Former Wyoming Governor Dave Freudenthal serves on the Arch Coal Inc. board of directors. Documents show he disposed of 2,757 “phantom stock” shares just days before the company filed for bankruptcy. (WyoFile)

by Benjamin Hulac and Dylan Brown, E&E reporters

Originally published by Environment & Energy Daily. Contact E&E for permission to republish.

Arch Coal Inc. paid its top executives more than $8 million in bonuses the business day before the company filed for bankruptcy in January, according to U.S. Bankruptcy Court for the Eastern District of Missouri filings published last week.

Securities and Exchange Commission records also show that 12 company insiders exercised or converted about 88,000 “phantom stocks” — a type of financial derivative used to incentivize employees — worth more than $70,000 that same Friday, Jan. 8, 2016.

On the following Monday, Jan. 11, Arch announced it had filed for bankruptcy protection.

Arch declined several written and telephone requests for comment about financial transactions made as the company stood on the brink of bankruptcy.

No agency has accused the company of wrongdoing in making the payments or in connection with the phantom stock activity. Several experts, however, said the timing of the payments and the activity by company officials so shortly before Arch filed for bankruptcy raises questions.

RELATED: Laid off coal miners on their own after fueling Wyo economy for decades

The most notable transactions Arch made in the days before filing for Chapter 11 bankruptcy protection, according to court and SEC filings, were payments of $8.12 million in bonuses to seven of its corporate officers, including its CEO, Chief Financial Officer and president.

Chairman and CEO John Eaves received $2.78 million the Friday before the bankruptcy announcement. Arch President and Chief Operating Officer Paul Lang received $1.75 million that same day, while chief financial officer and treasurer John Drexler received $1.17 million.

Allen Kelley, vice president of human resources; Deck Slone, senior vice president of strategy and public policy; Kenneth Cochran, senior vice president of operations; Lang; and Robert Jones, general counsel, also received payments ranging from $164,666 to $868,398.

The bonuses were paid on a regular schedule unconnected to the bankruptcy date and were approved by Arch well before the bankruptcy filing, according to a person familiar with the company’s current payment practices.

The bonuses were divided into two sections: those associated with a 2013-15 long-term incentive plan and those paid as part of an annual bonus plan, according to the same person, who spoke on the condition of anonymity, citing Arch’s ongoing bankruptcy proceedings. Approvals of each plan date back to 2013 and February 2015, respectively, they explained.

Still, some financial experts said they are concerned by the timing of bonus payments and phantom share transactions.

Expert questions ‘bizarre,’ ‘suspicious’ timing

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said the bonus payments “could be very likely voided by a bankruptcy court.”

Bankruptcy courts scrutinize a company’s financial transactions and payments made during the 90 days before that firm filed for protection. Hufbauer called the $8.12 million on the eve of bankruptcy “really suspicious.”

“So I would suspect that would be pretty hotly contested” by other creditors, he said of the $8.12 million in payouts, describing the situation as a “bizarre set of facts.”

Of the 12 insiders named in transactions with phantom stock, 10 were board members and the remaining two were Drexler, the CFO, and Cochran, senior vice president of operations.

Overall, the Jan. 8 transactions covered 87,783 phantom shares either exercised or converted for $72,859.89, according to SEC filings, which each list a name of a director or corporate officer, corresponding to a number of phantom shares.

For example, a form filed Jan. 12 but dated four days before lists David Freudenthal, the former Democratic governor of Wyoming, and shows that 2,757 shares worth $2,288.31 were disposed of.

“It seems strange that you would have such a coincidence,” said Thaya Brook Knight, associate director of financial regulation studies at the Cato Institute, referring to the short window between the Friday transactions and the Monday morning bankruptcy declaration.

Deferred compensation

She said companies commonly draft agreements about phantom stock — a type of compensation plan typically offered to insiders that pays out based on the performance of real shares. The document outlining a company’s phantom stock agreement is what a court would have to examine to determine if wrongdoing had been committed, according to Knight. That agreement would also likely detail when and how phantom stock payments are permitted to occur, she added.

“With so little data, it’s hard to really say that this or that happened,” said Knight, who reviewed SEC documents of Arch’s insider transactions at the request of ClimateWire.

“But if the executives had a choice in when the payout was made, that may make the transactions something of a red flag,” she said.

Arch made the transactions on behalf of its executives, and the phantom stocks involved deferred compensation, said the anonymous official with direct knowledge of Arch payment policies.

