NOAA Settlement with Rafael
Clears Path for Big Scallop,
Groundfish Vessel Selloff

by Jason Huffman

One of the many Carlos Rafael fishing vessels that have lined the New Bedford waterfront for decades. Fishermen’s Voice photo.

August 20, 2019—Now that the National Oceanic and Atmospheric Administration (NOAA) has settled its civil claims against Carlos Rafael and 17 of his former fishing captains, look for the wheeling and dealing to intensify for his 43 scallop and groundfish permits and a related 30 fishing vessels.

Almost two years after a federal judge sentenced Rafael to pay $300,000 in fines and restitution and spend 46 months in prison for 28 different criminal counts, including repeatedly lying about his catch to authorities and evading taxes, the 67-year-old, so-called “Codfather” of New Bedford, Massachusetts, reached an agreement on Monday to determine what civil penalties he might also pay.

NOAA budged little from the $3,356,269 it said in September 2018 that it would seek from Rafael, hitting him with a $3,010,633 civil money penalty. However, rather than revoking Rafael’s many limited access permits, as some in the fishing sector desired or even expected, NOAA has given him until Dec. 31, 2020 – about 16 months – to sell them along with the many fishing vessels he owns or controls through transactions reviewed and approved by the agency.

Based on the estimated value of the vessels, the sales could net Rafael tens of millions of dollars, money that John Markey, Jr., his New Bedford attorney, said will be used to pay the federal authorities, repay loans and cover capital gains taxes.

Rafael must also relinquish his seafood dealer permit by Sept. 1 and permanently cease all commercial fishing, except for scalloping, by Dec. 31. Scalloping must stop by March 31, 2019, the end of the current season.

“By doing it this way, their number one goal, which was to have Mr. Rafael out of the industry, was achieved, and [we achieved] our goal, which was to make sure people got back to work and these permits got used and that the hard work that Mr. Rafael has had on the waterfront for 40 years to build up the acquisition of these assets didn’t all get taken away as part of some civil procedure,” Markey, with the New Bedford firm of Moses Smith, Markey & Walsh, told Undercurrent News on Monday.

Federal limitations favor Quinn Fisheries

The tale of Rafael and his arrest dominated Massachusetts headlines for nearly two years and will forever be one of New England lore.

After coming to America in the 1960s as a 15-year-old boy from the Portuguese island of Corvo, in the Azores, Rafael climbed his way up from working as a fish cutter to become a commercial fishing mogul. His enterprise, at its height, was believed to be worth as much as $100m, including 36 vessels, a processing facility, various distribution channels and about one-fifth of the region’s cod.

Rafael survived several brushes in commercial fishing, even challenging the federal authorities to catch him breaking the law, before the one mistake that did him in: attempting to sell his business. Rafael told a group of federal agents, who were pretending to be interested Russian mobsters and wearing wires, not to worry about his accounting records because of the shortcuts he took to make his real numbers much better.

In order to avoid federal limits for certain species, including cod, he had mislabeled more than 700,000 lbs of fish over a period of four years, he later admitted to the investigators, saying he did it to protect workers whose jobs were threatened.

Now the biggest question remaining for the commercial fishing industry in New England becomes who will take over Rafael’s 11 limited access scallop permits and vessels or his 32 groundfish permits and 19 draggers.

“We have been letting folks know that we are hoping to get a deal done with the government and that any deal we enter into with them would be conditioned upon us achieving this,” Markey told Undercurrent on Monday. “And so people have expressed interest, we have engaged in talks and discussions, and we are hopeful that we will be able to get rid of all of the boats by the deadline, which is December 2020, but we are also optimistic that some of them will be sold during this calendar year.”

An early favorite to acquire the Rafael scallop permits and vessels and maybe some of his groundfish permits and vessels, many of which can also be used as dayboats to catch small amounts of scallops, appears to be Quinn Fisheries, a New Bedford-based scallop harvesting operation since 1986.

As reported earlier by Undercurrent, Charlie and Michael Quinn, a father and son, in July, bought 14 acres of abandoned commercial waterfront property previously used by a copper mill on which the company plans to operate a shipyard and has been rumored to be negotiating with Rafael.

Michael Quinn, the business’s operations manager, told Undercurrent in an earlier interview that the newly acquired property, once dredged, will likely be used to harbor the six scallop vessels already owned by the company.

The small number of scallop vessels the Quinns now own is an advantage over other potential acquirers. Per federal regulation, no more than 5% of the limited access scallop vessels and permit-relate quota can have the same owner. Because all of New England’s roughly 370 permitted scallop vessels have the same amount of quota, that limits their owners to 17 permitted boats each.

Reached by phone on Monday, Michael Quinn declined to comment about the prospect of buying Rafael’s boats.

The largest player in the US scallop industry is Eastern Fisheries, which is owned by both Nordic Fisheries and the O’Hara Corporation, and thus able to maintain a combined fleet of 27 vessels. One source familiar with Eastern said the company is not likely to bid for the Rafael boats, as it is enthusiastically pursuing other species, but is not maxed out on vessels and could be quickly interested if the price was right.

Atlantic Shellfish is another large scallop operation, but president Warren Alexander told Undercurrent that he already has his 17 vessels and is also not interested in Rafael’s groundfish fleet.

Blue Harvest Fisheries, yet another large scallop operation in New Bedford, has been reported to be on a spending spree in recent years with cash handy from the global private equity firm Bregal Investments, while Bregal simultaneously has sought to sell American Seafoods Group, a large harvester and processor of Alaska-caught pollock.

In April, Bregal announced that a second round of funding brought its total managed capital up to $1.25 billion.

But sources contacted by Undercurrent expressed skepticism about the possibility that Blue Harvest might attempt to obtain the Rafael vessels, noting in particular that the company has 15 scallop vessels now, just two shy of the limit.

