Who Runs Freedom Industries? West Virginia's Chemical Spill Mystery
"... Freedom was born and operated in a felonious milieu populated by old friends who seemed better suited to bartending at the Charleston-area saloons they also owned. ... In 1987, before he started Freedom Industries, Carl Kennedy II was convicted of conspiring to sell cocaine in a scandal that brought down the mayor of Charleston. ..."
January 30, 2014
Before the lawsuits and the retreat into federal bankruptcy court, before the change in ownership in a veiled roll-up by an out-of-state coal baron, before the Justice Department’s environmental-crimes investigation, the presidentially declared emergency, and the National Guard’s arrival—nine years before all of that—the co-founder of Freedom Industries, the company at the center of the Jan. 9 chemical spill that cut off tap water for 300,000 West Virginians, was convicted of siphoning payroll tax withholdings to splurge on sports cars, a private plane, and real estate in the Bahamas. And 18 years before that, in 1987, before he started Freedom Industries, Carl Kennedy II was convicted of conspiring to sell cocaine in a scandal that brought down the mayor of Charleston.
Little known, even locally, Freedom was born and operated in a felonious milieu populated by old friends who seemed better suited to bartending at the Charleston-area saloons they also owned. “These people who were running Freedom Industries weren’t the sort you’d put in charge of something like chemical storage that could affect the whole community,” Danny Jones, Charleston’s current mayor, says. “Who are these guys, anyway?”
Good question. Kennedy kept the books for bars and restaurants, including a rib house Mayor Jones used to own, although he hadn’t gotten to know him well. “He was pleasant enough,” Jones says. Until the spill, the mayor had no idea his former accountant had been enmeshed with Freedom. That really seems troubling, Jones says, “especially with the cocaine stuff in his history.”
Kennedy’s main partner was a college buddy named Dennis Farrell, who had some technical background and took over Freedom after Kennedy went to prison in 2006. By Farrell’s own account, the company, founded in 1992, nearly ran aground on his watch. Only a rescue in 2009 funded by the federal antirecession stimulus program kept the company going.
The third member of the company’s leadership triad, Gary Southern, has served as Freedom’s public face since the spill. He lives in Marco Island, Fla., and says he’d been advising the company for several years before becoming full-time president in 2013. Not blessed with a talent for public expression, Southern didn’t mention in the first days after the leak of 10,000 gallons of coal-processing compounds that Freedom had been acquired, only 10 days earlier, by Cliff Forrest.
A different sort of character from Kennedy, Farrell, and Southern, Forrest founded and heads Rosebud Mining, the third-largest coal producer in Pennsylvania and the 21st-largest in the country. He’s a prominent figure in his industry and an opponent of what he calls the Obama administration’s “war on coal.” Why he wanted Freedom’s decrepit facilities for blending and distributing chemicals remains a mystery. Publicly, Forrest hasn’t said a word. His connection to Freedom wasn’t confirmed until Jan. 17, when his lawyers put the company into bankruptcy. The Chapter 11 filing in Charleston required disclosure of a financial paper trail that led to Forrest’s coal company headquarters near Pittsburgh via another entity called Chemstream Holdings.
So while the spill revealed once again that porous legislation and murky assumptions about industry self-policing hinder oversight of dangerous chemicals, it also highlighted a peculiar and deeply troubling element of American commerce, one where holding companies and roll-ups make it difficult to determine who’s accountable.
Kennedy grew up in Montgomery, W. Va., a small city on the Kanawha River. He went to college there at West Virginia University Institute of Technology. It was later, in Charleston, that he attained a measure of notoriety.
West Virginia’s rugged mountains and forested hollows are home to struggling coal-mining communities. Locals call the Kanawha region Chemical Valley because of the network of foul-smelling refining plants spread across it. The state ranks among the nation’s poorest. Charleston, with its office towers and expensive eateries, is a place apart: Home to a social and business elite of lawyers, lobbyists, and coal executives, the capital enjoys a wealth and élan alien to the state’s rural and industrial precincts.
