The Opening Statement for this Prosecution Writes Itself: The Indictment of Massey Energy CEO

November 24, 2014

     By: Sara Kropf

MasseyAs a general rule, the government does not indict CEOs of big companies. No one really wants to say that out loud—at least on the government’s side of the aisle—but it’s true.

It is usually difficult for the government to prove a link between a CEO and the illegal conduct, given the many layers of corporate bureaucracy that are between a C-suite executive and the worker bees.

That makes the recent indictment of Don Blankenship, former CEO of Massey Energy Company, all the more interesting. The four-count indictment depicts Mr. Blankenship as an extreme micro-manager whose only concern was Massey’s bottom line and not the safety of its workers.

Mr. Blankenship has pleaded not guilty to the indictment. He is well represented by counsel.

Mr. Blankenship is charged with conspiracy to violate mine safety standards and to defraud the United States by trying to hide those violations from federal inspectors. Mr. Blankenship also faces two counts of fraud in relation to statements filed with the SEC regarding Massey’s adherence to federal mine safety regulations.

Query whether an SEC action is next.

The Government Mining Regulations

Massey was the fourth largest coal extractor in the United States in its heyday, with substantial mines in West Virginia, Kentucky and Virginia. In 2011, Alpha Natural Resources bought the company.

Massey was regulated by the Mine Safety Health Administration (MSHA). MSHA, under the authority of the Department of Labor, regulates nearly every aspect of running a coal mine.

For example, the MSHA has extensive regulation regarding ventilation and air flow in coal mines. That is because explosions are a near-constant concern while mining coal. Coal dust can be thrown into the air by excavation equipment and, once airborne, the dust can catch fire and explode.

In addition to ventilation, the MSHA regulates certain cleaning procedures to ensure that coal dust does not accumulate on machinery and provide an additional explosion hazard and mandates certain construction processes to prevent cave-ins.

Alleged Safety Violations at Massey’s Upper Big Branch South Mine

Mr. Blankenship’s indictment focuses mostly on the alleged mine safety violations that took place at Massey’s Upper Big Branch-South mine (UBB) in West Virginia.

The indictment states that UBB was Massey’s most profitable mine by far, producing yearly revenue of approximately $331 million. This amounted to nearly 14% of Massey’s 2009 revenue and 16% of its 2010 revenue.

As a result, the indictment hints, Mr. Blankenship became obsessed with UBB’s performance and its running tally of mine safety violations.

In early 2009, Mr. Blankenship allegedly began demanding daily reports of Massey’s mine safety violations broken down by mining group. By mid-2009, the indictment states, Mr. Blankenship was receiving more specific reports. These new reports showed year-to-date safety violations for the UBB mine itself, as opposed to those for the overall group of mines.

These allegations are key to the indictment because they will help the government establish knowledge. Through his daily reports, Mr. Blankenship supposedly had a front-row view of UBB’s safety record.

Presumably, Mr. Blankenship’s defense will argue that these daily reports indicate his extreme interest in mine safety, evidence of good faith rather than criminal intent.

The indictment alleges that Blankenship knew that UBB received hundreds of safety violations every year. The list of violations included aircourses that were supposed to be inspected weekly but had gone more than a year without inspection, sections of roofing that had fallen in, and coal dust that had accumulated to dangerous levels near heated excavation machinery.

Mr. Blankenship’s Alleged Role in the Conspiracy

The indictment also states that Mr. Blankenship took a heavy-handed approach to management of UBB.

According to the prosecution, Mr. Blankenship, the CEO of a multi-billion dollar company, conducted a personal review of all personnel hires, all raises awarded, all capital expenditures, and all new contractor deals that went on at UBB. His scrutiny allegedly extended to a two-dollar wage hike for UBB’s truckers and a $750 expenditure for a freeze-proofing contractor. Moreover, he corresponded extensively with a UBB manager, referred to in the indictment only as the “Known UBB Executive.”

All of this is more evidence of knowledge. It would also be a stunning display of a CEO getting in the weeds. CEOs generally focus on big-picture issues, not on low-level personnel issues.

Mr. Blankenship, the prosecution alleges, not only knew about UBB’s chronic violations but created a management culture that encouraged such violations and then hid them from government inspectors.

Here’s where we get to intent.

The indictment states that Mr. Blankenship’s handwritten notes to the Known UBB Executive contained messages such as:

run this sections [sic] like coal mines not like construction jobs.

This message and others like it supposedly indicated Mr. Blankenship’s displeasure that UBB employees were building ventilation structures and shoring up the mine’s ceiling supports rather than mining as much coal as possible.

Additionally, when the Known UBB executive’s coal production results were not high enough, Mr. Blankenship allegedly sent him a note stating

Pitiful, you need to get focused [. . .] I could Kruschev [sic] you. Do you understand?

Finally, the government maintains that Mr. Blankenship organized a system of warnings and code words that UBB supervisors and guards could use to warn other employees of surprise government inspections so they could cover up safety law violations.

The Mine Explosion and Mr. Blankenship’s Alleged Response

On April 5, 2010, an explosion in UBB killed 29 miners. The accident naturally drew intense scrutiny from both the media and Massey’s investors, as well as government inspectors.

UBB Memorial (via www.msha.gov)

UBB Memorial (via www.msha.gov)

In response to allegations that Massey routinely violated safety laws and all but allowed the explosion to take place, Massey’s stock dropped $9.15 per share.

Mr. Blankenship’s indictment states that this cost him approximately $3 million of his own personal wealth.

Ouch.

Mr. Blankenship allegedly responded by coordinating a statement to Massey’s investors affirming

[Massey] do[es] not condone any violation of MSHA regulations, and [Massey] strive[s] to be in compliance at all times.

The government alleges that this statement was a knowing misrepresentation in violation of the securities laws. If the allegations of Mr. Blankenship’s knowledge of and involvement with UBB’s extensive violations are true, then the statement Mr. Blankenship allegedly drafted would constitute fraud against the United States through a materially false SEC filing.

Are the Prosecutors Out for Blood?

The indictment quotes Mr. Blankenship extensively, pointing out his many typographical and grammatical errors. This is not exactly evidence of a crime. (If so, my fifth grader is in serious trouble.)

The government’s decision to charge Mr. Blankenship with securities fraud based on what appears to be a pro forma corporate response to falling shareholder value is fairly aggressive.

It is hard to believe that Mr. Blankenship wrote that statement alone. He no doubt received advice from inside and outside counsel, public relations professionals and others within the company.

What this case has going for it is the tragic story of the miners who died. It was a heartbreaking tragedy for their families and their community. The opening statement for the government is already in the can, and it’s brutal for the defense.

There’s little doubt the government wants to prosecute someone for that accident. And the allegations of the indictment are certainly troubling and enough to get past a motion to dismiss. But it remains to be seen whether the government’s evidence is really enough. This isn’t a negligence case, after all.

Published by Kropf Moseley

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