Friday, August 8, 2008

Incentives and Disincentives for Insiders to Expose Unlawful Cartels

Although unlawful cartels are increasingly recognized as causing substantial public harm, little has been done to create incentives for insiders to expose employers engaged in criminal antitrust activity. Some authorities have suggested that antitrust whistleblowers be rewarded for their information with a share of the criminal or civil antitrust fines collected by the government. The experience of Martin McNulty, my firm’s client, helps demonstrate the skewed incentive structure of the current system, and the need for such a program.

Potential Role of Insiders in Exposing Conspiracies - Price-fixing and other criminal cartels are by their very nature covert, and cause substantial harm to the public, often measuring in the tens or hundreds of millions of dollars. In order to effectively fight these secret conspiracies, a wide range of tools are needed. One important and effective tool is a corporate insider, who has access to information concerning a criminal conspiracy and therefore has the ability to expose and derail the conspiracy by providing this information to the government. When working with the government, corporate insiders serve as “informants” and often assist in exposing criminal conspiracies by tape recording conversations and meetings, and providing documents and other information to the government. One dramatic example of a corporate insider working with the government is Mark Whiteacre, whose inside information exposed a massive antitrust conspiracy and led to hundreds of millions of dollars in fines and civil recoveries. His story was captured by Kurt Eichenwald in a fascinating book called The Informant, which is being made into a movie starring Matt Damon and is scheduled for release in March 2009.

Insiders Have Disincentives to Expose Criminal Cartels - It is relatively rare for insiders to expose to the government their employers’ participation in a conspiracy, as the incentives are aligned against it. If insiders cooperate in the cartel, they will likely receive – either directly or indirectly – a portion of the company’s ill-gotten gains.

By contrast, becoming an informant to the government “can expose the private party to physical danger, professional retaliation, and social stigma, as well as require an expenditure of time and emotional capital in detecting behavior, sharing information with prosecutors, or testifying as a witness in judicial proceedings.” William E. Kovacic, Private Monitoring & Antitrust Enforcement: Paying Informants to Reveal Cartels, 69 Geo. Wash. L. Rev. 766 (2001). According to one study of whistleblowers in general, over 80 percent of those who reported misconduct to outside authorities were fired, and over half reported deterioration in their family relations.

Martin McNulty’s Experience Illustrates Incentives Not to Inform - My firm’s client, Martin McNulty, learned first-hand not only about the rewards he could have received from a criminal cartel, but also about the disincentives of exposing the cartel to the government. According to the Complaint my firm recently filed on his behalf, Mr. McNulty was terminated from his job because of his refusal to participate in his employer’s criminal conspiracy. After he was fired, Mr. McNulty allegedly indicated that he planned to speak to government authorities, leading his former employer to offer him large sums of money if he returned to work and did not follow through with his plan to cooperate with authorities. Mr. McNulty refused.

As a result of refusing to participate in his employer’s conspiracy, Mr. McNulty alleges that he not only lost out on the offered payments, but that he was also blackballed by the industry. He was socially isolated, was unemployed for several months, and was eventually forced to take a lower-paying job in another industry. Mr. McNulty eventually lost his house to foreclosure, and has suffered through difficult times for himself and his family. Although anecdotal, the economic pressures he felt are probably typical of potential antitrust whistleblowers – the offers of economic rewards for participating in the cartel, and the threat of economic punishment for refusing to participate and for cooperating with authorities.

Incentives Should Be Realigned to Encourage Antitrust Whistleblowers - While whistleblowers are entitled to rewards under the federal False Claims Act, those rewards only apply to recoveries for false or fraudulent sales to the government. If an antitrust conspiracy does not affect sales to the government, then a whistleblower may have no economic incentive to cooperate.

In order to re-align the incentives for antitrust informants, I support a rewards system for antitrust informants along the lines proposed in 1997 by the current FTC Chairman William Kovacic, including the following procedural elements:

  • The informer's data would be presented in writing to the DOJ.

  • The amount of the informer's bounty—ranging up to as much as 25 percent of all recovered fines and civil penalties—would be set ex post in a court hearing and would be adjusted downward where the informer has helped organize or execute the scheme.

  • Informers would be protected by anti-retaliation safeguards.

  • Informers could be represented by counsel, who would be entitled to the payment of reasonable attorneys’ fees and costs for assisting the informer.

  • Defendant organizations could pursue counterclaims for contribution against informers for their participation in illegal collusion.

  • Experimentation with such a mechanism might run for ten years and would sunset unless reauthorized by Congress.
See William E. Kovacic, Antitrust Policy and Horizontal Collusion in the 21st Century, 9 Loy. Consumer L. Rep. 97, 105-06 (1997).

Economists and Academics Advocate Antitrust Rewards - FTC Chairman Kovacic is not the only advocate of such rewards. A paper recently presented to the American Antitrust Institute recommends adopting an antitrust reward system for individual whistleblowers, arguing that such a program “would probably spur more cartel discoveries.” See John Connor, American Antitrust Institute, Working Paper #08-02, The United States Department of Justice Antitrust Division’s Cartel Enforcement: Appraisal and Proposals (June 10, 2008) (.pdf download). Similarly, the Anti-Cartel Enforcement Manual published in May 2007 by the International Competition Network points out that “a cartel informant reward program . . . can facilitate the gathering of evidence or information about cartels with minimal effort and cost, and can also help to deter cartel behavior.” In addition, economists and other academics favor the idea. See, e.g., Vivek Ghosal, Cartels in the EU (arguing that whistleblower rewards “could play havoc with their incentives”); Christopher R. Leslie, Cartels, Agency Costs, and Finding Virtue in Faithless Agents, 49 Wm. & Mary L. Rev. 1621, 1623 (2008) (“[A]ntitrust law should reward individuals who expose cartel activity . . . by paying antitrust bounties . . . .”); Cecile Aubert, Patrick Rey, & William E. Kovacic, The Impact of Leniency and Whistle-Blowing Programs on Cartels at 8 (2006) (“To induce firms to report collusion, the antitrust authority needs in general to offer a ‘reward’ . . . large enough to outweigh the punishment from retaliation.”).

Other Countries Have Begun Implementing Antitrust Rewards - There are precedents for implementing such a whistleblower rewards program. The False Claims Act offers whistleblower rewards for information about fraud on the U.S. government, including bid-rigging cases. Although it has been criticized in some respects, the False Claims Act has been very successful overall by creating incentives to expose fraud on the government and has resulted in the United States recovering billions of dollars in false or fraudulent claims that it might not have been able to recover otherwise.

Moreover, the rewards program that I advocate here would be similar to whistleblower rewards programs that have recently been implemented in South Korea beginning in 2002 and the U.K. beginning in March. (In an earlier blog post – which pre-dated my representation of Mr. McNulty – I suggested that the U.S. follow their lead. South Korea considers its program successful, stating that the number of reports it has received of cartel activity increased after it raised the ceiling for the amount of awards offered.

Conclusion - In sum, the existence of more whistleblowers like Marty McNulty or Mark Whiteacre would be a strong deterrent against antitrust conspiracies, as the likelihood of getting caught would significantly increase. Unless the incentives for potential informants are changed, however, there is no reason to think that the number of whistleblowers will increase. Offering informants a small percentage of the fines collected by the government would be a worthwhile investment, and would benefit consumers and taxpayers nationwide.

Related Stories: Kotchen & Low LLP Sues Packaged Ice Manufacturers on Behalf of Former Party Time Ice Executive Martin McNulty; Considerations for Individuals Who Refuse to Participate in Illegal Business Practices.


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