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Legacy of Disaster: Sifting Through the Rubble of 3 Energy Accidents

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Legacy of Disaster: Sifting Through the Rubble of 3 Energy Accidents

A fireball erupted 1,000 feet into the California air, an offshore rig exploded and coated the Gulf shore in oil, and an explosion ripped through two miles of underground mine tunnels in West Virginia.

In 2010, 48 people died in three of the energy industry's worst disasters in recent history.

Six years later, a jury convicted a California gas utility of six felonies, a multinational oil company reached a $20 billion settlement for gross negligence, and a judge sentenced a coal executive to a one-year prison sentence for a misdemeanor charge after a jury concluded he put profits before safety.

S&P Global investigated the impact these disasters have had on the energy sector, looking at how they have influenced changes to regulation and oversight, what their criminal cases revealed about the process to holding guilty parties accountable, and what behaviors led to safety violations and ultimately disaster.

Throughout the investigation, S&P Global heard repeated frustrations from victims' families, from community leaders and from legislators about a system that punishes companies instead of people and has hamstrung prosecutors chasing executive accountability.

Accidents happen. This was not an accident."

Jim Ruane, mayor of San Bruno, California

In this first part of the investigation, S&P Global looks at how those calls have influenced federal policy and explores some challenges inherent in holding individuals accountable.

"You should have a normal expectation, on Sept. 9, 2010, [when you] flipped your TV on to watch the first Thursday night football game of the season, heat a pot of soup and have your dinner without the whole place blowing up," said Jim Ruane, mayor of San Bruno, Calif., where eight residents were killed in a gas pipeline explosion. "Accidents happen. This was not an accident."




Public outcry like Ruane's has led federal prosecutors to take a new approach to hold executives more accountable for corporate misdeeds.

The Yates memo

A memo released by Deputy Attorney General Sally Yates in late 2015 lays out this strategy.

The Yates memo directed prosecutors to go after individuals behind corporate crimes, reasoning that personal fear of punishment would be a deterrent against future crimes.

"One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing," the memo stated. "Such accountability is important for several reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public's confidence in our justice system."

The memo outlined six steps to strengthen the pursuit of individual corporate wrongdoing, but key among them is that for a company to get any credit for cooperating in the investigation, the corporation has to give the U.S. Department of Justice all the relevant information about the individuals involved in the misconduct.

While the Yates memo could address populist outcries for justice, incentivizing corporations to offer up evidence to avoid company-wide prosecution may introduce new problems. The strategy could encourage a "corporation versus its executives" mentality and scapegoating rather than responsibility, Herrick Lidstone, managing director of law firm Burns Figa & Will PC, wrote of the Yates memo.

While speaking at the New York City Bar Association White Collar Crime Institute in May 2016, Yates stressed that the memo aims to reduce the existence or even perception of a softer system of justice for white-collar criminals. Yates said the memo led to a streamlined process for targeting individuals.

"Our intensified focus on individuals from the inception of an investigation is not expected to result in a flurry of individual indictments overnight," Yates cautioned. "But that was never the goal. The goal of this policy is to do everything we can to ensure that if there are culpable individuals, we are holding them accountable."

Companies may respond to the memo by staffing up their legal teams, which will make internal investigations more costly and complex, according to Sidley Austin LLP partner Timothy Webster.

"Given the increased focus on individual liability, the Yates Memo may cause companies to make counsel available earlier and to a greater number of employees (and even former employees) in both potentially civil and criminal cases — thus enormously increasing both the cost and complexity of internal investigations," he wrote in a newsletter for the American Bar Association. Even before the memo, Larry Thompson, a former deputy attorney general and general counsel for PepsiCo., expressed the frustration corporate legal departments face in the U.S.

"I think that corporations and corporate officers charged with legal non-compliance have come to feel a bit like the person that really can never accomplish a single good deed," Thompson told the National Association of Criminal Defense Lawyers in a 2011 speech. "No matter how gold-plated your corporate compliance efforts, no matter how upstanding your workforce, no matter how hard one tries, large corporations today are walking targets for criminal liability."

Is this getting to the point where corporations are going to sacrifice executives for the benefit of the corporation?

Herrick Lidstone, Managing Director of Burns, Figa & Will PC

The DOJ's prioritization — chase a corporation or chase an individual — tends to "pendulum" back and forth with leadership changes at the White House and public pressure, Lidstone observed, but the Yates memo may have swung the pendulum even farther than in the past.

"Is this getting to the point where corporations are going to sacrifice executives for the benefit of the corporation? For the benefit of the shareholders? To the detriment of these executives who otherwise are unlikely to be convicted of anything? Who may even be found innocent or exonerated in the long-run?" Lidstone said in an interview.

The impact of President Donald Trump's new administration on the DOJ's efforts is not yet clear. While Trump promised to ease the burdens the U.S. government places on business, his pick for attorney general, Sen. Jeff Sessions, R-Ala., has on multiple occasions spoken of the need for accountability for crimes committed behind the corporate veil.

Speaking specifically on the BP spill, Sessions said: "If they violated the law, you charge them," insisting that companies like BP are "not too big to fail."

