Goldman fined €37m by EU over subsea cable investment

Goldman Sachs was fined €37m on Wednesday as part of an EU cartel inquiry into subsea power cables that highlights the legal risks faced by buyout groups.

The European Commission hit 11 groups with penalties totalling €301m for price rigging, including Prysmian, the Italian cablemaker formerly owned by Goldman Sachs Capital Partners, the investment bank's buyout arm.

Joaquin Almunia, the EU antitrust chief, said Goldman was liable for part of the fine because it exercised a decisive influence on Prysmian for more than three years. He said the groups in the cartel "knew very well that what they were doing was illegal. This is why they acted cautiously and with great secrecy".

While it is common for Europe's top antitrust authority to fine parent companies when offshoots are embroiled in cartels, it is rare to penalise a primarily financial investor, especially for periods where it held a minority stake.

Goldman's buyout unit bought Prysmian from Pirelli in 2005 for €1.3bn including debt, and floated the cablemaker in 2007, leaving it with a 43 per cent holding. By 2010 it had fully sold down its stake.

The bank told the commission it was unaware of the effort to rig prices and carve up markets, which started several years before it bought Prysmian.

The commission decision is a warning to buyout groups over legacy legal risks and underscores their responsibility as owners for rooting out and ending any wrongdoing in the business, even when the expertise they bring to the board is primarily financial.

"The issue of parent company liability has received a lot of attention in the private equity community," said Jay Modrall, a partner at Norton Rose. "Private equity firms tend to think of their funds and investments as silos, rather than as part of a single group.

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"The implications of the commission's practice of imposing fines based on group-wide liability goes beyond the financial exposure," said Mr Modrall. "Private equity firms may want to look at their standard M&A contract language to see how this exposure is addressed."

A spokesperson for Goldman said it was "important to recognise" that the commission chose to hold the bank jointly and severally liable with Prysmian "solely under its parental liability doctrine".

"There is no suggestion that Goldman Sachs or its people had any knowledge or involvement in the purported collusive behaviour. Goldman Sachs is considering its rights of appeal," the spokesperson added.

Courts have largely backed the commission's approach to penalising parent companies and have made no significant distinction for private equity buyers. Goldman is the most prominent financial investor to suffer such a fine.

An EU charge sheet sent to the US investment bank covers from 2005 to 2009, including more than a year where Goldman's stake in Prysmian was under 50 per cent.

The commission said the buyout unit was liable to pay a share of Prysmian's fine because it exercised a decisive influence on Prysmian that went beyond a pure financial investment, including through nominating individuals to the board.

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Mario Mariniello of Bruegel, a think-tank in Brussels, said the case tested the point where investors carried direct legal risks from antitrust infringements.

"Investment with no control cannot entail direct legal liability. It would make little economic sense. Regardless of what an investor knows, its investment already carries extra risk as, ultimately, shareholders pay cartel fines," he said.

"Investment with control should directly be punished. The likelihood of a fine affects your incentives to ensure profits are legally made and to stop infringements. The notion of control is key here - it might be possible to have a decisive influence without direct control."

The commission fined 10 cable firms €302m for running a cartel that lasted for nearly 10 years from 1999. It involved six European, three Japanese and two Korean manufacturers.

Prysmian's penalty was the biggest and was shared between Goldman and Pirelli, its former owner. Nexans, the world's second biggest cablemaker, was fined €70m. ABB will not be fined, because it blew the whistle on the cartel to the EU.

A successful legal challenge to the grounds for the commission inspections mounted by Prysmian and Nexans has limited the scope of the case to high-voltage cables.

In a 2012 ruling, the EU General Court found the commission raids mounted in 2009 had no reasonable grounds for extending its search to information relating to all cables and electrical products.

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