Scott + Scott has filed a class action challenging the conduct of numerous private equity firms and investment banks when they take targeted public companies private through so-called “club deal” leveraged buyouts (“LBOs”). The complaint alleges the defendants violated federal antitrust law by unlawfully rigging bids and allocating participation in club deal LBOs, resulting in shareholders receiving less than fair market value for their shares of the target companies. The defendants include 17 of the largest private equity firms and investment banks in the United States,
including JP Morgan Chase, Goldman Sachs, and Blackstone.

“The wrongdoing by these financial institutions is devastating for shareholders,” Scott + Scott partner David R. Scott stated. “This sort of abusive practice is precisely the kind of conduct that evidences the core pandemic of greed that ultimately has lead to our country’s current financial crisis.”

An LBO occurs when private equity firms take public companies private by buying the shares of a company’s existing public shareholders. The target company is then run as a private company by the private equity firms, often by the target’s existing management. After a period of time running the target company as a private concern, the
private equity owners sell the company to another private concern or float an initial public offering to once again take the company public. For private equity firms, paying less than fair market value for the target company allows them to reap windfall profits when the target company is eventually re-sold or taken public.

The class action complaint alleges that the defendants used “bidding clubs” to rig bids and allocate the market for LBOs in order acquire public companies for less than the fair market value. Economic evidence cited in the complaint backs the allegations, showing that when bidding clubs acquire public companies, shareholders receive significantly lower premiums compared to acquisitions by private equity firms acting alone or compared to acquisitions by another company.

For shareholders, “defendants’ collectivist scheme is disastrous,” the complaint states, whereas for the defendant private equity firms, the scheme “has enabled them to reap supracompetitive, inflated, and monopolistic returns on their invested capital, typically 20%-30% per year, and sometimes more than 100% per year” — money that comes directly out of the pockets of the target company’s shareholders.

The case is Police and Fire Retirement System of the City of Detroit, et al. v. Bain Capital Partners, LLC, et al., No.1:07-cv-12388(D.Mass.). Please contact Scott+Scott directly with any press or other inquiries about this case. 

Source : Scott+Scott October 2008 Newsletter