The Pirates' Toll: High Stakes on the High Seas

This is the final part of a four-part series on the rise of hijack-and-ransom piracy in the shipping lanes off the coast of Somalia, and the costs it poses to the merchant shipping industry -- and global trade as a whole.

>>The Pirates' Toll: Part 1
>>The Pirates' Toll: Part 2
>>The Pirates' Toll: Part 3

THE HOSTAGES
When James Christodoulou received the phone call ( "area code: Somalia") while driving on the New Jersey Turnpike -- the one in which the caller accused of him of working for the mob and dumping toxic waste into Somali waters -- he was speaking for the first time to Abbas, a new negotiator. Hussein, the one he had spent the last few weeks attempting to disarm, had evidently been fired.

Christodoulou wouldn't learn the reason why until much later, until he had a chance to speak to the Biscaglia's crew after the ship's release. Hussein's bosses -- the clan "elders," or whomever headed this particular band -- felt that Hussein had become too soft in his negotiating style, that perhaps he had shown too much sympathy toward this group of Indian captives. Hussein, evidently, had come down with a case of Stockholm Syndrome.
Pirate Interactive Map

The 28 members of the Biscaglia's crew spent the 56 days of the crisis inside the wheelhouse, an enclosure, roughly 50 feet by 20 feet, interrupted throughout by radars, desks, the helm. They slept on the available floor space, guarded by dozens of young khat-gnawing Somalis with AK-47s. They ate not from the ship's stores -- the pirates had removed much of the food on board, the better to wield control over their captives. Instead, the pirates brought live goats to the ship every few days and slaughtered the animals there.

Most of the crew, like seafarers the world over, came from poor families in poor countries. Almost all merchant ships fly flags of convenience -- that is, the "home"-port boutique registries purchased by ship owners no matter where their company might have its headquarters -- whether Athens, Oslo or Stamford, Conn. This has given rise to a lot of vessels on the water with the names of island nations and obscure microstates painted onto their sterns: St. Vincent and the Grenadines. The Marshall Islands. Malta. Kirabati. In addition to tax avoidance, the flag of convenience allows a ship owner certain labor-cost advantages: that is, the ability to hire able-bodied seamen from anywhere in the world. It's the maritime version of offshoring.

Police in the semi-autonomous state of Puntland, in Somalia, guard a group of men suspected of piracy on the high seas.

ISEC had hired the men who would operate the Biscaglia as almost all shipping companies do, through a crewing agent. Up the gangway at the start of the voyage came 25 Indians and three Bangladeshis, including the captain. Before the hijacking, Christodoulou had met nary a one. "To me they were just names on a manifest." After the hijacking, he says, he trades emails with them. He receives cards from their parents.

By early January, however, a little more than a month after the hijacking, the crewmembers' families in India had reached a state of high anxiety. Christodoulou and the rest knew about this because they kept in daily contact with them. Tom Rozycki, ISEC's media-relations pro, sent out an email update each night. (A woman on his staff luckily spoke Hindi.) He also implored them not to talk to anyone in India's notoriously aggressive press -- the Biscaglia's captivity was big news in India -- for fear of tipping off the increasingly media-savvy pirates in Somalia, who could use any familial unrest as a chit in their bargaining favor.

Then the grandmother of one crew member went on a hunger strike. Christodoulou, when he found out, was on a plane to Bombay shortly thereafter. About 90 relatives -- parents, spouses, children -- traveled from as far as a day away to grill Christodoulou with questions. He went alone. "I was in a town-hall style meeting, surrounded on three sides. For three hours they were just beating me up. But, I think what they wanted to see was that I could withstand their beating, keep my cool, maintain my focus. I think what they said was, 'If he can take this, we're OK. We have confidence in him.'" He entreated the grandmother to eat by kneeling down in front of her and holding her hand.

He says, "That was the toughest shareholder meeting I ever had in my life. The toughest, and the most important one."

The grandmother, at the end of that long day, ate some ice cream.

Marines confront possible pirate skiffs off Somalia.

RANSOM MARKET
In his hotel room in Bombay that night, Christodoulou spoke to Abbas, the pirate negotiator. He'd brought the football with him to India. Through the entire ordeal, he was never far from Somalia.

