THE
RAIDER AND THE COAL TOWN
How a Hostile Takeover on Wall Street Polluted a West Virginia Community – and How the Town Fought Back
By Mark Reutter
Originally published in Southern Exposure, Summer 1991
© Mark Reutter, 2006
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Wayne Stutler has tracked down killers and extortionists during his 32
years on the police force in Fairmont, W.Va., but he says he’s never
been so stymied in finding justice as in the case just down the hill from
his house. He walks across the lawn to the edge of Hoult Road. In the
valley below, he points to the ruins of row after row of coke ovens, flanked
by railroad trestles, an ammonia plant, cooling towers, and a towering
coal tipple stripped of its machinery and rotting in disuse.
Amid this jumble of derelict buildings scattered down to the banks of
the Monongahela River are 120,000 cubic yards of hazardous waste, the
outgrowth of years of dumping of coal tars, cyanides, ammonia, arsenic,
beryllium, phenol, and acids at the Sharon Steel coke plant. The chemicals
have leached into the soil, befouling underground springs. After a rainstorm,
uncontrolled surface runoff dumps the wastes into backyards and chokes
local creeks, which rise and carry the contaminants into the Monongahela.
Behind this mess lies a web of alleged cover-ups, regulatory lethargy,
and the veiled world of the plant’s former owner – Miami Beach-based
corporate raider Victor Posner. “We call it rape and run,”
says Stutler, Fairmont’s retired police chief. Like other residents,
he believes that Posner took advantage of the Monongahela Valley when
he controlled the region’s largest coke oven works.
“When Posner was running the ovens, we couldn’t attract industry
to the city because the plant was so far in excess of air pollution standards,”
complains Rosemary Ruben, who formed Citizens Holding Onto a Klean Environment
(CHOKE) to fight the pollution. “Now we can’t attract industry
because no company wants to be near a hazardous waste dump. The guy took
the money and never reinvested it.”
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Posner is a Wall Street legend: a master of the art of
paper finance and leveraged buyouts. A seventh-grade dropout
who turned 72 last September, Posner runs his financial empire from
an apartment building in Miami Beach, where he can freely indulge his
passion for dealmaking, limousines, jumbo-sized yachts, and teenage
girlfriends. He puts his children and relatives on the payrolls of the
companies he buys. Big salaries and even bigger bonuses follow. Although
three of his corporate entities have collapsed into bankruptcy, the
financier remains one of America’s richest men. He has salted
away $300 million, perhaps more, in stocks, real estate, and cash. No
matter what happens to his companies, he is fond of telling his associates, “it’s
not going to change my lifestyle.”
Posner has been in the news in recent years, pleading guilty to tax evasion
and charged with stock reporting violations by the Securities and Exchange
Commission (SEC). His alleged transgressions against stockholders, however,
pale in comparison to his dirty deeds in Fairmont. Far from the media
spotlight, in a remote West Virginia city, Posner dismantled a vital factory,
threw hundreds of workers out of jobs, and polluted the soil, air, and
water.
The economic and environmental destruction is a reminder that the debris
from a decade of financial excess has not been confined to Mike Milken’s
X-shaped trading desk or Ivan Boesky’s suitcases full of cash,
but has spilled over to heartland communities like Fairmont. Posner
was among
the first financiers of recent times to discover that he could get rich
by piling up “junk bond” debt on Wall Street and
then ransack Main Street to stay one step head of his creditors.
Victor Posner entered the life of Fairmont in 1969, when he staged a
hostile takeover of the Sharon Steel Corp. Originally a real estate developer
in Baltimore, Posner was a new breed in the world of high finance, a self-style
“conglomerateur.” He was not interested in mining coal or
making steel; he was a numbers man in search of companies that he considered
underpriced with “good cash position and no debt.”
He began his corporate raiding in the 1960s with DWG, a Detroit maker
of cigars and pipe tobacco. When a management feud broke out, Posner jumped
into the fray and emerged as chairman and CEO. He shed the cigar business
and used DWG to buy interests in National Propane, Southeastern Public
Service Co., and Wilson Brothers. Although these companies sold very different
products – liquified gas, underground cable conduits, and men’s
shirts – they soon had one thing in common: Victor Posner, who made
himself the boss.
