Case study antitrust on the high seas

© Copyright Kordula, LLC www.500PearlStreet.com August 1, 2012

By: Walter A. Pavlo, Jr. August 1, 2012

Antitrust on The High Seas Jacksonville, FL is one of the busiest ports on the east coast of the United States. Shipments through the port represent more than 16 million tons each year of manufactured goods, farm products, coal, crude petroleum, refined petroleum products and chemicals. Ships from all over the world load and discharge goods in the port each day. Shipments to and from domestic U.S. ports are also part of port activities in Jacksonville but their activities fall under unique U.S. government maritime laws.

The Merchant Marine Act of 1920-‐Section 27, better known as the Jones Act, provides regulation for cabotage (shipping between U.S. ports). These regulations require that all goods transported by water between ports of the United States be carried on U.S. flagged ships, constructed in the U.S., owned by U.S. citizens, and crewed by U.S. citizens. The purpose of the Jones Act was/is to support the U.S. maritime industry and provide general security by having U.S. ships move cargo between U.S. destinations. Because of these restrictions and the relatively small size of these trade routes, oligopolistic markets develop where only a very small number of carriers serve routes to states or territories outside of the mainland U.S. Puerto Rico, a U.S. territory, falls under the Jones Act for maritime transportation between the continental United States and Puerto Rico.

If you have ever gone a cruise ship out of the port in Miami, FL and your destination was Puerto Rico, the ship stopped at a location outside of the U.S. prior to making port in Puerto Rico. For cruise ships, which are primarily non-‐U.S. vessels, they are required to do this because it would be a violation of the Jones Act to leave directly from Miami and then make port in Puerto Rico. Also, in a similar set of regulations, the U.S. airline industry has restrictions that limit domestic air routes to domestic U.S. carriers. This is why you do not see, for example, Air China flying from Boston non-‐stop to Los Angeles.

In October 1998, Sea Star Line (SSL) was formed to provide shipping services under the Jones Act, carrying goods from Jacksonville, FL to San Juan, Puerto Rico. SSL provided container, shipping services on their two ships, which were both about 764’ long and 92’ wide. They could carry up to 600 standard (40’) containers at a speed of 25 knots (about 30 mph).


2

Background

Peter Baci (51) joined Sea Star Line (SSL) in October of 1998 having spent his entire career in the maritime industry in positions of increasing authority and responsibility. In college, Peter had obtained a Bachelor of Science degree from a well-‐recognized maritime institution, the State University of New York Maritime College in New York City. In addition to his degree he was commissioned in the United States Navy Reserve and held a Third Officer’s Merchant Mariners License by the United States Coast Guard. During the first four years of his career he worked on the ocean and visited over 25 countries from South Vietnam, to India, to Northern Europe, to South America. He loved being part of the maritime industry and eventually took management jobs in the shipping industry with some of the leading shipping companies. At each step of his career he performed extremely well and was rewarded by his employers through promotions and bonuses. His roles at these companies generally focused on the commercial aspects of shipping including sales, marketing, business development and pricing/yield management.

Peter was also a family man who was married and had two children who were in high school at the time he joined SSL. During his time at SSL he served as President of the Jacksonville Maritime Museum Society, President of the Propeller Club of the United States for the Port of Jacksonville and First Vice President of the Fort Schuyler Maritime Alumni Association.

SSL got its start in 1998 by acquiring the assets of Puerto Rico-‐based Sea Barge, which had put itself up for sale after 15 years of being in business as a Jones Act carrier between the U.S. and Puerto Rico. SSL took over the existing customers and launched their business. An initial investment in the company was made by three partners; Matson Navigation (45%), Saltchuk Resources (45%) and Taino Star (10%). Matson had experience in Jones Act transportation services and it was subsidiary of a larger, NYSE traded company, with extensive experience in shipping between the continental U.S. and Hawaii. Saltchuk Resources (privately held) also was involved in domestic shipping routes operating between the continental U.S. and Alaska. Taino Star was a group of local Puerto Rican investors with numerous business connections in Puerto Rico including many at marine terminal facilities. It was an experienced group of investors with significant financial strength with the purchase of the Sea Barge customer base and the financial resources of the investors.

Sea$Star$Line$(SSL) Saltchuk$Resources$45%

Matson$Navigation$45%

Taino$Star$$$$$$$$$$$$$$10%

Ownership$of$SSL


3

Matson owned two ships that were idled in San Francisco and they put those into service at SSL. The speed of the ships (25 knots) enabled SSL to deliver cargo between Jacksonville and San Juan, Puerto Rico in 54 hours across a distance of nearly 1,200 sea miles. The speed was particularly important for the movement of products susceptible to spoilage such as produce and fresh chicken. ‘Speed’ was also important for customers in the pharmaceutical business, soft-‐drink manufacturing, package shipping, such as FedEx and UPS, and some large retailers such as Wal-‐Mart. With the high speed, SSL ships were able to make a round trip within a week on a regular basis. It provided an advantage over slower vessels, owned by competitors, which serviced the same route.

SSL had its own management team and its President reported to the Board of Managers representing the three investors. The Board of Managers met with the SSL President and his management team on a quarterly basis. These meetings generally focused on the financial results of the business and included strategic planning reviews and long term capital planning. The Board of Managers provided direction and was also responsible for the appointment of auditors. One member of the SSL team was the Senior Vice President-‐Commercial to whom Peter initially reported as Vice President-‐Marketing. Peter’s initial responsibilities included the pricing, intermodal (movement of cargo to and from the ship) and marketing function. Pricing decisions were based on an evaluation of the customer’s needs and the competitive environment. The marketing function measured SSL’s performance in the market and the development of market strategies, specifically, which parts of the markets SSL wanted to focus on to maximize sales and profit. In this position, Peter had access to every marketing and pricing decision that affected SSL’s customers.

Peter also was able to determine the market share of each competitor in the U.S./Puerto Rico market by using publically available information from the Journal of Commerce PIERs system. The PIERs system represented a commercial database, available by subscription, which provided a view into recent commodity movements of U.S. imports and exports. The Journal of Commerce was initially a marine transportation newspaper, similar to what the Wall Street Journal is to finance. As a newspaper it sends its reporters to the Customs Houses to gather shipping information. Over time, these became automated data feeds of valuable information that every shipping company used to gain market information. It provided in-‐depth information that allowed Peter to determine exactly which loads his competitors were moving to and from Puerto Rico. SSL’s competitors had the same competition visibility.


