Goldman Penalized in Cable Cartel Probe - Analyst Blog

The Goldman Sachs Group, Inc. GS and some of the world's top cable producing firms have been slammed with a total fine of €301.6 million by the European Union EU regulators. The companies were fined on the basis of investigations which revealed that these deliberately operated an illegal cable cartel for nearly 10 years since 1999.

The Probe

EU regulators alleged that during the above mentioned period, 11 firms comprising 6 European companies, 2 Japanese and 3 Korean companies set an agreed price of high-voltage underground and submarine cables that were sold to clients including huge infrastructure projects and offshore wind farms. Such an act involved sharing of markets among themselves, making confidentially pacts to stay out of each others domestic markets and manipulating the bid prices for power projects.

The formation of the cartel came into light after investigators raided the companies in Jan 2009.

The Goldman Part

Italy-based cable producer Prysmian SpA has been slapped with a fine of a whopping €104.6 million. However, out of the total fine, the cable producer will share €37.3 million with Goldman. Notably, Goldman acquired Prysmian in 2005 through its private equity arm Goldman Sachs Capital Partners.

Though Goldman sold its interest in Prysmian by 2010, regulators claim to possess sufficient evidence to prove the complete involvement of the banking behemoth in the management decisions of Prysmian during the cartel period. However, in response to the allegations, Goldman is contemplating its rights of making an appeal in the case and highlighted the fact that regulators' accusations were framed only on the basis of its position as a parent company to Prysmian.    

Notably, regulators are being stricter in examining the behavior of parent companies towards the mismanagement of their subsidiaries.

Others

Other alleged cable producers that were fined include France-based Nexans SA,  Denmark's NKT Holding, Japan's Exsym Corporation and J-Power Systems Corporation and Korea based LS Cable & System.

Bottom line

Formation of cartels in a market tremendously hampers the healthy competition. Further, customers are denied the choice to select different sellers. Moreover, the genuine market price is not reflected in the products and services, so even prices are extremely high, a client has no option but to purchase at an artificial price.

This latest revelation of running cartels is nothing new and rather adds to similar cases in the industry. With regards to Goldman, the issue will add to its litigation costs and definitely impact the sentiment of its shareholders.

Goldman currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in this space worth considering include Investment Technology Group Inc. ITG, Piper Jaffray Companies PJC and E*TRADE Financial Corp. ETFC. Both Investment Technology and Piper Jaffray hold a Zacks Rank #1 (Strong Buy) while E*TRADE Financial carries a Zacks Rank #2 (Buy).