Working for a better economy, better governance and a better society

By Michael Hansen

Beginning in 2008 six mid-level shipping executives with direct responsibilities in the domestic Puerto Rico trade have been sentenced to federal prison for violating the Sherman Antitrust Act by conspiring to fix ocean freight rates and allocate cargoes amongst the three shipping lines which employed them.

On Friday, December 6, 2013 the U.S. Department of Justice announced that the sixth executive, Frank Peake, formerly President of Sea Star Line LLC,  was sentenced to five years in federal prison and fined $20,000.00.  Peake was indicted on November 17, 2011, and went to trial in January 2012 for two weeks.

Jacksonville, Florida-based Sea Star Line is an ocean common carrier operating three older containerships in the cabotage-protected domestic Puerto Rico trade with the U.S. Mainland.  Sea Star Line was formed in 1998 by Matson Navigation Company Inc. with a 45% interest, Saltchuk Resources Inc. (a privately-held corporation) with a 45% interest and Taino Star Investment Inc. with 10% interest.  Taino is a Delaware corporation formed by group of Puerto Rican investors described by Sea Star as “involved in stevedoring, terminal, distribution, wholesale, real estate and banking in Puerto Rico, and influential in Puerto Rico business community and with Commonwealth Government.”  Matson, at the time, a subsidiary of Alexander & Baldwin Inc., contributed two Jones Act containerships, which were laid-up and inactive, to the Sea Star venture.

Saltchuk moved aggressively to consolidate their position in the Puerto Rico trade following the March 3, 2001 bankruptcy of the Holt Group Inc., then owners of Navieras de Puerto Rico / NPR Inc.  Although Saltchuk lost approximately $20 million in the previous year on the Sea Star operation, they bought-out Matson’s interest in the upstart line and acquired most of the assets of Navieras including three of its four ageing containerships for $32.0 million out of Holt Group bankruptcy.  The three Navieras ships gave Saltchuk the means to operate their own service.

Navieras had a tortured history. The Commonwealth of Puerto Rico owned and operated Navieras to provide ocean common carrier service between the U.S. mainland and Puerto Rico.  The territorial government sold Naveras in 1992 to Bankers Trust Investment Partners after incurring losses of $325 million. The company renamed NPR Inc. was subsequently sold to the Holt Group of Philadelphia in 1997.  Losses arising from the Navieras operation caused the Holt Group to declare Chapter 11 bankruptcy in 2001 and resulted in the sale of the line’s remaining assets to Saltchuk.

Saltchuk also operates a liner container service in the domestic Alaska trade known as Totem Ocean Trailer Express (TOTE), the sole inter-Hawaiian Island ocean common carrier service known as Young Brothers Limited(with Hawaiian Tug & Barge Corporation) and the major inter Hawaiian Island air cargo carrier, Aloha Air Cargo.  Saltchuk’s deep draft ocean shipping operations and logistical services – including  Sea Star Line and Totem Ocean Trailer Express – are held through its subsidiary TOTE Inc.

The Department of Justice said the conspiracy occurred during the years 2005 through 2008 and was between Sea Star Line, Crowley Liner Services Inc. (a subsidiary of Crowley Maritime Corporation) and Horizon Lines Inc.  Crowley operates large trailer barges in the Puerto Rico trade and several feeder-sized foreign flag containerships from the U.S. Gulf and East Coasts to foreign destinations in the Caribbean.  Horizon Lines operates domestic containership services in the Puerto Rico, Alaska and Hawaii trades.

Justice said in their announcement, “According to court documents and evidence presented at trial, Peake and his co-conspirators conspired through meetings and other communications in the continental United States and Puerto Rico to fix, stabilize and maintain rates and surcharges for Puerto Rico freight services, to allocate customers of Puerto Rico freight services between and among the conspirators and to rig bids submitted to customers of Puerto Rico freight services.”  (A good history of the case can be found here.)

A seventh shipping executive, Thomas Farmer, former Vice President of Price and Yield Management, Crowley Liner Services, was indicted in March 2013, pleaded not guilty and is scheduled to go to trial in May 2014.

The three carriers – Sea Star, Horizon and Crowley – all pleaded guilty to violations of the Sherman Antitrust Act in separate actions during 2011 through 2012 and were collectively fined a total of $46.2 million.  In addition, in April 2012 forty-six shippers in the Puerto Rico trade brought five overlapping civil actions against the three carriers seeking damages for the overcharging of freight rates, surcharges and other fees.  Thirty-seven shippers brought a single class action law suit that resulted in the collective payment by the three carriers of $52.3 million.  Nine major shippers did not join the class action suit but sued the carriers in four separate actions, all of which are pending.  (A table of these cases is here.)

The separate complaint by the food companies Kraft Foods Group, Inc. and The Kellogg Company named two prominent Jones Act lobbying and support groups – the Maritime Cabotage Task Force now known as the American Maritime Partnership and the Transportation Institute – as “co-conspirator industry trade associations.”  It noted that senior executives of Saltchuk, Crowley and Horizon were officers of the two organizations, and claimed the Transportation Institute’s Domestic Shipping Council provided executives of the three carriers “with the cover for additional rump meetings and discussions in furtherance of the conspiracy.”

Although several corporate officers from the three carriers were named in the civil suits including Thomas B. Crowley Jr., Chairman, CEO and President, Crowley Maritime Corporation, and Charles G. “Chuck” Raymond, formerly Chairman, CEO and President of Horizon Lines Inc., no corporate directors or officers have been indicted by the Department of Justice.  Raymond announced his retirement from Horizon on February 24, 2011, the same day Horizon originally pleaded guilty and settled with the Department of Justice for $45 million criminal fine (which was reduced in April to $15.0 million).  Crowley remains head of Crowley Maritime.

The three carriers incurred criminal fines and civil settlements totaling approximately $100 million over the past four years not including legal and other expenses associated with the rate fixing case.  Despite these costs, two carriers — Sea Star Line and Crowley – are each positioned to build two extraordinarily expensive new Jones Act containerships in the U.S. to replace their ageing vessels in the Puerto Rico trade.  At the end of the day, they had sufficient funds on hand and the revenue streams to facilitate these new building commitments.  Chronically insolvent Horizon Lines has chosen to refit two of their ageing ships in a Mainland Chinese shipyard for the Puerto Rico trade.

In an unrelated case, Matson and Horizon were sued in a whistleblower lawsuit formally known as a qui tam action filed on October 4, 2010 in the United States District Court for the Central District for California (Western Division – Los Angeles) for overcharges on military cargo involving the improver application of ocean fuel surcharges on overland freight movements.

Michael Hansen is the President of the Hawaii Shippers Council and an advisor to the Grassroot Institute on the Jones Act.