Sixth shipping executive goes to jail in Puerto Rico rate fixing case

by Michael N Hansen, President, Hawaii Shippers Council

Since 2008 six shipping executives with direct responsibilities in the domestic Puerto Rico trade have been sentenced to federal prison for violating the Sherman Antitrust Act by colluding on ocean freight rates and in cargo allocation schemes.

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.

Jacksonville, Florida-based Sea Star Line is an ocean common carrier operating three older containerships in the cabotage-protected domestic Puerto Rico trade.  Sea Star Line was formed in 1998 by Matson Navigation Company Inc. (as a subsidiary of Alexander & Baldwin) with 45% interest, Saltchuk Resources Inc. with 45% interest and Taino Star Inc. (a group of investors from Puerto Rico) with 10% interest.  Matson contributed two laid-up containerships for the service.

In 2001 with the bankruptcy of the Commonwealth-owned Navieras de Puerto Rico, Saltchuk moved aggressively, despite having lost approximately $20 million in the previous year on Sea Star, buying out Matson’s interest in Sea Star and the most of the assets of Navieras including three of its four ageing containerships.  (A good history of the case can be found here.)

Saltchuk Resources also operates a container liner 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.

The Department of Justice said the conspiracy occurred between 2005 and 2008 by Sea Star Line, Crowley Liner Services (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.

The Department of Justice said in their statement, “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 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 and 2012 and were collectively fined a total of $46.2 million.  In addition, several shippers in the Puerto Rico brought a civil class action lawsuit against the three carriers that resulted in the payment of a total $52.3 million.  Two major shippers did not join the class action suit and sued the carriers in a separate action which is pending.

Two of the carriers in the Puerto Rico trade – Sea Star Line and Crowley – recently announced that they would be building new Jones Act containerships in the U.S. to replace their ageing vessels.  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 application of ocean fuel surcharges on inland (overland) freight movements.

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LINK: List of Shipping Execs and their Jail Sentences