Illinois Legal Times
October, 1998 Pg. 1

ADM Execs Nailed on Price-Fixing, May Do Time Government Gets Watershed Convictions, But Company Still Dominates Lysine Market


To date, ADM has set aside $ 279 million to cover fines, settlements and litigation expenses stemming from antitrust investigations in lysine and citric acid, according to the company's March 1998 quarterly report. Despite the disruptions created by the investigation and private lawsuits, ADM has attained worldwide market leadership in lysine, one of its most profitable products.

It was almost the perfect crime. There was little risk of law enforcement detection, a low probability that even the victims would know they were being ripped off, and hundreds of millions to gain.

The perpetrators divided up the world market and gave each member a slice. Penny-by-penny, they stole from customers for three years. They met under the ruse of a trade association, setting prices and negotiating their share of the take. They kept tabs on each other through monthly reports, and designed a buy-back system in case anyone cheated. The conspirators stole in a market big enough to be profitable, but small enough to attract little public attention. They got caught.

Their illegal gains came to an end when one of their own gave up the cartel and captured their conversations on tape for the FBI. Convicted, the conspirators are held up as examples for what could happen to those who participate in "antitrust conspiracies that rob Americans of their hard-earned dollars," says Joel I. Klein head of the Justice Department's Antitrust Division.

On Sept. 17, a Chicago jury found three former top Archer Daniels Midland Co. executives -- Michael D. Andreas, Mark E. Whitacre and Terrance S. Wilson -- guilty of violating the Sherman Antitrust Act by fixing the price and allocating the volume of lysine, a corn-based feed additive.

ADM and four Asian producers also involved in the conspiracy have already pleaded guilty to violating antitrust laws in the lysine market. ADM also pleaded guilty to price-fixing in citric acid, another corn product.

So far none of the conspirators have done time. Three Asian executives pleaded guilty to the conspiracy, but have only paid fines. But that could change. Andreas, Whitacre and Wilson could face a maximum of three years in jail or a fine that could go into the millions of dollars. Sentencing is set for Jan. 7, 1999. Attorneys for Andreas and Wilson said they will continue to fight the charges. Their post-trial motions are due Oct. 2.

U.S. v. Andreas, et al wraps up an investigation of illegal activities surrounding a previously little-known product. With worldwide sales of $ 700 million, lysine is a relatively small slice of the agricultural market. ADM alone had sales of $ 12.7 billion in 1995, the year the FBI broke up the lysine cartel.

However, the case proves important in demonstrating how easily an international cartel is formed and how little recourse consumers have if not for governments willing and able to enforce antitrust laws, says John M. Connor, a professor at Purdue University . The conspirators overcharged U.S. purchasers between $ 155 million and $ 166 million, according to an estimate by Connor, an agricultural economist who testified as an expert witness in a civil suit against ADM. In addition, by colluding the companies saved millions of dollars they had been losing through competition, according to federal prosecutors.

In 1996 ADM paid a then-record $ 100 million criminal antitrust fine for price-fixing in lysine and citric acid. Even more embarrassing, and costly to the company's public image, are hundreds of hours of secretly recorded audio and video tapes made by Whitacre, then president of ADM's BioProducts Division. Whitacre became a government mole in November 1992 after being questioned about an embezzlement and sabotage scheme involving ADM's lysine plant. To date, ADM has set aside $ 279 million to cover fines, settlements and litigation expenses stemming from antitrust investigations in lysine and citric acid, according to the company's March 1998 quarterly report.

Despite the disruptions created by the investigation and private lawsuits, ADM has attained world-wide market leadership in lysine, one of its most profitable products. The company now controls half the world's market at a pre-tax profit margin of at least 20 percent, according to reports in the Chemical Market Reporter and Forbes. The entire market has grown from $ 100 million in 1991 to $ 700 million today. Industry analysts expect it to continue to grow with the world's increasing demand for meat and as producers expand their use lysine for more efficient growth of swine and poultry.

Embarrassing Details

While ADM's settlements and lawsuits made headlines, the executives' criminal trial makes vividly public the details of how these large international companies dealt with each other and how they managed the cartel.