Deferred compensation is the portion of the salary an employee opts to receive at a later date in order to save on taxes. The practice is allowed so long as the compensation is not guaranteed, or “unsecured.” Otherwise, it would be taxed.

The company held deferred compensation in a distinct fund, the source said. When the Department of Justice requested that the company move toward more conservative investments in preparation for bankruptcy, the company moved the phantom stocks, the person said.

Generally, insider trading involves someone, often a corporate executive inside a company, buying or selling an investment based on non-public information that would likely affect the performance of that investment if it were shared with the public.

However, Arch’s pre-bankruptcy transactions don’t appear to have involved investors on the open market. Rather, the phantom stock activities seem to have been made between Arch and its insiders, experts said.

Losing billions, golf club payments

Hemmed in by falling coal prices globally, cheap natural gas from U.S. hydraulic fracturing and looming environmental regulations, Arch is struggling financially.

The company reported yesterday a net loss of more than $2.9 billion for 2015, compared to a $558 million loss for the same period in 2014. The difference is a decline of more than 400 percent.

Arch has lost more money than it has taken in every year since 2012.

In financial statements filed yesterday, Arch called U.S. EPA’s Clean Power Plan a “sweeping” regulation.

“If the Clean Power Plan ultimately is upheld in its current form, it is projected to significantly curtail the construction of new coal-fired power plants and have a materially adverse impact on the demand for coal nationally,” the company said in a section of its latest annual report about climate change.

Court documents also show Arch made two other payments on the business day before it sought bankruptcy protection.

One was a $12,540 payment to the Algonquin Golf Club in St. Louis, where the firm is headquartered, and the other a $10,680 payment to the Bellerive Country Club, also in St. Louis.

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14 Comments

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  1. Sad that those execs can greedily take that kind of money knowing the families whom will be devasted by layoffs The employees whom actually worked for it and risked their lives underground will be on welfare But he’ll what’s knew the working man always gets the shaft

  2. It’s sad and difficult for the families here to deal with, but what we’re seeing here is what every other state has already endured. States that haven’t sat atop a pedestal during the crisis facing our world. We’ll get through it, but we need to make pushes in the renewable energy field, in order to create more energy and jobs for the state. We shouldn’t let it divide our communities further however. We’ll get through it, and come back stronger than ever, without coal.

    Tanner Bateman

  3. We’ve known for years that Gov Dave had sold out to Big Coal. But now we know just how cheap he came. After his $90,000 (more or less) annual Director’s stipend, he just had to vacuum up that last $2,288.31 before the creditors or the clean-up fund could get at it!

    1. It isn’t a fraudulent conveyance if they actually provided goods or services for the money. But, I wonder if it isn’t a “preferential transfer”, which means you pay your friends (and relatives) just prior to filing for bankruptcy, and preferential transfers can be set aside and the money recovered by the bankruptcy court.

  4. Hi WyoFile readers,

    My name is Ben Hulac — I’m one of the reporters who wrote this story. My colleague Dylan and I are working on big, broad and thorough stories about how the decline of the coal industry effects local communities, the outdoors, investors and everyone in between.

    If you feel like you have a story to tell, I’d love to listen.

    Thanks for reading, sincerely,
    Ben

    1. Come to douglas wyoming or go to Gillette Wyoming if you want to see what the start of a gost town looks like, we have been trained since grade school to work the mines or the oil feild, I remember half of our school day was about what skills we would need to work there.

      Ryan Good

    2. Today I posted a good Nat Geo Energy blog from 2012 which asks why we, as a nation or within natural resource communities, don’t do more to support the natural transitions that happen in industry. Furthermore,I ask why these big companies have no problem paying out the top people who made the poor investments and heavily bought into the M&A craze, but won’t help workers affected by 1) their poor decisions and, 2) the natural changes in industry. In regards to boom and bust towns in WY: who should be responsible for creating safety nets? Since the whole community relies heavily on the natural resource industry, I would think that the community would have an interest in creating safety nets and transitional assistance programs during the boom time to help them get through a bust time, yet I have never seen this done.
      Here is the link if interested – it makes some good points.
      http://energyblog.nationalgeographic.com/2012/06/04/facing-tradeoffs-the-decline-of-coal/

  5. Not really a surprise, for they knew when the ship is sinking. Amazing they leave with a profit when the honest workers leave with a pink slip. I guess that is why we call it a right to work state.

  6. Unbridled corporate greed at its best. I think it would be proper for those execs to come to Gillette to talk to the rank and file to tell them how sorry they are about losing their jobs and how glad they are about their bonuses. I think all that would be left of them would not even feed the magpies.