Sept. 3 (Bloomberg) -- Outside New York’s Winter Garden Theatre, where “Mamma Mia” is nearing the end of a 13-year Broadway run, unwitting tourists board a bus bearing the name of a company U.S. regulators tried to close two years ago.
New York Party Shuttle LLC was told to stop running buses in 2011 after failing a safety audit. A sister company in Washington was ordered off the road in April for violations that included lying about using a driver who failed a drug test, according to the shutdown order.
The companies nonetheless helped load buses daily in both cities, showing how businesses can exploit loopholes and murky jurisdiction to stymie regulators who say they’re aggressively policing buses for hire.
“They’re regulating an amorphous industry with moving targets, like a game of whack-a-mole,” said Deborah Hersman, chairman of the U.S. National Transportation Safety Board, which investigates bus crashes.
The companies’ owner, Houston lawyer C. Thomas Schmidt, said in an e-mail and interview that his operations now fall outside of federal, state or local rules. Regulators to date have agreed or found no evidence to contradict him.
Bus transportation was the fastest-growing form of U.S. intercity travel last year, with scheduled departures up 7.5 percent to 1,052 trips a day, the most in four years, according to a DePaul University study. It’s grown between 5.1 percent and 9.8 percent a year since 2006, reversing a 26-year decline.
The growth has come at a cost. In February, a bus carrying Mexican tourists returning from a daytrip to the mountains crashed in California, killing eight people. In 2011, a bus carrying residents of New York’s Chinatown coming back from a casino crashed in the Bronx with 15 fatalities.
“Reincarnated” carriers frustrate regulators because they repaint buses and change names to evade shutdown orders. The New York and Washington companies, which operate as OnBoard Tours, are different in that they operate in plain view.
Men wearing blue OnBoard Tours shirts check names off a clipboard as passengers present tickets for the “NY See It All” tour, with stops in Times Square, the Flatiron Building, Wall Street and Central Park’s Strawberry Fields. A driver with an OnBoard Tours shirt sits behind the wheel. The scene repeats itself in Washington’s “DC It All” tour.
Schmidt, in an interview, said his New York company can no longer be federally regulated because it doesn’t operate over state lines. It isn’t subject to state regulations because New York City sightseeing tours are exempt, he said.
Last year Schmidt persuaded a judge he wasn’t a tour operator, either, in a decision that overturned a $71,200 fine imposed by the city Department of Consumer Affairs for operating a sightseeing company without a license.
In Washington, Schmidt has been allowed by U.S. regulators to run tours by chartering an outside bus operator. The shutdown order prohibits him from leasing or renting vehicles.
Federal regulators “have zero authority over a tour company,” Schmidt said. “They only have authority over buses. The tour is not a bus thing. It’s a walking thing and a boat thing. The bus just takes you from a couple of point As to a couple of point Bs.”
In a December hearing before a New York City administrative law judge, Schmidt called himself a “travel agency of the modern day,” comparable to Expedia.com, selling tickets for other companies without operating buses or tours.
While Schmidt said he’s not a tour operator, OnBoard Tours sells tickets through branded websites operated by a Delaware-based company whose officer is Schmidt, corporate records show.
In June, Schmidt marketed OnBoard Tours in Washington, New York and Las Vegas at the U.S. Travel Association’s International Pow Wow trade show, according to an eyewitness and Schmidt’s personal Twitter feed. A post from June 10 reads “I’m at PowWow 2013 #ipw13 (Paradise, NV) w/ 3 others [pic],” with a link to a photo of his booth.
“@OnBoardDCTours is running the Delta Sigma Theta Tour in Washington this weekend,” Schmidt posted to his Twitter account July 9, referring to the sorority’s 100th anniversary. Schmidt posted 25 additional times about the tour that weekend.
New York denies operating authority for any bus ordered off the road by U.S. regulators, Beau Duffy, a spokesman for the state transportation department, said in an e-mail. The state won’t inspect buses of a company that doesn’t have authority to operate, he said.
