Co. Officials with 'Knowledge' of Environmental Problems Could Face Criminal Charges

Corporate executives and in-house counsel at companies with environmental problems beware: The next meeting you attend, study you review, memo you receive or government inquiry you respond to may form the basis for criminal charges ranging from criminal conspiracy to obstruction of justice.

This is the stunning lesson learned recently by W.R. Grace and seven of its current or former senior officials – including an in-house attorney. They were indicted Feb. 7 by a grand jury of the U.S. District Court in Montana for alleged conspiracy, violations of the Clean Air Act, wire fraud and/or obstruction of justice.

This article summarizes the allegations of the federal indictment and suggests measures that companies and individuals can take to protect themselves against prosecution. The case is only in its initial phases, and all defendants have pleaded not guilty.

Allegations in the Indictment

The indictment stems from Grace’s vermiculite mining operations in Libby, Mont. Vermiculite is a mineral found in products such as attic insulation, masonry fill, potting soils and fertilizers.

Unfortunately, the vermiculite deposits in the Libby mine were contaminated with a form of asbestos. According to the indictment, the government alleges that Grace knew as early as the 1970s that the Libby vermiculite contained asbestos, but suppressed this information and allowed the mine to operate until 1992. In the process, Grace’s employees, their families, and other Libby residents were exposed to high levels of airborne asbestos. To date, approximately 1,200 residents of the Libby area have been identified as having asbestos-related diseases.

The indictment charges Grace and, for certain allegations, a number of its senior corporate officials with: (1) failing to inform employees of the asbestos; (2) selling asbestos-contaminated properties to unsuspecting buyers; (3) providing asbestos-contaminated materials to the community; (4) failing to report environmental risks of the asbestos to the government; and (5) obstructing the Environmental Protection Agency’s investigation into its activities at Libby.
Failure to Disclose Contamination

According to the indictment, Grace conducted studies in the 1970s and 1980s that showed the Libby vermiculite contained asbestos and was giving Grace’s employees severe lung diseases.

For example, in 1982 Grace commissioned a mortality study of its employees, which concluded that an excessive number of Libby mine workers had died of respiratory cancer, including one form of cancer that is only caused by asbestos exposure. An individually named defendant provided copies of this study to Grace senior management, reportedly stating in an accompanying memorandum: “Our major problem is death from respiratory cancer. This is no surprise.”

From 1978 to 1979, Grace conducted other studies which found that the Libby vermiculite was releasing asbestos fibers into the air. One study allegedly showed that routine occupational activities, such as transferring the material between drums, released high levels of asbestos. Several individual defendants allegedly received copies of these studies, yet in 1983 Grace allegedly told the EPA that they had “no reason to believe, there is any risk associated with the current uses of Libby vermiculite-containing products.”
Exposing Libby to Asbestos

Even after these studies, however, Grace allegedly gave vermiculite contaminated with asbestos to the unsuspecting Libby community. In 1981, Grace provided vermiculite scraps to Libby for use as a foundation for its elementary school’s ice skating rink, and to surface school running tracks. Grace later analyzed air samples from one of the tracks, and determined that it produced “surprisingly high” asbestos fiber concentrations, but did not inform the community.

In a practice that would later be capitalized on by the U.S. Attorneys’ Office, Grace kept senior management well-informed of the risks of the Libby vermiculite. In 1977, Grace senior management received a memo stating that workers were carrying asbestos dust home with them, harming the health of their families. In 1983, Grace officials circulated a memorandum stating that local doctors were seeing an “asbestos related pattern” in the general Libby public, and that a doctor had speculated take-home dust from the Libby mine could be causing the problem.

The memo summarized discussions at Grace concerning a mandatory uniform and shower policy to eliminate take-home dust, but concluded that “a uniform and shower policy is unwarranted since adverse effects cannot be definitively proven and would only cause unwarranted fear or concern among employees and the Libby community.” Grace apparently did not provide workers with changing or shower facilities.
Selling and Leasing Contaminated Properties

Grace also allegedly leased and sold its contaminated properties without disclosing the asbestos. It sold some of its properties to the City of Libby for use as baseball fields. Grace and two of the individual defendants also sold Grace’s contaminated screening plant to a Libby couple, allegedly aware that they intended to reside and run a nursery there. After the EPA notified the couple of the potential asbestos contamination, Grace and an individual defendant allegedly sent the couple a check for $40,000.
Alleged Obstruction of Justice

The indictment charges Grace and several individual defendants with obstruction of justice. Some examples of this alleged obstruction are straightforward, such as under-reporting levels of asbestos in the mines.

