April 28 (Bloomberg) -- A lawyer for W.R. Grace & Co. accused U.S. prosecutors of filing a “political prosecution” against the company and then presenting perjured testimony and withholding documents showing a key witness lied.

Grace and four former executives are on trial in federal court in Missoula, Montana, charged in the asbestos contamination of Libby, a town in the northwest corner of the state. David Bernick, Grace’s lead lawyer, told U.S. District Judge Donald Molloy yesterday that the government’s misconduct was so extreme that he should throw out all the charges against the defendants.

“It is flagrant, it is pervasive, it is systematic,” Bernick argued in a daylong hearing yesterday. Prosecutors violated the defendants’ right to a fair trial, driven by “their notion of doing right by the people of Libby,” Bernick said.

At the request of prosecutors, Molloy yesterday dismissed the case against former Grace senior vice president Robert Walsh. Assistant U.S. Attorney Kris McLean told Molloy that the government can’t prove its case against Walsh, because of evidence rulings by the judge.

Yesterday’s hearing comes after prosecutors called their last witness in the trial, which began Feb. 19. Defense lawyers filed court papers late last week asking Molloy to throw out the case, based largely on the allegedly perjured testimony of former Grace executive Robert Locke, who spent three days on the stand as a government witness.

After Locke Testified

Grace, a specialty chemicals manufacturer based in Columbia, Maryland, is accused of conspiring to endanger the residents of Libby by exposing them to asbestos-contaminated vermiculite and to defraud the government by lying to investigators. Grace was also charged with violating the Clean Air Act and obstructing justice.

If convicted, Grace could be fined more than $280 million. Two individual defendants charged with conspiracy could be sentenced as much as five years in prison if convicted. Two other defendants, charged under the Clean Air Act with endangering Libby residents, face as long as 15 years.

All the defendants have pleaded not guilty. Walsh was charged with a single count of conspiracy, which Molloy dismissed yesterday.

128 E-Mails

Defense lawyers claim prosecutors allowed Locke to lie on the stand and didn’t turn over 128 e-mails between Locke and Robert Marsden, an investigator with the Environmental Protection Administration, until it was too late. They claim the e-mails show the prosecution team had an improperly close relationship with Locke and that Locke loathed Grace and Robert Bettacchi, his former boss, who is one of the individual defendants in the trial.

In one e-mail cited yesterday by Bettacchi’s lawyer, Thomas Frongillo, Locke sent a news story to Marsden about coyotes that were shot in Cambridge, Massachusetts, where Grace has a main office. Perhaps some other coyotes in Cambridge “should have been taken out,” the Locke e-mail reads.

Defense lawyers also claim that prosecutors stood by while Locke falsely testified he’d only met with the prosecution team six times, when he’d actually met with prosecutors and investigators at least 20 times.

Molloy and prosecutors disagreed over whether Locke testified truthfully.

‘Will Say Anything’

“The guy will say anything, any time, any place, as long as he think’s it’s what somebody wants to hear,” Molloy told Kevin Cassidy, one of the two lead prosecutors in the case. “I can’t believe you guys ever put him up on the stand.”

“He testified to facts,” Molloy said. “Made ‘em up as he went along, but he testified to facts.”

Cassidy told Molloy he believed Locke hadn’t lied on the stand.

“We have a disagreement about that,” said Molloy. “Probably hell would freeze over before we would come to any kind of agreement.”

In a series of emotional exchanges, McLean, the other lead trial prosecutor, defended himself against the defense claims that he had presented misleading testimony and purposely withheld documents.

“I have been trying cases in front of you for 13 years -- 40, 50, 60 trials,” McLean said to Molloy. “I don’t operate that way.”

In his testimony, Locke told jurors about how the company allegedly exposed employees and customers to asbestos-laced vermiculite and vermiculite ore even though it knew the dangers.

Health Study

Locke told jurors that he helped Grace head off government efforts to conduct a health study in Libby, where more than 1,000 have been sickened with asbestos-related diseases, including mesothelioma and asbestosis, and hundreds have died, according to the government.

Defense lawyers claimed Locke fabricated testimony in which he said he warned Bettacchi not to sell a plot of contaminated land to a Libby couple. He testified that Bettacchi responded, “buyer beware.”

They also claim Locke falsely testified that he rejected an immunity agreement from prosecutors. Government lawyers offered him assurances, “with a wink and a nod,” that he wouldn’t be prosecuted in the case.

Locke worked for Grace for more than 25 years, at one point directing a staff of 155 and managing a $17 million budget, until he was fired in 1998, according to documents he filed in the W.R. Grace bankruptcy.

At the end of yesterday’s hearing, Molloy said he will hear argument from prosecutors today. He’ll then permit defense lawyers to begin presenting their case to jurors, while he considers whether to dismiss the entire case.

After the hearing, Stephen Spivak, Walsh’s lawyer, declined comment, citing a gag order issued by the judge.

The Montana case is U.S. v. W.R. Grace, 05-CR-7, U.S. District Court, District of Montana (Missoula).

To contact the reporters on this story: Bob Van Voris in U.S. District Court in Missoula, Montana, at rvanvoris@bloomberg.net.

Last Updated: April 28, 2009 00:01 EDT