Reflecting back, Christodoulou describes his relationship with the pirates as a "sick codependency." Both pirate and owner "are held hostage." Everyone involved understands, in other words, that the ship and the cargo are, at bottom, worthless to the Somalis. What could they do with 25,000 tons of palm oil? Two million barrels of oil? A panamax-size load of coking coal? In Christodoulou's words, "It's the crew that's the real thing of value."

He says, "The pirates can't go anywhere else, because no one else is going to pay them for what they've got. So they're held captive to me. And I'm held captive to them because I can't say, 'F--- you. I don't want to do this deal,' and walk way. No one can walk away from it. But because no one can walk away from it, it tends to have a 100% resolution rate."

Before Christodoulou and his pirates could break their codependency, frightening moments accrued. While he tried to hold pat and not cave by sweetening the ISEC counteroffer, threats, both subtle and unsubtle, began to come down from the stronghold at Garacad. Even Hussein, the relative sweetheart, caused anxiety. The parties sometimes communicated via fax. The pirates used the Biscaglia's machine. A fax emerged on Christodoulou's computer.

"Your crew they don't have water maybe they will dye..."

"Somali gentlemen they know only how to kill or shooting the people. So please help me to finish this problem..."

Signed: Hussein.

>>View the actual ransom note here.

When Abbas the hardliner took charge, the threats gathered clarity -- the Biscaglia thrust aground onto some deserted Somali beach, the Biscaglia crew marched at gunpoint into the Somali interior -- but still these coercions were subtly couched. They never took the form of: Pay this amount, or else. Abbas would say, in his highly imperfect English, that some of his bosses may have recently discussed the possibility of these drastic measures. It became, in effect, the threat of a threat.

Christodoulou would respond in kind: I know you're capable of doing this, he would reply through the football. "But you're businessmen, not murderers. I know we don't want to let our situation get to that."

The Americans hunkered in Hoboken understood that Abbas' subtlety was smart. Neither side wanted to force a "face-off," Christodoulou says, "where somebody's gotta blink." (The story of the crisis, in the retelling, has burnished Christodoulou's language at times into noir.)

It did not put Christodoulou's mind at ease that Somalia's pirates had yet to run a ship aground, to shoot a sailor to make a point. "In the investment world, they're always saying that past results are not necessarily an indicator of future performance. Well, you never know if you're going be the first guy where they kill a crew, where they run your ship into the ground, where they take your guys into the caves."

All through the days, in the background to these conversations between Christodoulou and his pirate liaison, Reginald Taylor, the Englishman (not his real name), whose pre-kidnap-and-ransom career remained mysterious and much-discussed among the Americans in the Hoboken condo-bunker -- Christodoulou suspected Her Majesty's S.S. -- played many crucial roles. Among them was gathering "market intelligence."

So busy have the hijackings become off Somalia that -- in 2008 as now -- ships go in and out of captivity almost every week. Ransoms, therefore, are being transacted frequently enough that a going rate for the termination of a hijacking has more or less evolved. The going rate for a ransom depends on a ship's size and age and cargo and number of crew -- just as it would for charter rates, for ship asset values, for maritime insurance, for fees at the gates of the Suez Canal.

The Maersk Alabama as seen from a naval aircraft on the day the ship was hijacked by pirates.

Taylor, then, would monitor the "ransom market" for Christodoulou, who cringes when he says it.

"I hate to say it, but it is a market. I hate to put it in financial terms, but to them it's a business."

(He also compared notes with Per Gullestrup, of the Clipper Group, which finally re-acquired its ship from the pirates who'd siezed it for a reported $1 million to $2 million, on Jan. 13, 2009. The ship, the CEC Future, was a freighter somewhat smaller than the Biscaglia.)

The pirates, too, must contend with the movement of their captured ships. And so Taylor also kept tabs on this for Christodoulou and his team. There came a time when Hoboken saw that Garacad had experienced a sudden increase in hijackings. Christodoulou says, "We knew that they would have to redeploy their assets from our ship to the new ones, that they'd have to clear inventory -- so to speak. Once they get too many ships in, it becomes a storage problem. So they have to start to release ships to free up manpower for other ships. It's a cycle! A business cycle!"

