U.S. taxpayers are footing the bill for seven years of litigation against Icicle Seafoods Inc. after high-ranking officials in the U.S. Commerce Department settled on a penalty of $615,000 on Jan. 31. This despite the fact that federal prosecutors twice won $3.44 million judgments for 82 violations of the American Fisheries Act.
The process of resolving the case in Icicle’s favor dates back to the first days in office for Jane Lubchenco, administrator of the National Oceanic and Atmospheric Administration. Lubchenco was sworn in March 20, 2009, and issued an order on Icicle’s appeal 11 days later that instructed the presiding judge to reconsider half of the violations, as well as the overall size of the penalty.
The NOAA Office of General Counsel won’t say much about why it overruled a judge and its own enforcement staff by settling the Icicle case for pennies on the dollar, and neither will Lubchenco. It is NOAA General Counsel policy to not discuss settlement negotiations, and Lubchenco refused to answer several other questions not related to the negotiations.
Lubchenco, whose office touted her efforts to increase transparency in its response to the Journal, would not answer questions, such as how the Icicle case came to her attention, how much of the court record she reviewed, or if she has issued other similar orders after taking office.
“That’s what you’re going to get,” said NOAA spokesperson Monica Allen in response to the Journal’s follow-up inquiry, referring to an email from Lubchenco’s office that was little more than a timeline of the case dating back to 2004 and a comment that she “does not play a role” in decisions by General Counsel Lois Schiffer.
The questions about Lubchenco’s review of the Icicle case either before or after taking office in 2009 are key because her order to U.S. Coast Guard Administrative Law Judge Walter Brudzinski stated that he erred in upholding the $3.44 million fine against Icicle and Adak Fisheries.
The initial decision in the Icicle case was issued in March 2007, when Brudzinski sided with NOAA Office of Law Enforcement prosecutors after he found that Icicle and its partner Adak Fisheries LLC exceeded the amount of western Aleutian Islands golden king crab they were allowed to process under the American Fisheries Act, or AFA, and approved the proposed penalty of $3.44 million.
Icicle was allowed to process about 221,900 pounds of such crab per year under terms of the 1998 American Fisheries Act, but its operation with Adak Fisheries exceeded that amount by some 3.8 million pounds over 82 deliveries from 2002 to 2004.
The Icicle settlement comes on the heels of another major Alaska seafood processor busted for going over its crab processing limits. On Sept. 26, 2011, Peter Pan Seafoods, owned by Maruha Nichiro Corp., was found to have committed 45 violations of the AFA from 2004 to 2005 for going 4.1 million pounds over its caps for red king crab and snow crab that was worth more than $12 million.
The court records from both cases show the complex business arrangements used by Icicle and Peter Pan to avoid crab processing caps in the years leading up to the 2005 crab rationalization program, when they were awarded lucrative processing quota worth hundreds of millions of dollars.
The Peter Pan court record also raises issues about whether a foreign company illegally controlled a U.S. flagged fishing vessel for seven years after the American Fisheries Act took effect in 2001 (see story here).
In a statement provided to the Journal, Icicle noted the settlement does not include an admission of liability and the two prior decisions issued by Brudzinski have been withdrawn. The company also said it appreciated the, “recent efforts of the NOAA Office of General Counsel to finally bring this matter to a conclusion.”
“Icicle strives to comply with all regulations, and in this instance we carefully analyzed the structure of the Adak crab processing operations to comply with applicable law, including discussing the structure with NOAA,” said Icicle President and CEO Dennis Guhlke. “From the beginning, we believed the allegations in the (notice of violation and assessment) were without merit, both legally and factually, and were fully prepared to press our position in court. However, the fact that it took more than seven years to work through the administrative process was incredibly frustrating and factored into our decision to settle at this time.”
Crab caps and cash
According to the court record, Icicle sold the excess crab it purchased for more than $17 million. In July 2004, five months before NOAA released its notice of violations and assessment, Icicle sold its 50 percent interest in Adak Fisheries to Kjetil Solberg for $4.25 million.
In its proposed finding of facts, Icicle wrote that its $5 million offer to buy out Solberg was worth twice the book value of his 50 percent ownership. That means Icicle also received about double its share value when Solberg paid it $4.25 million.
Icicle bought its 50 percent interest in Adak Fisheries for $200,000 in 2001 and shortly after, an agreement was signed with Adak Fisheries Development Corp., or AFDC, to process crab at the former Naval base. Icicle prepared an internal report in November 2001, presented at trial, that concluded Adak Fisheries would be considered an “affiliate” under the American Fisheries Act and would therefore be subject to Icicle’s crab cap.
Nevertheless, Icicle determined that it did not control AFDC and the company was not limited by its 221,900-pound cap.
AFDC was fully owned by Solberg of Adak Fisheries, which in turn was being managed by Icicle, and Judge Brudzinski found the arrangement did exceed the permissible level of control under the American Fisheries Act and all crab processed by AFDC and purchased by Icicle counted against the 221,900-pound limit.
Brudzinski was persuaded that the arrangement between Adak Fisheries and AFDC was designed to circumvent Icicle’s crab cap and demanded a strong penalty, but Lubchenco disagreed in her April 1, 2009, order.
