Private Equity Firms Fail in Effort to Dismiss Antitrust Case

A federal judge has dealt a blow to the private equity industry, refusing to dismiss a lawsuit that accused firms of colluding to drive down the prices of corporate takeovers during the buyout boom, setting the stage for a possible trial in the five-year-old case.

But at the same time, the judge, Edward F. Harrington of Federal District Court in Boston, narrowed the lawsuit, suggesting in a ruling on Wednesday that the plaintiffs’ case was overly broad and had serious flaws.

The lawsuit was brought against 11 of the world’s largest private equity firms, claiming that they had participated in a plot to rig the market for more than two dozen multibillion-dollar takeovers of publicly traded companies and deprived the companies’ shareholders of billions of dollars. Shareholders filed the civil antitrust complaint in 2007 after the Justice Department began investigating possible price-fixing by the firms. The department has not brought any charges.

The case has been a cloud over the priate equity industry, and an expensive distraction, with many of the country’s most prominent buyout executives, including David Bonderman of TPG and Richard A. Friedman of Goldman Sachs, being required to sit for depositions. But with the ruling reducing the scope of the accusations, the firms could have leverage in any potential settlement talks with the plaintiffs.

“We are pleased the court has decided that there is no evidence of the overarching conspiracy plaintiffs have pursued for five years,” said Kristi Huller, a spokeswoman for Kohlberg Kravis Roberts, one of the firms named in the lawsuit. “We believe the remaining claim is without merit, and w! e will continue to contest it.”

Lawyers for the plaintiffs, which include a Detroit pension fund and a pair of doctors, also claimed victory.

“The plaintiffs are very gratified that the court has found that there is clear evidence of the overarching conspiracy to rig the going-private transactions the plaintiffs have identified,” said K. Craig Wildfang, a lawyer for the plaintiffs, who are former shareholders of the businesses acquired by the firms. “We look forward to putting this evidence to a jury.”

At the center of the case are “club deals,” which were popular during the leveraged buyout mania of the last decade. As the private equity takeovers grew to record sizes, the biggest firms pooled their money and began buying companies together. Companies that fell into private hands included the Spanish language broadcaster Univision, the retailer Toys “R” Us and the lodging giant Hilton Worldwide.

The plaintiffs call this period “the conspiratorial era.” They argue that behind the acquisitions were stealth agreements among the private equity firms to divvy up the big deals among themselves to artificially â€" and illegally â€" tamp down their prices. Essentially, the plaintiffs contend, there was a secret quid pro quo arrangement: If you don’t bid on my deal, I won’t bid on yours.

Private equity firms insist that there was spirited competition for these deals and others.

The judge essentially agreed with the thrust of their argument, concluding that there was no grand conspiracy across all the megadeals.

“Even where the evidence suggests misconduct related to a single transaction, there is largely no indication that all the transactions were, in turn, connected to a market-wide agreement,” Judge Harrington wrote. “Rather, the evidence shows a kaleidoscope of inter! actions a! mong an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market.”

The judge also expressed frustration with the plaintiffs for refusing to reduce the scope of their claims, which accused the firms of colluding on 27 deals. He said the expansiveness of the lawsuit “nearly warranted its dismissal.” He dismissed the case against one of the defendants, JPMorgan Chase, ruling that the evidence did not establish that it was in the business of takeovers.

Yet Judge Harrington decided that there was enough evidence to survive the private equity firms’ motion to throw out the lawsuit. He highlighted what he said were several important pieces of evidenc that demonstrated problematic behavior among the firms. Among them were comments from unnamed executives at Goldman Sachs and TPG in reference to the $17.6 billion takeover of Freescale Semiconductor by a consortium led by the Blackstone Group and the Carlyle Group.

The Goldman executive said that no one sought to outbid the winning group because “club etiquette” prevailed. And the TPG official said, “No one in private equity ever jumps an announced deal.”

“The term ‘club etiquette’ denotes an ac! cepted co! de of conduct between the defendants,” the judge wrote. “The court holds that this evidence tends to exclude the possibility of independent action.”

Judge Harrington also singled out the $32.1 billion buyout of the hospital chain HCA by K.K.R. and others â€" a deal that has proved to be hugely lucrative â€" as particularly problematic. K.K.R. expressly asked its competitors to “step down on HCA” and not bid on the company, according to an e-mail in the case that was written by Daniel Akerson, then a partner at Carlyle and now the chief executive of General Motors.

The judge also pointed to an e-mail sent by Hamilton E. James, the president of Blackstone, to his colleagues just after the Freescale deal was announced about Henry R. Kravis, the co-founder of K.K.R. and a frequent rival to Blackstone when competing for deals.

“Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Mr. James has been among the most vocal critics of the shareholder action, scoffing at the idea that Blackstone was secretly in cahoots with its rival firms to suppress deal prices. “This lawsuit is a complete fabrication and a bunch of malarkey,” Mr. James said during an investor call last fall.

The plaintiffs must cross several hurdles before a case could go to trial. The judge still must certify the plaintiff shareholders as a class, a ruling that would largely determine the scope of potent! ial damag! es. Plaintiffs are seeking billions of dollars in compensation.