He says, "Don't think they don't understand the time-value of money. They do!"

It's an insight that comes directly out of Christodoulou's dialogue with the pirate negotiators. In the event, the pirates here perhaps made an error. Abbas one day told his American counterpart something like the following: Every day we have your ship, it costs us money. Advantage, Hoboken.

In mid January, Christodoulou inched his offer higher.

MUM'S THE WORD

Like everything else, the Somali ransom market has suffered from inflation. The average payout sum has doubled between 2008 and 2009 ($1 million vs. $2 million). The shipping industry has noticed the trend and registered its disapproval.

Within maritime circles it's a touchy subject, piracy. Not many ship owners will freely discuss it, not publicly. DryShips ( DRYS) won't comment on the Saldanha, its panamax ship hijacked in April 2009. Navios Maritime Partners, on the subject of its pirate-captured Apollon, doesn't return phone calls. Even Diana Shipping ( DSX), which has never had a ship hijacked, says, through a spokesperson, that its executives "don't really have anything to add on the piracy issue."

A group of pirates said to have attacked a fishing vessel near the Seychelles are being guarded by Portuguese naval marines.

This isn't altogether surprising. It's bad publicity -- what businessman would want to admit to a security breach as serious as having a multi-million-dollar asset, poof, abducted in broad daylight? Who would want to admit to negotiating with criminals? But apart from this, ship owners and their insurers alike are wary of divulging anything that might embolden the pirate gangs, that might accrue to the corsairs' advantage. Say something in the media about the insurance you've taken out on your slow-and-low bulk carrier and the pirates, seeing the media report, might single it out on its next transit near Somali waters.

But mostly it's the subject of ransom that makes ship owners go mum. It's true that word of a payout will quickly spread through the streets of pirate-stronghold communities and into the media. ( Reuters' man in Somalia in particular appears to be well sourced when it comes to ransom-market scuttlebutt; for almost every ship released from captivity, the newswire reports a specific ransom figure, in U.S. dollars.) Still, ship owners would prefer to keep this information out of the public realm, Christodoulou says, "because you don't want to create expectations, inflation, market movement." He also says that such information could jeopardize negotiations ongoing, thus endangering crews' lives.

DARKEST MOMENT
By the last week of January, Christodoulou believed a deal was imminent. "I could tell, from pricing conversations, from the tone and pace, that we were getting to closure. It's not: they're saying A and we're saying Z. It was: they're saying M and we're saying L." The number of phone calls between Hoboken and Somalia shot up to as many as 20 per day as the two sides maneuvered.

This meant that, at long last, Christodoulou needed to call in a favor. Because kidnap-and-ransom insurance is an indemnity policy, the insurer does not front the capital for the payout, and ISEC, in its tight cash spot, didn't have the money to cover a (roughly) million-dollar ransom.

But, Christodoulou says, one of ISEC's biggest investors, a private-equity firm called Regent Private Capital LLC, of Tulsa, Okla., had assured him that finding the ransom money wouldn't be a problem. "We'd always been very confident that having the funds would not be an issue," Christodoulou says. "And that the only thing we had to focus on was safely resolving the negotiations."

Ransom money being readied for shipment to the pirates who captured the Clipper Group's CEC Future.

Christodoulou says ISEC and Regent had many times discussed the need to have money ready to go, "what we used to call cash-in-theater."

Switching to the present tense, Christodoulou describes this moment in the negotiations with the pirates: "It's getting to the point where any call coming up now could be the call where we agree on a price. I can't agree on that price until I know that we have the cash."

With Hoboken and Garacad "within spitting distance," he put in the call to Regent. The answer, according to Christodoulou, was: "We really can't. We really aren't a source for those funds."

Lawrence Field, one of the managing directors of Regent Private Capital, says, "I have absolutely no comment," when asked whether his firm had made any kind of assurances to ISEC regarding funds for the ransom. He says, "We're really bound under the insurance policies not to talk about it." He says, "Regent does not negotiate with any type of terrorist whatsoever."

On the call with Regent, Christodoulou received the same rationale for the firm's decision. When he closed his cell phone after the conversation, he went black with rage. Of the whole crisis, he says, this was his "darkest hour."