A sightseeing bus would need a city license, Schmidt said in the interview. He said he now relies on the state department of motor vehicles to do safety inspections.
Schmidt told city officials during the December hearing that he didn’t operate buses. Vehicles listed as being operated by New York Party Shuttle, though, have undergone state inspections in each of the past three years although the federal shutdown order hasn’t been rescinded. Half the 20 buses inspected during that period, ending March 31, 2013, were ordered off the road for serious defects, records show.
OnBoard Tours excursions were using buses labeled “Operated by New York Party Shuttle” as recently as last week.
“We’re not a transportation company,” Schmidt said. “The buses we own and operate in DC and New York are part of a legacy business. We’re a tour company. We provide zero transportation with our vehicles, other than for our tours.”
Washington DC Party Shuttle LLC, which operates as OnBoard DC Tours, was the first company U.S. regulators closed this year after training 54 investigators to target what they deemed the riskiest operators.
Schmidt is the company’s chief executive officer, and corporate records show he organized it.
Ray LaHood, then transportation secretary, said in an April 24 press release that the department was “making good on our pledge to get unsafe companies off the road.” The Federal Motor Carrier Safety Administration, the transportation department’s bus regulator, has ordered 28 motorcoach companies to shut down since that effort began.
OnBoard DC Tours continues to offer daily tours with buses operated by CP Limousine and Consulting Services Inc., based in Falls Church, Virginia -- an arrangement Schmidt said is allowed by the shutdown order. Before Schmidt’s company was shut down, CP Limo had one bus and two drivers, according to Transportation Department records. It now has five buses and 11 drivers.
CP Limo is providing “transportation services” to Party Shuttle Tours LLC, not leasing buses, David Dopsovic, the company’s outside attorney, said in an interview. CP Limo hired some of Washington DC Party Shuttle’s drivers.
According to the 2013 shutdown order, Washington DC Party Shuttle and Schmidt can’t be involved in bus operations in any way, even with rented or leased vehicles.
Party Shuttle Tours plans the routes, Dopsovic said. Its employees sell the tickets, and its dispatchers work on site, he said. CP Limo has no control over these functions, he said.
“They plan the tours,” Dopsovic, with the Washington law firm Lasa, Monroig & Veve, LLP, said of Washington DC Party Shuttle. “They have no say in the running of CP Limousine’s buses.”
CP Limo recently passed an FMCSA audit of its safety and employee screening processes, Dopsovic said.
New York Party Shuttle has operated buses without insurance, according to a lawsuit related to a 2011 accident in which a pedestrian was injured. She is suing Schmidt to recover the cost of her medical bills, court records show.
In 2010, an insurance company revoked New York Party Shuttle’s liability coverage. The insurer said it was misled into believing the buses weren’t crossing state lines, according to an e-mail obtained by Bloomberg and confirmed by the insurer as authentic.
“There are red flags at every turn,” Lancer Insurance Co.’s Fran Walsh wrote in the e-mail. “To knowingly be running across interstate lines illegally is unacceptable.
‘‘Had we been given FULL disclosure on the signed application we received, this would have been an easy decline,’’ Walsh said.
Lancer issued another policy for New York Party Shuttle beginning April 15, 2011, the day after the federal shutdown order was issued, U.S. Transportation Department records show. That occurred after the company reorganized to stay within state lines, said John Petrilli, senior vice president and general counsel at Lancer, based in Long Beach, New York.
Insurance costs for intrastate companies generally are lower because they have lesser coverage requirements than interstate companies, Petrilli said. New York Party Shuttle’s policy is for $5 million, the level required for interstate operations, he said.
Schmidt gave lengthy, varied answers during the city hearing in December about why he didn’t have a sightseeing license, or whether his company had or would operate buses. He said it would register two buses while also saying he’d avoided owning vehicles because it was too difficult to match supply and demand.