4

The Competition

There were a number of barriers to entry in the Puerto Rican cabotage market, which meant that there would be few competitors. The primary factors limiting competition were directly attributable to the Jones Act and were:

a) No competition from foreign operated vessels b) Entrenched market positions of the incumbent shipping companies c) Large capital investment and long delivery lead times in building a new container ship in the United States d) Substantial investment in infrastructure needed to handle container ships e) Constraints on port space in San Juan, Puerto Rico f) High fixed costs (e.g. ship) relative to variable cost (e.g. fuel), and g) Need to develop a broad base of customer relationships to realize economies of scale

With the acquisition of Sea Barge, the expertise of the investor partners and the connections of those same partners, SSL was able to overcome these barriers. There were five (5) companies, including SSL, competing in the United States (primarily Jacksonville) to Puerto Rico route (see table below). The shipping services were broken down into two types of services, Ship and Barge. The two primary differences between the services was speed of shipment (Ship Service being faster) and cost (Barge Service being cheaper). The competitive landscape and the number of vessels in use were as follows:

Market Competitors Ship Service Barge Service

SSL 2 Navieras de Puerto Rico (NPR) 4 Crowley Liner Services 7 Horizon Lines 4 Trailer Bridge 4 Total 10 11

Pricing in this environment was inelastic, meaning that price changes of the service, in this case shipping, did not cause much of an increase or decrease in the amount of shipping that was done over the route. After all, when goods have to be shipped to an island, there is no other competition for transportation such as truck or rail services (air freight is cost prohibitive for most items that are routinely transported in bulk). So the goods have to be shipped no matter the pricing pressure for getting the goods to their destination.

From 1998 until 2002, Navieras de Puerto Rico (NPR) embarked on a volume-‐driven business strategy, which meant that they would attempt to gain more business at any price. As a quasi-‐government (Puerto Rico) owned operation, it had already sustained significant financial losses for most of its 20


5

years in business. The strategy was to drive other competitors out of business so that, over time, prices could be increased to levels that would yield a profit. This strategy, and the competitive environment, would put pressure on SSL as it started its new business.

It was a highly competitive market. In fact, while there was a nearly 14% increase in the number of containers shipped on Puerto Rico trade routes from 1994 through 2003, freight rates for shipping between the U.S. mainland and Puerto Rico declined by 30% due to excess supply (too many ships). Operating results for all five carriers were awful. It was estimated that in 2001, three years after SSL’s initial voyage, the five shippers collectively realized financial losses in excess of $100M.

The investors in SSL had envisioned a peaceful, mature market place, like the ones they saw on their Alaska and Hawaii routes. Instead they found a market that was hyper-‐competitive, thanks in large part to the marketing strategy of NPR.

Some relief came when the owners of NPR filed for bankruptcy in March 2001. No longer able to sustain annual losses and achieve the goal of becoming the dominant player, NPR dropped out of the business by filing for bankruptcy. At the time, NPR had about 20% of the market, so this was good news for the surviving competitors.

SSL’s Board of Managers met to decide how to react to the demise of NPR. Saltchuk was motivated to purchase the assets of NPR with hopes of reshaping the market. Matson, on the other hand, wanted to stay the course without any further investment (NPR assets) and hope for better results with one-‐less competitor. SSL averaged an annual loss of $20 million a year, so throwing more money into the company was of no interest to Matson. Taino Star sided with Saltchuk, and the decision to move forward with the purchase of NPR assets was made, but Matson wanted out of the investment. Saltchuk invested the money needed to purchase the assets of NPR ($32 million) and a settlement was negotiated for Matson to leave the partnership. Saltchuk was now 90% owner of SSL and Taino Star was 10%. Saltchuk management would clearly be calling the shots for SSL.

SSL purchased NPR’s remaining assets, including 4 ships, for $32 million. Three of NPR’s ships were sold as scrap and one was sold to Horizon, who used it for replacement parts (never put into service). Now there were 6 ships providing “Ship Service” where there had been 10 before. While this took over 1,600 containers per week of capacity off of the market, Peter and others still had doubts that the companies could be profitable in this market.

But senior management still saw potential and sought to make changes in the management structure. The senior vice president of SSL was terminated in 2001 and Peter was promoted to the job. The person who Peter replaced had been the person who brought him into the company. The President of SSL was terminated and the new majority investor sent in their man to turn things around until a permanent president could be found.

Saltchuk, now the 90% owner, began to throw senior management resources and personnel at challenges that SSL was experiencing. One of them was senior shipping executive, Leonard Shapiro. As a result, heated meetings to turn things around and termination of employees became commonplace.


6

Shapiro was determined to turn things around. Even though Peter was a veteran of the industry, he knew things were tough and was intimidated by the new management and the difficult working conditions in the office.

In his new position, Peter’s most important mission was to increase the yield/container that SSL achieved, which would in turn make the company profitable. Once in the role, he considered various alternatives to achieve his goal, including simply announcing a very large price increase shortly after the asset acquisition of NPR. It would have been a quick fix but from a public relations standpoint and political implications, it would have been difficult to take over a competitor, NPR, and then jack up the prices so quickly. Peter continued to do detailed analysis of the competition and evaluated how SSL could turn the business around. Crunching some numbers, Peter determined that SSL needed real price increases to generate in excess of $40 million in sales, which would earn it a good profit. With NPR gone, and its ships taken out of commission, there looked to be some opportunity to meet this goal.

While the partners in SSL, namely Saltchuk, had plenty of money to support the business, it was clear that continuing to lose money was not going to be an option. Saltchuck management, primarily Leonard Shapiro, began to take an active role in the company after the purchase of NPR’s assets and the new appointment of Peter to the senior VP position. Board of Manager meetings became less relevant and formal meetings with staff were postponed. Shapiro started taking staff support from Saltchuk to SSL’s Jacksonville offices and some people lost their jobs in the process. While it was tough for everyone at SSL, things were beginning to take shape and there was a new sense of optimism. Then things took a more dramatic turn.


