This week's criminal charges against W.R. Grace & Co. for its conduct in a Montana mining town could complicate the Columbia-based chemical maker's efforts to emerge from bankruptcy protection in strong financial shape.
The company's stock dropped 8.3 percent yesterday, the day after federal prosecutors accused Grace of exposing mine workers and residents in Libby, Mont., to deadly asbestos and covering up the danger. The stock closed down 95 cents, at $10.50 per share. Grace operated a vermiculite mine in Libby from 1963 until the early 1990s.
Montana U.S. Attorney William W. Mercer announces the indictment of W.R. Grace and seven of its current and former executives.
(Tom Bauer -- The (missoula, Mont.) Missoulian)
"Investors are now concerned that they may be facing a situation that they did not anticipate," said Ivan Feinseth, managing director at Matrix USA, a New York investment banking firm.
The uncertainty stems from the legal fees Grace must pay to defend itself and seven current and former executives who allegedly conspired to hide health risks. If convicted, Grace also could pay twice the losses suffered by victims, including medical costs and lost wages. Or it could pay twice the gain associated with its alleged misconduct. Grace reported at least $140 million in after-tax profit from its mining operation in Libby during the period of alleged wrongdoing, prosecutors said.
Scott L. Baena, an attorney with a committee representing asbestos property damage claimants in the bankruptcy proceedings, said his committee opposed having Grace pay legal fees for the executives.
"This clearly waylays money that creditors might have otherwise expected to receive as part of the reorganization," Baena said. "W.R. Grace is going to be paying a lot of money to a lot of lawyers."
Grace filed for Chapter 11 protection in April 2001, citing a surge in asbestos-related claims in the previous year. Currently, the company said its asbestos liabilities fall into three primary categories: about 130,000 personal injury claims filed by people allegedly suffering from exposure to products containing asbestos; 4,300 property damage claims, mostly related to the installation of a fireproofing material sprayed on steel beams of buildings; and eight class-action lawsuits related to Zonolite Attic Insulation used mostly in homes.
Today, 110 of the personal injury claims come from Libby, the company said. At the Montana operation, Grace employees mined and processed an asbestos-containing form of the mineral vermiculite, which was used in the fireproofing spray. Prosecutors allege that Grace buried a paper trail dating back to 1976 that traced how asbestos dust from its Libby mine permeated the lungs of workers, their family members and residents.
The company denies the charges and declined to comment on how the indictment might affect its reorganization under bankruptcy. Greg Euston, a company spokesman, said the bankruptcy court has granted Grace permission to spend what it needs to defend the company and the seven targeted executives.
Under the bankruptcy plan proposed by Grace, the company seeks to cap its asbestos liabilities at $1.61 billion. Unsecured creditors and shareholders support the cap. The committees representing asbestos claimants say the amount is too low. The bankruptcy court judge has yet to rule on the company's proposal.
Michael L. Bernstein, a bankruptcy attorney at Arnold & Porter LLP, said the federal charges create a distraction for Grace at a time when creditors and shareholders would rather the company focus on successful reorganization.
"In addition, these charges could lead to additional private claims asserted against the company" as the charges gain publicity, Bernstein said.