Differing approaches to prosecution

Former Massey Energy CEO Don Blankenship is likely the first high-ranking executive to go to prison for violating workplace safety laws, but his case exemplifies the difficulty of ascribing accountability for a specific disaster to the C-suite.

Prosecutors had stacks of memos, phone recordings and other documentation that convinced a jury that the CEO had aggressively conspired to violate mine safety laws. The indictment had painted a portrait of a hands-on coal boss who pushed the sort of safety violations investigators had concluded caused the Upper Big Branch explosion.

When the verdict came in, Blankenship was convicted of conspiring to violate mine safety laws, a misdemeanor. The jury rejected felony counts against the coal boss accusing him of lying to investors, limiting the judge to a sentence of one year in prison, compared to the nearly three decades of imprisonment he faced under the original indictment.

The coal industry has been placed in a difficult situation by the Blankenship conviction and responded by filing a "friend of the court" brief in Blankenship's appeal.

The Illinois Coal Association, Ohio Coal Association and West Virginia Coal Association emphasized that "they do not seek to endorse or sanction any specific conduct" of Blankenship. The groups instead sought to draw a clear line between "business decisions and criminal conduct," saying they were concerned about a jury instruction in the case that permitted the jury to convict on a "lesser standard of culpability" that allowed a conviction without a finding of "bad purpose" or knowledge of unlawful conduct.

The trade group's arguments were rejected Jan. 19 when the U.S. Court of Appeals for the 4th Circuit denied Blankenship's appeal. In upholding the conviction, the 4th Circuit declared that a mine operator cannot "immunize himself from criminal liability."

Blankenship and other Massey employees were the only executives to serve jail time for the 2010 disasters.

Instead of pursuing individuals at Pacific Gas and Electric Co. after one the utility's pipelines exploded the San Francisco suburb of San Bruno, prosecutors went after the company. They secured six felony criminal convictions for violations of the federal Natural Gas Pipeline Safety Act and obstructing the investigation into the explosion.

For prosecutors and victims, the maximum financial penalty for the felony convictions limited the sense that the punishment matched the crime. The six felonies had a fine capped at a combined $3 million, which is much lower than the $565 million in losses prosecutors allege the explosion caused.

After the explosion, the company brought in an independent auditor for a fresh look at the utility's physical asset management and safety culture. The auditor gave the company two international standards certifications in 2014. One emphasized avoiding sacrificing long-term goals for competing short-term priorities. The other focuses on continuous improvement.

Calif. Sen. Jerry Hill, whose district includes the San Francisco suburb of San Bruno, where the pipeline exploded, has been an outspoken critic of PG&E and the state pipeline safety regulator. Hill has introduced numerous reform bills since the explosion.

"No one is going to prison. That's the part to me that is the most disheartening, the most troubling and really the most anticlimactic part of this, because until someone goes to prison, I don't think we're going to see the total shift in culture — not just in PG&E but in other corporations — when something like this happens," Hill said in an interview. "[As an investor-owned utility] the only way they can make more money is to cut expenses, and that's what they did."

BP plc paid billions for its role in the Deepwater Horizon explosion and settled charges of felony manslaughter, environmental offenses and obstructing Congress. The largest criminal resolution in U.S. history at $4 billion, the 2012 settlement provided for recovery and restoration in the Gulf region. The government also secured a $20.8 billion settlement with BP for repairing damage to more than 1,300 miles of shoreline across five Gulf states. The deal with state and federal agencies was the largest in the history of federal law enforcement.

But individual criminal cases in the Deepwater Horizon fallout largely came up empty.

Federal attorneys in 2012 charged two well-site leaders, Robert Kaluza and Donald Vidrine, with involuntary manslaughter, seaman's manslaughter and Clean Water Act violations.

The seaman's manslaughter counts were dismissed in late 2013, and by the end of 2015, the involuntary manslaughter counts were dismissed.

The day the court dismissed these charges, Vidrine pleaded guilty to the remaining misdemeanor Clean Water Act violation. He was later sentenced to 10 months' probation. In February, a jury found Kaluza not guilty of his Clean Water Act charge.

Complications with holding executives responsible when their companies are found to have inflicted damage are hardly limited to the energy industry.

The greatest deterrent effect is to prosecute the individuals in the corporation who are responsible for those decisions.

Eric Holder, Former Attorney General

In investigating General Motors Corp. for faulty ignition switches linked to more than 100 deaths, U.S. Attorney Preet Bharara highlighted a "siloing" effect, common among sizable companies suspected of wrongdoing, that complicates corporate prosecutions. Corporate misdeeds often involve multiple people who do not have criminal intentions and maybe unaware of others' actions, making it time-consuming and difficult to hang an indictment on a single person.

Sometimes it is not a lack of evidence that prevents prosecutors from pushing for corporate accountability. Republican staff for the U.S. House Committee on Financial Services said in a July 2016 report that former Attorney General Eric Holder declined to prosecute the multinational bank HSBC for money laundering and related charges because of the company's size and "systemic importance" to the world's economies. The decision was not made with an eye to justice, the committee staff said.

"I am concerned that the size of some of these [financial] institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," Holder testified in the wake of the HSBC case. "You know, the greatest deterrent effect is not by the prosecution of a corporation, although that's important. The greatest deterrent effect is to prosecute the individuals in the corporation who are responsible for those decisions."