7

The Conspiracy

On April 24, 2002, Peter Baci traveled to Charlotte, NC to participate in a high level meeting. The request for his attendance came from Saltchuk’s executive Leonard Shapiro, who was taking an active role in turning around Saltchuk’s investment in SSL.

Joining Peter and Shapiro would be top executives from SSL and Saltchuk, as well as executives from a competing shipping line, Horizon, at the Park Hotel in Charlotte, NC. This group represented the only companies offering “Ship Service” to and from Puerto Rico. Attendees included Phil Bates (Sea Star’s Sr. Vice President of Operations), Gabe Serra (Horizon’s Sr. Vice President & General Manager for Puerto Rico), Neil Perlmutter (SSL’s CFO) and Kevin Gill (Horizon). The purpose of the meeting was to conclude an agreement, an unwritten agreement, to eliminate the NPR capacity from the Puerto Rico trade route and make other arrangements to control shipping capacity so as to increase prices. It was that easy. There would be no more losing years. Peter felt some sense of relief that senior management was involved and even though he knew the meeting was wrong (unethical and probably illegal), it solved a lot of problems for him and, in turn, SSL. While on the surface this may have looked like a solution to Peter and those gathered at the Park Hotel, it was a violation of the Sherman Antitrust Act. It was a criminal violation.

With the reduction in shipping capacity associated with NPR’s sale, the other competitors, Trailer Bridge and Crowley, saw an opportunity to begin raising their prices. Though neither company was represented at the meeting in Charlotte, it was apparent to them both that a market without NPR was a good one.

After the meeting in Charlotte, Senior Vice President of Horizon in Puerto Rico, Gabriel Serra, told Peter that his contact within his company for pricing issues was going to be Peter’s long time friend, Kevin Gill. Peter had known Gill for years and each knew the other’s challenges at work. Shortly after the meeting at the Park Hotel, Gill and Peter met at Horizon’s corporate apartment in Charlotte to discuss price increases, including the need for rates to increase by 10% per year across the board. They also discussed the need to generate additional revenue by raising fuel surcharges, rates for refrigerated containers and rates on other cargo shipments. Both Horizon and SSL also increased tariff rates and SSL increased rates on NPR’s old customers. With Horizon and SSL being the only two shipping companies offering “Ship Service”, it was easy to control the entire market.

Controlling prices was not enough. The two companies needed to assure that there were sufficient loads going on each ship to make each run profitable. To address this issue, Leonard Shapiro met with Horizon’s Gabriel Serra to divide the business 50/50. They would be monitoring each other’s business to assure that the business would continue to be equally divided.

While Peter was meeting with Gill, Shapiro met with senior executives at Horizon, Crawley and Trailer Bridge about the industry. While meetings among competitors are usually reserved for trade shows or conferences, closed meetings with competitors are very uncommon.


8

Soon meetings and communications between Peter at SSL were being held among all of the competitors. Peter was working the day-‐to-‐day level of the conspiracy, while meetings were being held above him to review decisions he was making. At one point, SSL’s share of container shipments dropped to 45% compared to Horizon’s 54%. At about the same time, Peter was bidding on a U.S. military contract in direct competition with Horizon. Peter asked his counterparts at Horizon to allow SSL to win the contract in order to bring about some equity in market sharing. When Horizon refused, Peter escalated the issue to SSL’s newly appointed president, Frank Peake. Shortly thereafter, SSL won the government contract. Everything was back in balance.

By 2003, Peter and Gill spoke on the phone two to three times per week and also emailed pricing and other information to each other. In order to cover their tracks, they set up Gmail account aliases. Peter’s was [email protected]. The conspiracy began to work with an efficiency that rivaled the legitimate day-‐to-‐day operations. They would communicate in advance to ensure that they avoided each other’s major customers. They rigged the bids and exchanged information in advance of bids so that they would each understand the others expectations. It was a coordinated dance.

As in most businesses, 20% of the customers produced 80% of the revenue stream so it was not difficult to keep track of which customers were important to the other carrier. If an account was shared between SSL and Horizon they predetermined, based upon share, who would be the “lead” and who would be the “follower”. In doing this, if SSL had a larger share of a particular customers business they would make the initial pricing proposal (lead) and afterwards Horizon would follow their lead with a higher price, assuring a satisfied SSL customer. SSL would of course return the favor for Horizon customers.

After a number of meetings, Peter came away with firm decisions as to which days of the week SSL and Horizon vessels would sail on and the pricing associated with those loads. The two then exchange exact information pertaining to:

• Agreements to allocate customers of Puerto Rican cabotage • Rigging bids to customers for PR cabotage • Fixing rates, surcharges and other fees for Puerto Rican cabotage • Marketing and selling Puerto Rico cabotage at agreed-‐upon prices • Exchanging information on customers, bids, rates, surcharges, fees, volumes and capacity • Implementing and monitoring the arrangements among cartel members

Peter and Gill also routinely provided information to their superiors on pricing and customers so that decisions on the market could be made. Top executives from the companies started meeting at events to review this analysis in Washington, DC, golf courses in Puerto Rico and, one time, at the Iditarod sled dog race in Alaska.

While there was some trepidation by both Peter and Kevin Gill, they felt that their conversations would benefit both companies and the bosses would certainly approve of any decision that meant a profit for


9

their respective companies. They also knew that any pricing changes they might agree to would have to be approved by the their own management. Such passive approval would certainly be an indication that they (higher executives) condoned the means to get to those prices.

As time went by and as SSL and Horizon pushed their prices up, a large gap had developed between the Ship Service pricing and the Barge Service pricing. As Peter would say, “A rising tide raises all ships,” so it was time that every competitor in the Jacksonville-‐Puerto Rico route got involved in increasing shipping prices (and profits). Over time the Barge Service carriers started to raise their prices to closer match the raises experienced on the Ship Service. Again, most of the individuals involved in the shipping business had known each other for many years and there was a significant level of trust.

From May 2002 through April 2008, capacity for Puerto Rican cabotage remained flat, but rates, surcharges and fees increased dramatically and nearly simultaneously across all suppliers. Here are a few of the charges customer experienced:

February 2003 – Horizon, SSL and Trailer Bridge imposed a $40 per container terminal handling charge, where they had not done so previously, except for SSL.

