SK Energy: When the Other Bids Were Meant to Lose

The SK Energy military fuel antitrust settlement called for a $90,384,872 civil payment over allegations of bid rigging on U.S. military fuel contracts in South Korea. The government’s complaint described suppliers deciding who should win before the bids went in. A losing bid could do just as much work for the arrangement as a winning one.

SK Energy refines and supplies gasoline, diesel, kerosene and other petroleum products. The Seoul-based company supplied fuel to U.S. military installations in South Korea alongside other suppliers, including GS Caltex and Hanjin Transportation. The Justice Department announced the civil resolution on November 14, 2018. Its civil complaint alleged coordinated bidding from at least March 2005 through at least October 2016.

How Does Bid Rigging Work?

Bid rigging works by replacing competing decisions with an agreed result. In SK Energy’s case, the government alleged that suppliers divided fuel contracts among themselves, then submitted high bids or stayed out of the bidding to protect the chosen winner.

The purchasing structure made that possible at different levels. The Defense Logistics Agency bought fuel for military vehicles and heating through Post, Camps, and Stations contracts. Each delivery location had its own line item. Bidders could revise their initial offers after the agency reviewed them, and the lowest final bid won each item. A supplier could therefore win some locations while losing others in the same procurement.

The Army and Air Force Exchange Service bought gasoline for the exchanges used by military personnel and their families, including fuel for personal vehicles. Its bidding worked differently. For its solicitation in 2008, the lowest price across all listed locations won the whole contract.

The government’s civil complaint describes how suppliers allegedly used the line-item system in the 2006 Defense Logistics Agency procurement:

The complaint alleged that meetings, calls and emails between early 2005 and mid-2006 settled the allocations and inflated the bids to increase profit margins. The agency then awarded the line items according to that plan. The paperwork still offered a choice of prices. The suppliers had allegedly decided which choice the buyer would make.

A Whole Contract for SK Energy

The 2008 exchange-service contract went to SK Energy after rivals allegedly agreed to leave it alone. According to the complaint, the arrangement grew out of discussions about the earlier Defense Logistics Agency contracts.

GS Caltex submitted a bid significantly above SK Energy’s. Two other participants declined to bid even after the exchange service expressly asked them to participate. SK Energy won the contract, which was later extended through July 2013.

That invitation to bid is a revealing detail. The buyer was seeking more competition. The government alleged that the missing bidders had already promised not to provide it. For an employee who knew why a bid was withheld, the absence of an offer could tell as much as the prices that reached the buyer.

A Lower Bid That Still Cost Too Much

SK Energy won no 2013 items after Hanjin and S-Oil allegedly undercut the cartel while still charging above competitive prices; see S-Oil’s account.

The partnership had allegedly joined the arrangement for the agency’s 2009 contracts. The complaint said the existing participants gave them line items previously allocated to other members of the group. Hanjin handled transportation and logistics while its partner supplied the fuel.

The agency continued making inflated payments under these contracts through October 2016, according to the complaint. American taxpayers paid for the suppliers’ alleged arrangement.

SK Energy’s Civil Settlement and the False Claims Act Credit

SK Energy’s military fuel criminal and civil recoveries were separate. Its civil settlement connected the government’s antitrust case with its False Claims Act case through a payment credit.

SK Energy’s own False Claims Act agreement required a $71,866,000 payment to the United States. Under the proposed settlement terms, that payment counted toward SK Energy’s civil payment.

The Justice Department explained that each supplier’s civil settlement exceeded its individual overcharge. It also said the negotiated amounts reflected the value of the suppliers’ cooperation commitments.

The Justice Department described the false statements at issue as statements made to the government in connection with the suppliers’ agreement not to compete. The civil complaint also followed the transactions beyond the bidding: the suppliers submitted invoices to Defense Department offices in Columbus, Ohio, and received payments from those offices.

That connects the allocation discussions to the customer’s money. The competing offers, the statements supporting them and the requests for payment belonged to the same government purchasing process.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. In the SK Energy case, a whistleblower’s qui tam case prompted the government’s False Claims Act investigation.

What Fuel-Contract Insiders Can See

A person inside the fuel business may understand why a company priced a location to lose, withheld an offer or supplied a contract awarded to someone else. The procurement files show the submitted bids. The people who prepared them may know the intended result.

The Hyundai Oilbank case shows a different part of the fuel arrangement: changing the supplier after an award departed from the allocation.

The 2018 construction-bidding review treats statistical analysis and insider evidence as complementary ways of uncovering collusion.

For this fuel case, the useful connection is the delivery location. A bid analyst may recognize a price that makes little sense against delivery costs. A logistics employee may recognize a supply arrangement that preserves another company’s allocation. An employee involved in the communications may know why either happened. We connect those accounts with the bids, awards and payments to explain the commercial decision behind the paper trail.

You Know Why That Bid Lost

Tell our whistleblower experts why an SK Energy rival stayed out or submitted a bid high enough to lose a military-fuel item.