‘‘I don’t want to say we are going to operate tours with those buses,” Schmidt said during the hearing. “I’m not going to say we are not going to. I don’t know what is going to happen.”
New York City’s case against New York Party Shuttle for operating as an unlicensed tour operator collapsed when Schmidt cross-examined the city inspector who cited him.
The inspector, according to a hearing transcript, produced as evidence of the company’s operations a marketing brochure for a different business, City Sights NY.
Schmidt’s company has since applied for a license and regulators are evaluating it, said Abigail Lootens, a New York City Department of Consumer Affairs spokeswoman. It has investigated two enforcement complaints filed against the company, she said.
OnBoard Tours hasn’t abided by rules that New York’s 15 licensed sightseeing companies have to follow, said John Bilello, who was Schmidt’s partner in New York Party Shuttle before the two had a falling-out that led to a lawsuit and settlement. Bilello is now a competitor.
“Since the bus regulatory agencies, especially those in New York City, either take forever to inspect, or have no authority anyway, we make it our own business to rigorously check our own vehicles and drivers,” Bilello said. Referring to OnBoard Tours, he said, “I’m not sure every bus operator is as careful as we are.”
Letters between Schmidt and FMCSA officials show he was searching for ways to get back in business within days after Washington Party Shuttle was ordered to shut down.
He asked the regulator whether Party Shuttle Tours LLC, his Delaware holding company, could use “properly licensed third-party motor carriers” to organize tours and whether the company can operate motor vehicles that aren’t “commercial.”
The order doesn’t prevent selling tickets for bus tours as long as neither Schmidt nor the company “engage in or control a motor carrier operation,” Field Administrator Curtis Thomas wrote April 26.
The order stated it applied to Washington DC Party Shuttle and Schmidt personally, as well as “all of its officers, members, directors, successors, assigns and closely affiliated companies.” It applied to “all motor carrier operations and all vehicles owned, leased, rented or otherwise operated by Washington DC Party Shuttle.”
Schmidt and his companies remain blocked by federal regulators from operating buses. A proposal by Washington Party Shuttle to improve its safety practices and end the April shutdown order was rejected, said Marissa Padilla, a FMCSA spokeswoman.
“To date, we have no evidence that the out-of-service order that was issued against the company and its owner has been violated,” Padilla said. “We encourage anyone with information to the contrary to provide it to authorities immediately so the appropriate action can be taken.”
The April 24 imminent-hazard-to-public-safety order states Schmidt can’t transport passengers by bus or control the operations of a bus company. It applies “without limitation to all interstate and intrastate transportation.”
“While we are aware that the owner sells tickets for tours through other carriers, the agency does not have the authority to regulate such activities,” Padilla said.
Washington DC Party Shuttle is working on a plan to end the shutdown order with the help of a former FMCSA administrator, Annette Sandberg, Schmidt said in an interview. The company expects to have its federal authority restored within the next two weeks, he said.
Sanberg confirmed she is working with Schmidt to meet regulatory requirements.
Responding to criticism by Congress and safety board officials that the agency hadn’t done enough to get unsafe companies off the road, current FMCSA Administrator Anne Ferro last year asked for and received greater authority, including higher fines and more power to go after reincarnated carriers. Penalties increased from $2,000 to $25,000 per violation.
The bus agency has added regulations to ensure companies can’t evade orders by creating affiliates. FMCSA officials can determine that a company is an affiliated business operation under common control.
Bus-ticket sellers aren’t federally regulated, something U.S. accident investigators have identified as a safety concern since 2005. A motorcoach carrying senior citizens evacuating Hurricane Rita crashed, caught fire and killed 23 people. The nursing home used a broker which hired a company with a spotty safety record.
“This has been our frustration with this agency on many different issues,” said Henry Jasny, vice president and general counsel with Advocates for Highway and Auto Safety, a Washington-based group that pushes for tougher bus regulation. “They say the right things. The follow-through doesn’t always live up to its billing.”
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