April 2003 – Horizon, SSL, Crowley and Trailer Bridge imposed a “security fee” per container, where they had not done so previously, except for Trailer Bridge.

May 2003 – Horizon, SSL, Crowley and Trailer Bridge charged a bunker fuel surcharge of $225/container

March 2005 – Horizon, SSL, Crowley and Trailer Bridge increased bunker fuel surcharge $280/container

April 2005 – Horizon, SSL, Crowley and Trailer Bridge increase bunker fuel surcharge $310/container

June 2005 – Horizon, SSL, Crowley and Trailer Bridge increase bunker fuel surcharge $340/container

September 2005 – Horizon, SSL, Crowley and Trailer Bridge increase bunker fuel surcharge $375/container

It should have been apparent that something was wrong in the market. As reported in the Journal of Commerce on January 22, 2007, container volumes for Puerto Rico cabotage decreased between 8% and 12% in 2006, yet, freight rates, including surcharges and fees, increased an average of 5%. It was not a big increase, but in such a market one would have thought prices should decrease. On March 5, 2007, Marine Log quoted John D. McCown, Chairman and CEO of TrailerBridge as saying, “These are the best quarterly financial results that Trailer Bridge has reported in its history.” This was at a time when


10

economic factors should have shown that such price increases should not have been possible (lower demand does not equal higher prices).

Peter and Gill would monitor their market share through the Journal of Commerce PIERs data system to see the information that was required to achieve their objectives and to make sure that both companies were doing what they agreed to do (trust but verify). It was an honesty check among the co-‐conspirators. The PIERs data system was the same one both Peter and Gill had used when they were fierce competitors that showed them how much business the other was doing. Now it was used as a measuring device to make sure those in the conspiracy were keeping their word.

The meetings between competitors became routine and just a part of doing business. In fact, many within the SSL organization were aware of the information exchange between SSL (Peter Baci) and Horizon (Kevin Gill). It was an open secret inside the company, although Shapiro had warned Peter to keep these discussions a private matter.

With this plan, SSL was a turn around success. In 2002, SSL had lost money but in 2003 it had its first profitable year….with other profitable years to follow. The attitude around the office of SSL had changed from concern about the company staying open to plans for company get-‐togethers and bonuses. There was renewed energy and back-‐office talk about finding another job had all but vanished. It was a noticeable sign that the company was a success. Everyone in the ownership group was happy with the performance of the company and how Peter was managing things. The firing of employees had stopped, and a secure management structure was in place. New ship construction programs were discussed and planned. Everything was going extremely well and, as a result of SSL’s success, Peter’s salary continued to increase, as did his annual bonus. There was never any money given to Peter in exchange for participating in the conspiracy. His reward was a steady job, a bonus and peace of mind that he would have a long, successful career that would take him to retirement.


11

The Raid

On April 17, 2008, Peter got up early and went to the Jacksonville International Airport heading for meetings in New York. As he was taking off, the FBI and the Department of Justice raided the offices of all four of the ocean carriers (SSL, Horizon, Crowley and Trailer Bridge). FBI agents knocked on the front door of Peter’s home only to find he was not there, but his wife was. Peter’s wife called his cell phone just as he was getting off the plane in Newark. She was very upset and told him what had transpired and gave him the phone number of an FBI agent who had told her to have Peter call him immediately. As his wife spoke, Peter knew what was happening but it seemed like a dream. Who had tipped off the government?

His initial reaction was one of fear and isolation. Having never been in trouble with the law in all of his 61 years, his mind raced and he was not thinking clearly. His first thought should have been to do as his wife told him. Instead, he made a call to an old friend who worked for him, Alexander Chisholm. Peter told Chisholm to destroy all of the emails in the Gmail account that SSL used to share pricing and competitive information with Horizon. Chisholm complied.

He then made his first call to the FBI agent who had visited his home. The FBI agent was up front with Peter, telling him that it would be best to come forward immediately and cooperate so that he would receive the best treatment when it came to criminal charges. Criminal charges? It just kept getting worse. “What to do?” he kept asking himself. As he was thinking, the FBI agent told him that the offices of the four carriers, including those in Puerto Rico, were being raided as they were speaking. He advised Peter that they were not going to immediately arrest him and further advised him that they had him on tape recordings that concerned fixing prices. Someone had worn a wire? Raids? Arrest? Tapes? All this combined with the fact that Peter had just asked Chisholm to destroy emails. Peter could now add an obstruction of justice charge to things to worry about.

Wanting to get off the phone, Peter told the FBI agent that he would come to their offices after he arrived back in Jacksonville. Peter then tried to make other calls to the office to see what was going on but his company cell phone and email access had been suspended during the raid. He was cut off from the company and he had no idea what people were going through back at the office and at other offices….or what they were saying about him.

When Peter got back to Jacksonville, he had decided that rather than go to the office and speak with the FBI, he would get in touch with a lawyer for SSL. What Peter did not know was that in the short time he was in New York, people in the office were already cooperating with the government. The meeting with the FBI was cancelled and a lawyer paid for by SSL called the government and said that Peter had legal representation.

Peter went to work the following morning and met with a couple of his direct reports who were interviewed the previous day. It was awkward. He felt awful and chose not ask them what they had said to authorities but told them to do whatever they felt was right and to protect themselves and their


12

families. Peter felt alone and the looks on his co-‐workers’ faces told Peter that they had probably thrown him under the proverbial bus.

It was an odd place to work but they still had customers calling and ships moving to and from ports. It was difficult for everyone. The week following the FBI raid there was to be a scheduled company meeting to review operation results (SSL was doing great), but that meeting was superseded by the events associated with the raid of the company.

