To be certain of avoiding financial and criminal penalties for infringement of US and EU rules on anti-competitive behaviour, hedge funds should remain vigilant in applying basic antitrust principles in all communications with competitors.
In the light of the US Department of Justice (DOJ) investigation into whether hedge funds might have colluded to drive down the value of the euro, these funds should take stock of the basic rules in this area and re-visit the issue of antitrust compliance.
In the United States
Section 1 of the Sherman Act prohibits agreements in restraint of trade. For Section 1 to apply, more than one firm must be involved, but there need not be any sort of formal, or even informal, agreement. Rather, any coordination between or among firms that supplants competition on the market, including the coordination of prices, output and trading conditions, is strictly forbidden.
In recent years, the DOJ has meted out particularly harsh financial and criminal penalties on companies and individuals that infringe Section 1 of the Sherman Act. The DOJ is also increasingly aggressive on seeking the extradition of individuals outside of the United States for prosecution under the Sherman Act.
In the European Union
Article 101 of the EU Treaty prohibits anti-competitive agreements and concerted practices, and notably practices which limit or control markets (including currency markets). The fact that the concerted activity takes place outside the European Union or on an open market is no defence, provided the effects of the conduct are felt within the European Union. The Head of the Eurozone Finance Ministers’ Group is reported to have said in jest that the European Union has “instruments of torture” that can be used in financial markets. The principal instrument comes from antitrust – the power to fine infringing parties up to 10 per cent of group worldwide annual turnover. This was used against the financial sector in 2001 when five German banks were fined a total of about $90 million for collusion which “gave a blow to citizen's confidence in the European single currency”.
Although the European Commission’s Directorate-General for Competition in Brussels and the US DOJ often co-operate on investigations which affect world markets, there is no indication so far of involvement of the European Commission.
Basic Antitrust Guidelines for Dealing with Competitors
You may discuss publicly available market and economic data in general terms with a view to drawing your own objective opinion as to what markets, interest rates or exchange rates will do. Once you start to discuss individual investment strategies, however, you are entering a danger zone. The following guidelines offer practical suggestions for navigating these problem areas, but they are not a substitute for specific legal advice.
- Do not speak with competing hedge funds about their plans in respect of a given security, currency or risk, or discuss your plans. You should avoid even unilateral statements about your plans.
- Do not participate in any discussions that could be viewed as encouraging competitors to act in a similar way in relation to a given security, currency or risk, or that could be viewed as soliciting strategic information. If communications with a competitor stray into prohibited areas then you should stop such discussions immediately and exit in a way that will be remembered by other participants.
- Do avoid all meetings or other gatherings, formal or informal, where any such topics are being discussed among representatives of competing hedge funds, even if you are not participating in such discussions. All meetings between representatives of competing funds must be confined to clearly permissible activities and objectives.
- Do not do indirectly what you are prohibited from doing directly, as outlined above. You should examine your motives for engaging in conduct; if it is to achieve some prohibited result by some ostensibly legal means, do not do it. Examine the probable effects of a course of conduct; if it produces a prohibited result even though that is not the primary purpose, do not do it.
- In the event of doubt, do seek privileged counsel from an independent lawyer, or if need be ask the lawyer to accompany you in discussions, meetings and the like.