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An Agricultural Law Research Article

Lysine: A Case Study in International Price-Fixing

by

John M. Connor

Originally published in CHOICES 13:03 CHOICES 13 (1998)

www.NationalAgLawCenter.org

CH( ll( 1.\ Third QUemer 1998 13

LVSINE A Case Study in Intemational Price-Fixing

n 14 October 19% in L.S. Disrrict Court in able cartel rhat could easily have gone underecred. by John M. OChicago, Archet Daniels ~ lidland (AD~ I) com­ Company managers will no doubt norice thar rhe Connor pany pleaded guilty to price'-tlxi ng in the' world penalties for and chances of being caught fixing prices market for the amino acid lysine'. In rhe' pica agrcc­ have escalared as a direcr result of rhe lysine episode. ment, ADM and rhree Asian lvsinc manufacrurers Here I chronicle the operarion of rhe 1992-95 lysine admirred to rhree felonies: colluding on lvsinc prices, conspiracy and idemity a number of key legal, eco­ allocating the volume of lysine to be sold b;· cach nomic' and managemem issues raised by rhe episode. manufacturer, and participating in meetings to monitor compliance of cartel members (Dept. of The market for lysine Justice). A corporate officer of ADM testified rhat Lysine, an essential amino acid, srimulares growrh his company did not dispute rhe facts contained in and lean muscle development in hogs, poultry, and the plea agreement. In addition to precedent-set­ fish. Lysine has no subsrirures, bur soybean meal ting fines paid by the companies, four officers of also contains lysine in small amounts. Somerime in these companies pleaded guilry and paid hefty fines, rhe 1%Os, Asian biorechnology companies discov­ while four more managers have been indicted and ered a fermentarion process rhar converts dextrose face probable fines and jail sentences for their lead­ into lysine ar a much lower cosr than conventional ing roles in the conspiracy. exrraction merhods. (Documentarion of rhese and The lysine price-fixing episode was one of the other tacts can be tound in Connor 1998a and in largest, best documented, and most important pros­ orher publications lisred in "For More Informa­ ecutions in modern times under the Sherman Act of rion"). By rhe 1980s, rhey were importing large 1890. The lysine cartel was striking in its comprehen­ quantiries of dextrose from U.S. wer corn millers sive multinational dimensions. Both the structural char­ and exporting high-priced lysine back [() the Unired acteristics of the world lysine market as well as the Srares. ADM became rhe largest U.S. manufacturer corporare management culrures of the principal con­ of lysine in February 1991 and quickly gained about spirarors helped tacilirare collusive selling behavior for half of rhe U.S. market. U.S. lysine consumprion abour rhree years. Amirrusr officials have learned how grew 10 percent per year in rhe 1990s. The U.S. easy ir was for four derermined companies wirh sales marker reached sales of $330 million in ] 995: world spanning tlve cominems [0 organize a highly profir­ sales totaled $600 million. 14 CHOICES Third Quarter 1998

