Anti-Trust Law Violations
A cement manufacturer and a distributor acquired competitors in a growth strategy. They aspired to increase market share, and eventually became the second-largest company of its kind in the southern United States. These acquisitions increased revenue but also brought more risk and liability. The company’s due diligence failures, and failures to create compliance programs that would mitigate risk set the company up for exposure to legal risks and liabilities.
All of the information in this case study comes from the Department of Justice press release and other articles referenced below.
State of the Industry
Many regional and national companies pursue a strategy of accelerated growth through mergers and acquisitions. These transactions enable those companies to leverage debt to provide higher rates of return on equity. Significant analysis goes into determining rates of return on capital, future growth projections, potential cost savings through the elimination of duplication of services, and other profit-related aspects of the acquisition. When companies limit their analysis to revenue growth, they often discount the importance of updating a compliance strategy that may mitigate potential liability.
With access to lower costs of capital, companies often pursue riskier deals in search of higher returns. High-debt levels come with risks. To satisfy debt obligations, the companies require more revenues. In an effort to satisfy cash flow requirements, companies sometimes make shortsighted decisions, like cutting compliance budgets.
Background and Analysis
Argos USA LLC, located in Alpharetta, Georgia, produces and sells ready-mix concrete. Argos is a subsidiary of Grupo Argos, a South American company with revenues of $4.1 billion and more than $13 billion in assets. Argos USA operates dozens of concrete plants in the eastern United States, with many in Georgia, the Carolinas, and Florida.
Argos USA accelerated its growth through an aggressive acquisition strategy. Argos acquired Lafarge Holcim for $760 million, and it acquired Lehigh Hanson for $660 million. Along with other acquisitions, Argos increased its capacity to supply cement per millions of tons per year.
As stated above, those deals made Argos the second largest cement manufacturer in the southern United States. Significant logistical challenges came with that growth, and it struggled to integrate a compliance program that would address those challenges.
In the case of Argos, they faced the continuous problem of competition and industry collusion.
With fierce competition, business executives sometimes ignore or overlook antitrust laws that forbid them from colluding to discuss pricing schemes. When one company executive conspires with an executive at another company to set prices for a product, authorities may bring criminal charges for violating the Sherman Anti-Trust law. Such allegations bring enormous risks to the company, and to the individuals involved.
The government began investigating Argos for its role in price-fixing between 2010 and 2016.
Price fixing occurs when an agreement (written, verbal, or inferred from conduct) among competitors raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor.
According to prosecutors, when consumers make choices about what products and services to buy, they expect that the rule of supply-and-demand sets price, not a secret agreement by competitors. The government believes that when companies enter into agreements to restrict competition, consumers suffer from higher prices. Authorities will investigate allegations of price-fixing and bring charges against organizations and people that violate antitrust laws.
At Argos, the government’s investigation focused on a small number of employees at a local sales office in Pooler, Georgia. The government asserted that these employees colluded with other ready-mix concrete companies to carry out a conspiracy. According to the charges, the executives conspired by raising prices to customers, assigning ready-mix concrete contracts between them, charging fuel surcharges and environmental fees, and offering products to customers at collusive and non-competitive prices.
On Sept. 2, 2020, a grand jury indicted Argos. The DOJ is also prosecuting two former company employees, Gregory Hall Helton and James Clayton Pedrick, from that Pooler, Georgia office. If found guilty, both Helton and Pedrick could potentially receive sentences of up to a decade behind bars.
Faced with mounting evidence, and the costs and uncertainties of litigation, Argos USA chose to settle with the Antitrust Division of the US Attorney’s office in Georgia. Argos USA entered into a Deferred Prosecution Agreement with the Justice Department. The terms of the agreement required Argos to pay a monetary penalty of $20,024,015.
In addition to the financial penalty, Argos USA agreed to cooperate in government investigations against its former employees and its former partners that participated in the price-fixing scheme. Further, it had to enhance the corporate compliance program and internal controls.
Willful blindness comes at a price. We recommend that corporate stakeholders make a bigger investment in helping law-abiding citizens understand the complexities of white-collar crime.
People in sales positions frequently pursue higher commission levels, or higher performance toward sales targets, without fully understanding the law. Their decisions on the job can bring massive exposure.
In the case of Argos, shareholders had to pay more than $20 million in penalties. It likely paid millions more in legal fees. Fortunately, the government did not indict the company on criminal charges, but the Deferred Prosecution Agreement did not immunize the business from the fallout. It had to cooperate against former employees and partners.
Compliance does not fit in a neat and easily definable box on business ledgers. Lack of compliance, however, elevates a company’s exposure to investigations and prosecutions. Companies would be well served by playing solid defense in order to preserve the rewards generated by an aggressive company growth strategy.
To avoid costly government investigations and legal settlements, we recommend that businesses bring in subject matter experts to analyze risks that are specific to the industry. Those subject matter experts would be positioned to assess potential risks for exposure to investigations that could lead to possible charges for white-collar crime.