In the mid-1980s, Kennedy moved easily in a narcotic-fueled night scene associated with Charleston’s Republican mayor at the time, James “Mad Dog” Roark. Targeted by a federal investigation, Roark pleaded guilty to cocaine possession in 1987, resigned as mayor, and went to jail. The same year, Kennedy, then 30 years old, was charged with distributing the not-trivial amount of 10 ounces to 12 ounces of coke. In a plea deal, he admitted to one distribution count and was sentenced to five years’ probation. In all, federal prosecutors notched some 30 convictions.
A forgiving town, Charleston didn’t ostracize Kennedy. Despite his criminal record, he and Farrell became prolific business partners. Farrell had earned a master’s degree from West Virginia University and for a time was employed by a company called Sherex Chemical. Together they invested in commercial real estate and a saloon in Montgomery called the Bank Bar & Grill. In a laudatory 2002 article, the Charleston Gazette marveled at the pair’s “far-flung array of business ventures,” which included a manufacturer of a synthetic fuel additive, a trucking company, and a plant in the town of Nitro, W. Va., that mixed chemicals. Kennedy’s portfolio also contained Freedom Industries, which he incorporated in 1992, according to filings with the West Virginia secretary of state. (Kennedy, Farrell, and lawyers who have represented them over the years all failed to respond to telephone and e-mail messages.)
Kennedy’s work with the tax ledgers at Freedom is what got him back into serious trouble. When armed IRS agents showed up at his office in Charleston in 2004, he knew why they’d come. “He quickly admitted everything he [had] done,” his criminal defense lawyer, John Kessler, later told U.S. District Judge John Copenhaver Jr., according to the Gazette. Kennedy pleaded guilty to pocketing more than $1 million withheld from Freedom employees’ paychecks that he was supposed to have passed along to the federal government. He admitted, as well, that he’d evaded personal taxes of $510,040.96. “These are large sums,” Copenhaver observed in court. He’d been the judge for Kennedy’s earlier cocaine conviction. “It seems to me,” Copenhaver said during a hearing in January 2006, “you would have learned from past experience.” Since Kennedy apparently hadn’t, the judge sentenced him to 40 months behind bars.
Kennedy’s lifestyle had been expensive, court records showed. Among his possessions were a Hummer H2, two MGB sports cars, five Ford trucks, a pair of excavator vehicles, a private plane, and three two-acre plots on Rum Cay, an island in the Bahamas. His wife, Kathy, had filed for divorce.
In 2005 a prison-bound Kennedy filed for personal bankruptcy. He left Freedom and began to sell his business investments. Freedom, for its part, failed to file an annual report that year and had its state business license revoked. It later reorganized and got its paperwork in order. Freedom sued Kennedy in 2005, seeking to get back money he allegedly misappropriated. Not in a conciliatory mood, perhaps because of his date with the Federal Bureau of Prisons, Kennedy filed a counterclaim against Freedom for the value of his 45 percent ownership stake. That dispute resulted, strangely, in the company paying him $800,000 in a settlement.
Nothing if not enterprising, Kennedy eventually struck a deal to get his prison sentence reduced. In exchange for his help with a drug investigation, federal prosecutors persuaded Judge Copenhaver to release Kennedy after only 22 months. An assistant U.S attorney named Monica Schwartz told the judge that Kennedy “was anxious to cooperate.” Under the supervision of federal agents, he made “controlled buys” of cocaine that led to the convictions of two longtime business associates.
Freedom survived Kennedy’s cooking the books, with Farrell replacing his college classmate as president. The compounds the company wholesales control road dust, keep coal from freezing, and help prepare the fuel for burning. One Freedom facility, a tank farm along the Elk River formerly used by Pennzoil (RDS/A) to store gasoline, has 17 huge steel vats capable of holding 35,000 gallons each. Known as the Etowah River Terminal, the tank farm “processes large volumes of chemicals rapidly and cost effectively,” Freedom’s website says. The riverside location allows the plant to do business by barge as well as truck.
