Greek Shipping News Cuts
Week 47 - 2008
---Angeliki Frangou-led Navios Maritime's confirmation it was ditching orders for 12 ships lifts to 37 the number of ships cancelled by Greek interests in the past weeks. At least another 12 hulls are expected to join the list in the coming days. Most of the cancellations involve bulkcarriers with a fairly even split between ship sizes.
Prime reason behind the cancellations is a desire by owners to preserve capital, a move supported by market analysts.
US-listed Navios has cancelled three capesize units, six Kamsarmax bulkers and three handysize bulk carriers. The ships were to deliver from fourth quarter 2009 throught to 2011. A cancellation fee of $1.5m was paid for the capers and the cancellation will result in capital expenditure savings of $265m. The other cancellations will result in annual savings of $61m and were said to be "at no cost".
Chopping the contracts was the right thing to do says Omar Mokta, analyst at Dahlman Rose, as the decision has improved Navios' balance sheet and boosted its net asset value (NAV). Nokta wrote in a note to clients: "Cancelation of the capesize order is a major net positive." He notes Navios paid $100m each for the capes but their value has plummeted in recent weeks as vessel values have retreated.
"Given the weakness of the dry bulk market and near-standstill within the sale-and-purchase market, we estimate the value of the vessels has declined to at best $64m each, based on recent sales of smaller vessels by Norden and Sumitomo," Nokta said. He said a total cancellation fee of just $1.5m provides a lift to the NAV assessment of nearly $2 per share.
As reported by Newsfront Vol 9 Nr 43, a number of orders for capesize bulkers seems to have fallen through. GrandUnion has dropped three from its orderbook, Meandros Lines has decided against two big bulkers, Transmed and DryShips two each, while Excel Maritime has pulled the plug on four of the big ships. Metrostar is said to have cancelled 10 of 16 supramaxes after Jinse Shipbuilding of South Korea failed to provide refund guarantees and Nasdaq-listed Eagle Bulk's said to be ready to pull contracts for 12 of a total 33 supramaxes it has on order in China and Japan. The contracts under risk are all reported to be at the Dayang yard in China.
Harry Vafias-led LPG specialist StealthGas will not go ahead with an order for two suezmax tankers. The two firm, two options, contract at China's Jiangsu Rongsheng HI was announced in September. No price details were revealed but it was thought around $95m was on the table.
Vafias said the Nasdaq-listed StealthGas was still optimistic for "the long-term prospects of the tanker market". He said that by cancelling the ships "we would be able to rebuy the ships or other resales for around 15 to 20% lower". However, he said the company was not considering acquisitions until February at the earliest, depending on market conditions".
-- Filed: 2008-11-20
Greek shipping hit by global financial crisis
The global financial crisis has hit the shipping industry hard, reducing volumes and sending charter rates for dry bulk cargo such as iron ore, coal, steel, grain and other commodities plunging by about 90 percent.
Shipowners, brokers and analysts say ships that earned $50,000-100,000 a day a few months ago are now struggling to take in $5,000-10,000 a day. The Baltic Exchange Dry Index, an indicator of dry bulk freight rates, has plunged from a record high of 11,793 points in May to a nine-year low of just 815 on Nov. 4.
The Greek-controlled fleet, counting vessels of more than 1,000 tons under Greek and foreign flags, came to 4,173 ships and more than 154.5 million gross tons in February, Hellenic Union of Shipping figures show.
Just a few months ago, the picture was completely different. Shipping had enjoyed four or five years of burgeoning trade that had seen companies ordering new ships while still keeping old vessels in service, reluctant to decommission and sell them for scrap.
With orders for 24 new vessels in shipyards in China, Japan and South Korea, the group has the fourth largest order book in Greece, Vafias says. But with banks unable to provide financing, or giving it only on very expensive terms, companies are forced to use a lot of their own money to take delivery of the ships.
Resurgence for the Greek flag
Currently, the Greek-flagged orderbook ranks third internationally and first in the EU in tonnage terms. For existing vessels, Greece is seventh internationally, between Hong Kong in sixth place and Malta in eighth, with a total of 1,487 vessels and an average age of 23 years.
Until April 2007, registering with Greece was not easy. For a vessel to fly the Greek flag it was required that a significant number of its crew were Greek nationals. For owners this was expensive and difficult to achieve: although willing to employ highly-paid Greek officers, their dwindling numbers in recent years posed an insurmountable problem.
According to the new regulation, a Greek-registered ship still requires part of its crew to be Greek nationals, but the number has been lowered dramatically. Since then, owners have flocked to register their ships with Greece. The appeal of the Greek flag is not only its recognisability, but also the fact that it is considered a quality flag, ranking high in the Paris MOU and IMO white lists.
Source: Fairplay International Shipping Weekly - Feature 20 Nov 2008
Focus on the sunny side
---A Greek salvage supremo claims the current crisis could throw up some 'once-in-a-lifetime' opportunities.
Amid the gloom spread by the credit crisis, a few experienced and resilient players are already forecasting that such adversity will present once-in-a-lifetime opportunities.
And it will not come as a surprise to discover that some of the most enthusiastic prophets of hope are Greek shipowners.