Saltchuk corporate counsel came to the office and interviewed every SSL employee that had been interviewed by the FBI, and Peter. This was a fact gathering effort on their part. Peter was offered the opportunity by corporate counsel to have his own lawyer, who had been selected by SSL. Scared to talk to anyone, Peter decided to speak only with his own lawyer who was located in Miami. Peter’s personal lawyer was provided under the terms of an Understanding of Advancement, basically meaning that the fees were being paid by SSL but if he were found guilty of a crime then he would be responsible for the legal fees….and Peter felt very guilty. However, the alternative was talking to the FBI without a lawyer or talking with lawyers who represented the owners of SSL. While Peter was busy thinking about what to tell his lawyer, SSL put him on paid administrative leave, which meant he continued to get his salary and benefits but he could not return to the office.

Peter’s lawyer made it clear that Peter alone was his client even though the lawyer was being paid by SSL. Initially his lawyer advised him that his role would be to keep him out of prison and to maintain his employment with SSL. Prison? It seemed surreal. Peter was concerned but his lawyer told him that he had to be honest about everything, and that meant EVERYTHING. As they met, Peter’s lawyer understood that his client was deeply involved in illegal actions and would most likely be looking at prison unless they could find a way to cooperate with the government and get some leniency. It was decided that Peter’s lawyer would travel to Washington, DC to meet with members of the Department of Justice to see if they could negotiate a deal. The meeting did not go well as the government already had a lot of information, even at this early stage of the investigation. The government did agree to a meeting with Peter in Miami, with his attorney present, to go through some questioning. This is known as a “proffer”, which is an agreement to allow someone under investigation to be questioned by federal authorities without having their answers be used against them at trial…unless it is information the government already knows.

That meeting went well as Peter remembered a lot of meetings, dates, times and names. Much of what he said matched what others had said, but Peter was at the center of the action. Afterwards his attorney began the negotiation of a plea agreement. Prison was now a certainty and as soon as it was known that Peter was in negotiations to plead guilty, his employment with SSL was terminated with an effective date of August 31, 2008. Peter was also responsible for his own legal fees.


13

Pleading Guilty and Prison

Peter’s first day in federal court was October 20, 2008. In the weeks between his first meeting with the Department of Justice and October 20th he tried to recall as many details about what he had done and what he knew others had done relative to the conspiracy. Everyone that Peter provided information about had been close business and personal friends for years; it was difficult. His personal objective at this time was to try and move this forward as quickly as possible… GET IT OVER WITH. There was a drive to plead, get the prison sentence and start serving his time as soon as possible. After all, his prison sentence could not end without it beginning at some point.

What was ironic about the date of October 20, 2008 was that it represented the ten-‐year anniversary of Peter’s start at SSL. He would have never envisioned this ending. Peter was not the only one who would be in court that day entering a guilty plea. Along with Peter were the subordinate at SSL he had called to destroy documents and delete the Gmail account once he knew of the raid, Alexander Chisholm. Then there was Garbiel Serra (Horizon) and two people who worked for him at Horizon, Kevin Gill and Gregory Glova. Glova had taken over for Gill after Gill had requested to be moved to another position because he grew uncomfortable in his role of having to fix prices. He trained Glova, a good friend, to work with Peter and moved on to a new position that did not involve setting prices with competitors.

Peter was sentenced to prison based on Federal Sentencing Guidelines. Those guidelines are rules that set out a uniform sentencing policy for individuals and organizations convicted of felonies against the United States. Those guidelines mandate “points” for each offense and those points are then matched to a chart (Federal Sentencing Guideline Table) to arrive at a range of months in prison for the judge to consider during sentencing. The guidelines are just a recommendation for the judge in considering a length of prison sentence, but most sentences fall within the recommended range of the guideline. Peter’s plea incorporated a $20,000 fine and a total offense level of 32 (See Exhibit II for breakdown), which was discounted slightly by his cooperation and acceptance of responsibility to reach an offense level of 25 (57-‐71 months). Peter entered his plea of “Guilty” and a sentencing date was scheduled for January 30, 2009.

As a condition of his plea, Peter was fingerprinted, had his photo taken and was questioned about every aspect of his personal life (finances, family, home, cars, health, etc.). All of this information would be used to put together a Presentencing Report, which is prepared by the government. He had to surrender his passport and was informed that he would not be allowed to travel outside of the Jacksonville area without permission. During this time, Peter also spent time with prosecutors about information he knew on others involved in the conspiracy who had not yet pled guilty.

On January 30, 2009, Peter Baci was sentenced to prison for 48 months. It was slightly below the recommended sentence but the government and judge both agreed that his testimony was substantial. At the writing of this case study (May 2012), Peter’s cooperation has led the arrest of others….people he


14

had also once worked with at SSL. He will be asked to testify at those trials as a government witness. Peter was the first one sentenced in this case, and as it turned out, he has received the longest sentence to date. Peter was the last one to cooperate of the four others that had pleaded guilty back in October 2008.

On April 15, 2009, almost six months after pleading guilty and a year after the initial FBI raid on SSL, Peter arrived at the Federal Prison Camp in Pensacola, FL. Peter made the six-‐hour drive across Florida with his 30 year-‐old son. They decided to head over the night before surrendering to prison and stayed at a local beach hotel.

He entered the main building of the prison facility shortly before noon and stated his name, “Peter Baci”, and sure enough, they were expecting him. He waited as a guard made a call and within a few minutes another prison officer arrived to take him to a room called Receiving and Discharge, which is the room where inmates are received into the prison system and released back into society. Peter was asked questions about his health and state of mind. There were also various forms to fill out and Peter turned over prescriptions for medication he was taking under doctor’s orders. Those prescriptions were confiscated and he was told that he could see a physician inside the prison within a few days to get any prescriptions needed. The only item Peter was allowed to keep was his eyeglasses. The guard handed him an orange jump suit and told him to strip off all of his clothes. His clothes and personal items were inventoried and put in a package that Peter sealed. These items were mailed back to Peter’s home. With that, Peter was sent with another inmate to obtain his everyday green prison uniform, which he would wear until his release. By 4:00pm the day of his surrender to prison, Peter’s son was not even back to Jacksonville while Peter was standing up in his cell for a daily prisoner count conducted by a prison guard.

