Federal Price Fixing Investigation Has Ties to Hawaii Transportation Companies

BY MALIA ZIMMERMAN – HONOLULU – An ongoing price fixing case being prosecuted by the U.S. Department of Justice’s Antitrust Division that involves most of the nation’s domestic shipping companies, has led to a half a dozen senior executives going to prison and fines totaling more than $100 million.

Now, industry experts say there are hints that Hawaii shipping routes may also be part of the investigation.

Frank Peake, former president of Sea Star Line LLC, a water freight carrier in Jacksonville, Fla., was the latest senior U.S. shipping executive to be convicted for violating the violating the Sherman Antitrust Act. He was sentenced to 5 years in federal prison on Friday, December 6, and must pay a $25,000 criminal fine for participating in what the U.S. Department of Justice called “a conspiracy to fix rates and surcharges for freight transported by water between the continental United States and Puerto Rico.”

Sea Star Line’s parent company, Shaltchuk, also owns Hawaii-based companies Young Brothers, Aloha Air Cargo and Hawaiian Tug and Barge.

Sea Star was started in 1998 as a joint venture between Saltchuk and Matson, Hawaii’s largest cargo container carrier with roughly 65% of the market.

The two Sea Star ships, the El Yunque and the El Morro, were formerly Matson ships used in Hawaii (then called the Kaimoku and the Kainalu).

Matson, then a part of Alexander & Baldwin, eventually sold its ownership of Sea Star to partner Saltchuk.

Bill Baer, Assistant Attorney General in charge of Department of Justice’s Antitrust Division, said the conspirators inflicted “serious harm” on American consumers, both in the continental United States and in Puerto Rico. “The Antitrust Division will continue to vigorously prosecute executives who collude to fix prices at the expense of consumers,” Baer said.

According to court documents and evidence presented during a two-week trial in January in Puerto Rico overseen by U.S. District Judge Daniel Dominguez, 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.  Peake was involved in the conspiracy from at least late 2005 until at least April 2008, court records show.

For their roles in the conspiracy, the three largest water freight carriers serving the continental United States and Puerto Rico, including Peake’s former employer Sea Star, pleaded guilty and were ordered to pay more than $46 million in criminal fines, the Justice Department said.

• Sea Star pleaded guilty on Dec. 20, 2011, and was sentenced to pay a $14.2 million criminal fine.
• Horizon Lines LLC, the second largest carrier in Hawaii as well as in Alaska and Puerto Rico, was sentenced to pay a $15 million criminal fine on March 22, 2011 for their part in the conspiracy.
• A total of 5 individuals in addition to Peake have been sentenced to prison for between seven months and five years after pleading guilty. Their collective time in prison will exceed 11 years. They include Gabriel Serra, Peter Baci, R. Kevin Gill, Gregory Glova and Alex G. Chisholm.
• Thomas Farmer, Crowley Liner Services’ former vice president of price and yield management, also was indicted in March 2013 and will go to trial in May 2014.

There have been hints over the years that Justice Department may be investigating the pricing and other practices of Matson and Horizon in Hawaii as well.

John Terzaken, then a U.S. Department of Justice prosecutor, said in court its investigation is nationwide involving “other trade lanes.” Besides Puerto Rico, the other Jones Act trade lanes are Alaska, Hawaii and Guam.

“The ongoing investigation is far broader than simply the US and Puerto Rico trade,” Terzaken said, adding “There will be charges in these other aspects of the case as well. And those are — those are to come down the road.”

To date, no one from Matson has been charged in the case. However, Alexander and Baldwin acknowledged in an April 28, 2008 statement, and again in 2011, that documents related to its then subsidiary Matson Navigation were subpoenaed in connection with the Department of Justice’s investigation into the pricing and other competitive practices of carriers operating in the domestic trades even though it does not operate vessels in the Puerto Rico trade.

Jeff Hull, Matson’s director of public relations, said in 2011, “Matson understood that while the investigation was focused primarily on the Puerto Rico trade, it also included pricing and other competitive practices in connection with all domestic trades, including the Alaska, Hawaii and Guam trades. Matson does not operate vessels in the Puerto Rico and Alaska trades.  It does operate vessels in the Hawaii and Guam trades. Matson has cooperated, and will continue to cooperate, fully with the Department of Justice.”

In its press release Friday, the Justice Department stated: “This case is part of an ongoing investigation being conducted by the Antitrust Division’s National Criminal Enforcement Section and the Defense Criminal Investigation Service. Anyone with information concerning price fixing or other anticompetitive conduct in the coastal water freight transportation industry is urged to call the Antitrust Division’s National Criminal Enforcement Section at 202-307-6694.”

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