Goldman’s cartel fine signals EU warning to investors?

31 January 2017 9:55am

 2 April 2014. By Lewis Crofts and Matthew Newman.

Private-equity firms would do well to heed the message from Brussels today: Investments in cartel members can lead to millions of euros in fines, even though the shareholders may think they are miles away from the price fixing.

Today’s decision to impose a fine of 37.3 million euros ($51.4 million) on Goldman Sachs in an undersea-cable cartel isn’t the first time the European Commission has sanctioned an investor, but it signals its clear willingness to do so again.

EU antitrust chief Joaquín Almunia unveiled 302 million euros in fines today, hitting manufacturers including Nexans, Exsym, Brugg Kabel and Viscas for their involvement in a decade-long cartel for high-voltage cables.

The decision is notable because the commission ruled that Goldman Sachs could also be held liable for the conduct because a fund it managed, GS Capital Partners, had purchased a stake in Milan-based manufacturer Prysmian.

The EU regulator has imposed this kind of fine on at least two previous occasions. But both involved much smaller cartels, and the investors had nowhere near the size and power of Goldman Sachs.

In assessing the Goldman fine, the commission first looked at Prysmian’s role in the price fixing, calculating a penalty of 104.6 million euros, based on the length of its participation and the volume of products it sold during the cartel.
It then considered which companies had “decisive control” over the
manufacturer’s business, finding Pirelli and Goldman Sachs jointly liable for roughly two-thirds and one-third for the fine, respectively. Both companies held investments in Prysmian at various times.

Almunia said his staff had evidence that Goldman Sachs had been involved in the “management decisions of Prysmian” through voting rights and board
representation. The manufacturer, in turn, was “directly involved in the cartel,” he said.

“This was not [the] normal involvement of a financial investor,” Almunia added. GS Capital Partners invested in Prysmian between 2005 and 2009. The bank said today there was “no suggestion that Goldman Sachs or its people had any knowledge or involvement in the purported collusive behavior.”

The commission didn’t find that Goldman Sachs participated directly in the cartel, so it couldn’t fine it directly. Instead, it traced links between the investment bank and the company’s management, judging that its shareholding gave it “decisive influence” over commercial policy.

GS Capital Partners reduced its investment over the three and a half years it held a stake. But the commission found that individuals on Prysmian’s board were from Goldman Sachs itself, and not just the fund.

“In our investigation, we have concluded that Goldman Sachs held, for almost two years, 100 percent of the voting rights,” Almunia said. “They could revoke the board of directors. They could nominate the new board of directors at any time.”

“They were regularly updated on Prysmian business through monthly reports,” he said.

In the past, the commission has fined Gigaset, a German investor, and 1. garantovaná, a Slovak investor, for their links to a calcium-carbide cartel. Judgments from the EU courts in appeals against those fines have affirmed that EU officials can sanction investors who have shareholdings in manufacturers.

The commission has long targeted holding companies that aren’t involved in the cartel themselves but are still responsible for the illegal activities of their subsidiaries.

The EU watchdog can find that a parent company is responsible for cartel conduct when it owns 100 percent of a subsidiary. EU courts have also upheld fines against parents when the commission has proved that the parent has “decisive influence” over the subsidiary.

Today, the regulator has shown that it’s unlikely to see much of a difference between the liability of a traditional holding company and that of a financial investor. Both must bear responsibility for the businesses they control.

Almunia told journalists today that investment companies “should take a careful look at the compliance cultures of companies they invest in.”

Goldman Sachs said it was considering an appeal. The question of decisive influence could become a focal point of any potential courtroom fight.

Even though EU case law appears to support the commission’s view, future litigation could flag the differences between a small-time Slovak investor and a fund managed by one of the world’s largest investment banks.


Two other manufacturers, Pirelli and NKT, have already announced they will appeal the fines.

While the commission tried to show a strong case on liability, it will also face questions over how it calculated fines for some of the companies, basing its math on worldwide sales.

In typical cartel cases, the commission uses sales based on a company’s business in Europe when setting the fine.

However, the commission said that the Asian companies in the power-cable cartel had very little or no sales in Europe, because of the conspiracy’s marketsharing agreement. As a result, the EU executive said these figures didn’t reflect their involvement in the cartel.

The regulator therefore took the total sales of the cartelists in Europe and assigned a value based on their respective worldwide sales. The commission used a similar approach in a marine-hose cartel.

This is likely to be a point of dispute for some of the non-European companies that received fines today.

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