However, other allegations are more convoluted. For instance, in 1994 Grace sold a contaminated mine site to a development company. Once the EPA began its investigation, however, Grace purchased all of the development company’s stock, in an alleged effort to regain control over the mine.

Grace later denied the EPA Superfund Emergency Response Team access to the mine. The U.S. Attorneys’ office charges that this repurchasing scheme was an attempt to obstruct the EPA’s investigation.
Avoiding Prosecution

Information – in the hands of a company and its corporate officials – provides the power to compete. But in the hands of zealous prosecutors, information provides the power to destroy – both the pocketbooks and the reputations of companies and individuals alike.

In the Libby case, information allegedly known to the company and its officials may form the basis of their own self-destruction. Let’s consider what they might have done differently, assuming they acted as alleged.

It’s important to remember that the indictment does not involve allegations of the wrongful discharge, dumping or release of hazardous chemicals. Rather, at the heart of the indictment is the alleged knowledge and cover-up of a dangerous situation caused by the company.

Viewed through this lens, seemingly mundane activities and transactions – attending meetings, writing memos, reading documents, closing on real estate transactions, wiring instructions for a stock purchase, and responding to government inquiries – are suddenly transformed into the overt acts of an alleged criminal conspiracy.

If an executive decides to dump hazardous wastes in a public area, the executive can be fairly certain that he is involved in criminal conduct. If the executive decides to read intra-office memos or e-mails or attend a meeting, it is less obvious that a criminal indictment may await the result of the activity.

In both cases, however, the executive is in control of his or her fate by simply making the right decision not to endanger the public or cause or allow others to do so. In the first situation, the executive must decide not to do something to create the endangerment. In the second, the executive must take affirmative steps to prevent an endangerment (e.g., by advocating that a dangerous product be pulled from the market, informing individuals of a health risk, or reporting the danger to government officials).

In the short run, each of these affirmative actions involves considerable risk to the company and to the executive. Pulling a product affects both the immediate bottom line and the likely value of the company’s stock. Informing the public may trigger civil suits or even class actions.

Reporting a danger to the government embroils the company in a bureaucratic maze of inspection and enforcement. Merely suggesting any of the three can affect, directly or indirectly, the executive’s salary, bonus, advancement, or tenure.
So why stick your neck out?

“Because it’s the right thing to do,” is the best response. But that is often easier said than done. When an executive and his colleagues dance on the head of a pin to rationalize not taking action to protect the public health against a significant risk, an executive’s warning radar should sound and the executive should ask the management group, “Are we – the company and the shareholders – better off in the long run if we face this problem now and cut our losses, or if we bury it and hope it will never surface?”

If the response is, “bury it,” it’s time for the executive to recommend that the company seek the advice of outside counsel. More often than not, the management team will agree with this request, particularly if it involves responding to a governmental information request.

False or misleading responses to such requests can result in “sitting duck” prosecutions because the response is in black and white – as are the laws prohibiting false or misleading statements in response to such requests. As a result, such responses must be approached with all appropriate inquiry and candor.

Efforts to protect the company by sitting on inflammatory information because there is no “duty” to disclose may seem appropriate in the short run, but such efforts often fail to pass the test of time when the information ultimately surfaces, and indictments, cover-up allegations and individual and corporate bankruptcy filings follow. (Grace and its affiliated companies have filed consolidated bankruptcy proceedings in Delaware, and asbestos claims have a large part to play in those proceedings.)

If the management team refuses to consult outside counsel or refuses to follow his or her advice, the executive should consult his or her own independent counsel for advice as to the options. If all other options within the company have been exhausted, if the company’s outside counsel simply toes the company’s “bury it” line, and if the executive’s own outside counsel confirms the seriousness of the problem of doing so, it is time to either blow the whistle or leave the company, appropriately documenting your protest on the way out the door.

The reason for this is that the “bury it” response may be seized upon by zealous prosecutors as an overt act on the way to a Grace-style indictment – of the company and the participating management.

Finally, while pondering your options, each executive should keep in mind that if you don’t blow the whistle, your colleague might. This can take many forms, from public statements that implicate the company and its management in environmental wrongdoing, to “CYA” memos to the file, to “turning state’s evidence” for the prosecution in a Grace-style indictment in return for more lenient treatment by the government.

Ultimately both the individual’s and the company’s best protection is to approach every significant problem of this kind from the outset in a manner that protects not only the company and the individual but also the public. On balance, it’s better to do the right thing earlier than to be on the receiving end of a criminal indictment later.