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Recent U.S. Cases Highlight Liability Risks to Executives in Mining, Heavy Industrial Transactions

Historically, corporate executives rarely faced personal or criminal liability resulting from mining or environmental accidents in the United States.  Several criminal cases stemming from two recent disasters, however, indicate that the tide may be turning.  These disasters, the repercussions of which have been playing out recently in the U.S. criminal courts, should put private equity and strategic investors in the mining and heavy industrials space on alert.  Thorough due diligence into a target’s past operations and compliance record is more important than ever before. 

In the case of Freedom Industries, a specialty chemical provider for the coal, steel and cement industries, a January 9, 2014, chemical spill from its Charleston, West Virginia, plant reportedly left 300,000 West Virginia residents without potable water for days.  The incident, which occurred shortly after Freedom was purchased by Chemstream Holdings Inc. at the end of 2013, caused Freedom to file for bankruptcy eight days after the spill and only shortly after the close of the transaction. 

In the case of both Freedom and Massey Energy—at whose Upper Big Branch underground mine an April 2010 explosion killed 29 miners—former corporate officers and employees are under criminal indictment.  These disasters and the related prosecutions are instructive for anyone potentially seeking to invest in coal and other industrial assets, as each of the underlying incidents is alleged to be a consequence of unlawful historical environmental, health or safety practices, and resulted in serious consequences to the relevant entities after the closing of important corporate transactions.

Freedom Industries Spill

In December 2014, four former executives of Freedom were charged with criminal violations of the Clean Water Act relating to the January 2014 chemical spill that polluted a river in Charleston, West Virginia.  The spill involved the release of 10,000 gallons of 4-methylcyclohexane methanol (a coal-cleaning chemical known as MCHM) from Freedom’s facility into the Elk River, caused the governor to declare a state of emergency, and, in addition to leaving a large population without potable water for several days, caused more than 400 people to seek medical treatment for symptoms relating to MCHM exposure.

Litigation initiated immediately following the spill forced Freedom to file for bankruptcy protection, just eight days after the spill and only a few weeks after its December 2013 sale to Chemstream Holdings.  Following the initiation of bankruptcy proceedings, the U.S. Environmental Protection Agency and Federal Bureau of Investigation began investigating Freedom for potential Clean Water Act violations.  The indictment charged three Freedom owners and officers, each of whom held management positions at the company until the sale to Chemstream Holdings (and one of whom continued in a management position following the acquisition), as well as Gary Southern, the newly installed president of Freedom, with Clean Water Act violations relating to the spill.  Among other violations, the indictment alleged that the executives failed to properly maintain and inspect the tank from which the MCHM leaked; establish spill prevention, control and countermeasures plans; and fund certain improvements required to comply with environmental regulations.  Most large industrial facilities that store material quantities of petroleum and other chemicals are subject to these types of requirements.

Southern also has been charged in federal court with bankruptcy fraud, wire fraud and lying under oath in connection with Freedom’s bankruptcy proceedings, and faces a potential 68 years in prison if convicted.  The other Freedom executives charged face up to three years imprisonment each.  Two other Freedom employees, an environmental consultant and tank farm plant manager, face up to one year in prison if convicted.  In January 2015, the four executives each pleaded not guilty to the charges.  Their respective cases will go to trial in March 2015.

Massey Energy Explosion

Also in West Virginia, federal criminal charges have been brought against several executives and managers of Massey in connection with the April 2010 explosion at the Massey Upper Big Branch underground coal mine.  The explosion was the deadliest mining accident in the United States in 40 years.  In June 2011, Alpha Natural Resources acquired Massey for $7.1 billion and subsequently settled criminal and civil penalties against Massey relating to the explosion for $209 million.  These penalties included a record-breaking $10.8 million penalty issued by the Mine Safety and Health Administration.  Several individuals who worked at the mine were convicted of crimes, including a miner who used a fake license required for conducting safety inspections at the mine, a security director who lied to investigators and tried to destroy evidence, and a foreman who gave advance notice of federal mine safety inspections and disabled a methane monitor used to detect and prevent explosions.

In addition to the Upper Big Branch mine employees, a former Massey executive with no direct involvement in day-to-day operations at the Upper Big Branch mine pleaded guilty in 2013 to federal conspiracy charges in connection with operations at another Massey mine.  As part of his plea, the executive, who served as the president of a Massey subsidiary, admitted to warning miners at Massey mines of impending surprise safety inspections by mine safety and health officials.  The executive was sentenced to 42 months in prison, a sentence that exceeded the top of the federal sentencing guidelines for the crimes for which he was convicted.

Most recently, in November 2014, former Massey CEO Don Blankenship was indicted in federal court on charges of conspiracy to violate mine safety laws, conspiracy to impede and obstruct federal mine safety officials, securities fraud, and making false statements to the U.S. Securities and Exchange Commission (SEC).  The indictment charged that Blankenship closely managed the Upper Big Branch mine and that for a period of more than two years he conspired to commit routine, willful violations of federal mine safety standards, failed to provide resources needed to safely operate the mine, knew of safety violations at the mine but caused additional hazards by instructing managers not to conduct safety-related improvements and to instead focus on coal production, and conspired to provide advance notice of federal mine safety inspections.  The indictment also charged that after the April 2010 explosion Blankenship made false statements to the SEC concerning Massey’s safety practices and also made false statements, representations and omissions in connection with the purchase and sale of Massey stock.  If convicted on all counts, Blankenship faces a potential prison term of 31 years.  Blankenship’s case is set to go to trial in April 2015.

Conclusion

As demonstrated by these events, the importance of conducting thorough due diligence with respect to environmental, health and safety issues at mines and other heavy industrial facilities cannot be overstated.  Based on these prosecutions, it appears that both Freedom and Massey had a history of environmental, health and safety violations.  These types of issues often can be identified during due diligence and can be addressed, with related financial responsibility negotiated, in the context of the subject transaction.

© 2019 McDermott Will & Emery

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About this Author

Thomas Sauermilch, McDermott Will Emery Law Firm, M&A Attorney
Partner

Thomas Sauermilch is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office.  He currently leads the Firm’s Industrials Group.

212-547-5532
Daphne Trotter, Litigation Attorney, McDermott Will and Emery
Partner

Daphne is both an environmental litigator and a transactional lawyer.  She frequently counsels clients on the role of environmental issues and the management of associated risks in corporate, real estate and lending transactions.  In this role, she has:

  • Regularly served as lead environmental counsel for both purchasers and sellers in mergers and acquisitions involving facilities in a variety of industries.  Recent transactions have addressed gas-fired, coal-fired and solar power facilities, building material supply and manufacturing,...

202 756 8043
Associate

Bethany K. Hatef* is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on occupational safety and health law and environmental law. 

202-756-8474