Archer Daniels Midland of farm-state Congressmen and Senators, especially ADM is a large and diversified company. In flscal and Robert Dole. Since 1979, year 1995, ADM had consolidated net sales of$12.7 Andreas and ADM have contributed more than $4 billion (ADM). During 1986-95, ADM's net sales million to candidates for national offlce or rheir had increased by 10.1 percent per year. ADM's parties. ADM has benefitted greatly from the U.S. major divisions are oilseed and corn starch prod­ sugar program and from federal ethanol subsidies ucts. The corn products division produces corn and usage requirements (Bovard). sweeteners, corn starch, alcohols, and a host of bio­ technology products. Within the corn products di­ Economic conditions facilitating vision, fructose and ethanol are mature or matur­ price-fixing ing industries with slow growth and narrowing mar­ Standard industrial organization textbooks and sur­ gins: however, the other bioproducts from corn gen­ veys provide checklists of market conditions that are erate much higher margins. During 1989-95, ADM known from economic theory or industrial experi­ invested $1.5 billion in its bioproducts division. ence to encourage overt cartel behavior. With one or two exceptions, the lysine market exhibits all the necessary conditions that facilitate price-flxing. First, market sales concentration was very high. The lysine cartel consisted of four manufacturers that produced 95 percent of the world's feed-grade lysine. During 1994, ADM supplied 48 to 54 percent of the U.S. market. Second, lysine is a perfectly homogeneous product. Third, technical barriers to entry are high. Plants are highly specialized in production (imply­ ing large sunk costs of invesrment), and rheir sizes are large relative to marker demand. Parents and technological secrecy impede entry. Fourth, marker power is difficult to exercise when accurate price reporting mechanisms exist, such as auctions in public exchanges. Domestic lysine prices are almost completely hidden from public view. Fifth, lysine purchases were large and infrequent. Animal­ feed manufacturers purchased lysine by the ton. Large and lumpy orders are easier for a cartel to monitor for compliance than are frequent, small transactions. Finally, the conditions necessary to develop tacit collusion in the lysine market were absent. Tacit pricing cooperation (which is rarely prosecuted) de­ For a company of its size and diversity, ADM is velops from companies with years of experience in managed by a remarkably small number of manag­ observing strategic moves and countermoves in an ers (Kilman and Ingersoll). Dwayne Andreas and a few top offlcers reportedly made all major strategic decisions from 1970 to 1997. Until late 19%, rhe ADM board contained a large majority of current Antitrust officials have learned how and former company offlcers, relatives and long­ easy it wasforfour determined standing close friends ofAndreas, or offlcers of com­ panies that supply goods and services to ADM. companies with sales spanningfive Andreas cultivated the image of an international continents to organize a highly statesman primarily concerned with world hunger and national food security. His official biography profitable cartel that could easily credits him as one of the major forces behind the PL 480 Program (Kahn). He is identified as Armand have gone undetected. Hammer's successor, by becoming rhe U.S. capi­ talist with the closest relationship with Kremlin and other Eastern Bloc leaders in the 1980s. Andreas industry. ADM's large-scale entry abruptly has builr a legendary network of powerful business reconfigured the nascent lysine industry. The ab­ and government contacts since the 1960s. He was sence of a long period of business interaction means close friends with and contributor to a wide array that tacit cooperation could not be learned. whereas (H( )ICES Third Quarter 1998 15 the advantages of forming a cartel can be appreci­ shares across several regions of the world. ated quickly. When ADM's new plant came on The conspirators apparently were successful in stream in 1991, ADM cut U.S. lysine prices from raising rhe U.S. price of lysine to $0.98 for three $1.30 per pound to the $0.60 to $0.70 range and months (November 1992 to January 1993). From kept those money-losing low prices for about a year. October 1993 to August 1994, prices held at a The Asian exporters of lysine were losing more steady $1.08 to $1.13 and then rose again to about money than ADM because their facilities were $1.20 for another six months. Industry output smaller and older, their dextrose supplies were more growth was constrained to half its historical rate. A costly, and trans-Pacific transportation COStS were year after the conspiracy ended in late 1995, U.S. significant. ADM's willingness to accept and inflier lysine exports doubled. losses in pursuit of a large market share may have persuaded the Asian exporters of the superior prof­ itability of a cartel arrangement. ADM's willingness to accept In sum, nearly all of the market preconditions for price-fixing were met for lysine. The major ex­ and inflict losses in pursuit of ception is the surprisingly pluralistic composition a large market share may have of the conspirators and their globe-girdling loca­ tions. Cultural diversity and geographic distance persuaded the Asian exporters can no longer prevent effective collusion among multinational corporations, if in fact they ever did. ofthe superior profitability ofa cartel arrangement. Price-fixing: chronology and mechanics By the late 1980s, Ajinomoto, Kyowa, and one Whiracre was recruited by the FBI as a secrer in­ South Korean compan:' (Sewon) were exporting formanr (a "mole") in November 1992. Up until June about 530 million of l\'Sine per year to the United 1995, he provided hundreds of audio tapes of many States and charging 51.00-52.00 per pound, much price-fixing meetings concerning lysine, ciuic acid, less rhan U.S. organiL' L'hemicll companies were and fructose. The FBI secrerlv made additional video charging for extraered l\'Sine. Then, ADM discov­ tapes of the "lysine associarion" meerings. A federal ered why Asian biotechnolog\' companies were buy­ grand jury was formed in Chicago in early June of ing so much dexrrose from rhe Lnitcd States-ir is 1995 and obtained subpoenas for all information on t~rmenrarion. the raw material tor Ivsine. madt' lw. price-fixing by ADM and its co-conspirators. In 1989, ADM commirrt'd an initial 51 'iO million More than 70 FBI agents raided ADM's corpo­ to build the world's largesr Iysint' EKton' in Decatur, rate offices in Decarur, , on the nighr of 28 Illinois, and hired thirty-two-ycar-old biochemisr June 1995: many ADM officers were interviewed Mark Whiracre to direer rhe nnv [nine division. in rheir homes rhat night as well. Seized docu­ Produerion began in February 1991, and ,I "uc­ menrs show 1992-95 "sales targets" and "actual mendous price war"erupred (Whiracre). The U.S. sales" by all members of the lysine association. price dropped from $1.30 in 1990 (or S1.20 in Documen ts were subpoenaed from many other January 1991) to a record low of $0.64 in July firms as well. In the three monrhs f()llowing, ADM's 1992. ADM's cosr of produerion is, reportedly, be­ srock price fell 24 percent ($2.4 billion of market tween $0.65 to $0.70 per pound when rhe plant is value). Ar its Ocrober 1995 stockholders' meeting, operaring as designed. Ar selling prices near $0.60 Chairman Andreas did not allow discussion of the ADM was losing millions of dollars per month in price-fixing charges. By February 1996, ADM had its lysine operarions. Asian producers were suffer­ a total of ar leasr eighry-tive suits filed againsr it, ing even grearer losses per ton. fourteen by lysine buyers and many others by stock­ Abour rhis rime, the lysine division was placed holders claiming mismanagement and failure to di­ under ADM Vice President Terrance Wilson. [n vulge marerial informarion. April 1992, Wilson and Whiracre mer wirh In the spring of 1996, the Department of Ajinomoto and Kyowa Hakko in Japan where rhey Justice's criminal case was beginning ro Ldter. proposed rhe formarion of an "amino acids trade No indierments had yet been filed. The Depart­ associarion." By rhis rime ADM controlled one­ ment of Justice was targeting Execurive Vice rhird of rhe world market. In June 1992, rhe firsr President Michael Andreas and Terrance Wilson of many meerings of the "lysine associarion" lOok for criminal charges, but not a single ADM of­ place in Mexico Cirv. The rhree companies (and ticer offered [() corroborare rhe evidence. The larer anorher Somh Korean company) discussed rais­ Asian companies also refused ro cooperate. More­ ing prices, allocaring producrion, and serring sales over, Whitacre's credibiliry was rarnished by his pi 16 CHO!CF" lhird Quarter J ')9H

