May 21, 1999 U.S. Outlines How Makers of Vitamins Fixed Global Prices By STEPHEN LABATON and DAVID BARBOZA [W] ASHINGTON -- Every year around August or September, the senior f executives from the world's largest producers of vitamins would gather r clandestinely for a few days at a European hotel or an executive's home for what some called the "top-notch meeting" and others the "summit conference" to plan "the budget for Vitamin Inc.," Federal prosecutors said Thursday. They said the meetings set production quotas, prices and distribution for vitamin ingredients that were used to enrich products in every refrigerator and kitchen cabinet in America, from morning supplemental pills to enriched milk and orange juice, fortified breakfast cereals, breads, butters and meats. The global market for such vitamins as A, B2 (riboflavin), B5, C, E and Beta Carotene would be divided among the participants to the half-percentage point. A few months later, according to the prosecutors, the budget would be reviewed by midlevel executives to make sure everything was working as planned, or it would be adjusted to reflect corporate profits and worldwide demand. Attorney General Janet Reno and her aides described in detail Thursday a decade-long vitamin cartel that they said had been shattered in one of the largest criminal prosecutions ever made by the Justice Department. In a Federal court in Dallas, Hoffmann-LaRoche Ltd., the Swiss pharmaceutical giant, pleaded guilty to one criminal count of violating the Sherman Antitrust Act and agreed to pay a $500 million penalty, the largest criminal fine ever imposed by the Justice Department. Announcing a management shake-up today that included the departure of top officials in its vitamins division, Roche Holding A.G., the parent company, said that it anticipated "substantial further fines" in Europe and Canada. It may also face potentially crushing damages in class-action lawsuits that have been filed by consumers and companies that bought or used vitamins. A second company, BASF A.G. of Germany, has agreed to pay a $225 million fine for its role in the conspiracy. A dozen smaller companies are still being investigated. At a news conference here to announce the initial results of the investigation, Attorney General Reno and other senior officials described a global conspiracy to fix vitamin prices. They said one Swiss executive had agreed to return to the United States to serve a jail sentence, although he was not the highest-ranking official involved in the scheme. At least seven other executives remained under investigation. "On a daily basis for the past 10 years, every American consumer paid to eat and drink or use a product whose price was artificially inflated," Ms. Reno said. "Day by day, consumers took a hit in their wallet so that these co-conspirators could reap hundreds of millions of dollars in additional revenue." Joel I. Klein, the Assistant Attorney General in charge of the antitrust division, said the conspiracy affected more than $5 billion of commerce "in products found in every American household." He did not provide specifics on how the prices of individual products were affected. Justice Department officials said the director of worldwide marketing for the vitamins division of Hoffmann-La Roche had agreed to travel from his home in Switzerland to the United States to plead guilty to antitrust and cover-up charges, pay a $100,000 fine and serve a four-month prison term. Investigators were said to have been particularly angry at the executive, Kuno Sommer, because he had lied about the existence of the vitamin cartel and his role following Roche's guilty plea in another price-fixing case two years ago. In that case, involving citric acid, Roche paid a $14 million fine and promised to cooperate with investigators. Dr. Sommer, who had previously lived in New Jersey when he served as North American regional manager for Roche, denied in a 1997 interview with investigators that there was a vitamin cartel and said he was not aware of any meetings or conversations involving price-fixing in that market, according to court papers filed by the Government Thursday that are part of his plea agreement. In fact, at that time he was still playing an important role in setting vitamin prices and allocating market share, according to a plea agreement filed on his behalf Thursday in Federal court in Dallas. While Justice Department officials said Dr. Sommer was not the highest-level executive who knew about the conspiracy and cover-up, they did not say who might be prosecuted next. Among the executives who did not receive immunity in the deal reached with Roche were Roland Brönnimann, president of the Vitamins and Fine Chemicals division, and Andreas Hauri, a former executive vice president and head of global marketing. Martin D. Hirsch, a Roche spokesman, said that both Dr. Sommer and Brönnimann had left the company and that it would take a one-time charge against its earnings to pay for the Justice Department case. "We're redoubling our existing efforts to insure that people at all levels of our organization receive training on proper business policies," Hirsch said. "We want to make it clear that any improper practices will not be condoned by the company." The turning point in the long investigation came three months ago, when Rhône-Poulenc of France, one of the members of the cartel, came forward with crucial evidence in order to avoid prosecution. Lawyers said Rhône had decided to cooperate in large part because of a pending $22 billion merger with Hoechst A.G., which cannot be completed without the approval of antitrust officials in the United States and Europe. Gary R. Spratling, head of the antitrust division's criminal section, said top executives had treated the industry as one great big company that they called "Vitamin Inc." Spratling said the executives "took great pains to conceal the activity," issuing instructions to destroy all records and notes of their meetings or face possible termination if anyone found out. "Simply put, the vitamin cartel was as bad as they get," said Spratling, an official in the antitrust division for 28 years. "Nothing was left to chance -- or, more accurately, to competition." Spratling said Federal sentencing guidelines gave the Government the discretion to seek fines as large as $1.3 billion against Roche and $300 million against BASF. But prosecutors decided on the lower figures as part of the deal reached with the companies. The fine imposed Thursday on Roche dwarfed the previous record cases. The largest total fine collected by the Justice Department before Thursday had been $340 million paid by Daiwa Bank in 1996 for fraud and a cover-up in a large securities fraud case. And the largest previous fines imposed by the antitrust division occurred earlier this year, when SGL Carbon agreed to pay $135 million and UCAR International $110 million for their role in a cartel that had controlled the market for graphite electrodes. As a result, with more than four months remaining in its fiscal year, the Justice Department's antitrust division has already collected $913 million, substantially more money than the total amount collected in its entire history. The vitamin cartel case grew out of a smaller investigation into price-fixing in the additives market that involved some of the same companies at the heart of Thursday's inquiry. That investigation ultimately led to a $100 million fine imposed on Archer Daniels Midland in 1997. ----------------------------------------------------------- Here is some more information from the WSJ (5/21/99) The two firms being fined are Hoffman-Laroche, a Swiss firm and BASF, a German firm. A third firm that participated in the cartel was Rhone Poulenc, a French company. Rhone Poulenc weren't fined now because they began "cooperating with federal investigators" a few months ago under an amnesty program and helped make the case against their co-conspirators. Together the three firms accounted for 75% of the market. Hoffman Laroche has a market share of 40%, BASF 20%, and Rhone Poulenc 15%. The total amount of the fine assessed was 725 million dollars. Roche has annual revenues from vitamin sales of about 2.5 billion dollars. Notice that these fines are being imposed by the U.S. department of justice on European companies for their actions in the U.S. market. The WSJ story reports that "talks with the European antitrust authorities may take some time to progress". In an interview, Roche's CEO, Franz B. Humer said "I am personally, absolutely shocked at what has happened."