Hedge-fund managers quit Massey Energy board, blast chief executive, cite ‘Blankenship Discount’

Managers of the Third Point hedge fund quit the board of Massey Energy Co. yesterday, saying other directors had "a misguided insistence on keeping" as the company's chief executive Don Blankenship, left, perhaps the most controversial executive in one of America's more controversial industries. (Photo from The State Journal, Charleston)

The managers said that cost Massey a chance to merge with another firm and improve shareholder value. They also criticized what they called Blankenship's "confrontational" and "counterproductive" handling of environmental and safety matters. Federal officials are suing Massey "for thousands of alleged violations of the Clean Water Act and, though Massey disputes the figure, by some estimates faces $2.4 billion in fines," The Associated Press reports. "Massey is appealing a federal lawsuit that resulted in a judge voiding permits for four of its surface mines and jeopardizes the longstanding industry practice of using settling ponds to remove sediment from streams at mountaintop-removal mines." (See next item)

Massey, based in Richmond, Va., also faces a record fine of $1.5 million for safety violations the federal Mine Safety and Health Administration "determined contributed to the deaths of two miners in a January 2006 fire," which is also "the target of a federal criminal probe and the subject of a wrongful-death lawsuit, which also names Blankenship as a defendant," AP's Tim Huber reports. (Read more) "These and other correctible deficiencies combine to maintain a 'Blankenship Discount' in the market price for Massey's shares, and do a grave disservice to our shareholders by masking the underlying strength of the company's business, assets and workforce," Third Point CEO Daniel Loeb and analyst Todd Swanson wrote.

Three months before the fire, Blankenship sent managers a memo saying, "If any of you have been asked by your group presidents, your supervisors, engineers or anyone else to do anything other than run coal (i.e.: build overcasts, do construction jobs, or whatever) you need to ignore them and run coal." Overcasts ensure proper air flow. The Appalachian News-Express of Pikeville, Ky., then a weekly newspaper, revealed the memo.

Massey is the fourth largest coal company in the U.S. and the largest in Central Appalachia, and Blankenship is one of the most politically powerful people in West Virginia. He put $3.5 million into a 2004 campaign that helped unseat a state Supreme Court justice, has targeted another one for next year, and tried unsuccessfully last year to finance a legislative takeover by Republicans. He has given GOP candidates $6 million.