own admission that, while an FBI mole, he de­ guilty to criminal price-fixing, to pay a $70 million frauded ADM of $9 million. federal fine for its lysine activities. and to fully co­ In April 1996. ADM, Ajinomoto. and Kyowa operate in helping the Department of.J ustice pros­ offered to pay "civil damages" of $45 million to ecute Michael Andreas and Terrance Wilson. N u­ the class of buyers of Ivsine during 1994-95. Tech­ merous changes in ADM's Board of directors oc­ nically, the three companies were not admi rring curred soon after: Michael Andreas was placed on that they were guilty of price-flxing. The class was "administrative leave"; Terrance Wilson resigned; represented by a Philadelphia law firm that made and Dwavne Andreas was relieved of his duries as the lowest fixed-fee bid in an unusual auction held CEO (though he keeps his title of chairman). by a U.S. 7th District Court judge. The judge re­ fused to consider bids based on conventional per­ centage contingency fees. Buyers had three months Buyers had three months to decide to decide whether to accept an assured part of the $45 million settlement immediately or to "opt-out" whether to accept an assuredpart of of the agreement and possibl:' win larger settle­ the $45 million settlement ments in the future. Based on a damage estimate that was ten to twelve times higher, thirty-two large immediately or to «opt-out" ofthe companies did, in tact, opt our. The judge was agreement andpossibly win larger criticized for rushing to judgment civil penalties that normally follow the completion of the crimi­ settlements in the fitture. Based on a nal case. Law firms operating under fixed fees have incentives to setrle quickly rather than to wrest big­ damage estimate that was ten to ger settlements through protraered negotiations. twelve times higher, thirty-two large In a shocking setback for ADM. in August 1996 the three other lysine co-defendants "copped a plea." companies did, in fact, opt out. In return for lenience, the three Asian companies filed guilty pleas, and three of their executives ad­ mitted personal guilt and agreed to testify against The criminal fines and civil damages have COSt ADM. Now isolated, ADM's lawyers began to ne­ the guilty parties at least $159 million in the case gotiate in earnest with the Department of Justice. of lysine alone as of late 1997. Legal costs are around On 14 Oerober 1996, ADM also agreed to plead $76 million for lysine and other commodities, and shareholders' suits were serried for $38 million by $1 ADM. The total monetary costs for price-fixing,