Peter’s sentence was 48 months. In the federal system there is no probation but inmates can earn “good time” for good behavior. It is an incentive for inmates to obey the rules and keep order while in prison. An inmate can earn up to 54 days of good time taken off of their sentence. In addition, Peter qualified for additional time off because of his participation in the 500-‐hour Residential Drug and Alcohol Program. In total, Peter spent 25 months in prison and six months in a Halfway House/ Home Confinement, which ended as of November 14, 2011. During his time in prison, Peter’s cooperation with the government continued, including an appearance before a Grand Jury. Since his release, Peter is on two (2) years of probation, which will end in November 2013. Peter was able to find employment as a clerk for a small shipping company in Jacksonville. He has no management authority.


15

Epilogue

Both SSL, Horizon and Crowley have settled their criminal cases with the Department of Justice. SSL was sentenced to pay a $14.2 million criminal fine on December 20, 2011. Horizon Lines LLC was sentenced to pay a $15 million criminal fine on March 22, 2011. On August 1, 2012, Crowley Liner Services, Inc. pleaded guilty and was sentenced to pay $17 million criminal fine for its role in a conspiracy to fix prices in the coastal water freight transportation industry.

The other companies, Crowley and Trailer Bridge, were not charged criminally. SSL agreed to pay a fine of $14.2M. Horizon Lines agreed to pay a fine of $15M to the U.S. government. A class action settlement valued in excess of $50M was awarded to customers who claimed that they were harmed by the price fixing practices. The companies paying into the settlement included; SSL $18.5M, Horizon $20M and Crowley $13.75M.

On November 17, 2011, Peter’s boss at SSL, Frank Peake (President of SSL), was arrested as part of the continuing investigation. Mr. Peake has pled “not guilty” and his trial is scheduled for some time in 2012. Horizon was delisted from the NYSE on October 14, 2011 due to low trading price (capitalization) and has been working with its shareholders to restructure its $80 million debt. Trailer Bridge filed for bankruptcy in January 2012 and is currently working on a restructuring plan. SSL is still in operation and is now owned 90 % by American Shipping Group, Inc.(Parent of Saltchuk) and 10% Taino Star, Inc.

The investigation into price fixing in the Puerto Rico routes covered by the Jones Act are active in the Department of Justice.

Gabriel Serra (Inmate #32577-‐018) – Pled guilty on October 20, 2008 that he and his co-‐conspirators engaged in a combination and conspiracy in violation of Section 1 of the Sherman Act to suppress and eliminate competition in the market for cabotage between the U.S. and Puerto Rico.

R. Kevin Gill (Inmate #32574-‐018) – Pled guilty on October 20, 2008 that he and his co-‐conspirators engaged in a combination and conspiracy in violation of Section 1 of the Sherman Act to suppress and alimnate competition in the market for cabotage between the U.S. and Puerto Rico.

Gregory Glova (Inmate #32576-‐018) – Pled guilty on October 20, 2008 that he and his co-‐conspirators engaged in a combination and conspiracy in violation of Section 1 of the Sherman Act to suppress and eliminate competition in the market for cabotage between the U.S. and Puerto Rico.

Peter Baci (Inmate #32572-‐018) – Pled guilty on October 20, 2008 that he and his co-‐conspirators engaged in a combination and conspiracy in violation of Section 1 of the Sherman Act to suppress and eliminate competition in the market for cabotage between the U.S. and Puerto Rico.

Alexander G. Chisholm (Inmate #32573-‐018) – Pled guilty on October 20, 2008 that he became aware of an investigation by a grand jury sitting in the Middle District of Florida, assisted by the FBI, into possible federal antitrust offenses in Puerto Rican cabotage, on April 17, 2008, he corruptly altered, destroyed


16

and concealed records and documents and attempted to do so with the intent to impair the availability of the records and documents for use in the investigation.

Frank Peake – Peake, the former president of SSL, was arrested on November 17, 2011 and is scheduled to stand trial on January 14, 2013. Peter Baci is listed as a government witness.

In April 2012, Kraft Foods Group, Inc. and The Kellogg Company filed a lawsuit against SSL, Saltchuk Resources, Crowley and Mr. Leonard Shapior alleging price fixing. Both Kraft and Kellogg chose not to settle with the shipping companies and have instead pursued their own lawsuit for damages associated with their companies shipping goods to Puerto Rico.

There has been pressure to eliminate the protectionist legislation that is the Jones Act. Unions and domestic shipping companies want to protect the Jones Act while large corporations that ship goods believe that shipping prices are kept at high rates. In 2012, Senator John McCain (Republican, Arizona) introduced legislation that would repeal the Jones Act. Businesses in Hawaii are also applying pressure to their representatives stating that shipping goods from Los Angeles to Hong Kong, is half the price of shipping goods from Los Angeles to Hawaii (half the distance). Ship builders are also getting involved stating that with cut backs in the Department of Defense budget and the elimination of the Jones Act at the same time would destroy their businesses. As of 2009, 85% of new cargo ship capacity worldwide was built by Korea, China and Japan. There is also pressure on the airline industry to further deregulate to allow foreign carriers on domestic routes.


17

Source Documents This case is based off of the case of antitrust filed by the U.S. government against Peter Baci in the United States District of Florida, Jacksonville Division, Case No.: 3:08-‐cr-‐350-‐J-‐32TEM. Ct. 1: 15 U.S.C § 1. Source documents include the following:

United States of America v. Peter Baci, Case No.: 3:08-‐cr-‐350-‐J-‐32TEM, Plea Agreement, October 20, 2008

United States of America v. Peter Baci, Case No.: 3:08-‐cr-‐350-‐J-‐25JRK, Indictment, October 1, 2008

Department of Justice, Press Release, “Florida-‐Based Sea Star Line LLC Agrees To Plead Guilty And Its Former President Is Indicted For Price Fixing On Coastal Freight Services Between The Continental United States and Puerto Rico, November 17, 2011

Civil Case, CIVIL NO. 08-‐1467 (DRD) (08-‐1525, 08-‐1553, 08-‐1555, -‐08-‐1617, 08-‐1626, 08-‐1618, 08-‐1665); 08-‐1569 (DRD); MDL NO. 08-‐1960, Second Consolidated Amended Class Action Complaint, February 23, 2009

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO, JOINT MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT WITH ALEXANDER CHISHOLM, CERTIFCATION OF SETTLEMENT CLASS, AUTHORIZATION TO DISSEMINATE CLASS NOTICE, AND STAY OF PROCEEDINGS AGAINST CHISHOLM, Master Docket No. 08-‐md-‐1960 (DRD)

