If Bid Rigging Is Wrong, Chesapeake, Lots Of Others Don't Want To Be Right

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Bid-rigging is a pretty boring crime because, like a lot of economic crimes, it is so close to being just fine. If I see a deep-pocketed competitor trying to buy a thing that I also covet, I may decide to spend my time elsewhere rather than bid against them and risk ending up with an expensive thing and a winner's curse. That's fine! But if I talk to them about it first, or even worse if I say I'll hold off on bidding in exchange for them doing the same on the next deal, it's not fine. You can see why there'd be a difference but it's not a matter of life and death or anything, it's just behavior (not bidding on things that are too competitive) that we are willing to tolerate but that we don't want to encourage with too much conniving about it.

Since it's kinda boring it tends to get juiced up rhetorically. Enter Harry First:

"The famous phrase is a ‘smoking gun.' That's a smoking H-bomb," said Harry First, a former antitrust lawyer for the Department of Justice. "When the talk is explicitly about getting together to avoid bidding each other up, it's a red flag for collusion, bid-rigging, market allocation."

When the talk is explicitly about market allocation, BOOM SMOKING H-BOMB.* Anyway that thermonuclear talk came of course from today's, reallyeveryday's, miscreants, the good folks at Chesapeake Energy, who Reuters reports were maybe talking with their competitors at EnCana about maybe splitting up the bidding on Collingwood shale leases in Michigan, which would be bad.

There is of course an alternative explanation - CHK and ECA were discussing a joint venture, say, or an area-of-mutual-interest arrangement in which they shared geological data and gave each other options to go halfsies on their properties in the region. The thing about that is ... it'd be fine! Sort of! I am not an antitrust lawyer but Chesapeake has arrangements to go halfsies on pretty much all the properties in all their regions, usually because those arrangements come with money and CHK likes money and never seems to have any of it. From the 10-K:

In February 2011, we entered into a joint venture with a wholly owned subsidiary of CNOOC Limited (CNOOC) to sell a 33.3% undivided interest in approximately 800,000 net acres of leasehold overlaying the Niobrara Shale, Codell Sand and various other formations in the Powder River and DJ basins in northeast Colorado and southeast Wyoming. Under the terms of the joint venture, we received $570 million in cash at closing, and CNOOC has agreed to fund 66.7% of our share of drilling and completion costs until an additional $697 million has been paid, which we expect to occur by year-end 2014. CNOOC has the right to a 33.3% participation in any additional leasehold we acquire in the joint venture area of mutual interest at cost plus a fee.

And there are others, including with fellow independent operator types like PXP. These arrangements have much the same effect as straight-up bid rigging - if I know I can buy half the property from you at whatever you paid for it, and you can buy half from me at whatever I paid for it, I don't have much cause to outbid you - but come with a pleasing patina of non-nefariousness that makes them okay.

Or doesn't. The market seems unimpressed by this defense - Chesapeake was down 8.5% today and EnCana was down over 4% - as does a lawyer Reuters spoke to, who said "Nothing in the documents suggests any benefit to the joint venture other than making the price fall .... If it has no other purpose, then it's just a shell and doesn't change the liability for illegal conduct." Of course if there was another purpose - like, say, EnCana paying for participations in existing Chesapeake properties so that Chesapeake could continue to finance its business - then it might be okay, leading to the irony of Chesapeake maybe getting in criminal trouble for the one time it didn'tsell off rights to its drilling for immediate cash.

You can feel for the Cheseapeakers: after years of selling off participations in all of their properties, negotiating those participations became second nature. And if they rushed to get those agreements done before the next land auction, so as to keep down the prices in that auction ... and if they, um, emailed each other saying explicitly that that was their goal ... well, who can blame them? Their lawyers, I guess, and federal prosecutors, and everyone who knows not to put bad shit in email, but other than that who can blame them?

Chesapeake's shenanigans seem sort of ... middle-of-the-road dumb as bid-rigging goes? If you want a good tale of super-dumb bid-rigging, at the cost of exceeding your yearly allowance of overheated rhetoric,** there is this fun account of muni GIC bid-rigging, which ... I mean, there were not a lot of legitimate joint ventures going on there, and there were a lot of "I hope no one listens to these obviously recorded conversation"-type conversations, so, pretty dumb.

On the other hand ... are you excited for the private equity bid-rigging trial? That has always struck me as a stretch - private equity firms teamed up to bid on big buyouts because they needed to in order to get those deals financed, not to keep down prices, and in any case surely they wouldn't be so dumb as to send emails saying otherwise, but maybe I was wrong:

The shareholders claim to have a “smoking gun” e-mail from an executive at one PE firm clearly outlining a deal in which one firm would not enter a bid in a particular takeover in return for the executive’s firm not entering a bid in a separate takeover.

The evidence is that explicit, said one PE source involved in the case.

The source added, “There are more than one or two communications that they [the PE firms] are not going to want to show a jury.”

Let's hope so, though after Chesapeake's smoking H-bombs it's hard to imagine going back to a world where a smoking gun email would impress anyone.

Special Report: Chesapeake and rival plotted to suppress land prices [Reuters]
The Scam Wall Street Learned From the Mafia: How America's biggest banks took part in a nationwide bid-rigging conspiracy - until they were caught on tape - DUN DUN DUN [Rolling Stone / Matt Taibbi]
Tell it to the judge: PE price-rigging case moving ahead [NYP]

* Later the same former antitrust lawyer/current unpublished hardboiled detective novelist says "It's what the prosecutor puts up in a PowerPoint presentation for the grand jury. It would take a Hail Mary pass to defend that," and I picture Tim Tebow running into the courtroom and hurling a football at the PowerPoint projector and, yes, okay, that could work.

** Harry First, however hard you try you will never be Matt Taibbi:

In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business. What's more, in the manner of old mob trials, Wall Street's secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices. The new-age gangsters even invented an elaborate code to hide their crimes. Like Elizabethan highway robbers who spoke in thieves' cant, or Italian mobsters who talked about "getting a button man to clip the capo," on tape after tape these Wall Street crooks coughed up phrases like "pull a nickel out" or "get to the right level" or "you're hanging out there" – all code words used to manipulate the interest rates on municipal bonds. The only thing that made this trial different from a typical mob trial was the scale of the crime.

Oh and also the lack of murders! And that it was about shaving a few basis points off the interest rates on municipal GICs!