Between lambasting the recent boom as a "Mickey Mouse economy" and calling for shipping to "go back to basics", salvage czar George Tsavliris tells TradeWinds that he has told his five children to prepare to seize opportunities the like of which they may never see again.
"I told them the other day that in the next couple of years, if you maintain your code of ethics, maintain your self-respect, make sure you keep an open eye and maintain lateral thinking, you will see opportunities that you will not see again in your career," he said.
So deep is his conviction that there will be unprecedented market openings that he is already mulling ways for the family salvage and towage group he runs with his two brothers, Nicolas and Andreas, to return to the cargo-carrying market.
"We have been in the business since 1939 and we took a very long absence from the [cargo]market by putting our emphasis on the salvage sector," he said. "But now that situation has changed, I would definitely encourage it and will definitely be involved in looking at opportunities in commercial shipping."
Handysize, handymax and multipurpose (MPP) vessels are the types of ships he believes would be most attractive.
Salvage will remain at the core of the group, although he fears that the current recession will see an increase in ship casualties, particularly those caused by failure of on-board electrical systems in modern vessels built to lower specifications and finer tolerances than in the past.
"We are sometimes misunderstood since as a company we never want casualties to take place," he said, noting there are between 200 and 250 major casualties each year.
"I think there will be more casualties because through this cash squeeze there's going to be pressure put on management teams.
"Even without knowing it they'll be cutting corners, perhaps not maintaining maintenance standards and we will see casualties.
"The problem will be caused by the owning community being short of cash and the modern ships not being kept up to the standards they should have been kept up to."
Such cash shortages will mean owners will also struggle to meet the calls now being made on them by their protection-and-indemnity (P&I) clubs, Tsavliris believes.
"A month ago, you made a cash call and everyone was willing to be supportive to the industry. But now they can't afford to pay it. I'm very concerned and very worriedthat the major P&I clubs and insurance companies, too, for that matter will join the problems. We've had the banks being exposed and owners being exposed. Now, insurers could be next."
Owners are unlikely to refuse to pay outright, however, since most can see the need to support the club system, he adds.
"I think the serious owners will see the big picture. If they are thinking about winning the war rather than the battle, they will find a way around it and address their obligations.
"But there are some owners who perhaps just can't do it because they simply won't have the cash."
Despite the current crisis facing many owners, he believes the resourceful will survive and prosper. "I think there will be a lot of players who will go by the board," he said. "A lot of big players will be seriously hit, no doubt about it.
"But the people who have been consistent and who have been around a while, they will survive because they have the survival instinct.
They have known what it means to live hand to mouth. They know what it is like to live with $1,000 in the bank and $100,000 of commitments. There are ways of solving those things.
"You sit back and address the issues in a positive manner. You create confidence in those people around you and you find solutions to problems."
He added: "And maybe that's also an opportunity for the Greek shipping community that you're going to get real togetherness now people will have to get together and make a combined effort to literally work as a society rather than this individualistic approach where you try to outsmart somebody else."
Warming to his theme, he continued: "You can't have a situation where an owner orders five ships for $260m simply because somebody else has ordered the same thing. That's bad logic. It's a form of commercial drunkenness!"
Rejecting the impact of the recent boom, he appeals to shipowners to rediscover what heviews as the real meaning of wealth meaning more than asset values alone.
He reflects that the modern Greek word plousios means someone who is financially wealthy, while in Ancient Greek, plousios comprised two words pliris ousias the nearest translation being "someone of substance".
"To be considered someone pliris ousias in Ancient Greece, besides having financial wealth, you had to be educated, have a cultured background, a position in society, be a family man and have refinement.
"We should rediscover plousios as seen by Ancient Greeks. A lot of money has been made in Greek shipping, no doubt about it. But perhaps there has been disregard that being wealthy should mean a little bit more than just having money."
By Julian Bray, Athens, Published: 14:20 GMT, 20 Nov 2008 | last updated: 14:20 GMT, 20 Nov
EIB to bankroll Greek port upgrades
19 Nov 2008
The European Investment Bank is holding talks with Hutchison and Cosco in respect of funding their investments respectively in the ports of Salonika and Piraeus.
Bank is looking to fund Cosco Piraeus project
Mitropoulos calls for action
---On 20th November, IMO secretary-general Efthimios Mitropoulos issued a call for a co-ordinated and cohesive response, both internationally and nationally, to combat piracy off the coast of Somalia.
He also outlined a series of actions the Security Council might consider taking to address the situation. In particular, he requested that the Security Council take appropriate action:
* To extend the validity of the mandate in paragraph 7 of resolution 1816;
* To call upon States interested in the safety and environmentally sound function of shipping activities, that have the capacity to do so, to take part actively in the fight against piracy and armed robbery against ships (including mother ships) off the coast of Somalia and in the Gulf of Aden;
* To strengthen and enhance the provisions of resolutions 1816 and 1838, particularly with respect to having clear rules of engagement for participating units to facilitate the disruption of pirate operations; and
* To urge States, with due regard to their obligations under international law, to establish an effective legal jurisdiction to bring alleged offenders to justice.
He said that with more than 12% of the total volume of oil transported by sea using that route widespread diversions around the Cape of Good Hope would bring about a series of negative repercussions.