Charlotte Observer, “Shipping Company Fined $45 million – Horizon Lines to Plead Guilty in Price-‐Fixing Scheme For Freight to Puerto Rico,” February 25, 2011

The Journal of Commerce, “Sea Star, Crowley Confirm Antitrust Payouts,” April 25, 2011

United States of America, Plaintiff v. Frank Peake, Defendant, Indictment, Criminal No. 11-‐512 (JAF), Violation: 15 U.S.C. § 1, November 17, 2011

Department of Justice, Press Release, “Former Shipping Executive Sentenced to 48 Months In Jail For His Role in Antitrust Conspiracy,” January 30, 2009

Jacksonville Business Journal, “Former Horizon Officers Get Prison Terms,” May 12, 2009

Pacific Shipper, “Widespread Conspiracy Alleged,” February 8, 2009

Notice of Settlement, “If you paid for ocean shipping services (“cabotage”) between Puerto Rico and the continental United States, you could receive a benefit from class action settlements,” August 25, 2010

United States District Court For The District of Puerto Rico, MDL Docket No. 3:08-‐md-‐1960, Opinion and Order on Legal Fees, August 30, 2011

United States of America v. Alexander G. Chisholm, Case No.: 3:08-‐cr-‐353-‐J-‐25MCR, Indictment, October 1, 2008

Journal of Commerce, “Horizon Converts $49.7 Million of Debt to Equity”, Joseph Bonney, Senior Editor, January 11, 2012

United States of America v. Gabriel Serra, Case No,” 3:08-‐cr-‐349-‐J-‐327TEM, Plea Agreement, October 20, 2008

Jones Day, “Antitrust Alert: U.S. Justice Department Obtains Record Jail Sentence for Antitrust Conspiracy: The Value of Cooperation and Judicial Discretion,” April 2009

Kraft Foods Group, Inc. and The Kellogg Company v. Sea Star Line, LLC; Saltchuk Resources, Inc.; Crowley Maritime Corporation; Crowley Liner Services, Inc. and Leonard H. Shapiro in the U.S. District Court for the District of South Carolina Charleston Division, April 13, 2012

Arrowpac Incorporated; et.al. v. Sea Star Line, LLC’ Saltchuk Resources, Inc.; Totem Ocean Trailer Express, Inc.; Crowley Maritime Corporations’ Crowley Liner Services, Inc.; and Leonard Shapiro, in the U.S. District Court for the District of South Carolina Charleston Division, Case No. 2:12-‐cv-‐1008-‐CWH, April 12, 2012

Department of Justice Press Release, FLORIDA-‐BASED CROWLEY LINER SERVICES INC. PLEADS GUILTY TO PRICE FIXING ON FREIGHT SERVICES BETWEEN U.S. AND PUERTO RICO, August 1, 2012


18

Exhibit I -‐ Time Line

2001 – NPR Navieras filed for bankruptcy and ceased operations

May 2002 – first meeting to discuss fixing prices

December 2005 – Glova joins the conspiracy

April 17, 2008 – FBI raids offices at Horizon, SSL and Crowley. Alexander Chisholm accessed a remote server from his home computer and deleted files that were relevant and material to the grand jury’s investigation….he later recovered the files and gave them to the government. The instruction to delete files came from Peter Baci, “take down the G-‐mail account.”

May 7, 2008 – Sea Star issued a press release stating that it was cooperating with DOJ’s investigation and had placed a number of employees on indefinite administrative leave for violations of company policy.

August 31, 2008 – Peter Baci is terminated from SSL as his attorney enters into discussions to arrange a guilty plea with the government.

October 1, 2008 – Baci, Gill, Glova charged with one count of conspiracy to suppress and eliminate competition by rigging bids, fixing prices and allocating customers

October 1, 2008 – Chisholm charged with altering, destroying and concealing records.

October 20, 2008 – Serra (Horizon Puerto Rico) pleads guilty, Gill (Horizon) pleads guilty, Glova (Horizon) pleads guilty, Baci (SSL) pleads guilty

January 30, 2009 – Peter Baci sentenced to 48 months in prison and fined $20,000 (no restitution as he had no significant assets and the companies would eventually have to pay some form of settlement).

May 12, 2009 – Alexander Chisholm (SSL) was sentenced to 7 months in prison and fined $4,000. Gabriel Serra (Horizon) was sentenced to 34 months in prison and fined $20,000. R. Kevin Gill (Horizon) was sentenced to 29 months in prison and fined $20,000. Gregory Globa (Horizon) was sentenced to 20 months in prison and fined $20,000.

June 11, 2009 – Horizon came to a settlement agreement as part of a class action suit to pay $20,000,000. In addition, it provided relief to members of the class action to freeze shipping rates for a period of two years.

January 15, 2010 – Crowley came to a settlement agreement as part of a class action suit to pay $13,750,000. In addition, it provided relief to members of the class action to freeze shipping rates for a period of two years.


19

July 21, 2010 – SSL came to a settlement agreement as part of a class action suit to pay $18,500,000. In addition, it provided relief to members of the class action to freeze shipping rates for a period of two years.

February 24, 2011 – Horizon Lines agrees to pay $45 million fine to the U.S. government and plead guilty to taking part in a scheme to fix prices for freight transportation to Puerto Rico. It also agreed to pay $1.8 million fine in Puerto Rico to settle lawsuits from people alleging they paid inflated prices because of the company’s price fixing.

April 2011 – Horizon negotiates a reduced payment with the government for $15 million, down from $45 million, after noting the financial difficulties of the company. Includes statement that its legal fees associated with this action cost it almost $11 million.

April 25, 2011 – A class action lawsuit settles with those claiming harm from the conspiracy by the companies involved. Sea Star line paid $18.5 million, Crowley paid $13.75 million and Horizon paid $20 million. These amounts are in addition to criminal fines.

July 13, 2011 – Crowley, SSL and Trailer Bridge share in a $70.5 million contract with the Department of Defense for cargo sealift transportation services.

