Giordano, Atlas’s treasurer and COO, and Randolph Weil, Sunshine’s president—were accused of, among other things, “discussing and agreeing upon the maximum prices to be paid to specific suppliers of scrap metal” and “the maximum prices to be paid for specific grades of scrap,” the Justice Department charged.
Tried in federal court in Miami, the companies and executives argued that they had been engaged in merger and joint-venture negotiations, not price-fixing and customer allocation, says John McCaffrey of McLaughlin & McCaffrey L.L.P. (Cleveland), who defended the Giordanos.
Convicted in February 1999, the four executives were each sentenced to a year in federal prison, with the Giordanos each fined $31,800 while Weil was fined $41,950. The companies were also fined—Atlas for $356,175 and Sunshine for $469,864.
After serving five months, however, the defendants were all released on bond, pending appeal of their convictions.
At presstime, the appeal before the 11th Circuit Court was still pending. In the meantime, however, Sunshine declared bankruptcy and Atlas was sold by its creditors to new owners.
As an outgrowth of the Atlas/Sunshine prosecution, the Justice Department in March 2000 secured a guilty plea from Richfield, Ohio-based Bay Metal Inc. for “conspiring with unnamed co-conspirators to allocate suppliers of solid ferrous and nonferrous scrap and to rig bids for the right to service certain scrap metal accounts.” Specifically, Bay Metal and its co-conspirators agreed not to compete against each other in the Cleveland-Akron and Canton-Massillon, Ohio, scrap markets, thus denying scrap suppliers a competitive price, the Justice Department charged. It also accused the conspirators of agreeing on prices to submit for contracts to buy from certain suppliers and either refrained from bidding for certain contracts or submitted “intentionally low, complementary and non-competitive bids” for certain contracts for ferrous and nonferrous material.
As part of its guilty plea, Bay Metal agreed to pay an $850,000 fine and cooperate with the Justice Department’s ongoing investigation.
Your Momma’s Rules to Keep Other People From Getting You and Your Outfit in Antitrust Trouble
Antitrust lawyer David A. Bagwell of Armbrecht Jackson L.L.P. (Mobile, Ala.) created the following “Momma’s Rules” to help people steer clear of antitrust problems. The rules have been praised by Antitrust magazine for “using humor and easy-to-understand comparisons to keep this material lively and accessible.”
1. Who’s Giving the Party? When you were 15, your momma wouldn’t let you go to a party unless the right group sponsored it (like a church or school or somebody’s parents). You couldn’t just say, “Momma, a few couples are getting together in the woods.” Same deal here. Your momma was right. Don’t go to any meetings unless there’s a clear and proper sponsor and it’s the right kind of officially recognized body that is properly constituted, broadly based, and well-run. Otherwise, you might get in more trouble than you can handle.
2. What’s Up? Your momma wanted to know, “What kind of party is it?” She was right. There’s a difference between drinking and skating, and she wanted to know what was going on. Same deal here. What is going on? If they don’t send you a written agenda in advance, you really shouldn’t go. (It isn’t an agenda if all it says is “(1) Old Business, (2) New Business, (3) Other,” or anything like that.)
3. Chaperones. When you were 15, your momma wouldn’t let you go unless a chaperone was going. A lawyer is kind of like a chaperone. They tend to spot any developing troublemakers and throw them out of the party. If no lawyer is going to be there to chaperone, it’s a sign that the party might get too wild and maybe you shouldn’t go.
4. Stay Out of the Bushes. Your momma knew that if you left the party, you were more likely to get in trouble. She was right. Don’t go to “rump sessions” before, during, or after meetings. The natural human temptation is to talk business there, and your business is best discussed openly in the proper forum. It’s OK to have lunch with a friend or two, but don’t let it turn into a “rump session” (hard to define, but we all know it when we see it, so see it before it’s too late).
5. No Select Groups. Remember how it hurt your feelings when some people got invited to the party but you didn’t? Same deal here. If they don’t invite the whole class, don’t go. Especially don’t go if they say something stupid like “Let’s get the ‘Big Three’ together.” That kind of talk will just get you in trouble. Don’t go.
6. Don’t Get Taken in by Sweet Words. Your momma told you they’d talk sweet to you. Don’t get taken in. She was right. It would be simple if you could spot antitrust trouble just by seeing an evil-looking guy in a cloak and silk hat and a waxed mustache who whispered, “Psst! Let’s conspire!” They don’t do that. People sometimes unknowingly fall into conspiracies, pulled in by other nice-seeming people who say, “Let’s get on the same wavelength” or “Let’s sort this out before the meeting” or “Let’s get our story straight.” If they whisper to you like that, they are the Devil. Don’t be tempted. Don’t go. It can only get you in trouble. Your “story” is open and honorable and firmly based on correct data, and your story is already “straight.” The only time you need to be on the “same wavelength” as anybody else is when you both tune in to the religious channel on your separate radios.
7. Don’t Let Them Spike the Punch. Your momma suspected that some boy might try to spike the punch, and she told the chaperone to keep a lookout. She was right. Same deal here. Watch out that no narrow interest tries to rig the meeting or the system unfairly in favor of its company or its narrow interest. Like a spiked punch at a junior-high party, it can only lead to trouble (and don’t let anybody do the minutes on company stationary—it makes it look like their company was “in charge,” which is probably unfair).
8. Appearances Count. Your momma knew that if you slipped off to the woods from the party, people would assume the worst, even if you only hold hands. She was right. Pay attention to how things might look to somebody else. Some people always assume the worst and start a bunch of gossip. Don’t be grist for the gossip. Make sure you behave and look like you’re behaving. For instance, don’t sit over in the corner whispering with your competitors, even about football or movies. (At this point in your life, it won’t be a gossip who will spread the scandal. It will be some lawyer trying to make you look bad to a jury so he can personally make a lot of money. Strike a blow for liberty—behave and look like you’re behaving and keep all the lawyers poor.)
9. If the Party Turns Wild, Leave. Your momma told you to leave if it got wild. She was right. If other people at your meeting start talking about or doing bad stuff, get up and walk out. (It may be unpleasant, but it beats going to jail or getting sued.)
10. Call Your Momma If You’re Not Sure. Your momma gave you money to call her if you needed advice or help. She was right. Same deal here. If you can’t call your momma, call your lawyer.
Reprinted with permission of David A. Bagwell, who can be reached at P.O. Box 290, Mobile, AL 36601; 334/405-1202; or e-mail: dab@ajlaw.com.
Several scrap firms recently paid large fines and had company officials jailed over alleged price-fixing and other antitrust conspiracies. Here’s a look at how to avoid antitrust problems—and what to do if the Justice Department comes after you.