Such diversions would almost double the length of a typical voyage from the Gulf to Europe thereby increasing fuel consumption, emissions and transport costs, which would have to be passed on eventually to consumers everywhere.
Source: (Nov 21 2008), http://www.tankeroperator.com/news/todisplaynews.asp?NewsID=849
Nov 22 2008 by Ben Schofield, Liverpool Daily Post
A PANAMANIAN-flagged ship docked at Liverpool has been detained by inspectors for being in substandard condition.
The Greek-owned 41,016-tonne bulk carrier, Pistis, had berthed in Liverpool to discharge a cargo of grain.
It was boarded by Liverpool-based Marine and Coastguard Agency (MCA) inspectors who were alerted by the UK Border Agency.
According to reports from maritime union Nautilus UK, three of the Russian and Ukrainian crew needed medical attention.
The Pistis will remain under detention until the deficiencies are rectified.
Caroussis chairs UK Club
---Mr Dino Caroussis was elected Chairman and President of the UK P&I Club at the recent Board meeting in Hong Kong. He succeeds Mr Tullio Biggi who has retired from the Board.
Mr Patrick Decavele of Brostrom Tankers was elected a Deputy Chairman and Vice President, joining Mr E. Andre of Suisse Atlantique and Mr. A K Olivier of Grindrod in those roles. Mr Peter Evensen of Teekay Corporation, Mr Edward Jones of Carnival UK and Mr Masamichi Marooka of NYK Europe were elected to the Board.
Source: Press Release,20 November 2008
TOP SHIPS Inc Reports Third Quarter and Nine-Month 2008 Financial Results
For the three months ended September 30, 2008, the Company reported net income of $41,640,000, or $1.48 per share, compared with net loss of $21,986,000, or $1.80 per share, for the third quarter of 2007. The weighted average numbers of common shares used in the computations were 28,153,538 and 12,222,812 for the third quarter of 2008 and 2007, respectively. The results for the third quarter of 2008 include the following items: a net charge of $4,277,000 of stock-based and cash compensation, a net charge of $2,783,000 from changes in the fair value of financial instruments, a net charge of $490,000 from the amortization of financing fees due to the sale of vessels and a net gain of $18,978,000 from the sale of vessels. For the three months ended September 30, 2008, operating income was $49,127,000, compared with operating loss of $15,309,000 for the third quarter of 2007. Revenues for the third quarter of 2008 were $71,094,000, compared to $51,193,000 recorded in the third quarter of 2007.
For the nine months ended September 30, 2008, the Company reported net income of $17,210,000, or $0.70 per share, compared with net loss of $11,711,000, or $1.04 per share, for the nine months ended September 30, 2007. The weighted average numbers of common shares used in the computations were 24,556,897 and 11,280,5511 for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008, operating income was $53,771,000, compared with operating loss of $3,210,000 for the nine months ended September 30, 2007. Revenues for the nine months ended September 30, 2008 were $220,418,000, compared to $200,470,000 recorded in the nine months ended September 30, 2007.
Press Release in full is available at: http://www.topships.org/inv_relations.php
Omega Navigation Enterprises, Inc. Reports Third Quarter and Nine Months 2008 Results
Piraeus, Greece, November 17, 2008 - Omega Navigation Enterprises, Inc. (NASDAQ:ONAV, SGX: ONAV50), a provider of global marine transportation services focusing on product tankers, announced today its financial and operational results for the third quarter and nine months ended September 30, 2008.
The Company had previously announced the declaration of its quarterly cash dividend with respect to the third quarter of 2008 of $ 0.50 per share payable on November 28, 2008 to stockholders of record as of November 17, 2008.
Third Quarter 2008 Results
For the quarter ended September 30, 2008, Omega Navigation reported total revenues of $ 19.5 million and Net Income of $ 6.2 million or $ 0.41 per share, excluding a loss on its interest rate derivative instruments, a gain on warrants revaluation and incentive compensation grants. Including these items, the Company generated net income of $ 5.2 million, or $ 0.34 per basic share. EBITDA for the third quarter of 2008 was $ 14.8 million. Please see below for a reconciliation of EBITDA to Cash from Operating Activities.
Net Income included $ 1.8 million primarily attributable to profit sharing on charters of the vessels Omega Lady Miriam and Omega Emmanuel.
The Company owned and operated an average of 8 vessels, all product carriers, during the third quarter of 2008, the same number as in the third quarter of 2007. The Omega Lady Miriam entered her scheduled drydock on September 21, 2008, and therefore had only 83 revenue generating days during the third quarter of 2008. The drydock costs amounted to about $ 0.5 million and in accordance with our accounting policies we will defer this amount which will be amortized over the period through the next drydocking scheduled in 2013. Should we follow the alternative accounting policy and expense dry docking cost as incurred, our net income would be decreased by $0.5 million as of September 30, 2008. Excluding profit sharing, the Panamax product carriers in our fleet earned an average time-charter equivalent rate of $ 25,035 per day per vessel during the third quarter of 2008, versus $ 25,047 per day per vessel during the third quarter of 2007. The Handymax product tankers in our fleet earned an average time charter equivalent rate of $ 20,788 per vessel per day during the third quarter of 2008, versus $ 20,777 per day per vessel during the third quarter of 2007.