“The (Administrative Law Judge’s) decision with respect to the entire penalty assessed in this case seems to rest in part on a conclusion that Respondents (Icicle and Adak Fisheries) engaged in an improper scheme to evade the law,” Lubchenco wrote. “The record does not support that conclusion. The record demonstrates that Respondents attempted to structure their business arrangement to meet the requirements of the law and cooperated fully with the Agency when it raised questions about that arrangement. The fact they did not succeed in achieving compliance does not increase their culpability.
“On remand, the ALJ should reconsider the penalties assessed with respect to all of the charges proved in light of these comments.”
Penalty upheld in 2010
In his decision on the order issued Oct. 29, 2010, Brudzinski flatly rejected Lubchenco’s reasoning and upheld the $3.44 million penalty and all 82 violations. He also told Lubchenco that reconsidering the penalty could lead him to a conclusion the fine should have been higher based on the $4.25 million Icicle received for its share of Adak Fisheries.
“Respondents’ actions frustrated the very purpose of the AFA and undermined the direct efforts of Congress, (National Marine Fisheries Service), NOAA, the (North Pacific Fishery Management) Council, and other Bering Sea fishing representatives who were instrumental in enacting the legislation,” Brudzinski wrote. “The administrative record shows Respondents sought to maximize crab processing and avoid the crab processing sideboard limitations.”
Brudzinski estimated the total revenue before expenses realized by Icicle over the course of the Adak partnership, including the buyout, was more than $22.3 million.
“The existing penalty is fair and appropriate under the circumstances,” Brudzinski wrote to Lubchenco in his concluding paragraph. “It reflects the substantial amount of unlawful overages occurring for well over two years and all factors required by the applicable law. It is also more than the cost of doing business and should deter future violations.”
He emphasized evidence in the record from his initial decision, particularly the testimony of Solberg that AFDC was designed to be a “sleeper” company until crab rationalization was in place and the processing caps would be removed.
Brudzinski wrote to Lubchenco that Icicle’s control over AFDC was “pervasive and overt” and Icicle was “fully aware” of the control issues raised by the arrangement.
Lubchenco and NOAA ended up overruling Brudzinski and their own enforcement staff when they settled with Icicle for $615,000. The NOAA General Counsel office won’t say why it settled for the amount that it did, but the penalty is similar to the $567,244 Icicle claimed was its share of the net profits from the excess crab purchased at Adak.
Brudzinski had expressly denied such reasoning in calculating the penalty.
“To tie a civil penalty exclusively to net profit would result in a civil penalty amounting to no more than the cost of doing business,” he wrote to Lubchenco, “thereby thwarting the intent of AFA to discourage such unlawful conduct.”
One bit of insight into the decision to settle the Icicle case at $615,000 provided by NOAA was the Peter Pan case.
In response to questions from the Journal regarding the reduced penalty for Icicle, Office of Law Enforcement spokesperson Lesli Bales-Sherrod said NOAA General Counsel determined it was “appropriate” to settle the Icicle case for an amount “similar” to the Peter Pan case.
But that explanation raises some questions. In the Peter Pan case, it was the presiding judge who lowered the proposed penalty.
U.S. Coast Guard Administrative Law Judge Parlen McKenna found Peter Pan and Seven Seas Fishing Co. guilty of 45 AFA violations for exceeding their limits for red king crab and snow crab by 4.1 million pounds from 2004 to 2005.
The Icicle penalty was proposed on a per violation basis, but prosecutors in the Peter Pan case proposed the $4.3 million penalty based on their estimates of the net revenue earned from the crab overages.
Judge McKenna determined the formula used was too simplistic in that it merely took the difference between the dock and wholesale prices, and he further concluded prosecutors had not presented evidence of alleged economic harm to other participants in the crab fishery.
McKenna reduced the fine to $450,000, or $10,000 per violation. NOAA settled with Peter Pan a month later for $525,000.
In contrast, NOAA prosecutors had won two judgments upholding the $3.44 million fine against Icicle yet the General Counsel office settled for 18 cents on the dollar, with each side responsible for costs incurred over the seven-year litigation that was preceded by a two-year investigation.
The NOAA General Counsel office also settled the Icicle case for far less on a per violation basis than the Peter Pan case. NOAA settled with Icicle for $7,500 per violation compared to $11,666 per violation for Peter Pan.
As evidence of its transparency, Lubchenco’s office pointed to the Enforcement Section website where violations and settlements are posted every six months. In examining the most recent report of 23 settlements, 18 of those violations were settled for at least 70 percent of the original proposed penalty.
Back at Adak
After leaving in 2004, Icicle is back in business on Adak after signing agreements last April with creditors in the bankruptcy proceeding of Adak Fisheries filed by Solberg in 2009. Icicle took its first deliveries last July after the processing plant was idled during 2010.
According to testimony in the court record, the Aleut Corp., owners of the Adak plant, have always wanted Icicle on the island based on their desire to work with an American company that didn’t have conflicting shore-based operations at Dutch Harbor.
By law, at least 50 percent of the golden king crab harvest must be delivered to Adak as long as the plant is open.
This year that amount was 1.6 million pounds.
Andrew Jensen can be reached at [email protected]