ranking general. They had to split their recovery fee with him (and probably the rest of his unit), but without his influence she might have been there for several weeks more.
Tam’s company was called Dynamic Financial Services. It was on Des Voeux Road, almost next door to the headquarters of the Hong Kong Shanghai Bank, on Queen’s Road in Central, the very heart of Hong Kong’s financial district. About a year before, Seafood Partners had come to Dynamic Financial Services with a master purchase order from Major Supermarkets for six million pounds of Thai shrimp, cooked, peeled, and deveined, with the tail on.
Ava made her first note: Who introduced Dynamic to Seafood Partners?
The purchase order was of twelve months’ duration, and the selling price was locked in for the entire period.
Note 2: Isn’t shrimp a commodity? Don’t prices fluctuate? How could Seafood Partners commit to Major Supermarkets for a year?
The product was to be packed under Major Supermarkets’ own label, and Tam had affixed a copy of their specifications. They didn’t seem particularly onerous. There had to be an average of thirty-seven to thirty-nine shrimp in every bag. Each bag had to have a true net weight of one pound, true net weight being the weight after the shrimp had thawed. The tails were to be a uniform red colour, with no black tails allowed. Tripolyphosphates and/or salt were permitted up to a residual level of two percent. The shrimp had to be processed from fresh and frozen only once. On the specification sheet Tam had highlighted in yellow the net weight requirement and the tripolyphosphates level.
It was anticipated that Major Supermarkets would need about 500,000 pounds of shrimp a month. In order to manage that level of business, Seafood Partners would need to have 1.5 million pounds of shrimp in their system at any one time — an on-hand inventory of 500,000 pounds, another 500,000 pounds in transit to the U.S. from Thailand, and another 500,000 pounds being processed. Seafood Partners was buying the shrimp at $4.10 a pound and selling to Major Supermarkets at $4.80 a pound.
Note 3: Given what was essentially 90 days’ financing at 2 to 3 percent a month, and given customs, storage, trucking, and distribution charges, how the hell did Seafood Partners expect to make money?
The master purchase order was from Major Supermarkets to Seafood Partners. Seafood Partners assigned the purchase order to Dynamic Financial Services, and Dynamic issued letters of credit to the Thai packer and imported the product into the U.S. Major Supermarkets had six distributors that drew up weekly purchase orders for shrimp; Seafood Partners and Dynamic Financial Services were copied on those purchase orders. Seafood Partners released the product from inventory and Dynamic Financial Services sent an invoice for the product directly to Major Supermarkets. The cheques went to Dynamic, which took its money and interest off the top and then sent the balance of the funds to Seafood Partners.
Note 4: Why didn’t Dynamic retain complete control of the inventory? Why did they allow Seafood Partners to release product?
After five months, relations between Major Supermarkets and Seafood Partners began to go sour. Shrimp sales were not meeting expectations, and the buyer at Major Supermarkets was having second thoughts about the length and volume of his commitment. The documentation included copies of emails that had gone back and forth, and in many of them the buyer was looking for price relief. He claimed that the market had tanked and that he could buy the same shrimp more cheaply almost anywhere. He needed help to remain competitive.
At first Seafood Partners refused. A deal was a deal, they repeated. The buyer kept at them to reduce their prices, making (not very subtle) threats to go elsewhere to average down the cost of Seafood Partners’ product. Finally Seafood Partners relented and dropped their selling price to $4.40.
Note 5: Didn’t Dynamic Financial Services ask if dropping the selling price of the shrimp was even remotely possible?
As Ava read on, she could see the train wreck coming. She didn’t know what form it was going to take, but Tam’s yellow highlighting of the net weights and chemical levels offered a clue.
There are several ways to make more money on a basic food commodity than the market warrants. Cheating on weights is perhaps the simplest. Put a label weight of one pound on a bag and then put 15 ounces of product in it, and you can increase your profit by seven percent. If someone actually weighs the bag, the packer has a problem. But the weight of shrimp is easier to manipulate than most other seafood products, since you have to add an ice glaze to protect the flesh. Under normal circumstances a five percent glaze is added, meaning that a one- pound bag’s gross weight becomes 16.8 ounces. If Seafood Partners put a twelve percent glaze on the shrimp, the bag would still have a gross weight of 16.8 ounces, but 1.8 ounces would be ice, leaving only 15 ounces of shrimp. The product would pass any rudimentary inspection.
Another common trick is to “pump” the product, to add moisture to it. Ava didn’t know who had discovered this technique, but she knew that just about every protein sector — including beef and chicken producers — does it. With shrimp it’s very simple: all you have to do is soak them in a chemical solution, typically a tripolyphosphate. The longer you soak the shrimp and the more potent the solution, the more moisture the shrimp absorbs. The moisture adds weight — artificial weight.
The economic impact of adding weight goes beyond the extra weight itself. Shrimp are sold by size: the larger the size, the higher the price. Shrimp that come to between 31 and 40 pieces per pound sell for more than smaller shrimp that count between 41 and 50 pieces per pound. So if Seafood Partners added enough weight chemically to change a 41–50 count into a 31–40 count, they would make more on a per pound basis.
How many stunts had Seafood Partners tried? As it turned out, all of them. Ava could hardly believe it. Cheating using one method was risky enough. Trying two was begging for trouble. Doing all three? Craziness — or complete desperation.
And Major Supermarkets had caught them out. Actually, the U.S. Food and Drug Administration caught them first, in a random inspection, which was when the weight discrepancy was identified. The FDA turned the problem over to Major Supermarkets’ in-house quality-control team, which bored in and exposed the whole mess. It was the excuse the buyer needed to get out of the twelve-month contract. The day after the internal inspection results, Seafood Partners were informed that they had been delisted. The product already in stores was to be picked up, the master purchase order was cancelled, inventory in the U.S. and on the water was now their problem, and none of the outstanding invoices would be paid.
Seafood Partners did not tell Dynamic Financial Services about the fiasco. It was not until Dynamic called Major Supermarkets about the outstanding invoices that they were told what was up. In the meantime, Seafood Partners had moved the inventory and Dynamic had no idea where it was. More than a million pounds of shrimp had gone missing. Add close to a million dollars in unpaid invoices, and Dynamic was out of pocket at least five million dollars.
Andrew Tam had done a good job of piecing it all together. There were copies of the financing agreement, the master purchase order, the letters of credit Dynamic had issued, and examples of Major Supermarkets’ purchase orders. He had also attached the FDA inspection report and Major Supermarkets’ quality-control team reports, and he had somehow accessed a series of emails from Seafood Partners to the packer that outlined, in bold terms, what they wanted him to do.
Note 6: Has Tam spoken to the packer? Does the packer have any liability?
Ava checked her watch; it was 4 a.m. in Hong Kong. She dialled Tam’s cellphone number. To her surprise he answered. “I was hoping you’d call,” he said.
“I’ve just finished going through your paperwork. What a mess.”
There was silence from the other end, and Ava wondered if she had insulted him. Then he said, “Tell me about it.”
She looked at her notes. “I see two signatures on the financing agreement on behalf of Seafood Partners. How many partners are there?”
“Those are them: George Antonelli and Jackson Seto. Antonelli lives in Bangkok. He handles production and the technical side of things.”
“Like short weights?”
“I guess. Seto kind of floats between Seattle and Hong Kong. He seems to have residences in both places. He is the marketer and the money guy.”
“I take it you’ve spoken to them about this problem?”
“I’ve tried to.”