The question of paying ransoms is controversial only on the surface. Every ship owner, and almost assuredly every pirate, knows there's really no other alternative. "Is paying the ransom reinforcing bad behavior? Are we in fact perpetuating the cycle by rewarding them?" Christodoulou asks rhetorically.

Yes, a military operation could be mounted to take back any ship from the pirate gangs who have captured it. And yes, the operation would likely "save a good portion of the crew. But what the hell do you tell the familes of the crew members who were collateral damage on this thing," he says. "Blood on a CEO's hands? Or saying, 'Well, we've sacrificed these five people because we wanted to draw a line in the sand?' You can't do that. I don't care what they say."

Ransom drop: Millions of dollars in cash float toward Somali waters as the Clipper Group attempts to secure the release of its hijacked ship.

With a deal nearly on the table, but no money to pay the pirates holding the Biscaglia, Christodoulou and his team began scrambling and brainstorming. He considered going on CNN to make some sort of public appeal. A fundraiser. A hotline phone number and Christodoulou on the air: "Everybody, please, send in your nickel, dimes quarters. I gotta get my guys out." Some type of variety-show benefit concert. "You want me to sing Tom Jones karaoke? I'll do it." He went so far as to ask his lawyer to look into the legality of raising money to pay off criminals.

RELEASE
But it was, in the end, unnecessary. A simple call to Per Gullestrup in Copenhagen solved the problem. The Clipper Group would advance ISEC the ransom amount. "He didn't even have to think about it," says Christodoulou. "Boom, done." Two days later, through the windows at his riverfront condo, Cristodoulou saw some sort of froth on the Hudson. He was on the football, making final arrangements with Abbas. At the front of the turbulence was an oddly shape watercraft. Sully had just landed his plane.

With Clipper's guarantee, ISEC got a loan. With the loan, cash -- 100s, 50s, 20s, 10s, "It's been reported as more than a million; let's leave it at that," is all Christodoulou will say -- went into a tube and into a private aircraft that flew over the Biscaglia anchored off Garacad, swooped low over the ship to take photographs of 28 crew members standing on the deck -- proof of life -- swung back around and dropped the tube, parachute blooming, which fell softly into the ocean. Also in the tube was a cash-counting machine.

When the crew returned to India several days later, they walked together into the Bombay airport terminal and were mobbed by media, camera flashes popping.

Before the tube of cash parachuted into the water, ISEC's lawyers drafted an actual contract, signed by both parties, ship-owner and pirate gang. The irony was not lost on anyone: drafting a contract for the release of a thing from the very party that stole it from you.

Among the last things Christodoulou told Abbas was a half joke that later became the full truth: You're going to put me out of business, and then I'll need to find a job.

And Abbas said: I'll give you a good reference.

Earlier this year, ISEC sold the Biscaglia and its sister ship to a Turkish company. Despite Christodoulou's belt-and-suspenders approach to insurance coverage, enough gray-zone costs came out of the hijacking that it overwhelmed ISEC. Repairing the ship, for instance -- ships sitting idle for long periods don't do well -- cost "hundreds of thousands of dollars. A poor market for seaborne shipping rates didn't help matters. And so ISEC has been dissolved, and Christodoulou is looking for a new job.

But in some respects, more than a year later, he remains in Somalia. He's adamant about the subject of piracy; he still gives his talks at shipping-industry conferences. He keeps in touch with some of the Biscaglia crew. And if he does return to the shipping world for employment, he'll assuredly be forced to confront the subject once more. Piracy, after all, is in the nature of shipping.

During an interview session not long ago in the lobby of a Manhattan hotel, Christodoulou pulled out one of his cell phones -- not the football. He scrolled through his contact list. Under the "A"s was "Abbas." He held the phone up: in underscored blue lettering, a pirate's hotmail.

"He gave it to me," Christodoulou said. "In case we ever had to communicate again."

-- Written by Scott Eden in New York

This is the final part of a four-part series on the rise of hijack-and-ransom piracy in the shipping lanes off the coast of Somalia, and the costs it poses to the merchant shipping industry and, perhaps, global trade as a whole.


Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.

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