Another company to keep an eye on, sources said, is Cooke. The Canada-based seafood giant has been extremely acquisitive of late, picking up shrimp farming operations in Central America, and was apparently enthusiastic to get more into the scallop industry after acquiring the Wanchese Fish Company in 2015. Wanchese brought with it eight US scallop vessels and licenses and two more licenses in Argentina.

Prior to acquiring Wanchese, Cooke was reported to be looking at buying all of Rafael’s scallop vessels but no deal materialized.

A Cooke spokesperson said on Tuesday morning that the company never comments on pending acquisition efforts and so he would be unable to talk about whether Cooke has interest anymore in the Rafael fleet.

Scallop permits and vessels said to be worth about $7m each

Whoever winds up buying any of the Carlos Rafael scallop permits and vessels better be ready to bring with them several wheelbarrows full of cash, veteran sources of the New England scallop industry told Undercurrent.

As the sources explained, the going rate for a limited access scallop permit is about 12 to 14 times earnings before interest taxes depreciation and amortization (EBITDA), which works out to about $6m. The vessels themselves might sell for $500,000 to $1.5m, but are virtually worthless without the permits.

So, the overall asking price for each permit and vessel, combined, is going to be about $7m, sources estimate.

Good luck trying to separate one from the other, too. The federal fishing permits in New England come with horsepower, length and tonnage specifications to match the original vessels and changes are difficult to make, sources advised.

Also, don’t look for much help from lenders, the sources warned. Banks have been somewhat skittish and loaning only about 50% of the price of a vessel, meaning buyers could be forced to come up with about $3.5m to $4m in cash for each permit and vessel combination.

One scallop industry professional suggests the Rafael vessels might be sold in a sort of reverse auction, where the price starts at the highest level and drops until one of the existing scallop companies sees an agreeable price.

“I think anybody with enough money and enough capital that knows it is a good value, if it is in fact a good value and the price doesn’t get too high, might step up and buy them, as long as they don’t have the restriction of too many boats,” the source said.

To maximize the value of each scallop permit, Rafael has elected to allow his vessels to fish in a very limited capacity over the past six to eight weeks, Markey told Undercurrent.

Assuming most of the quota remains, the combined more than 1.7m lbs of scallops, worth about $16.0m in dock prices, would be a generous prize to leave on the table as the 2019-2020 scallop season is shaping up as a good one with a total 62.5m lbs expected to be landed, 10% more than the previous season, which was also strong.

Nearly 33,000 lbs of U-10/20s, the most common size of scallops, from the Georges Bank sold at the New Bedford seafood auction on Monday for $9.05 to $9.25/lb.

The groundfish permits and their related boats will be much cheaper, going for 5 to 6 times EBITDA, sources said. The vessels have been prohibited from fishing, though Rafael was able to lease out his quota to other harvesters. Putting these groundfish vessels back in the water, potentially could make them buyers of leases, driving up the value of the species, Markey suggested.

Buyers will have to decide about captains and crews

Another issue related to the sale of Rafael’s fleet will be how the buyers choose to assign captains and crew. As many as 17 of Rafael’s former captains are looking at suspensions ranging from 20 to 200 days as part of the settlement agreement. And after they’ll also be looking at probationary periods ranging from one to three years, during which time their boats will be subject to additional monitoring and reporting requirements.

Markey told Undercurrent that some captains began serving their suspensions last week and many hope to satisfy their requirements intermittently, in blocks of days between heavy fishing periods.

As one source noted, the need for experience might result in the buyers being more prone to hire the former Rafael captains.

“These boats are all different and they don’t come with instruction manuals,” the source said.

“People make mistakes,” another scallop industry professional said. “They should get another chance.”

However, a Maine-based groundfish industry source plans to ask for a list of the Rafael captains that includes the lengths of suspensions and time served to share with colleagues to avoid them being held up from fishing or subjected to extra scrutiny while on the water.

Looking forward to vacations in Portugal

Meanwhile, as the commercial fishing industry prepares to move forward and absorb Rafael’s assets, many are displeased with the NOAA settlement.

The Maine-based groundfish source told Undercurrent that harvesters there felt Rafael’s quota should’ve been seized and redistributed to other vessels, as prosecutors suggested previously.

“So the lesson from Carlos Rafael is that crime does pay,” the source said.

Tom Nies, executive director of the New England Fishery Management Council (NEFMC), expressed a similar sentiment in a statement shared with Undercurrent. The NEFMC announced on Monday that it plans to discuss the settlement and ask questions of NOAA officials at its next meeting in Gloucester, Massachusetts, in late September.

“We know Carlos Rafael committed egregious fisheries violations, but the NOAA Fisheries statement is unclear about what those civil offenses actually are and whether or not Carlos Rafael has admitted responsibility for those offenses,” Nies said. “We’re pleased to learn that he will be permanently removed from the fishery once the terms of the settlement have been carried out, but we also know some fishermen will be troubled by the fact that a man who built his business through illegal activity will be allowed to financially profit through the sale of his operations.”

As for Rafael, the sale of the permits and vessels brings him one step closer to closure, his attorney said.

He reported to a federal prison in Devens, Massachusetts, on Nov. 6, 2017, and would reach the end of his 46-month term in September 2021, though he could be eligible for parole much sooner, in March 2021.

“Carlos is a strong-minded and strong-willed person,” Markey said. “That’s why he did well on the waterfront and that’s why, I think, he is doing fine where he is. All in all, he would rather be with his grandkids and his wife and be able to take vacations on Corvo in the Azores ... But he recognizes that’s not in the cards for last year and this year, but he’s hoping, once this is behind him, he will be able to enjoy some of these things.”

Reprinted with permission from Undercurrent News, www.undercurrentnews.com