Grace's plight made worse

Road out of Chapter 11 could get even rockier

Turnaround expected to take years

Indictment in Montana may trigger more lawsuits

Asbestos Litigation

February 09, 2005|By William Patalon III | William Patalon III,SUN STAFF

The road to recovery for W.R. Grace & Co. was made tougher by an indictment this week alleging that the company knowingly exposed a Montana town to deadly asbestos for decades and will become tougher yet if the Columbia company takes a hard-line stance, experts said.

Grace filed for bankruptcy protection in 2001 to shield itself from more than 100,000 asbestos-related lawsuits, a move necessary for it to emerge as a continuing business.

The indictment "makes it a lot more difficult," said Ivan Feinseth, an analyst with Matrix Securities in New York. Feinseth, who rated the stock as a "sell" in November, said he owns no Grace shares, and has no relationship with the company.

The Justice Department said Monday that seven current or former Grace officials - and the company itself - had been indicted on charges of endangering the health of community residents and its workers in Libby, Mont., where the company once operated the world's biggest vermiculite-mining operation.

The public image of a company in trouble is crucial because it can affect the number of additional lawsuits a company faces, say experts such as Walter Olson, a senior fellow at the Manhattan Institute, a nonpartisan think tank. Grace could end up ceding part of its stock to a trust to pay litigants, he said.

Olson, an expert on asbestos litigation at the institute's Center for Legal Policy, said it is "very unusual" for a company to be indicted, meaning that this week's development is ominous for the company. He predicted that it will take years for Grace to engineer a turnaround while finding a way to address past and future claims.

With an anticipated rush of new litigation, fueled by the attention of the indictments, Grace could end up establishing a separate trust fund from which it could pay on claims filed for asbestos-related illnesses, experts said.

Grace shares fell 95 cents, or 8.3 percent, yesterday to close at $10.50 on the New York Stock Exchange. The shares are down nearly 23 percent this year.

Grace, which operated the Libby mine from 1963 to 1990, is charged with continuing to mine and market vermiculite, which is used in some kinds of commercial insulation and other products, despite knowing since the late 1970s that the material was contaminated with asbestos.

The indictments, which also allege wire fraud and obstruction of justice, charge that the company sent workers home covered in asbestos-laced dust and that it provided vermiculite to the community for use in gardens and running tracks at the community's schools.

Grace, which in November said it expected an indictment, said this week that it was "surprised by the government's methods and disappointed by its determination to bring these allegations." The company also said it "categorically denies any wrongdoing."

Adopting a hard-line stance in denying wrongdoing may well extend the time it takes for a company such as Grace to work through its bankruptcy proceedings, said Susan White, a professor of finance at the University of Maryland's Robert H. Smith School of Business. She drew comparisons to the long-distance giant WorldCom, which emerged from bankruptcy protection two years after being brought down by an $11 billion accounting scandal.

"WorldCom, obviously, did some very bad things, but worked as quickly as possible to make things right," starting by admitting wrongdoing and fixing the problems that prompted it, White said.

Janet C. Barnard, a Rochester, N.Y., management consultant and former professor at the Rochester Institute of Technology College of Business, said that the public seems to reserve most of its scorn for corporations that appear to be covering up acts of wrongdoing.

"People are more concerned with what you say than what you did," she said.

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