Puerto Rico Antitrust Case: Slow Steaming

They say the wheels of justice turn slowly, and there’s no better proof than the protracted prosecution of price-fixing by U.S. mainland-Puerto Rico carriers betwen 2002 and 2008.

After nearly six years, the case finally is winding down. Former Sea Star CEO Frank Peake is appealing his conviction and five-year prison sentence. Tom Farmer, former vice president at Crowley Liner Services and the sole remaining defendant, is set to go on trial in September.

The antitrust investigation of Jones Act domestic ocean carriers became public on April 17, 2008, when federal agents seized computers, phones and documents from headquarters of Horizon Lines, Sea Star Line, and Crowley. Five Horizon and Sea Star officials were quickly charged, admitted guilt, and agreed to cooperate with the investigation.

Peake will be the sixth former carrier official to go to prison in the case, but he’s the only one convicted in a trial. The others pleaded guilty, as did the three carriers, all of which paid hefty fines in addition to civil settlements with customers.

With the end of the case apparently in sight, it’s fair to ask: Why has this taken so long?

No one can blame Justice Department prosecutors for wanting to do a thorough job. The Puerto Rico price-fixing conspiracy was a major scam that distorted the market and victimized shippers. “The spectrum of the conspiracy was extensive in scope and pervasive,” U.S. District Judge Daniel R. Dominguez wrote in denying Peake’s request for a retrial.

The brazen nature of the conspiracy was detailed in testimony and evidence in Peake’s trial, and in pre-sentence statements from other defendants and informants. Carrier officials used meetings, e-mails and phone calls fo fix prices and allocate business. Peake and Gabriel Sierra, Horizon’s senior vice president, used their personal phones to communicate 319 times between Aug. 1, 2003, and April 10, 2008, court records show. That’s more than one call per week between the competitors over nearly five years.

The evidence was extensive, but prosecutors apparently had all or most of it years ago. The feds undoubtedly had solid information before conducting their raids in April 2008. They gleaned additional evidence from the raids, and from interviews with the defendants who were charged and pleaded guilty within weeks.

The brisk initial pace of the prosecution appeared to slow in 2009 and 2010 while cargo interests pursued civil class-action lawsuits against the carriers. Perhaps the feds were hoping the civil lawsuits would turn up additional information for their criminal case. However, it apparently was the other way around — the civil cases were based largely on the Justice Department’s criminal case.

The delay must have been excruciating for former Horizon CEO Chuck Raymond and John Keenan, the company’s former chief operating officer. They were left hanging for five years until last April, when the Justice Department confirmed that they had been cleared.

Costs of the dragged-out litigation weakened Horizon Lines, which already was highly leveraged after being flipped twice by private equity groups, and helped push the company into the need for a debt-for-equity reorganization.

One could say that by participating in the price-fixing, Horizon deserved what it got. But what about Trailer Bridge, the Puerto Rico trade’s smallest carrier?

Trailer Bridge paid a heavy price even though it wasn’t involved in the price-fixing. (Participants’ code name for their conspiracy, “Who Shot John,” may have been a sly reference to Trailer Bridge CEO John McCown.)

Trailer Bridge was included with the other carriers as a defendant in the civil antitrust suits filed in the wake of the criminal case. The company spent two years, and incurred millions of dollars in legal costs, before winning dismissal from the class-action suits. The costs, combined with price-fixing by competitors during previous years, hastened Trailer Bridge’s slide into Chapter 11 bankruptcy and a sale to new owners in 2012.

Today the Puerto Rico trade seems to have stabilized, despite the commonwealth’s dire economic straits. The island’s stagnant market probably is too small to support four Jones Act carriers. However, the carriers have regained their financial footing, and Sea Star and Crowley have announced plans for new LNG-powered ships.

Still, one can’t help wondering what would have happened if the Justice Department had moved more expeditiously with its prosecution. The slow pace of the case has been a bonanza for the lawyers, but it’s hard to see how it’s benefited anyone else.

Contact Joseph Bonney at jbonney@joc.com and follow him on Twitter at www.twitter.com/JosephBonney.

For the full story: Log In, Register for Free or Subscribe