~ 2.3 ~. ~ ~ mismanagement. and fraud for all three products 2.2 Ceiling Price--!\ j ~ (lysine, citric acid, and fructose) are $600 million 2.1 , \ iH and rising (Connor 1998a).

ceived even larger discounts because they agreed to pattly the tesult of entty of wet-corn millers into cooperate with prosecutots two months before the traditional synthetic organic chemicals indus­ ADM did. The size of the discount awarded to the try, which had sales of nearly $100 billion in 1995. lysine producers for their good behavior is not These products include food ingredients (such as known but could be as high as 50 percent. In addi­ sorbi toll. feed ingredients (tryptophan), and tion, the Department of Justice agreed to forgo medicinals (ascorbic acid). For most specialty or­ prosecuting ADM for its role in the potentially ganic chemicals, only one to three domestic pro­ larger corn-sweeteners case. Thus, the $70 million ducers are active. For example, in 1994 ADM was lysine fine is a minimum indicator of the true over­ one of three U.S. manufacturers of lactic acid, so­ chatges incurred by buyers of lysine. dium lactate, and methionine. As wet-corn millers Given ADM's share of the lysine market, one continue to move into these specialry chemical mar­ can infer that the total overcharge on direct buyets kets with their high sales concentration, the oppor­ of lysine was at least $65 million, but it could have tunities for price-fixing will increase. been as high as $140 million. Sales oflysine duting The lysine conspiracy resulted in far-reaching the conspiracy were about $495 to $550 million, changes in ADM's governance structute and leader­ so the conspiracy raised U.S. lysine prices by 12 to ship. Five of ADM's officers were facing criminal 28 percent above the competitive price. indictments in early 1998. The ADM board of di­ rectors has been transformed. Up until 1995, the Implications and final observations great majoriry of the seventeen board members were The lessons fot public policy and managers of mul­ insiders by anyone's definition. In 1996, eight insid­ tinational agribusiness firms are profound. A state­ ers on the board resigned, but not all of their re­ ment of U.S. Attorney Genetal Janet Reno on the placements pleased the stockholders. A resolution by day ADM pleaded guilty said in part, "This $100 institutional shareholders of ADM that would have million ctiminal fine should send a message to the imposed stricter guidelines in selecting outside di­ entire world." Measured by the widesptead atten­ rectors nearly passed at ADM's 1996 annual meet­ tion of the world's business press and by the sharp ing. In April 1997, Dwayne Andreas relinquished reaction of ADM's stock prices, she is certainly his title of CEO to his nephew, G. Allen Andreas. right. The lysine settlements demonstrate that the Antitrust prosecutors tend to target companies price of price-fixing has suddenly gone up. More­ like ADM that lead their industry. Targeting high­ over, the chances of being caught are now higher profile companies is a wise use of constrained ad­ than ever (Bingaman). Dozens of investigations of ministrative resources because it increases the de­ international price-fixing have since been launched terrence effect. Moreover, the Department of Jus­ by federal authorities, and a new era of multilateral tice imposed sanctions on ADM that have mark­ coordination among the world's antitrust agencies edly changed the rules of the price-fixing gambit. has begun (Connor 1998b). Since 1996, price-fixers have faced public penalties and private damages that are five times their illegal profits, far higher than their previous exposure. If The crimintzlfines and civil the "two-times" rule for fines is fully applied, then patient private plaintiffs will have a clearer guide to darnages have cost the guilty parties the treble damages they may seek. Thus, the new at least $159 million in the case of penalty guidelines could lower the negotiation costs of private antitrust suits. lysine alone as oflate 1997. Legal Perhaps the most important lesson of the lysine costs tlre tlround $76 million jf}r conspiracy for antitrust enforcers is the ease with which an international cartel was formed and ex­ lysine and other commodities) and ecuted. The two smaller lysine producers claimed that they were coerced into joining the cartel by shareholders'suits were settledflr leaders ADM and