At the same time, Posner was eager to transform a small laminated plastics
company that he owned into a conglomerate. Although the company, named
NVF, wasn’t doing too well in its own business, it became the vehicle
by which Posner acquired Sharon Steel. Posner lured Sharon stockholders
by offering to swap their shares in the company for NVF bonds with a face
of value of $70 – 40 percent above what Sharon stock was selling
for on the New York Stock Exchange.
The key to the deal for Posner was that he didn’t have to pay off
the $99-million bill for the 1969 takeover until 1994, when the bonds
came due. The takeover was not only an early example of a little company
gobbling up a big one (Sharon was seven times NVF’s size), but of
equity (Sharon stock) being swapped for debt (NVF bonds) in a hostile
takeover.
The Sharon deal made a tremendous impact on Wall Street, serving as a
forerunner to the junk-bond and leveraged-buyout boom of the 1980s. In
Fairmont, where the Sharon coke plant was the biggest single employer
in town, the takeover was greeted with astonishment. Posner had no track
record in West Virginia – although given the state’s checkered
history, people should have been wary.
Fairmont owes its gritty industrial character and extremes of wealth
and poverty to coal. From the narrow, winding valley of Buffalo Creek
west of the Monongahela River to the Allegheny highlands of western Maryland,
and from the Pennsylvania state line south to Buckhannon and Elkins
in
the central part of the state, West Virginia is honeycombed with subterranean
veins of Pittsburgh, Freeport, and Kittanning bituminous coal. Mining
began here in the 1850s, and the importance
of “black diamonds” was reflected in the fact that the Watson
family, founders of Consolidation Coal Co., built their opulent estates,
High Gate and La Grange, on the edge of town.
On the heels of coal came oil. The rich beds of oil and natural gas in
neighboring Mannington, W.Va., attracted various homegrown moguls, including
Standard Oil tycoon and former U.S. Senator Johnson Newlon Camden. Camden
built a railroad between Fairmont and Clarksburg, using the Watsons as
his agents to buy 70,000 acres of prime coal and gas land at prices as
low as $5 an acre. He organized the mines at Monongah with future Governor
Aretus Fleming and cleared virgin timber from central West Virginia.
Clarence Wayland Watson dazzled Wall Street in 1909 by merging the northern
coal fields of West Virginia and the southwest coal fields of Pennsylvania
into his Consolidation Coal group, which made Consol the biggest coal
trust in the nation. The company was infused with $20 million in fresh
capital, much of its supplied by John D. Rockefeller and Standard Oil.
In 1920, the Watson-Rockefeller-Camden interests unified their West Virginia
coking facilities into Domestic Coke Corp. and established a large by-product
plant in East Fairmont. Sharon Steel, a specialty steelmaker based in
Sharon, Pa., purchased the plant, plus a coal reserve of 15 million tons,
in 1948.
For the next 20 years, the Joanne Mine at Rachel, a coal-patch hamlet
near Mannington, supplied coal to the Fairmont coke ovens, which in
turn
made the coking coal that was needed for the blast furnaces at Sharon,
Pa. The coke plant also sold sulphate, benzol, tar, and other coal chemicals
to industrial customers and contractors, who used the coal by-products
to make women’s nylons, explosives, aspirin, plastics, and highway
asphalt.
Like the moguls of old, Posner placed coal at the center of his strategy
as the new chairman and CEO of Sharon. To raise cash, he sold the Joanne
Mine to Eastern Associated Coal, a Peabody Coal subsidiary, and entered
into a contract with Eastern for the long-term supply of coal. Thus
assured
of a reliable source of raw material, he began selling coal and coke
to outsider buyers.
Fortune smiled when the energy crisis induced by the oil embargo gripped
the nation in 1972. Spot coal prices soared from $8.50 to as much as $80
a ton in a little over a year. By buying coal cheap and selling it dear,
Posner reaped windfall profits. In 1976, nearly half of Sharon Steel’s
operating profits came from its coal operations, which amounted to less
than 10 percent of sales.
Posner used these profits to finance his increasingly ornate lifestyle.
Sharon, a landlocked Pennsylvania company, purchased three “company”
yachts, all conveniently docked at the chairman’s house on Sunset
Island, Fla. A 1978 audit ordered by the SEC found that Posner had billed
his companies for Cigarette speedboats costing $94,000 apiece, the rent
for his 10-room suite at New York’s Plaza Hotel, and liquor and
restaurant bills in excess of $100,000.
