O, What a Web We Weave By Tom Monahan (May 29, 2014) There’s an old poem that connects my thoughts with All Aboard Florida. Written by Sir Walter Scott, it goes in pertinent part: “O, what a web we weave when first we practice to deceive.” What jogged my memory was the misleading propaganda that the Florida East Coast Industries is spreading all around to justify its application for the largest federal loan for a railroad in history, and make the public think it can launch the first profitable railroad passenger service in modern history. It makes me think of the Wizard of Oz behind a curtain creating myths like smoke in the air. One somewhat puzzling effort is seemingly to interchange subsidiaries, like peas under a walnut shell. All Aboard Florida keeps on saying that FECI (Florida East Coast Industries) continues the rich history of the railroad that was established by Henry Flagler in 1892. In a handout at the Tequesta public meeting on May 27, 2014, it states “FECI has a rich history dating back more than a century.” FECI even promotes this myth on its own website, www.feci.com. However, Wikipedia and the website of FECRWY (Florida East Coast Railway, L.L.C.), www.fecrwy.com, say that Florida East Coast Railway is the continuation of Flagler’s enterprise. Like everything in All Aboard Florida’s corporate history, this is complicated. FECI, Inc. was incorporated in 1983 and made the holding company for the Florida East Coast Railway Company and the Commercial Realty/ Flagler Development Company in 1984. That alone negates the claim that FECI’s history is made rich with roots in Flagler’s achievements. But there’s more. FECI, Inc. surrendered its corporate status in Florida and became Florida East Coast Industries, L.L.C., in Delaware on December 2, 2013. Eight days later, Florida East Coast Railway was spun off by FECI, L.L.C., to the railroad holding company, Railroad Acquisition Holdings, L.L.C (RAH). Not surprisingly, RAH is a wholly-owned subsidiary of the Fortress Investment Group, which is also incorporated in Wilmington, Delaware. Now only RAH can legitimately claim some link to Florida East Coast Railway Company’s roots with Flagler. FECI, L.L.C., was apparently created in 2013 for the purpose of applying for the loan and operating All Aboard Florida as a passenger service. A distinct advantage is that the corporate tax for a Limited Liability Company in Delaware is limited to $250 per year.
In corporate law, it is most legitimate to use a corporate status to shield a corporation from liability and protect its assets. By shedding its ownership of the historic railway company, FECRWY, L.L.C., the now separate owner of All Aboard Florida, FECI, L.L.C.,, has separated the assets of the railway from any liabilities of the FECI, L.L.C. While perfectly legal and above board, these maneuvers do become crucial in connection with how FECI, L.L.C., the applicant for the $1.5 billion federal loan, will provide collateral for the loan. Because of questions about FECI. L.L.C.’s financial soundness, many people are skeptical. On the other hand, The Palm Beach Post has assured us in an editorial: Not surprisingly, this wild-eyed theory, doesn’t hold up under scrutiny. To apply for the federal loan, the company has had to put up its railway and other assets as collateral. People are still skeptical, because no facts about the loan have been made public by the Federal Railway Administration, and FECI, L.L.C., as a private company, has so far declined to make any financial disclosures. An insight into the truth was also presented to the Federal Railway Administration by a Jupiter attorney, Barry B. Byrd. He laid it out this way: In fact, FECI was incorporated December 2, 2013, in the State of Delaware. It was registered to do business in the State of Florida on December 9, 2013. It has a short history of only a few months. FECI has a similar name to Florida East Coast Railway Corp., and thus is attempting to confuse the public, and, in particular, the FRA, in order to gain confidence and enhance is reputation, with the goal of obtaining the Federal loan funds for FECI under RRIF. Even the Palm Beach Post has been flummoxed under this propaganda onslaught. In its article on the May 27, 2014 public meeting in Tequesta, it said, “Fortress Investment Group bought Florida East Coast Industries in 2007.” Actually, the Fortress hedge fund bought the railroad, FECRWY, in 2007. All this mingling of corporate activity and history is used when it seems convenient to confuse the public, but the switch can be turned off. On April 27, 2014, Frank Cerabino, columnist for the Palm Beach Post, wrote a column about the realistic prospects for passenger rail service in South Florida and for increased freight traffic after the completion of the Panama Canal improvements this year. Cerabino correctly pointed out that the federal loan for which FECI, L.L.C., is applying, will improve the tracks that FECRWY also will use to haul the increase in freight from China. He prudently raised the question that so many critics have voiced. If, realistically, passenger rail has
small odds in succeeding, and the prospects for increased freight traffic are virtually assured – “. . . is All Aboard Florida really about moving people on one of Florida’s freight lines.” Right away, the Palm Beach Post reported a rejoinder from Michael Reininger, president of All Aboard Florida, to this well-done column, in which he called it a “fictional tale” suggesting a “conspiracy.” To muddy the waters, Reininger incorrectly stated that Cerabino said the federal loan “is designed solely to result in new capacity for freight traffic on the historic Flagler corridor.” However, in this instance, to strengthen a rejoinder, Reininger abandoned the commingling of history and activity and insisted that FECI, L.L.C., and FECRWY were separate companies with distinct managements. Isn’t it hard to believe that all these subsidiaries of this huge hedge fund, the Fortress Group don’t practice teamwork and coordination? There does seem to be more than one company involved in making the most profit out of Flagler’s old railway line. Fortress Investment Group, an investment management firm in New York City, is described as a hedge fund with more than $60 billion of investor funds under management. With numerous and diverse investments, it significantly owns many railroads and has billions invested in ship container and container ship leasing. Fortress achieved some notoriety during the 2008 presidential campaign for its patronage of Senator John Edwards of North Carolina. It was disclosed by the Wall Street Journal that Edwards had invested $16 million with Fortress, and then was employed by Fortress ‘as a part-time consultant” for $479,512. Another example of All Aboard Florida’s sleight of hand is in the color flyer the railroad handed out at the May 27 meeting at the Tequesta Baptist Church. In it, All Aboard Florida stated, “All Aboard Florida will be privately funded and will not require an ongoing subsidy.” First of all it is not accurate to say “privately funded” when its business plan is predicated on a $1.5 billion RRIF loan from the taxpayers. It is also misleading to say “(it) will not require an ongoing subsidy.” I believe most economists would agree that it is not possible to operate a railroad passenger service without a subsidy. The president of AMTRAK said that AMTRAK will never be profitable. Two Florida governors, Jeb Bush and Rick Scott abandoned plans in Florida for high speed rail, after government studies, because the numbers did not add up, and it was concluded it was too much risk for the taxpayers. Then All Aboard Florida listed in its flyer speculative benefits from a commissioned economic report, which an economist, quoted in the Palm Beach Post, said was “pie in the sky.” Earlier, another high speed passenger service, Florida Overland Express (FOX) was promoted as a twenty first century rail service using magnetic levitation. With speeds of 200 mph, it was like modern systems in France, China, and Japan. It was abandoned nearly 20 years ago because sufficient ridership could not be assured. The absence of ridership leads to collapse or lifesustaining subsidies.
Interestingly, Florida East Coast Railway was once in the passenger business. According to Wikipedia, the railway offered passenger service into the 1960’s under the leadership of Edward Ball. This was the time of such railroad labor abuses as wasteful work rules and featherbedding. Ball fought hard for reform, but labor strife became a small war including shootings and bombings. The labor strike lasted 14 years, but the railway finally gave up the last remnants of its passenger service in 1968.