Since the inception of our product tankers' charters through the end of the third quarter of 2008, the profit sharing element of those charters that we have or are entitled to receive amounted to approximately $ 11.4 million. The Company has already received $8.9 million of cash and has recorded profit share revenues of $ 8.6 million, and currently expects to record an additional $ 2.8 million in quarters to follow for voyages performed through the third quarter of 2008. The table below presents the amount of profit share revenues recorded per quarter.
Operating expenses for our MR product tankers averaged $ 4,972 per day per vessel in the third quarter of 2008, versus $ 5,074 per day per vessel in the third quarter of 2007. Our Panamax product tankers averaged operating expenses of $ 5,577 per day per vessel in the third quarter of 2008, versus $ 4,380 per day per vessel in the third quarter of 2007. The increase of the daily operating expenses of the Panamax product tankers relates mainly to an increase in crew wages and maintenance cost for the Omega Lady Miriam which was incurred during drydock.
George Kassiotis, President and Chief Executive Officer of Omega Navigation, commented: "We are pleased to have concluded our tenth consecutive profitable quarter since our IPO in April 2006. We attribute our strong operational and financial results to our strategy of acquiring high quality modern vessels and seeking predictable and stable cash flows through the long term employment of our vessels. In addition, the fact that the charters of six of our eight product tankers have profit sharing has enabled us to participate in the upside of the charter market and thereby maximize our profitability and the return for our shareholders. The profit sharing agreements in 2008 have allowed the Company to enjoy particularly strong earnings.
We continue to return strong operating results even in this most challenging economic environment. As evidenced by our recent charters of the Omega Lady Miriam and Omega Lady Sarah, time charter rates in the product tanker sector have remained solid, while rates in some other shipping sectors have come under some pressure. With oil prices significantly below the highs we saw this past summer, we are cautiously optimistic that demand for petroleum products in the short term will rebound and we continue to be bullish about our sector in the long term. Based on current charter rates and the continued performance of each of our charterers, we believe that we are well positioned to continue to operate profitably even in this economic climate. We also believe that we continue to have strong relationships with our commercial lenders, that are large European and Asian banks which to date have held up extremely well, even in this credit crisis.
All of the vessels in our current fleet are under three year time charters with established charterers pursuant to which we have contracted 100% of our operating days for 2008 and 79% for 2009. The charters on the Panamax Ice Class vessels delivered to us in March and April of 2007, respectively, extend to 2010. The recently announced acquisition of two newbuilding product tankers to be delivered to us in the second quarter of 2009 and the third quarter of 2010, respectively, have also been fixed on three year time charters, thereby enhancing the stability and visibility of our cash flows. In addition, a three year time charter has been concluded on the first of the five newbuilding vessels we contracted for in mid 2007. This brings our overall fleet coverage to 80% in 2009. The table above shows that, assuming that each of charterers continue to perform in accordance with the terms of their respective charters, we are well on our way for both our current fleet and our newbuildings in securing profitable time charters for the entire fleet which will continue to allow us to achieve strong and visible earnings.
We would like to reiterate that we are continuing to pursue a strategy of prudent growth, gradually expanding our fleet and our revenue and profit generation potential. Based on the activity we have announced so far, we expect to add seven newbuilding product carriers to our fleet, thereby expanding it to a total of 15 vessels, and solidifying our position as a major player in the global product tanker market. We expect to be taking delivery of these seven vessels between the second quarter of 2009 and the first quarter of 2011. In addition, the two MR resale acquisitions are on terms that are favorably comparable to the current value of a promptly delivered vessel, and current newbuilding contract values for vessels similar to our five newbuildings currently exceed the prices that we contracted for.
We remain optimistic about the long term fundamentals of the product tanker market, the area of our strategic focus. We believe that we enjoy strong competitive advantages in this market with our focused business strategy, our fleet of young high quality vessels, long term employment with established charterers, a solid and flexible capital structure and a strong management team, enabling us to continue delivering strong, stable and predictable results for our shareholders.
Finally, we continued with our stable dividend policy, declaring our tenth consecutive quarterly dividend of $ 0.50 per common share with respect to the third quarter of 2008."
Press Release in full is available at: http://www.omeganavigation.com/111708.html
Source: Press release, November 17, 2008
Tsakos Shipping and Trading S.A. plans expansion of Seagull Training System and associated services in its fleet.
---Seagull AS, Norway is pleased to announce that Tsakos Shipping and Trading S. A. has decided to expand its existing relationship with Seagull AS by implementing the Seagull Training System and associated services onboard their next generation of vessels.
Tsakos Shipping and Trading S.A. is already using the Seagull Training System onboard more than 50 vessels and has finalized plans to install the system in 30 more new vessels within the next 2 years, in an effort to enhance services and performance to its customers
Tsakos Shipping Trading S.A. manages and operates a diversified fleet consisting of tanker, container and dry cargo vessels currently numbering 70 ships approximately 6.7 million tonnage (dwt). It ranks among the largest Greek ship management companies and is one of the ten largest tanker companies in the world.
Tsakos Shipping and Trading S.A. is certified under ISM code, ISO 9002 and ISO 14001: 2004, making it one of the first major shipping organizations to be accredited by Lloyd's Register.
The management and staff of Tsakos Shipping & Trading S.A. are dedicated to the protection of the environment. In line with this strong commitment, the company has an established Environmental Management System.