His children also lived well at the expense of Sharon Steel. On Manhattan’s
East Side, daughter Gail Posner had her own limousine and driver, used
Sharon’s corporate jet, and ran up $39,032 in telephone bills. The
cost of Steven Posner’s own suite at the Plaza was picked up by
his father’s companies, along with a beach house in the Hamptons,
a vacation spot in the Catskills, an antique Stutz, and free groceries.
To settle the SEC complaint, Posner and his children agreed to repay nearly
$2 million to his companies, but not without a sense of hurt and self-pity.
Steven protested to an SEC lawyer that it was unfair to ask him to pay
for his $6,400-a-month rooms at the Plaza because he and his family had
been subjected to “jungle-style tenement living” there.
The lawyer was startled. “The jungle tenement living that you are
referring to – was that at the Plaza Hotel?”
“Yes,” Steven answered. “This is the way the family
and I viewed it.”
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Far from Steven’s sufferings at the Plaza, Wayne Stutler knew
something was wrong when the coke oven doors kept blowing out. “It
was terrible,”
he remembers. “The explosions waked you up at night. Sometimes
you’d
think the whole place was going to erupt.”
For Rosemary Ruben, who lived a few doors down Hoult Road, it was the
constant downpour of soot that made her suspicious. “Everybody was
getting sick. People were getting skin rashes. And I had trouble breathing.
I went through all the allergy tests, and the doctors couldn’t find
anything. Then I started asking, ‘Do you think this could be related
to Sharon Steel?’”
Local residents woke up to find grit on their windows, on their cars,
on grass, plants, everything. The rotten-egg smell of hydrogen sulfide
increased. Loathsome-looking pools of bluish-black liquid puddled in washout
piles and oozed into the yards of houses huddled, coal-country style,
within 200 feet of the works.
“When you grow up here, you accept pollution, but this was something
worse than in the past,” Ruben remembers. “Then we started
hearing about cover-ups,” Stutler adds. “That
made me very angry.”
In Charleston, state environmental officials also heard about strange
goings-on at the Fairmont plant. On a routine patrol of the Monongahela,
an inspector for the water resources department reported seeing “bubbling
action within the river approximately 20 feet from the shoreline.”
He then noticed a pipe running along the shoreline. He followed it, and
it led to the Sharon coke ovens. Another pipe was discovered in a cave.
“This is willful pollution by concealed discharges,” the inspector
wrote.
By 1978, a foot-wide crack was found in one of the coke oven batteries.
Several ovens were beginning to lean over and some had collapsed within,
permitting poisonous gas to escape.
Three workmen suffered heart attacks while working on the ovens, and other
employees complained of short breath and dizziness from the smoke and
gas, according to Kenny Springer, president of the Oil, Chemical and Atomic
Workers local at the plant. “Nothing was being kept up,” says
Springer. “Say an oven needed to be relined. That takes six to eight
weeks to do right. But they’d be throwing in bricks and getting
it fired again as fast as they could.”
The debt that Posner had accumulated to purchase the plant impelled him
to squeeze every dollar he could out of the operation. “We weren’t
making a good product anymore,” an ex-supervisor with 30 years
seniority says. “Our tar got so bad that Reilly Chemical, a big buyer,
couldn’t use it.”
Tests by the U.S. Occupational Safety and Health Administration (OSHA)
indicated that some coke oven workers were exposed to nine times the maximum
daily dose of carcinogens. In December 1978, the agency cited Sharon for
exposing workers to dangerous emission, failing to provide safety equipment,
and failing to regularly inspect and maintain the ovens.
“Pie in the sky,” Posner scoffed in a press release, but the
company eventually paid $10,000 in fines to OSHA. The state also cited
the plant for massive violations of air pollution laws, but delayed taking
action because Posner had promised to rebuild the plant.
“Victor Posner strung out the State of West Virginia,” charges
Charles Beard, who was the director of the Air Pollution Control Commission
at the time. “His people told us, ‘We’re going to build
a completely modern coke oven battery. Spend $20 to $25 million. Just
give us more time.’”
The Miami Beach mogul did not directly communicate with state officials,
but instead used his older brother Bernard as his go-between. One time
Bernard, known as Bob, flew to Charleston with a retinue of lawyers to
attend a compliance meeting with the air pollution staff.
“I won’t forget it,” says Robert Weser, a member of
the staff. “When we have compliance hearings, company officials
tend to dress and act very formal. But Bob Posner comes in wearing a shirt
unbuttoned to his navel, with a gold chain and gold bands across his arm.”