Much of Freedom’s commerce comes from distributing products made by larger companies, including a chemicals unit of Georgia-Pacific owned by billionaire brothers Charles and David Koch. In May 2008, Georgia-Pacific Chemicals announced that Freedom would serve as a distributor of its Talon mining reagents—compounds that reduce ash content and prevent the loss of combustible coal—in eight states: West Virginia, Virginia, Pennsylvania, Ohio, Maryland, Minnesota, Kentucky, and Michigan. (Four years later, Georgia-Pacific ended Freedom’s distribution role, the manufacturer said in a written statement. Georgia-Pacific didn’t explain the change and said the West Virginia company is “still a customer of ours.”)
In 2009, Farrell told the Charleston Daily Mail, Freedom faced having to shut down its main Elk River location because silt buildup made it difficult for barges to travel from the terminal to the confluence with the Kanawha River. “At some point, we wouldn’t have been economically fit to run the facility,” Farrell said. “That’s our claim to fame—the barges.” The U.S. Army Corps of Engineers came to the rescue. With $400,000 in federal stimulus money, the Army Corps dredged the Elk River and kept the Freedom plant viable.
Photograph by Paul Corbit Brown -- All 17 of the storage tanks operated by Freedom Industries on the Elk River will be scrapped following the leak that led to more than 30 hospitalizations, treatment for hundreds, and egg on the faces of state regulators. Since the spill, first indicated through reports of its odor by nearby residents at 8 a.m. on Jan. 9, the West Virginia Department of Environmental Protection has twice increased its estimate of the scale of the contamination, first from 5,000 gallons to 7,500 gallons and then to 10,000 gallons, as of Jan. 27
Freedom and a constellation of affiliated companies were dissolved and reformulated several times in the 2000s, state records show. The purpose of this paper shuffling wasn’t disclosed. Freedom’s operations along the Elk River did not receive much government oversight, according to records and local officials. The U.S. Environmental Protection Agency leaves regulation of such chemical facilities primarily to the states. West Virginia doesn’t view that delegation of authority as reason to regulate aggressively, however. To the contrary, the state prides itself on being industry-friendly, and Governor Earl Ray Tomblin, a Democrat, routinely castigates what he calls federal overreaching. West Virginia doesn’t require inspection of storage tanks containing potentially dangerous coal-processing chemicals, according to Larry Zuspan, who runs the local emergency planning committee in Charleston. What made the Freedom tank farm on the city’s outskirts unusual, even for West Virginia, is that the regional utility operates the sole intake for the area’s public water system only a mile and a half downriver.
Also surprisingly close to the Freedom site is a cluster of working-class homes. From time to time over the years, Mayor Jones says, people have complained to state authorities about unpleasant odors wafting from the facility. State inspectors have looked around but never reported anything amiss, according to available records. In particular, they didn’t notice that a concrete containment wall meant to prevent any tank leakage from reaching the river was visibly cracked, Jones says. Only after the Jan. 9 spill did Freedom disclose that sometime in 2013 it had set aside $1 million to fix the wall and make other improvements; for reasons that haven’t been clarified, the repairs hadn’t started. On Jan. 25, Governor Tomblin’s office announced that the state had ordered Freedom to shut down and dismantle the entire tank farm because all 17 tanks lack adequate containment walls to prevent leaks from spreading.
At some point recently, Forrest, the man in charge of Rosebud Mining in Kittanning, Pa., decided that Freedom Industries was worth owning. Named for the flower, not the enigmatic line from Citizen Kane, Rosebud calls itself “a great employer—and a great neighbor.” Forrest, a plainspoken executive, voted for Barack Obama in 2008 but then turned bitterly against the president because of what Forrest perceived as the White House’s hostility to coal. In an interview with Bloomberg TV in October 2012, he warned that if Obama was reelected, the industry might not survive.
Despite that grim assessment, Forrest last year went ahead with his acquisition of Freedom, which relies heavily on coal company clients for its $30 million in annual revenue. On Dec. 6, Forrest, operating via Chemstream, agreed to pay $20 million to Freedom’s three owners—Farrell and two other men. Then, on Dec. 31, Forrest merged Freedom with three smaller companies. Neither transaction received any publicity. Nine days later, the water supplies were shut down.