Tsakos Shipping & Trading S.A. traditionally strives to motivate and promote an active safety culture throughout the Group and its vessels where comprehensive training procedures are practiced both ashore and throughout the Tsakos-managed fleet.
Source: Press Release (20 November, 2008)
Wavefield vessel involved in Aegean Sea spat
Martyn Wingrove - Monday 17 November 2008
The 1965-built vessel, which was converted into a seismic acquisition vessel in 2007, was on charter with a Turkish energy company TPOA to shoot surveys in the Aegean Sea, but has been forced to halt operations.
Norwegian-owned Malene Ostervold was in the Mediterranean en route to a southern area of the Aegean under escort by the Turkish frigate Gediz when a Greek frigate intercepted the two ships and halted their passage over the weekend.
Greece has made a protest to the Norwegian and Turkish authorities because the government claimed the area where the ship was going to shoot the survey is on the Greek continental shelf.
But the Turkish government claimed the ship was going to carry out exploration activities into the Turkey-controlled seabed, even though the activities would be in international waters.
The Greek foreign ministry said Malene Ostervold sent a message confirming it had halted exploration activities in the disputed region.
Turkey and Greece have had a territorial dispute over parts of the Aegean for decades, and came close to battle in 1996 over the disputed island.
But relations between Athens and Ankara have improved recently following political moves between the two neighbours earlier this year.
Previous exploration efforts in the Aegean have not successfully found hydrocarbons, but Turkey has accelerated its operations in the Black Sea and Mediterranean over the last few years.
The next well to be drilled in the Aegean is set to commence in Greek waters in January 2009, when the Energy Exeter jack-up rig is mobilised from the North Sea.
'Ionia' Challenge to Corporate Criminal Liability
Ronald G. White and Charles L. Shaw
New York Law Journal, http://www.nylj.com/
November 21, 2008
Mark Twain once reportedly observed that "everybody talks about the weather but nobody does anything about it."[FOOTNOTE 1] The same could be said of corporate criminal liability.
In recent years, the corporate defense bar has frequently complained about the low threshold for vicarious corporate criminal liability and the resulting imbalance of power between the government and companies under investigation. However, since potential corporate criminal defendants typically resolve such investigations without a trial, opportunities to challenge the broad scope of corporate criminal liability are rare.
But in a case now pending before the 2nd U.S. Circuit Court of Appeals, United States v. Ionia Management SA,[FOOTNOTE 2] the defendant corporation, as well as a diverse group of business and legal organizations acting as amici curiae, are asking the court to re-examine what had previously been accepted as black-letter law regarding when a corporation may properly be held vicariously liable for the acts of its employees.
While the defense bar has successfully battled some of the U.S. Justice Department's specific tactics in corporate criminal investigations (such as pressuring companies to waive attorney-client privilege or deny payment of employees' legal fees), this is the first significant direct challenge in recent years to the long-standing doctrine of corporate criminal liability. Their arguments, if accepted by the court, could have far-reaching consequences for the balance of power between the government and the targets of corporate criminal investigations.
For nearly a century, it has been accepted as well-settled law that a corporation may be held vicariously liable for the criminal conduct of its employees, where they were acting within the scope of their employment and with the intent to benefit the company, even if they were acting in violation of established corporate policy prohibiting their illegal conduct. Moreover, there is no limitation on the level of employees whose wrongful actions may be imputed to the corporation, so the conduct of even a single, low-level employee could trigger vicarious corporate liability.
Thus, where prosecutors obtained evidence of criminal wrongdoing by a single corporate employee (assuming he was acting within the scope of his employment and with intent to benefit the company), the liability of his corporate employer was virtually automatically established, even if the company had robust compliance programs in place to prevent the improper conduct.
It is this hair-trigger standard for imposition of vicarious corporate liability -- which fails to take into account either the level of the offending corporate employees or the good faith steps taken by the company to deter and detect improper conduct by its employees -- at which the defendant and the amici in Ionia take aim. Instead, they urge the court to adopt a heightened standard under which a corporation would be vicariously liable only for the acts of its "managerial" employees, and only where the company lacked effective compliance policies.
The case that is the vehicle for this challenge to vicarious corporate liability arose in a very different context than the typical corporate criminal investigation.
In Ionia, the defendant company, which was headquartered in Greece, was the owner of a commercial oil tanker that delivered oil to ports in the United States. The indictment charged that members of the ship's crew, all of whom were Ionia employees, directed or participated in numerous discharges of waste oil on the high seas, and falsified the ship's records in order to conceal such illegal discharges, in violation of several federal criminal statutes. At trial in the U.S. District Court for the District of Connecticut,[FOOTNOTE 3] without objection from Ionia, the District Court instructed the jury in accord with what has been accepted as established law on vicarious corporate criminal liability.