Posner sat through the meeting, saying very little, Weser says. “The
impression I had was they could care less what happened to Fairmont. They
acted very cocky.”
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Sharon shut down the Fairmont coke works on May 31, 1979. Two hundred
people lost their jobs, and 270 more were idled by the simultaneous shutdown
of Joanne Mine at Rachel. To this day, many locals mistakenly believe
that “the environmentalists” and “the government”
were responsible for the closings. In fact, papers filed in Clarksburg
show that the plant was shut the same day that its low-cost supply contract
with Eastern Associated expired. State and federal regulators had granted
Sharon Steel permission to operate the noncompliant Fairmont ovens until
“on or before June 30, 1979.” Thus Posner ran the defective
ovens to the day that the coal contract – and the government permits
– ran out.
While the company said it couldn’t afford new coke ovens because
of costly environmental regulations, the company’s owner was waging
a battle for the control of another mining company. His target was UV
Industries, a coal and precious metals conglomerate with operations in
Alaska and the Southwest. Hoping to elude the raider, UV stockholders
had voted to liquidate rather than be acquired by Sharon Steel.
Under the liquidation plan, Posner could have sold Sharon’s 3.4
million shares in UV Industries for about $110 million in cash –
plenty to build new ovens at Fairmont. Instead, he bid for the company.
“Victor is convinced that everyone who fights him is trying to cheat
him,” a former employee explained, and thus Posner raided UV Industries
in order to teach its chairman, Martin Horwitz, a lesson.
The raider did not propose to pay for UV Industries out of his own
pocket. That would be foolish. He arranged for Sharon Steel to float
$411 million of subordinated debentures – better known as “junk
bonds” – to finance the takeover. To consummate the deal,
however, he needed the SEC’s approval for the registration of
the bonds. In January 1980, the commission staff launched an investigation
of alleged insider trading at Sharon Steel.
A month later, the Environmental Protection Agency (EPA) moved against
Sharon, filing suit in U.S. District Court in Clarksburg for air and water
pollution violations at the Fairmont works. The agency sought $16.5 million
in civil penalties for the company’s disregard of the Clean Air
Act during 1978 and 1979, and $379,000 for the illegal discharge of water
pollutants.
Within months, however, both the SEC and EPA backed off. Despite a critical
report by the SEC staff of “suspect trades” among Posner companies,
the agency brought no formal charges. As a result, the UV Industries bonds
were floated, and Posner won control of the company in late 1980.
Then, in June 1981, the EPA dropped all proposed fines against Sharon.
In return, the company pledged to build a $2.5-million facility to contain
wastes at the closed Fairmont plant. The change in heart came five
months after President Ronald Reagan took office and named Anne Burford
as chief of the EPA.
“We had a total reorganization and shifting of staff and orientation,”
acknowledges Ray George of the EPA’s West Virginia office. The agency
decided to allow Sharon to bury the wastes in Fairmont rather than remove
them. “The cost would have been inordinate, and there was the question
of public exposure to the material during transport,” George says.
“It was done for the best of reasons.”
“The best of reasons” left the people of Fairmont facing
the prospect that the city’s largest single parcel of land –
nearly 100 acres – would become a permanent hazardous waste site.
Under the consent agreement between EPA and Sharon Steel, a single clay-lined
vault would be built for the disposal of wastes near the Monongahela River,
and a betonite slurry cutoff wall with an impervious cover would surround
Oxidation Pond No. 2, which would also contain the excavated sludge from
Pond No. 1, sludge, light oil wastes, and tar pit wastes.
“It was a mockery,” says Rosemary Ruben. A nurse and mother,
Ruben formed CHOKE to fight the consent decree. “At first I got
phone threats to my life,” she recalls. “People said, ‘Who
are you to stop jobs?’ The company was promising to reopen the plant,
and the workers thought they’d get their jobs back. It was a lie,
but even my late husband said I shouldn’t get involved.”
CHOKE sold t-shirts, held a benefit dinner in Morgantown, and raised
$600. An engineer hired by the group found serious flaws with the containment
plan. The “impervious cover” wasn’t so impervious after
all and would crack over time, the engineer stated. And a single-lined
vault wasn’t adequate to hold the landfill wastes. Meanwhile, an
on-site study by Battelle Laboratories
found that the plant contained higher levels of cyanide, phenol, and
arsenic contamination than originally believed. To top it off,
Sharon Steel
was still discharging wastes from its sludge ponds into the Monongahela
River.