Ajinomoto, and leaked tapes of $38 million by ADM. the price-fixing meetings corroberate the charge (Eichenwald). With just two or three top managers from each company attending meetings around the The antitrust agencies have reason to monitor world every few months, the conspirators were able wet-corn millers closely for price-fixing. Lysine and to arrive at complex allocations of production from citric acid are but two of a long list of synthetic at least six plants, exports from three countries, organic chemicals now being made by ADM and and sales to five continents that were, if not opti­ other wet-corn milling companies. The rapid growth mal, highly profitable. The cartel hung together in of specialty chemicals made from corn starch is the face of gyrating and uncontrollable soybean and CHt lit h Third Quarter 1998 19 corn prices and a presumptive cultural chasm be­ Bovard, ]. Archer D{miels Midland: A Case Stlld.y in tween ADM and its three co-conspirators. Were it Corporate Welfare. Policy Analysis No. 241. Washing­ not for a well-placed whistle-blower, the lysine car­ ron DC: The Caro Institute, September 1995. tel might still be in full operation today. Connor,].M. Archer Dill/ieis Midland: Price Fixer to the World. Staff Paper SP 98-10, Department ofAgricul­ Given ADM's share ofthe tural Economics, Purdue University, May 1998a. lysine market, one can inftr that --.The International ConvetgenceofAntitrust Laws the total overcharge on direct buyers and Enforcement. Rev. Antitrust Lawand Econ. in press, oflysine was at least $65 million, 1998b. but it could have been as high as Department of]ustice. "Archer Daniels Midland Co. ro Plead Guilty and Pay $100 Million for Role ill Two $140 million. Internation~1 Price-'Fixing Conspiracies [Online]." (Available online: http://www.usdoi.gov/gopherdata/ au/press_releases/I 996press/508ar.htm). Because it was an international conspiracy, over­ charges as large as those in rhe were Eichenwald, K. "The Tale of the Secret Tapes: Bizarre very Iikelv incurred by buyers of lysine in other and Mundane !\·1ix at Archer Daniels." Times. ~id an~itrust pa;ts of rhe world. In i 997, authori­ 16 November 1997, pp. 3-13, Sec. 3. ties in the European Union and Mexico opened duplicative investigations of lysine price-fixing. The Kahn, E.]. SlIpemuaketer to the World: The Story of' multinational character of the lysine conspiracy un­ Dwa}ne Andretls, CEO ofArcher Daniels Midl{wd. New derscores the need for multinational legal approaches York: Warner Books, 1991. (Connor 1998b). Recent court decisions make it clear that U.S. authorities can seek redress from Kilman, S., and B. Ingersoll. "RiskA Verse." Wall Street off-shore conspiracies that affect U.S. trade or do­ jOllrtl,d, 27 Ocrober 1995, pp. AI. mestic commerce. However, effective national pros­ ecution is unlikely unless the rarget companies own Page, \VH., ed. Prol'ing Antitrust Damages: Legal '/Ild significant assers in the affected nation's territory. Economic Issues. Chicago: American Bar Association, Bilateral antitrust protocols have been signed and Section of Antitrust Law, 1996. formal annual meetings have recently begun among the U.S., Japanese, European Union, and other an­ Whitacre, M. "My Life as a Corporate Mole for the titrust agencies, but so far cooperation is limited to FB!." fortune, 4 September 1995, pp. 52- 68. gathering and sharing of information. It is difficult to envisage a legal structure that would permit mul­ The author assisted a few lysine bu}ers in estimating the tilareral prosecutions of international cartels. (jJ overclMrges thi'} ma} have incurred as a result of the conspir{/{y. Allstatements offict in this article are based on • For more information publicry available materials, andallopinions expressedare Dr. Connor's own and not necessariry those ofany parry or Bingaman, A.K. "The Clinton Administration: Trends law}er involved in the legal proceedings discussed in this John M. Connor is professor of in Criminal Antitrust Enforcement." Speech before the article. The author thanks ja} Akridge, Mike Boehlje, Corporate Counsel Institute, San Francisco CA, 30 agricultural Peter Barry, Lee Schrader, Chris Hurt, and anon}mous economics at November 1995 (Available on-line: gopher:// reviewers of Choices for their construetil'e comments. Purdue justice12. usdo j.gov:70/00/au/talks/speech.n30). Purdue journal Paper No. 15439. University.