Specifically, the court instructed the jury that Ionia could be held vicariously liable for the unlawful acts of its employees if "done on behalf of and for the benefit of the corporation, and directly related to the performance of the duties the employee has authority to perform."[FOOTNOTE 4] The court advised the jury that "the fact that the agent's act was illegal, contrary to his employer's instructions or against the corporation's policies" did not relieve the company of responsibility for the agent's acts.[FOOTNOTE 5] The court did, however, instruct the jury that it may consider "whether the agent disobeyed instructions or violated company policy in determining whether the agent intended to benefit the corporation and/or was acting within his authority."[FOOTNOTE 6] The court's instructions did not require that, in order to convict Ionia, the jury find that the offending employees were of any particular level of seniority or managerial authority. The jury convicted Ionia on all counts. On appeal, both Ionia and the amici challenge the district court's jury charge on corporate criminal liability, and urge the 2nd Circuit to adopt a heightened threshold for vicarious liability.
THE AMICI BRIEF
The amici submitting a brief on appeal in Ionia include business organizations (U.S. Chamber of Commerce and National Association of Manufacturers), bar associations (Association of Corporate Counsel, National Association of Criminal Defense Lawyers and New York State Association of Criminal Defense Lawyers), and a conservative public interest group (Washington Legal Foundation).
'NEW YORK CENTRAL '
In the brief, the groups argue that, despite being consistent with long-accepted precedents, the district court's instructions to the jury on vicarious corporate criminal liability were erroneous. The amici ask the court to reconsider the long-established rule of New York Central & Hudson River Railroad v. United States,[FOOTNOTE 7] the seminal 1909 Supreme Court case dealing with respondeat superior in the corporate criminal context, arguing that it has been misinterpreted over the years to impose an improperly low threshold for corporate liability.
Instead, the amici urge the court to adopt limitations on the scope of vicarious corporate liability similar to those imposed by the Supreme Court in recent civil cases involving claims of sexual harassment. Under these precedents, a corporation could only be held vicariously liable for the acts of its employees if it lacked effective policies and procedures to deter and detect the wrongful action by its employees. The amici brief argues that such a standard is also supported by policy considerations, since it would encourage the adoption of rigorous corporate compliance programs and shield companies from liability where they had taken all reasonable steps to prevent the misconduct.
The starting point for the brief's arguments is the assertion that, despite long acceptance as black-letter law, the low threshold for vicarious criminal liability of corporations is not required by either statute or precedent. While federal statutes provide that corporations can be criminally prosecuted, Congress has not legislated (except in rare circumstances) how courts are to impute to a corporation the conduct and intent of its employees. Indeed, the federal criminal statutes that Ionia was alleged to have violated were silent on this issue. In the absence of such guidance, courts have frequently looked to New York Central and the line of cases following its holding. However, the amici argue that New York Central held only that Congress had the authority to impose a low threshold for vicarious corporate liability if it chose to do so, not that it required such a result, as subsequent courts have interpreted it.
In New York Central, the Supreme Court considered the criminal conviction of a railroad company for violations of the Elkins Act, which prohibited the granting of rebates to customers. The Elkins Act explicitly provided that, where the acts of any employee or agent of a company were "within the scope of his employment," such acts "shall in every case be also deemed to be" those of the corporation.[FOOTNOTE 8] The Court rejected the defendant company's challenge to the statute, holding that "we see no good reason why corporations may not be held responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them."[FOOTNOTE 9]
Amici argue that the Court's ruling that it was permissible for Congress to impose a low threshold for vicarious corporate liability in a particular statute (requiring only a showing that the employees were acting within the scope of their authority) does not suggest at all that such a low standard is required for all federal criminal statutes, particularly those where there is no explicit direction as to what standard should be applied in imputing an individual's conduct to his employer. Notwithstanding this, the brief argues that subsequent cases applying New York Central erroneously "drifted into a judicial assumption that application of expansive respondeat superior principles to determine vicarious corporate criminal liability is required regardless of the text of the statute in question or the intent of Congress."[FOOTNOTE 10]
The amici brief argues that, since such a low threshold is not required by precedent, the courts should look to how the Supreme Court has applied respondeat superior principles in analogous cases in the civil context.
The brief argues that several Supreme Court decisions addressing vicarious corporate liability for sexual harassment claims under Title VII provide such a standard. For example, in Faragher v. City of Boca Raton[FOOTNOTE 11 ]and Burlington Industries, Inc. v. Ellerth,[FOOTNOTE 12] the Supreme Court effectively raised the threshold showing necessary to establish vicarious corporate liability for Title VII claims, ruling that an employer is entitled to an affirmative defense if it had reasonable policies in place to prevent and correct wrongdoing by its employees.