The case was argued before Judge Blanche M. Manning in the U.S. District Court for the Northern District of Illinois in Chicago. Evidence presented at trial showed the companies to be at best cozy competitors willing to share highly valuable market information, and at worst criminals stealing millions from customers by manipulating the market.

Prosecutors argued that trial testimony and the tapes show top ADM executives exhibiting a disregard for customers and basic business decency. Referring to a statement made by a top ADM executive, lead prosecutor U.S. Attorney Scott. Illinois Legal Times Lassar asked in his closing arguments, "What kind of a company calls the 'competitor the friend and the customer the enemy?'"

On a videotape of an October 1993 meeting in Irvine, Calif., Michael Andreas questioned Ajinomoto executive Hirokazu Ikeda on how to divide the coming growth in the lysine market. Andreas, son of ADM's Chairman Dwayne O. Andreas and now on paid leave from the company, predicted growth to be 14,000 tons. Andreas says: "So the question is how do we share that growth? What would you be willing to accept and what would we be willing to accept?"

On the tape Andreas suggested giving each of the three smaller competitors -- the Korean companies Cheil Jedang, Sewon and the Japanese company Kyowa Hakko -- 2,000 tons each, leaving 8,000 tons to be split between ADM and Ajinomoto, the Japanese company that then had the largest market share. Andreas says: "The thing you have to keep in mind is that we have a lot more capacity than what we are using. If it's a free-for-all ... our numbers will be a lot higher." They could agree that ADM would grow 5,000 tons or the company would produce 20,000, he said. Later in the meeting Andreas remarked that top ADM executives keep tight control on pricing, because the company didn't trust its salespeople. The salespeople became friends with the customers, he said.

Defense attorneys only called one witness, making their argument through cross examination of the government's witnesses. Throughout the trial Andreas's attorney, John M. Bray, a partner in the Washington, D.C., office of King & Spalding, argued that Andr-eas never intended to make an agre-ement with the Asians. Andreas met with competitors, who had been in the business much longer than ADM, to gain vital market inf-ormation, Bray said. When Andreas discussed volume with competitors, he did so merely to state ADM's present intentions, not to make a binding agreement, he said.

Moreover, no one can trust the reliability of the video and audio tapes, said Bray, because they were produced by Mark Whitacre, a man who stole millions from ADM, a felon who failed two FBI polygraphs, and a man of considerable ambition who wanted to be ADM's next president.

The government had more tapes of Wilson, a "corn man" who was brought over to advise Whitacre in BioProducts because of his previous experience in citric acid price-fixing, said Lassar. A videotape of a Hawaii meeting in 1994 shows Wilson, who has since resigned from ADM, talking with competitors, in a speech that inspired Lassar to call him "Coach Wilson" during closing arguments.

"Just as long as I know I'm getting 67,000 tons, I don't care what price you sell it for, I'll sell it at the full price," Wilson said. "I want to be closer to you than I am to any customer ... Let's all agree on what we're going to do and let's go out and do it."

Wilson's defense was that he never intended to form agreements with competitors. He met with the Asians to get market information to crack the long-standing Asian cartel already in existence before ADM entered the market, his attorneys said. He used the language of a price-fixer to lull the competition into complacency by pretending to agree, while ADM was taking the Asians' customers by underbidding them, said Wilson's attorney, Reid H. Weingarten, a partner at Steptoe & Johnson in Washington, D.C.

Throughout the trial Wilson's attorneys emphasized that the Japanese and Koreans lied to each other and to ADM. "This was not business ethics 101," Weingarten said in closing argument. "Wilson knew this was an unorthodox mission to ... deceive competitors." Wilson had no warm feeling for his alleged conspirators, rather it was "F--'em," said Weingarten, quoting his client's frequent use of the phrase while discussing the Asians with Whitacre and Andreas.

The deceptive nature of this market became a cornerstone of Weingarten's closing argument. At the end of Weingarten's approximately five-hour closing, he assigned to each of the 12 jurors one reasonable doubt.

The fourth doubt was a tape of Whitacre and Wilson discussing strategy where Wilson says a big problem is to remember what lies you have told. Wilson told Whitacre Dwayne Andreas's advice -- "to write down your lies, so you remember them."

