Kentucky Coal Shed

Following the Arab oil embargo of 1973, a series of investment incentives were introduced to address the rising demand for coal. These measures included exemptions for long-term coal production contracts from wage and price controls, windfall profit tax exemptions, loan guarantees, and exemptions from Securities and Exchange Commission regulations. These incentives made coal investments highly attractive, especially to those in high tax brackets. However, they also led to widespread reluctance among investors to cooperate with investigators, fearing that fraudulent schemes could jeopardize their tax deductions.

By 1977, investigatory agencies began uncovering extensive criminal activity across state lines, including grand larceny, securities and tax fraud, political and business corruption, murder, extortion, theft of heavy equipment, loan sharking, narcotics trafficking, price fixing, and bank and tax fraud. In response, a multistate strike force, known as the Leviticus Project, was launched in 1980 to investigate criminal operations in the Appalachian coal industry. This investigation revealed that organized crime had gained significant control over the American coal market. Through fraudulent foreign coal purchase contracts, these criminal elements defrauded international purchasers and drove American coal producers into bankruptcy.

By September 1984, the Leviticus Project had led to 233 criminal and 179 civil charges against individuals and businesses. Nearly $200 million in questionable investments were referred to the Internal Revenue Service. Federal grand juries were active in Alabama, Georgia, and Illinois, with proceedings set to begin in West Virginia and planned in up to five additional states.

States such as Indiana, Kentucky, and California initiated their own inquiries, while others prepared to follow suit. Four Southern Governors—those of Alabama, Kentucky, Georgia, and Virginia—petitioned Attorney General Griffin B. Bell to form a multi-agency federal task force to investigate these crimes. They requested the inclusion of the Securities and Exchange Commission and the Internal Revenue Service, alongside federal law enforcement agencies.

The goal of this task force was to combat what Governor George Busbee of Georgia described as a widespread crime pattern, encompassing securities fraud, murder, extortion, wire fraud, tax evasion, bribery, kickbacks, political corruption, bankruptcy fraud, organized labor issues, loan sharking, and insurance fraud.

Governor Busbee highlighted a cooperative investigation among Alabama, Kentucky, and Georgia, initiated in late 1976, which revealed that organized crime had gained a substantial foothold in the American coal industry and continued to expand its influence. These criminal figures defrauded foreign coal buyers and bankrupted domestic producers.

Investigators in Alabama and Georgia identified securities fraud—particularly the sale of fake or worthless coal leases—and tax evasion through fraudulent shelters as major elements of this criminal enterprise. These schemes allowed for large write-offs under the guise of "energy investment," facilitated by phony loans through controlled lending institutions or through manipulation and bribery.

Thomas L. Krebs, director of the Alabama Securities Commission, described the situation as "an incredibly complex, multistate, multilevel problem." In Alabama alone, 15 to 20 cases of small mine failures were uncovered, believed to result from deceptive practices aimed at taking over mines or coal leases.

Typically, a small coal operator would be approached with a lucrative coal deal involving a foreign buyer. They were often persuaded to purchase additional equipment to boost production, with loans arranged through a broker connected to a bank and other parties involved in the swindle.

I recall 1977 vividly, as it marked a pivotal moment in my life and career. As a coal mine operator from Corbin, Kentucky, I acquired seven coal leases and three deeds in a larger scheme known as the "Tree Deals." These transactions were syndicated through 12 limited partnerships by affiliates of Bitumco.

My involvement began when I was introduced to a promoter named Wellbrock by Marvin H. Stone. Wellbrock instructed me to divide a deed from Jefferson Land and Mineral Co. for a substantial 3,204-acre plot in Perry County, Kentucky, into three separate parcels. He also directed me to establish two corporations: Heidrick Fuels, Inc. and Towers Construction Co., and to deed those parcels jointly in my name and in the names of these companies.

The strategy was to create the illusion of multiple deals—seven leases and five deeds—by subleasing the remaining deeds and leases through Heidrick Fuels, Inc. This approach was mirrored in Pennsylvania and West Virginia, where properties were similarly divided.

I agreed to operate as a contract miner for the 12 "Tree Deal" limited partnerships under Driggers Equipment Co., Inc. However, things quickly soured when I defaulted, claiming that the promoters failed to provide the promised funds for start-up costs—a claim they disputed.

The situation deteriorated further when investors were persuaded to exchange their interests in Kentucky for fractional interests in supposedly coal-rich lands in Pennsylvania. Unfortunately, these lands contained much less coal than reported, leading to the collapse of mining operations and financial losses for investors.

Of the $20 million invested by 541 individuals, only 40% was used for working capital; the rest went toward formation or promotion fees (our pockets). Additionally, there was another questionable deal, Sequoia Associates, which allowed investors a significant tax write-off and appeared to violate federal regulations. This deal bypassed SEC rules regarding private offerings and registration, further compounding the legal issues.

The Pennsylvania Crime Commission investigated these activities and shared their findings with various law enforcement and regulatory bodies across the country, including the SEC and the IRS. Their investigation revealed potential tax write-offs totaling $42 million.

Ultimately, in May 1982, a federal grand jury in London, Kentucky, indicted myself—Edwin T. Driggers, Marvin H. Stone, and Roy K. Cornellius on charges of mail fraud and conspiracy. Cornellius was later dismissed due to health reasons, but both Stone and I were convicted in November 1982. I received a sentence of five years in prison for each count and a $4,000 fine, while Stone was fined $10,000 and sentenced to three years.

In prison, time stretched out like the endless tunnels of the mines. I had space to think, to replay each decision, every moment where it all went wrong. I thought of the investors, the families whose lives were altered by our actions. I thought of the land, still and silent, bearing witness to our folly.

When I was released, the world outside had changed. Life had become simpler in its complexity—do what you can with what you have, keep your word, and face the consequences when you don’t.

The land remains enduring, the Kentucky hills still filled with gold. The alure is as enticing as it is tantalizing.