Frustrated by federal and state inaction, the city government decided
to defend itself. In 1983, the Fairmont City Council passed an ordinance
making it illegal to dump hazardous waste within city limits. “The
Council decided that they didn’t want Posner’s pigsty in our
parlor,” says George Higinbotham, who as then the city attorney.
Sharon immediately filed suit to block the ordinance. Over the next three
years, the case wound its way through the state courts. Although the company
lost nearly every action it brought, its attorney, Blair McMillin, bluntly
told the Charleston Gazette that fighting Fairmont in court cost Sharon
Steel five to 10 times less than obeying the anti-dumping ordinance.
“Posner’s initial strategy was to pose such an aggressive
threat to EPA that they backed off,” Higinbotham says. “Then
when Fairmont took up the fight, the strategy was to wear us out.”
In fighting the city, Sharon found an unusual ally – the attorney
general of West Virginia. In a brief filed with the state Supreme Court
in 1985, the state’s chief prosecutor accused Fairmont of trying
to “obstruct the exercise of state power” by passing a law
that preempted the state’s Hazardous Waste Management Act.
The state court rejected the attorney general’s argument and validated
the Fairmont law. McMillin then took the case to the U.S. Supreme Court.
By the time the high court rejected Sharon Steel’s appeal without
comment, many more months had lapsed.
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By the start of 1987, Wayne Stutler believed that the company
was finally going to comply with the city ordinance. In his capacity as
chief of police, Stutler served a warrant on the plant guard, stating
that Sharon was in violation of Fairmont’s anti-dumping ordinance
and subject to fines of $500 a day.
But the clean-up efforts were stymied again when Sharon filed for Chapter
11 bankruptcy protection in April 1987. The filing was prompted not so
much by the Fairmont dispute, but by Sharon’s default on UV Industries
bonds – the very debt that Posner had floated to stage the hostile
takeover.
U.S. Bankruptcy Court Judge Warren Bentz began picking through the ruins
of Sharon. The acrimony between the judge and Posner, who remained debtor
in possession, became so bitter that Bentz removed the financier from
control of the company for “gross mismanagement.”
The chaos arising from the proceedings ended all efforts to contain and
remediate the hazardous waste at the Fairmont site. Finally in October
1990, Fairmont won a small but significant victory when the company removed
an estimated 5,000 cubic yards of waste from the tar pits. According to
a report by the Center for Hazardous Materials Research at the University
of Pittsburgh, another 120,000 cubic yards of wastes remained at the plant.
City Manager Edwin Thorne says Fairmont is still waiting for post-Posner
management to come up with a clean-up plan for that waste. The company
emerged from bankruptcy in late 1990 under the control of New York financier
George Soros, whose Quantum Fund held a large block of the defaulted bonds.
According to lawyer Higinbotham. Sharon officials still assert that their
only responsibility to Fairmont is to contain the waste on the site. “If
EPA or West Virginia stepped in decisively, I’m convinced that the
problem could be cured very quickly,” he says.
Despite the on-going delay, Rosemary Ruben of CHOKE says that she has
learned a lesson about the value of community organizing. “I think
our group and the city did accomplish something. All the necessary laws
to control toxic waste dumping are on the books.” She and other
citizens hope that their fight for local control of toxic waste remediation
will have long-range benefits for other communities plagued by industrial
pollutants. But for now, they’re worried about the mess that Posner
has left behind in the Monongahela Valley.
To settle the negligence suits brought by Sharon creditors, Posner agreed
to pay $7.5 million to the Sharon estate, a pittance to a man who made
the cover of Business Week in 1986 as America’s highest
paid executive. Regardless of the disasters that befell his company or
the citizens of Fairmont, the raider was not to be denied his pay ($12.7
million between 1984 and 1987) by a board of directors that included his
brother Bob, his son Steven, and other Posner family members.
Standing outside his house on Hoult Road, Wayne Stutler mulls over the
convoluted story of the raider and the coal town. “You know,”
he says, “this site has a lot of potential. It could be used for
recreational purposes. Or for industrial. Yup, this property has real….”
He stops and looks out over the rows of rusting towers and trestles that
stretch down to the banks of the Monongahela like the headstones of
a giant cemetery. He then shakes his head. Reality has returned.