(CN) - U.S. Steel Corp. faces a shareholder derivative action after the company allegedly engaged in extreme cost-cutting and fraudulently pushed a process called the “Carnegie Way Program” as a means to make the company profitable again after years of financial downturn.
The Carnegie Way, named for U.S. Steel co-founder Andrew Carnegie, was a three-pronged program aimed and marketed within the company to cut costs and engage employees, according to the 200-page complaint.
Plaintiff Richard Hoskins claims the first arm of the program, known as “Employee Engagement” was purportedly enacted get employees engaged with the program. The second, called “Reliability Centered Maintenance,” aimed to take proactive measures to improve operations and facilities. The final part of the plan, “Operational Excellence,” attempted to cut costs. However, a confidential witness claims the Carnegie Way Program was fraudulent, since it was allegedly widely known to employees that only the cost cutting prong of the plan was implemented.
“U.S. Steel severely abridged the maintenance initiative because that would cost money. According to confidential sources,” the complaint states. “U.S. Steel adopted a motto of ‘don’t buy, get by’ in which plant managers were only permitted to purchase parts when absolutely necessary and were required to ‘jury-rig’ machines to keep them operating, instead of making the necessary repairs.”
According to the complaint, employees began characterizing the other prongs of the Carnegie Way as a “joke” and a “load of crap” claiming the company was not committed to its employees because of the cost.
The cost-cutting took an extreme turn in 2015 which led to a stop of critical maintenance to facilities and equipment and massive layoffs, according to the complaint.
“These measures left U.S. Steel with a skeleton crew of inexperienced plant employees who did not know how to maintain or repair the equipment, were required to work long hours of up to ninety hours per week, and which led to severe unplanned outages, production delays and at least a 20% decline in production output due to U.S. Steel’s equipment failing and becoming inoperable,” Hoskins claims.
Meanwhile, the global steel market improved in 2016 which U.S. Steel was unable to capitalize on because “mounting repair costs and unplanned outages.”
Following the implementation of the Carnegie Way, U.S. Steel made a secondary offering of 21.7 million shares which they sold to “unsuspecting investors” which netted the company $482 million.
Following the offering, a U.S. Steel press release reported “unplanned outages” for the third quarter of 2016. Despite the outages, U.S. Steel told its investors that the company was improving and properly positioned for a recovery.
“While the market was expecting the Company to turn a strong profit, U.S. Steel announced a ‘surprise’ net loss of $180 million, or $1.03 per diluted share,” the class claims. “Upon the news, the price of U.S. Steel common stock dropped from a closing share price of $31.11 on April 25, 2017 to close at $22.78 per share on April 26, 2017, a loss of 27% or over $2 billion in market value, on extremely heavy trading volume.”
That 27 percent loss marked the steepest price drop since 1991, according to the complaint.
Hoskins issued a written demand of U.S. Steel’s board of directors to investigate and take action against those responsible for the company's sustained damages, but the demand went without a response for eight months, which the he claims was “wrongful and unreasonable under Delaware law.”
Hoskins is represented by Blake A. Bennett of Cooch and Taylor P.A. from Wilmington, DE and Joshua M. Lifshitz of Lifshitz & Miller LLP from Garden City, NY.
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