The Court found that this limitation on vicarious liability was appropriate in light of Title VII's primary objective, which was deterring the offensive conduct in the first instance. The Court noted that a rule which permitted corporations to get credit for making reasonable efforts to prevent improper conduct by its employees would provide an incentive for companies to put in place effective anti-harassment policies.[FOOTNOTE 13]
KEY AMICI ARGUMENTS
The amici argue that these cases provide the basis for establishing the proper standard for vicarious liability in the corporate criminal context. Consistent with these precedents, they propose that the 2nd Circuit adopt a standard under which a corporation would bear vicarious criminal liability only where, in addition to the existing elements of liability, the corporation "lacked effective policies and procedures to deter and detect criminal actions by [its] employees."[FOOTNOTE 14] Under such a heightened standard, a corporation would be able to present evidence of its compliance programs and their effectiveness as a defense to criminal liability.[FOOTNOTE 15]
The amici argue that this heightened threshold for liability, in addition to being consistent with Supreme Court precedents, is supported by sound policy considerations. First, they assert that the prevailing standard for vicarious liability, which fails to take into account a corporation's compliance efforts, undermines the proper functioning of the criminal justice system. They argue that the broad sweep of the current standard, along with the fact that an indictment is frequently "a life or death matter" for a corporation, has so tilted the balance of power between prosecutors and potential corporate defendants that companies may forgo legitimate defenses in order to resolve threatened prosecutions. Their brief argues that "because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms" demanded by prosecutors. Moreover, they note that "the vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review," and quote the observations of a sitting federal judge that "guilt and punishment are increasingly decided not in courts, but through a kind of administrative adjudication, in which prosecutors play the part of magistrates or administrators."[FOOTNOTE 16]
The amici brief also argues that adding an element to the prevailing standard for corporate criminal liability requiring proof that a company lacked effective compliance policies would serve the fundamental goals of the criminal law. The amici argue that, just as the Supreme Court found in the Title VII context, this heightened standard will more effectively create incentives for companies to institute policies that will deter and expose wrongdoing by their employees. The brief maintains that, if a corporation must bear liability for the wrongdoing of its employees despite having implemented reasonable policies to deter criminal conduct, then companies will have little incentive to monitor employee conduct and expose wrongdoing. The brief argues that limiting the application of vicarious corporate criminal liability would encourage precisely this type of internal oversight by corporations.
Moreover, it argues that, in cases where the corporation, through its established compliance policies and procedures, has done everything reasonable to prevent criminal conduct on the part of its employees, it is not morally culpable in any sense, and there is little sense in punishing it. The brief claims that raising the threshold of vicarious criminal liability in this manner "has the dual benefit of encouraging effective self-policing while also protecting corporations and their shareholders from rogue employees who commit crimes despite a corporation's diligence."[FOOTNOTE 17]
THE IONIA BRIEF
While most of its brief is devoted to its arguments regarding statutory construction and sufficiency of the trial evidence, Ionia also challenges on appeal another aspect of the district court's instructions to the jury on vicarious corporate liability. In its brief, Ionia argues that vicarious corporate criminal liability can only be based upon the acts of "managerial" employees, an element which the trial court's instructions did not require the jury to find in order to convict the company.[FOOTNOTE 18] Ionia finds support for this position from several 2nd Circuit and Southern District of New York decisions which it asserts limited vicarious corporate liability to the conduct of managerial employees.
For example, in United States v. Koppers Co.[FOOTNOTE 19] the Court of Appeals upheld a district court's instructions that the jury could find the defendant corporation vicariously liable for criminal antitrust violations based on the acts of its "managerial agents," which it defined as those employees "having duties of such responsibility that [their] conduct may fairly be assumed to represent the corporation."[FOOTNOTE 20] In affirming the defendant corporation's conviction, the 2nd Circuit rejected the defense argument on appeal that the threshold for such liability should be even higher, permitting a conviction only where it is based on the conduct of a company's "high managerial agents."[FOOTNOTE 21] Similarly, Ionia cites United States v. Coleman Commercial Carrier, Inc.,[FOOTNOTE 22] a 2002 case in which the district court denied a defendant company's challenge to its conviction, finding that the trial jury was "properly instructed" that vicarious liability must be based on the acts of the corporation's "high managerial agents."[FOOTNOTE 23]
Ionia argues that the district court's instruction to the jury in its case omitting the requirement that employees be of "managerial" level in order to impute their conduct to the company, coupled with the government's explicit argument at trial that corporate liability could be based on the acts of any of Ionia's employees, including low-level sailors on its ship, warrants reversal of its conviction.
In its reply brief, the government (represented by the U.S. Attorney's Office for the District of Connecticut and the Justice Department's Environment and Natural Resources Division) attempts to defeat the defense challenges primarily by procedural means rather than by directly addressing their criticisms of vicarious corporate liability on the merits.
With respect to the amici's argument that a lack of effective compliance policies be required as an additional element of vicarious corporate liability, the government argues that a 2nd Circuit panel lacks the authority to impose such a new requirement in light of prevailing precedents.[FOOTNOTE 24] The government asserts that cases following the standard formulation of vicarious corporate criminal liability (which do not mandate a showing of a lack of effective compliance programs), are "long-standing and govern unless and until reconsidered by the Supreme Court or this Court sitting en banc."[FOOTNOTE 25]
In a similar vein, the government argues that Ionia failed to object at trial to the corporate liability instruction given by the district court.[FOOTNOTE 26] Although the government brief does not articulate it in this manner, such an omission would require a showing on appeal that the district court's instruction was "plain error" in order to warrant reversal, a significantly more difficult burden for the defense to bear in light of the numerous decisions repeating the accepted formulation of vicarious corporate liability which Ionia and the amici challenge as insufficient.
