Massey In Federal Crosshairs - Updated

Add a U.S. Justice Department lawsuit alleging massive Clean Water Act violations to the legal woes besetting Massey Energy Co., the nation's fourth-largest coal producer by revenues and a major employer in southern West Virginia.

The Associated Press first reported last week that federal prosecutors had sued Massey and 27 subsidiaries. Filed on behalf of the U.S. Environmental Protection Agency, the lawsuit alleges the coal operations exceeded average monthly or maximum daily discharge limits 4,633 times within the last six years, for about 69,071 days worth of violations.

Depending on when the illegal discharge occurred, seven Massey subsidiaries face fines of $27,500 or $32,500 per day of violation.

Massey responded to the lawsuit Monday afternoon, several hours after news of the lawsuit threatened to reverse the recent growth in the company's stock value:

* The AP quoted Daniel W. Scott, an analyst at Banc of America Securities, who estimated a "worst case" cost to Massey of $2.24 billion. Scott said Massey faced a sort of double-whammy between the Clean Water Act lawsuit and the recent federal ruling rescinding valley fill permits at four Massey operations.

* Massey shares fell 14 percent, or $4.26 at $26.07 per share, before trading was halted, Reuters reported. "The stock was the worst percentage decliner on the New York Stock Exchange."

Reuters also quoted an analysis from Credit Suisse First Boston that pegged the potential fines at just below $2 billion.

"Even if this most recent lawsuit ultimately results in an immaterial adverse impact on Massey Energy's financial position, we believe the uncertainty associated with the outcome suggests investors would be better served investing in U.S. coal companies that are not the direct target of such an extensive lawsuit," the analysis said.

* Also drawing on the Credit Suisse analysis, Bloomberg reported that the stock's drop was the worst for Massey since July 28. "Before today, the stock had jumped 31 percent this year."

"Considering the theoretical scope and magnitude of this most recent federal lawsuit, in our view this cannot be good from a Massey Energy shareholders perspective,'' Credit Suisse's David Gagliano said in the Bloomberg piece.

The followup AP article reflects both Massey's response and the Banc of America analysis. Both it and the original story note some of the coal operator's other legal troubles: $1.5 million in federal and $70,000 in state fines for violations stemming from last year's fatal Aracoma Mine fire; a federal criminal probe into that Logan County accident; a lawsuit filed by the widows of the two miners killed at Aracoma; and the ongoing lawsuit targeting the four Massey mountaintop removal operations.

Update: Massey disputes the analysts' estimates of potential civil penalties and alleges that prosecutors inflated the number of violations in a story today from AP Business Writer Tim Huber.