Friday, March 7, 2008
How is this for a cryptic press release: "Reddy Ice Holdings, Inc. (NYSE: FRZ) announced that federal officials executed a search warrant at the Company's corporate office in Dallas on March 5, 2008. The Company is cooperating with the authorities." That's it on the search (the release is below), and there's nothing more in the press about what was seized or the potential crimes being investigated. Reddy Ice touts itself as "the largest manufacturer and distributor of packaged ice in the United States," and it's business doesn't appear to be all that complicated -- even I can make ice.
There have been a few things going on at the company over the past four months that could be connected to the search. Reddy Ice had agreed to be bought out by a private equity firm in a deal that finally collapsed on January 31, with the buyer paying the company a $21 million termination fee (see Steve Davidoff's Deal Professor story [here] for an analysis of the transaction's demise). There doesn't seem to be anything untoward there because any number of private equity deals have cratered since the credit crunch hit last August, but due diligence at a company sometimes has a way of turning up skeletons. On the management front, Reddy Ice's chief operating officer stepped down on January 3 "to pursue other business interests," so something may be going on there. The CEO resigned in November 2007 "due to medical reasons," which means its two senior officers left in a bit over a month. While corporate officers usually leave when there is a buyout, so whether these resignations are related to the search or just something in the normal course of business remains to be seen, but the timing is enough to raise at least some suspicions.
A search of a corporate headquarters often indicates that prosecutors believe there are documents and other items at the company that may not be produced in response to a grand jury subpoena. Executive computers are particularly valuable because they often contain e-mails and other electronic files that might not be on the main company server. While there's no word yet on what was seized, it would not surprise me to hear that desktop and laptop computers, or at least the hard drives, were seized by agents. What the underlying investigation involves will come out eventually once subpoenas are served or perhaps a cooperation agreement is reached with a former employee. (ph)
UPDATE: Reddy Ice issued another press release that states, "The execution of the search warrant was directed by the Antitrust Division of the United States Department of Justice in connection with an investigation of the packaged ice industry." This certainly clarifies the basis for the investigation. The potential violations being investigated probably would be some type of bid-rigging by the company and others in the packaged ice industry, or perhaps some type of agreement to divide markets along geographical or industry lines. The fact that the FBI conducted a search indicates that another company has taken advantage of the Antitrust Division's amnesty program that gives immunity to the first one in the door to report a violation. This policy has worked remarkably well because it gives companies, and their executives who can also receive immunity for their cooperation, a strong incentive to inform the government of illegal conduct. Unlike the Department of Justice's McNulty Memo that looks to various factors in deciding whether to charge a company with a crime, the Antitrust Division policy gives a measure of certainty about the treatment for the first company to report. For those who get caught up in the subsequent investigation, the government is not quite as forgiving, and fines are a likely outcome of an investigation. The use of a search warrant indicates that Reddy Ice is unlikely to get a free pass from the Department of Justice, and the interesting issue will be whether any individuals get caught up in the investigation. (ph)