October 14, 2011 – New York Stock Exchange suspends Horizon Lines from trading because the company’s average capitalization over 30 trading days fell below $15 million. The stock was trading at $0.32/share. It now trades on the OTC market under the symbol HRZL.

November 16, 2011 – Trailer Bridge files for Chapter 11 Bankruptcy (NASDAQ: TRBR)

November 17, 2011 – Frank Peake, Chief Operating Officer and President of SSL is indicted

November 18, 2011 – SSL agreed to pay a $14.2 million criminal fine to the U.S. government

December 20, 2011 -‐ SSL was sentenced to pay a $14.2 million criminal fine to U.S. government.

January 11, 2012 – Horizon settles with debt holders to convert $49.7 million in debt to equity

January 17, 2012 – Trailer Bridge files plan to exit Chapter 11 after negotiating with is debt holders on $82.5 million in notes.

April 2012 -‐ Kraft Foods Group, Inc. and The Kellogg Company filed a lawsuit against SSL, Saltchuk Resources, Crowley and Mr. Leonard Shapior alleging price fixing. Both Kraft and Kellogg chose not to settle with the shipping companies and have instead pursued their own lawsuit for damages associated with their companies shipping goods to Puerto Rico.

August 1, 2012 -‐ Crowley Liner Services, Inc. pleaded guilty and was sentenced to pay $17 million criminal fine for its role in a conspiracy to fix prices in the coastal water freight transportation industry.


20

Exhibit II – Calculation of A Federal Sentence

The base offense level was 12, it was increased by one for submitting non-‐competitive bids , by three for my role, by two for my attempted obstruction of justice, and by 14 because of the volume of commerce attributed to my actions. The DOJ maintained that the impacted commerce was $1B which equates to the total SSL revenue during the dates of the conspiracy. We had tried to dispute the $1B number as it was very arbitrary. I went thru all of the SSL revenue data at my disposal and by my calculations the impacted commerce was significantly less than $1B. I looked at customers that were never part of any discussions with competitors and other factors such as contractual relationships and ramp-‐up timing of the conspiracy. As far as the DOJ was concerned there would be no discounting of this number. They basically said if we prevailed on this issue they would simply add another charge such as mail fraud to make the prison time equate to what they wanted to achieve. Under the plea agreement the minimum amount of time I would serve would be 57 months. This was a “type C” plea agreement which basically presents the terms to the Judge as a ‘take it or leave it” deal. The Judge has very little opportunity to change the terms of the sentence.

Base Level Offense 12

Participation in an agreement to submit non-‐competitive bids +1

Volume of Commerce Attributable to Baci was over $1 billion +14

Defendant’s leadership role +3

Obstruction of justice +2

Acceptance of responsibility -‐2

Timely Acceptance of responsibility -‐1

Substantial Assistance -‐4

The government recommended an offense level of 25 on the Federal Sentencing Guidelines. This took into account Peter’s assistance to the government and his acceptance of responsibility. The prison sentence for a person in this range, with no previous criminal history (Criminal History Category I ), is 57-‐71 months in prison (see Table on following page). One driving factor in the government’s recommendation was the amount of money involved in the conspiracy, which they pegged at $1 billion (the total sales of SSL over the entire period of the conspiracy).


21

SENTENCING TABLE(in months of imprisonment)

Criminal History Category (Criminal History Points)OffenseLevel

I(0 or 1)

II(2 or 3)

III(4, 5, 6)

IV(7, 8, 9)

V(10, 11, 12)

VI(13 or more)

Zone A

1 0-6 0-6 0-6 0-6 0-6 0-62 0-6 0-6 0-6 0-6 0-6 1-73 0-6 0-6 0-6 0-6 2-8 3-94 0-6 0-6 0-6 2-8 4-10 6-125 0-6 0-6 1-7 4-10 6-12 9-156 0-6 1-7 2-8 6-12 9-15 12-18

7 0-6 2-8 4-10 8-14 12-18 15-218 0-6 4-10 6-12 10-16 15-21 18-24

Zone B9 4-10 6-12 8-14 12-18 18-24 21-27

10 6-12 8-14 10-16 15-21 21-27 24-30

Zone C11 8-14 10-16 12-18 18-24 24-30 27-3312 10-16 12-18 15-21 21-27 27-33 30-37

Zone D

13 12-18 15-21 18-24 24-30 30-37 33-4114 15-21 18-24 21-27 27-33 33-41 37-4615 18-24 21-27 24-30 30-37 37-46 41-5116 21-27 24-30 27-33 33-41 41-51 46-5717 24-30 27-33 30-37 37-46 46-57 51-6318 27-33 30-37 33-41 41-51 51-63 57-7119 30-37 33-41 37-46 46-57 57-71 63-7820 33-41 37-46 41-51 51-63 63-78 70-8721 37-46 41-51 46-57 57-71 70-87 77-9622 41-51 46-57 51-63 63-78 77-96 84-10523 46-57 51-63 57-71 70-87 84-105 92-11524 51-63 57-71 63-78 77-96 92-115 100-12525 57-71 63-78 70-87 84-105 100-125 110-13726 63-78 70-87 78-97 92-115 110-137 120-15027 70-87 78-97 87-108 100-125 120-150 130-16228 78-97 87-108 97-121 110-137 130-162 140-17529 87-108 97-121 108-135 121-151 140-175 151-18830 97-121 108-135 121-151 135-168 151-188 168-21031 108-135 121-151 135-168 151-188 168-210 188-23532 121-151 135-168 151-188 168-210 188-235 210-26233 135-168 151-188 168-210 188-235 210-262 235-29334 151-188 168-210 188-235 210-262 235-293 262-32735 168-210 188-235 210-262 235-293 262-327 292-36536 188-235 210-262 235-293 262-327 292-365 324-40537 210-262 235-293 262-327 292-365 324-405 360-life38 235-293 262-327 292-365 324-405 360-life 360-life39 262-327 292-365 324-405 360-life 360-life 360-life40 292-365 324-405 360-life 360-life 360-life 360-life41 324-405 360-life 360-life 360-life 360-life 360-life42 360-life 360-life 360-life 360-life 360-life 360-life43 life life life life life life

November 1, 2011

Case study antitrust on the high seas

Documents

Transcript of Case study antitrust on the high seas