Broker Bond Clash Continues After Law Sets Higher Minimum

This story appears in the July 23 print edition of Transport Topics.

A provision in the recently enacted federal transportation legislation aimed at protecting truckers and shippers by dramatically raising the bond freight brokers must pay has ignited a storm of controversy.

The provision, which will raise freight broker surety requirements to $75,000 from $10,000, is intended to make it more difficult for “fly-by-night operators” to do business, said Robert Voltmann, president and chief executive officer of the Transportation Intermediaries Association, a group composed mostly of 1,300 brokers and freight forwarders.

The increased surety requirement, which was slipped into the transportation bill as a last-minute amendment, is supported by TIA, American Trucking Associations and the Owner-Operator Independent Drivers Association — three trade groups that often disagree on transportation legislation. But smaller brokers claim it is a move by larger brokers, represented by TIA, to put them out of business, and some members of a smaller broker association have sent emotional e-mail messages to Voltmann.

For example, Voltmann received an e-mail from Jim Murrell, president of JMG Freight Group LLC, Franklin, Tenn., who asked: “Are you the president, CEO of the Transportation Intermediaries Association for the large intermediary companies or all intermediaries? Please remind me again who you represent?”

Voltmann said the new federal provision will address what has been for years a “Wild West mentality” in the broker industry and will allow those who are cheated by brokers to pursue civil damages in court. It also will require carriers and brokers to have separate operating authority and to indicate in all transactions whether they’re acting as brokers or carriers, Voltmann said.

Raising the bond has been widely debated for years, and various past attempts to implement the higher requirements failed to pass Congress.

Voltmann said the higher bond requirement will help to put out

of business load-board double-

brokering scammers such as Kulwant Singh Gill, who was sentenced to more than 10 years in prison in April for defrauding 165 brokers and motor carriers of more than $1 million (4-16, p. 5).

“By making the bond higher, we actually created larger pools of money to sue against,” Voltmann said. “We can go after the trust company. We can put class actions together.”

“This is a game changer, but not just because the bond went up,” Voltmann told Transport Topics. “There are things [in the bill] that will start addressing some of the fraud that crept into the marketplace because DOT refused to be the sheriff.”

A spokeswoman for the Federal Motor Carrier Safety Administration, the agency under the U.S. Department of Transportation that would be responsible for policing the new federal mandate, did not respond to a message seeking comment by TT’s press time.

Prasad Sharma, vice president and general counsel of ATA, said he is hopeful the legislation will be a step toward reforming the broker bond surety industry and help eliminate some of the fraudulent practices that sometimes leave carriers unpaid when dealing with brokers.

“DOT always had the authority to set the bond amount required to register as a broker,” Sharma said. “But on numerous occasions, they have declined to increase that amount from the $10,000 that was set back in the late 1970s.”

Todd Spencer, executive vice president of OOIDA, said the bill’s language will close loopholes that crooked brokers have used to defraud truckers.

“The bad guys have gotten away with exploiting the system for far too long,” Spencer said. “When fully implemented, the increased bond, coupled with greater accountability that comes with it, will be a win-win for truckers and the many legitimate brokers they deal with.”

But the new federal provision has drawn the wrath of a trade group of small brokers, the Association of Independent Property Brokers and Agents, which has accused TIA of attempting to put small operators out of business.

James Lamb, president of AIPBA, said the legislation’s increased surety requirement is an “underhanded” attempt by “mega brokers” and TIA to eliminate their smaller competitors.

Lamb even charged that Voltmann was pushing the higher surety requirements to help TIA’s bond underwriting program, an allegation that Voltmann denied.

Voltmann told TT in March that the naysayers of the surety increase were “fear mongers” making “specious arguments” (3-26, p 29).

“They’re being spread by the people who this legislation is designed to stop — the cheats, the churners and the thieves,” Voltmann said.

Lamb said previous attempts to get similar surety increase legislation passed have failed when subjected to congressional debate.

“It was an anti-competition move not to fight fraud but to drive small brokers out of business,” Lamb said. “It was slipped in the bill under the radar and was not subjected to debate.”

Lamb said his group, which has about 135 members, will attempt to get Congress to reconsider the issue in future legislation. “We’re not going to roll over and let this happen,” he said.

In a statement following the bill’s passage, Pacific Financial Association, a firm that underwrites bonds for 5,000 brokers, said it is optimistic it will be able to help brokers comply with the higher bond requirement.

“While Pacific Financial initially had estimated that such new regulations may eliminate a large number of brokerage operations as independent business enterprises, we are certain that the provision in the final text of the transportation bill authorizing the use of ‘group surety bonds’ will enable us to ensure your compliance without effective disruption of your current procedures,” the statement said.

Voltmann disputes that TIA only represents large brokers, saying that 60% of its members have revenues of $5 million or less. And, he said, brokers can secure bonds at a cost of 1% to 5% of the surety requirement.

“For a broker doing $5 million a year, which is five loads a day, the bond is going to cost you as much as $5,000. That’s $5 a load — a cup of Starbucks,” Voltmann said. “You may not like it, but is it really going to put you out of business? If you’re running that close, maybe you shouldn’t be handling other peoples’ money.”

Voltmann claims that the majority of the broker industry is financially sound and well run.

“Yes, this is a little speed bump for them,” Voltmann said. “But it’s not going to put them out of business.”

However, Vince Santiago, owner of VETrans LLC, a small Covington, Wash.-based broker, said the new bond requirement could put him out of business.

“I called several underwriters to check this out, and they said they wanted one-and-a-half times the surety requirement to cover the bond,” Santiago told TT. “I don’t have $112,000 sitting around. I don’t know what I’m going to do.”