May 8 (Bloomberg) -- W.R. Grace & Co. was found not guilty in connection with the asbestos contamination of Libby, Montana, ending what was called the biggest environmental-crime prosecution in U.S. history.

A federal jury in Missoula, Montana, today acquitted the company of conspiracy, violating the Clean Air Act and obstruction of justice. Three former executives were also acquitted of all charges. The verdicts, on the second day of deliberations after 11 weeks of trial, sent Grace up 36 percent in trading in New York.

“The legacy of what happened in Libby doesn’t go away, but the notion that the defendants engaged in criminal conduct was not grounded in fact -- it was very politically motivated,” David Bernick, a lawyer for the company, said after the verdict.

Grace faced more than $280 million in fines and restitution if convicted, an amount that might have complicated the company’s planned exit from bankruptcy protection this year. Grace spent more than $120 million to defend itself and the former executives, it said in a March regulatory filing.

“We always believed that Grace and its former executives had acted properly and that a jury would come to the same conclusion when confronted with the evidence,” Fred Festa, Grace’s chairman and chief executive officer, said today in a statement.

‘Jury Has Spoken’

“The jury has spoken and we thank them for their service,” the Justice Department and U.S. Attorney Bill Mercer said in a joint statement, declining to comment further because one former Grace official hasn’t been tried yet.

Prosecutors claimed in charges filed in 2005 that the company and seven former executives conspired for decades to expose Libby residents to asbestos-contaminated vermiculite.

Grace, a specialty-chemicals manufacturer based in Columbia, Maryland, mined and processed vermiculite, a mineral used in gardening, insulation and fireproofing, in the town until 1990.

Defendant Alan Stringer, a former general manager of Grace’s operations in Libby, died in 2007. Mario Favorito, the company’s former legal counsel, is to be tried separately.

Near the end of the trial, prosecutors dropped charges against Robert Walsh, a former senior vice president, and William McCaig, the former manager of operations at the Libby mine, after U.S. District Judge Donald Molloy limited the evidence jurors could hear.

Defense Arguments

Defense lawyers claimed the government’s case was factually flawed, politically motivated and tainted by misconduct. They argued the conspiracy charge was clearly baseless because asbestos danger in Libby was no secret to the government.

The company’s attorneys asked Molloy to acquit the defendants without sending the case to the jury. Molloy said he wouldn’t announce a decision on that request until after the jury ruled. Because the defendants were all acquitted, Molloy won’t have to decide the matter.

Asbestos-related diseases including asbestosis, a scarring of the lungs, and mesothelioma, a fatal cancer, have killed more than 200 people in the Libby area and sickened more than 1,200. Libby residents die from asbestosis at a rate 40 to 80 times normal, the government said.

During the trial, jurors saw scores of internal corporate memos and documents and heard testimony from physicians, occupational-health experts, government officials and Libby residents sickened by asbestos-related disease.

Little-Leaguers

Former Little-Leaguers told jurors they played baseball on fields contaminated with asbestos-tainted vermiculite.

Grace knew the vermiculite ore it mined and processed in Libby contained naturally occurring asbestos that released toxic fibers into the air “at the drop of a hat,” Assistant U.S. Attorney Kris McLean told jurors May 6 in closing arguments.

The company nevertheless donated vermiculite to schools, allowed children to play on it, lied about it to federal agencies and sold contaminated properties, the government alleged.

Molloy frequently criticized the prosecution’s case, outside the presence of the jury, and limited the evidence the government was permitted to present.

Several of the judge’s pretrial rulings were reversed by the U.S. Court of Appeals in San Francisco before the trial.

The appeals court reversed Molloy’s conclusion near the trial’s start that none of the 34 Libby residents who were potential government witnesses could be considered “victims” under the 2004 Crime Victims’ Rights Act.

Victim Law

That law permits victims to attend most trial proceedings even if they will be called as witnesses.

“It’s very disappointing,” Libby Mayor Doug Roll said of the verdict. Roll, a part-time car repair-shop operator who has led the town of 2,500 since November, was critical of prosecutors, saying they did “a poor job.”

“They had plenty of time and still couldn’t get it together,” he said in a telephone interview. “At this point, we’re just going to have to go on.”

In April, defense lawyers claimed prosecutors irreparably tainted the trial by failing to turn over e-mails favorable to the defendants and presenting perjured testimony.

Stephen Spivak, a lawyer for defendant Robert Walsh, said at the time he would ask U.S. Attorney General Eric Holder to investigate the prosecutors’ conduct in the case. No such request has been received by the department, according to a spokesman.

Grace rose $3.43, or 36 percent, to $13.06 in New York Stock Exchange composite trading. The shares have fallen 48 percent in the past year.

The 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 New York at rvanvoris@bloomberg.net; Amy Linn in Missoula, Montana, at amylinn@bresnan.net.

Last Updated: May 8, 2009 17:19 EDT