Residents began reporting a licorice-like smell coming from the Freedom tank farm a little after 8 a.m. on Jan. 9, a Thursday. State inspectors drove to the facility and by 11:15 a.m. located a 4-foot-wide stream of 4-methylcyclohexane methanol, or MCHM, seeping through the cracked containment wall and into the Elk River. By noon, the West Virginia unit of American Water Works (AWK), a large publicly traded utility company, had been informed of the contamination. The water company added carbon filters in an attempt to keep the MCHM out of its treatment plant but decided not to shut the intake.
By the time tap water was declared safe to drink again, four days after the spill, FEMA had trucked in more than 530,000 gallons of bottled water. Photographs by Michael Switzer/AP Photo; Lisa Hechesky/Reuters
Not until 12:05 p.m. did Freedom officials finally call a West Virginia hotline to report the leak—a step state officials say they were supposed to have taken immediately. By late afternoon, MCHM was found in tests of filtered water. Shortly before 6 p.m., Governor Tomblin announced a ban on water use for drinking, cooking, and bathing. President Obama declared a federal emergency the next morning, authorizing the National Guard to truck water into Charleston and eight surrounding counties.
Harmful if swallowed or inhaled, MCHM can cause skin irritation, nausea, and vomiting, according to the American Association of Poison Control Centers. Apart from that, relatively little is known about MCHM’s effect on humans. It’s one of the thousands of chemicals that weren’t tested when they were grandfathered in for commercial use under the Toxic Substances Control Act of 1976, says Daniel Rosenberg, a senior attorney with the nonprofit Natural Resources Defense Council. More than 500 West Virginians have reported symptoms possibly related to exposure to MCHM. While more than 30 were admitted to hospitals, there haven’t been any deaths or serious illnesses reported.
On Friday evening, Jan. 10, Southern, the man listed in state records as Freedom’s president, called a press conference. (Confusingly, the company’s website still says Farrell is the president.) No mention was made of the company’s sale to Forrest. Southern, who has close-cropped white hair and a British accent, is affiliated with a number of companies in addition to Freedom, according to public records. These include Blackwater Consulting Group in Marco Island, the Florida resort where he lives; Ecodrill, also located in Marco Island; and HVC, a chemical company in Cincinnati.
At the press conference, Southern initially apologized. “This incident,” he said, “is extremely unfortunate, unanticipated, and we are very, very sorry for the disruption of everyone’s daily life.” His explanation, however, was vague. He said Freedom employees became “aware” of a leak “around 10:30 a.m.,” more than two hours after residents first complained of the licorice odor. He conceded that the company had “occasionally” had “reports of an odor previously,” but he didn’t elaborate on what preventive steps, if any, had been taken. “It has been an extremely long day,” he continued, looking exasperated. “I would appreciate it if we could wrap this thing up.” A local reporter interjected that it had “been an extremely long day for a lot of people” without water. Sipping from a plastic bottle of water, Southern answered several more queries before abruptly walking away.
Two days later, Charles Ryan Associates, a prominent Charleston public-relations firm, dropped Freedom as a client, refusing to explain why. A woman who answered my call to Freedom’s corporate office said executives weren’t available. She referred me to what she said was a public-relations firm; the Florida phone number connected to an answering machine where messages left over several days went unanswered.
In the hours after the spill, additional insight into the mood within Freedom came from Kathy Stover-Kennedy, Carl Kennedy’s ex-wife. Now Farrell’s girlfriend, Stover-Kennedy took to her Facebook page (since deleted) to defend her ex-husband’s ex-partner. “I’m not asking for anyone’s sympathy but a little empathy wouldn’t hurt,” she wrote. “And just so you know, the boys at the plant made and drank coffee this morning! I showered and brushed my teeth this morning and I am just fine!” Noting “criticism from many about how Freedom Industries is handling this,” Stover-Kennedy continued: “Denny is not a spokesman and has no desire to be. His expertise was much needed elsewhere.” She didn’t respond to phone messages.