The government addresses the merits of the amici's argument by noting that the district court specifically instructed the jury that it could take into consideration Ionia's compliance policies in assessing whether to impute employees' conduct to the corporation. The government argues that the trial court properly instructed the jury that such policies and procedures were relevant to determining whether an employee acted within his authority or intended to benefit the company, in contrast to amici's claims that such compliance efforts should act as a complete defense to vicarious liability.[FOOTNOTE 27]
With respect to Ionia's argument that vicarious corporate liability may only be based upon the actions of managerial agents, the government argues that Ionia's claims misread 2nd Circuit precedents. First, it asserts that the use of the term "managerial" in Koppers, the primary case relied upon by Ionia on this issue, "is best understood as another way of saying that the agent's actions must be within the scope of the agent's employment."[FOOTNOTE 28]
Moreover, the government argues that the 2nd Circuit has long ago rejected the claim that a corporation could not be held liable for the acts of low-level employees. In United States v. George F. Fish, Inc.,[FOOTNOTE 29] the court affirmed the conviction of the corporate defendant, rejecting its argument that the actions of its low-level salesman should not be imputed to it. In this 1946 decision, the 2nd Circuit noted that the body of cases recognizing vicarious corporate criminal liability made no distinction "between [employees] holding positions involving varying degrees of responsibility," and ruled that the actions of even "subordinate" and "minor" employees could give rise to vicarious liability.[FOOTNOTE 30] Finally, the government argues that, even if there were some error from the omission of the word "managerial" from the court's jury instructions, the error was harmless, since the trial evidence established that certain Ionia employees who were "indisputably" managerial agents were involved in the criminal activity of which Ionia was convicted.[FOOTNOTE 31]
While the defendant and amici in Ionia have procedural hurdles to overcome in persuading the 2nd Circuit to reach the merits of their arguments, their challenge to the long-accepted elements of vicarious corporate criminal liability could have significant consequences. With the current threshold for corporate liability so low, defense counsel for a company under investigation frequently has little choice but to concede liability.
As a result, corporate counsel is often left merely to argue to prosecutors that they should exercise their discretion not to bring criminal charges or to attempt to minimize the financial penalties to be imposed on the client. Moreover, this lack of leverage is exacerbated by the severe collateral consequences that a criminal indictment can bring upon a corporation, particularly a public company.
With liability easily established and a contested trial not a realistic possibility, corporations often have little choice but to agree to the settlement terms dictated by prosecutors.
However, if the 2nd Circuit were to accept the arguments of Ionia and the amici, vicarious liability would not be so easily established, and corporate defense counsel will gain increased leverage in negotiations with prosecutors and expanded opportunity for advocacy on behalf of their clients, since they will have a greater ability to put the government to its proof.
Such a change in the law could have a substantial effect on the dynamics of future corporate criminal investigations. In addition, whether or not their arguments on appeal succeed, Ionia and the amici have at the very least taken the important step of moving the evolving discussion on this important topic from the world of law journals and legal commentaries into the courts, where real change can be affected.
Ronald G. White is a partner in the Securities Litigation, Enforcement and White-Collar Defense practice group at Morrison & Foerster. Charles L. Shaw is a litigation associate at the firm.
FN1 "Respectfully Quoted: A Dictionary of Quotations" (1989) (available at http://www.bartleby.com/73/1982.html).
FN2 Docket No. 07-5801-CR. Oral argument in the case is currently scheduled for Nov. 21, 2008.
FN3 Indictments were returned against Ionia in four separate districts, but were consolidated for trial in the District of Connecticut. Brief for the United States of America at 3, United States v. Ionia Mgmt. S.A., No. 07-5801-CR (2d Cir. Aug. 15, 2008) (hereinafter Govt. Brief).
FN4 Govt. Brief at 45.
FN5 Govt. Brief at 46.
FN7 212 U.S. 481 (1909).
FN8 Id. at 491-92.
FN9 Id. at 494-95.
FN10 Brief for the Association of Corporate Counsel, et al. as Amici Curiae Supporting Appellant at 16, United States v. Ionia Mgmt. S.A., No. 07-5801-CR (2d Cir. June 6, 2008) (hereinafter Amici Brief) (emphasis in original).
FN11 524 U.S. 775 (1998).
FN12 524 U.S. 742 (1998).
FN13 Faragher, 524 U.S. at 805-07; Ellerth, 524 U.S. at 763-65.
FN14 Amici Brief at 23, 25.
FN15 Amici Brief at 15, n.5, 26.
FN16 Amici Brief at 20-23 (quoting Gerald E. Lynch, "The Role of Criminal Law in Policing Corporate Misconduct," 60 Law & Contemp. Probs. 23, 55 (1997)).
FN17 Amici Brief at 24.
FN18 Appellant's Opening Brief at 21-22, United States v. Ionia Mgmt. S.A., No. 07-5801-CR (2d Cir. May 29, 2008) (hereinafter Ionia Brief).
FN19 652 F.2d 290 (2d Cir. 1981).
FN20 Id. at 298.
FN22 2002 U.S. Dist. LEXIS 23155 (S.D.N.Y. 2002).
FN23 Id. at *2-3.
FN24 Govt. Brief at 43.
FN27 Id. at 40-43.
FN28 Id. at 51. The government points out that the district court's instruction in Koppers defined a "managerial" agent not with reference to an individual employee's seniority or decision-making authority, but as a person "having duties of such responsibility that his conduct may fairly be assumed to represent the corporation." Id. (emphasis in original).
FN29 154 F.2d 798 (2d Cir. 1946).
FN30 Id. at 801.
FN31 Govt. Brief at 51-52.