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Bain, Goldman Settlements A Cautionary Tale For PE Firms

Bain Capital Partners LLC and Goldman Sachs Group Inc. on Wednesday agreed to pay $121 million to resolve claims they teamed up to deflate prices in leveraged buyouts, and while experts say the move won't halt collaborative deal-making, it's a reminder for firms to keep themselves in check.

The investment firms — and several of their big-name rivals — have spent the past six years mired in a shareholder suit accusing them of holding back from competing on deals to give each other price breaks. The litigation names several “club deals” involving one or more private equity buyer groups.

Bain and Goldman agreed to dole out $54 million and $67 million in cash, respectively, to escape further legal wrangling and divert the spotlight to a string of other firms that remain locked in the suit, including Blackstone Group LP and KKR & Co. LP. By exiting the litigation, the firms can scrub themselves of the scandal, which threatened to mushroom into a potential detractor from their standing in the marketplace.

“One of the things that typically has distinguished, from a competitive standpoint, one PE firm from another is a reputation for fair play vis-a-vis the companies they're buying and the competitors they're teaming up with,” said Gabor Garai, who heads Foley & Lardner LLP's private equity and venture capital group. “Reputation is a currency and a value that's as important to PE firms as the money they put on the table and the expertise they bring to the companies.”

The lawsuit has yet to inflict much outward damage on the players accused in the scheme or the private equity industry in general, but a looming trial, scheduled for November, could hurt. Still, some of the remaining firms have explicitly said they plan to head to the courtroom.

So far, the parties named in the suit have handled allegations in briefs and other court documents, but a trial would drag charges into a more public forum. The proceedings would likely bring new information and dredge up existing evidence, including damning email correspondence unsealed two years ago.

“I think it would behoove them to settle rather than have it drawn out to a trial that would attract much more publicity than a settlement announcement,” said Jared Hershberg, a private equity partner at Winston & Strawn LLP. “They can pay $50 million and be done. They don't have to worry about any further exposure, bad publicity or additional regulatory pressure.”

For Goldman in particular, the settlement provides an easy out amid regulatory pressure to put distance between its core banking operations and its private equity offshoot. Down the line, Goldman will likely reduce or spin out its private equity operations to comply with the Dodd-Frank Act, which restricts lenders' outside investments.

“It's probably in their interest to pay something to get rid of [the lawsuit] because private equity businesses are going to disappear or get shrunk down,” said George Meierhofer, a securities expert and trial attorney at Kaufman Dolowich & Voluck LLP. “Diversified financial institutions are not going to want to litigate over what their private equity arms did in the past.”

Since the lawsuit was filed more than a half-decade ago, club deal activity has plummeted. Club deals, which had taken firm hold of the marketplace in the robust stretch between 2002 and 2007, fell off in large part because of the global financial crisis that upended healthy markets and iced over deal making in general.

These deals provided private equity outfits a pathway to enormous acquisitions in an unusually frothy market, but as M&A activity dried up, firms switched back to their more traditional go-it-alone method.

“What we're back to right now is a new normal, where private equity companies are on their own,” Meierhofer said. “That's partly influenced by the case, but it's more about the economic factors than the possibility of legal liability.”

But as the market picks up steam, leaving the recession in the dust, some buyers are pursuing different cooperative arrangements to lower risk, including co-investments alongside limited partners and collaborations across investment profiles, like with hedge funds or strategic suitors.

Whether club deals pick up appeal down the line or firms stick with alternative cooperative approaches, Hershberg said lessons from the current suit hold up — especially considering the upcoming trial would put more scrutiny on firms' internal operations and communication.

The case hinges on emails allegedly sent between firm leaders, sketching out an elaborate set of bidding rules that steered 19 deals between 2003 and 2009.

“The participants really need to, from square one, put in place proper internal controls and procedures, the right firewalls between the parties, and essentially create a record showing that there wasn't collusion,” Hershberg said.

The case's overall message should be one of caution for investment firms that will inevitably land under the microscope, experts say. Shareholder litigation is at an all-time high, and the purported collusion would fan general skepticism toward private equity, especially if the other firms go to trial.

“It's going to hopefully encourage private equity firms not to engage in what is anti-competitive behavior in other markets,” Garai said.

The plaintiffs are represented by David W. Mitchell, Patrick J. Coughlin, Randi D. Bandman, Susan G. Taylor and Phong L. Tran of Robbins Geller Rudman & Dowd LLP, David R. Scott, Christopher M. Burke, Walter W. Noss and Kristen M. Anderson of Scott + Scott LLP and Lisa A. Furnald, K. Craig Wildfang, Thomas J. Undlin and Stacey P. Slaughter of Robins Kaplan Miller & Ciresi LLP.

Bain Capital is represented by John D. Hanify and Michael T. Marcucci of Jones Day and Craig S. Primis PC, David R. Dempsey, James H. Mutchnik and Jennifer W. Cowen of Kirkland & Ellis LLP.

Goldman Sachs is represented by John D. Donovan Jr. of Ropes & Gray LLP and Richard C. Pepperman II and Benjamin R. Walker of Sullivan & Cromwell LLP.

The case is Kirk Dahl et al. v. Bain Capital Partners LLC et al., case number 1:07-cv-12388, in the United States District Court for the District of Massachusetts.