Meanwhile, Randy Huffman, cabinet secretary of West Virginia’s Department of Environmental Protection, was also on the defensive. Since the spill, Huffman has tried to explain why his agency didn’t show more skepticism earlier about Freedom. One point he’s stressed to journalists is that as far as state and federal chemical classifications go, MCHM isn’t considered “hazardous.” Freedom thus didn’t need a special state permit to store the compound, he said. Records released in the wake of the spill show that West Virginia inspectors had visited the Elk River tank farm at least five times since 2001 but focused primarily on air quality.
The company that made the MCHM, Eastman Chemical (EMN), based in Kingsport, Tenn., discloses in publicly available information that MCHM has a U.S. Occupational Safety and Health Administration rating of “hazardous.” Rosenberg of the Natural Resources Defense Council explains that the apparent contradiction over MCHM’s danger level isn’t unusual. “We rely on manufacturers to test the vast majority of chemicals used in commerce,” he says, “so there just isn’t much consistency or certainty.”
Within 24 hours of the announcement of the contamination, plaintiffs’ attorneys were heading to Charleston’s state and federal courthouses to sue Freedom, West Virginia-American Water, and Eastman. More than two dozen suits have been filed so far, some seeking class-action status. All three companies have denied wrongdoing. Although she forcefully rejected the accusation that Eastman failed to provide adequate warnings about MCHM, a company spokeswoman pointedly told me the manufacturer couldn’t vouch for the conduct of Freedom or the water utility.
On Jan. 17, Freedom filed for Chapter 11 protection. That had the effect of freezing the liability suits against the company while U.S. Bankruptcy Judge Ronald Pearson sorts out creditors’ claims. During a preliminary hearing on Jan. 21, Pearson called the situation “one of the most unusual Chapter 11 cases I’ve seen.”
Freedom’s bankruptcy attorneys, led by Mark Freedlander of the Pittsburgh office of McGuireWoods, immediately floated a theory designed to ease Freedom’s liability. “It is presently hypothesized,” they wrote in one filing, “that a local water line break [caused] the ground beneath a storage tank at the Charleston facility to freeze in the extraordinary frigid temperatures in the days immediately preceding” what Freedlander delicately termed “the incident.” He further hypothesized that “the hole in the affected storage tank” was caused by “an object piercing upwards through the base” of the tank.
The implication is that water expanded as it froze, pushing the mystery “object” up through the floor of the tank. It’s difficult to say whether the court will buy this explanation. Certainly plaintiffs’ attorneys are going to argue that steel tanks containing dangerous chemicals ought to be able to withstand winter weather.
Testifying at the preliminary hearing, Southern continued in the obtuse vein of his prior appearance. “The unfortunate incident of the 9th, which resulted in material leaving the facility,” he said, “caused an otherwise profitable and successful company to endure the tragedy of consequence relating to that which we’ve dealt with since the 9th.” A company lawyer hastened to clarify that Southern, who said he’d worked in the chemicals industry for 30 years, didn’t mean to imply that Freedom had been negligent. “Absolutely not. No sir,” Southern said.
Mayor Jones wasn’t impressed. “I don’t think any of these people at the company seems honest,” he says. And he worries that Charleston’s woe isn’t over. Many residents, he says, are still scared to drink from the tap. The U.S. Centers for Disease Control and Prevention in Atlanta has warned pregnant women that they ought to play it safe and stick to bottled water.
In response to orders from state officials, Freedom moved its MCHM supply from the Elk River facility to its location in Nitro. After the MCHM had been transferred, though, state environmental authorities cited the Nitro operation for five fresh violations. The most urgent related to the absence of a secondary containment wall—an ominous reminder of the apparent failure of the aging cement wall on the Elk River. “Given what we’ve been through, it would be very hard for me to convince anybody that there’s not something to be nervous about,” Huffman, the state environmental chief, told reporters. Freedom is now looking for another place to store the chemical.Barrett, an assistant managing editor and senior writer at Bloomberg Businessweek, is working on a book about the Chevron oil pollution case in Ecuador, which is scheduled for publication by Crown in 2014. His most recent book is GLOCK: The Rise of America’s Gun. http://www.businessweek.com/printer/articles/181473-who-runs-freedom-industries-west-virginias-chemical-spill-mystery