Whitacre's argument for acquittal was simple. His attorney, Bill T. Walker, a sole practitioner from Granite City, Ill., argued that the government did not prove his client was involved in the conspiracy for the five months in 1992 prior to the time he became an FBI mole. The conspiracy allegedly began in June 1992 and Whitacre became a mole on Nov. 5, 1992. During his cross-examination of the government witness-es not one could give a clear affirm-ative answer that price-fixing occ-urred before November 1992, Walk-er said during closing arguments.

Testimony from Japanese executives demonstrates that the cartel knew their scheme was wrong and that they needed to hide their actions. Kanji Mimoto, an Ajinomoto executive who pleaded guilty to antitrust violations and paid a $75,000 fine, testified that the companies met in Paris in 1992 under the guise of forming a trade association and produced a fake agenda. The fake agenda included discussions on animal rights and environmental issues, but they actually talked about the price of lysine, he said.

Masaru Yamamoto, a manager for Kyowa Hakko who pleaded guilty and paid a $50,000 fine, testified that after representatives of the five producers met in Atlanta during a poultry producer trade show, the representatives left the hotel room separately, so that customers would not see them coming out of the same room.

All this deception was for a product that at the time barely raised a blip in the entire agricultural market, but producers are betting it will grow in the future.

A Value-Added Good And an Essential Amino Acid

If ever there was a product amenable to price-fixing and sales allocations, it is lysine. Few companies produce lysine, there is little publicly available information on prices and production costs, it is expensive to enter the field, and relatively few alternative sources exist for this important amino acid.

Since the early 1990s ADM's annual reports have heralded its expansion into bioproducts. Bioproducts include feed additives like lysine, threonine and tryptophan, and other products such as vitamins E and C, lactic acid and MSG.

By producing these goods ADM takes its supplies of soy and corn, commodities exchanged on the markets, and turns these raw agricultural goods into highly profitable, value-added products. These Illinois Legal Times products are exchanged in markets with few producers -- allowing ADM to retain more control over price than is possible for a large, commonly exchanged commodity like corn or soybean meal.

Japanese companies began producing lysine in the early 1970s. Lysine is made by a fermentation method in which enzymes feed off a sugar supply such as dextrose to produce the acid.

ADM began manufacturing lysine in 1991. The amino acid plant cost the company $ 100 million to build. The huge plant doubled the world's capacity, and ADM gave tours of it to some of its Asian competitors.

ADM entered the market in part because it learned that Asian competitors were buying dextrose from ADM to make lysine and then shipping the finished product back to the United States, says agricultural economist John Connor. ADM thought it could sell the lysine cheaper in the United States than foreign companies because it did not have additional transportation costs, he says.

Lysine is one of 20 essential amino acid, a necessary building block for muscles, skin and bones, says Tim Stahly, a professor of animal science at Iowa State University. Animals do not produce the acid on their own, so it must be ingested either through natural sources like soybean meal or corn or through synthetic sources.

A growing pig needs 22 grams of lysine per day, says Pete Merna of the Illinois Pork Producers Association. A farmer bases his decision to use natural or synthetic lysine mostly by the price of the competing sources. Factors such as building a more balanced diet or decrea-sing the level of nitrogen waste are also considered, says Merna.

A typical Illinois pork producer may use two tons of lysine per year, says Merna. The amino acid constitutes 2 percent to 3 percent of a pig's diet and 7 percent or 8 percent of a pork producer's total expenses, he says.

The lysine market now stands at $ 700 million and producers expect continued growth. Most of the major producers -- including ADM, BioKyowa, a subsidiary of Kyowa Hakko, Ajinomoto, Cheil and Sewon -- plan to increase their production capacity, according to the Chemical Market Reporter, a trade journal covering the chemical industry. And a new competitor should arrive shortly. Cargill, an agricultural producer based in Minneapolis, and Degussa, a German chemical company, have announced a joint venture to build a 75,000 metric ton lysine plant in Blair, Neb., set to begin production in 1999, says a Degussa spokesperson.

ADM plans to increase its capacity to 350 million pounds per year at its Decatur plant. That capacity will rise to 450 million pounds when a second amino acid complex in Cedar Rapids, Iowa, is complete, according to ADM's 1997 annual report.

The companies are gambling they can make money even on a product whose price has fluctuated dram-atically in the 1990s from a low of less than $ 0.70 to a high of $ 3.00.