DETROIT (Oct. 7, 12:35 p.m. ET) — The U.S. government's prosecution of Japanese supplier Furukawa Electric Co. should have the worldwide supply chain on edge as more charges are likely, legal experts say.
Last week, Furukawa announced it would pay a $200 million fine, and three of its executives will appear before a judge in U.S. District Court in Detroit to plead guilty for their role in alleged global price-fixing among automotive wire-harness suppliers on three continents.
The U.S. Department of Justice confirmed the fine is the largest judgment that its antitrust division has obtained from a Michigan prosecution or an automotive company — and it could rank among its top 10 fines of all time.
Lee Goldman, professor of antirust law at the University of Detroit Mercy School of Law and former litigation attorney for the Federal Trade Commission, said Furukawa's plea deal should have other suppliers worried.
“It tells me that the rest of the companies are in big trouble, because if [Furukawa] is admitting collusion they couldn't collude by themselves. If they're pleading guilty, they can't plead the Fifth Amendment anymore on the witness stand if and when someone is tried.”
As part of the prosecution, three local employees of Furukawa will plead guilty to violating the Sherman Antitrust Act and serve time at U.S. prisons under an agreement with the Justice Department — serving between a year and 18 months. The employees are Hirotsugu Nagata, former CFO of U.S. subsidiary American Furukawa Inc., and Junichi Funo and Tetsuya Ukai, both former managers in American Furukawa's Honda sales division.
Furukawa's North American subsidiary, American Furukawa, took the first blow as a result of the 20-month investigation, but the FBI raided several suppliers in relation to antitrust regulations.
In February 2010, Japan's Fair Trade Commission raided the Tokyo offices of Furukawa, Sumitomo Electric Industries Ltd. and Yazaki Corp. as part of an expansive investigation into alleged collusion dating back to at least 2003.
Around the same time, FBI agents raided the North American headquarters of Japanese subsidiaries Yazaki North America Inc. in Canton Township, Denso International America Inc. in Southfield and Tokai Rika Group North America in Plymouth Township. The European Commission also conducted similar unannounced inspections of TRW Automotive Inc.'s and Southfield supplier Lear Corp.'s offices in Europe.
Back in the Detroit, the U.S. indictments didn't identify which suppliers colluded with Furukawa in the conspiracy or which customers were affected.
Spokesmen for TRW and Denso indicated the suppliers were involved in an ongoing investigation, but would not comment on whether it was related to the Furukawa case.
Mel Stephens, vice president of communications for Lear, said the company is involved in the wire harness business, but declined to comment whether it is directly involved in this case. He did say the breakup of antitrust practices is “a good thing for Lear.”
It's a strong possibility that one of the colluding companies cut an initial deal to help the feds, legal experts said. If so, it wasn't Furukawa.
Considering the size of the fine and the fact that the company itself pleads guilty along with the executives under the agreement with the Justice Department, it's more likely that someone else cooperated first.
David DuMouchel, an attorney at Butzel Long PC who leads the law firm's white-collar criminal defense, internal investigations and corporate compliance practice, could not speak to Furukawa, but said antitrust probes in general build on the cooperation of one or more companies who obtain amnesty or leniency for their own roles.
But a company seeking amnesty to avoid prosecution must be the “origin point” of information for investigators to build a collusion case. Amnesty deals may have exclusions or “carve outs” for the company's employees to face prosecution, but will protect the company itself.
“It [an investigation] usually snowballs, and there may be raids on a number of auto suppliers as we've seen,” he said. “If any company was raided then that raid was occasioned by a search warrant — and that was usually obtained from an affidavit requesting the warrant. And some of the facts attested to in that affidavit came no doubt from someone else who had cooperated earlier.”
Copping a plea
Law professor Goldman said the plea deal still offers advantages. Companies found guilty of collusion in court will likely face civil lawsuits with additional damage claims from their customers. Being found guilty at a criminal trial establishes “prima facie liability” for civil litigation purposes, where a plea means liability still has to be proven in civil court.
“[Collusion] doesn't happen all in one day. It's usually more gradual than that,” he said. “You usually see it take shape in an industry with a small number of competitors, and some significant entry barriers, like a high overhead cost or a minimum scale [for profitability]. Or you have some limited availability of resources like in minerals, or oil.
“And you have to be able keep it secret, and avoid the temptation to cheat on the agreement because you could make huge market gains if you come in a few cents under the others. So it has to cover a major share of the market.”
Sheldon Stone, partner at Detroit area restructuring firm Amherst Partners LLC, believes the growing price-fixing activity is a result of consistent pressure to cut prices from automakers combined with volatile economy.
“Is the root cause of this because they [Furukawa] were unable to make a profit on these wire harnesses because of what the [automakers] were willing to pay?” he said. “I'm not advocating what is going on here, it's criminal, but maybe this is a result or a symptom of the continual ratcheting down of prices in the supply base that has caused people to look at other avenues.”
Stone said 90 percent of the firm's clients over the past two years have been involved in some form of fraud.
More fines could be devastating across the supply base. Because of the $200 million fine, Furukawa is revising its global projected second quarter 2012 net income from $149.2 million to $38.9 million.
Furukawa is also docking the pay of four of its top executives. Chairman Hiroshi Ishihara and President Masao Yoshida will forgo 50 percent of their salaries for three months. Director and Corporate Vice President Masahiro Yanagimoto will forgo 30 percent and Corporate Vice President Suguru Shinozaki will forgo 25 percent, both for three months.
But don't expect the large fines and jail time to change the behaviors of the supply base in the immediate future, Stone said.
“This is a sign of the times, and you're going to see more and more of these types of cases moving forward,” he said. “If they are caught they will pay the fine because it's cheaper than allowing the [automakers] to get the price they're after.”