By Asjylyn Loder and David Evans - Oct 3, 2011 9:00 AM ET Bloomberg Markets Magazine
In May 2008, a unit of Koch Industries Inc., one of the world's largest privately held companies, sent Ludmila Egorova-Farines, its newly hired compliance officer and ethics manager, to investigate the management of a subsidiary in Arles in southern France. In less than a week, she discovered that the company had paid bribes to win contracts. "I uncovered the practices within a few days," Egorova- Farines says. "They were not hidden at all." She immediately notified her supervisors in the U.S. A week later, Wichita, Kansas-based Koch Industries dispatched an investigative team to look into her findings, Bloomberg Markets magazine reports in its November issue. By September of that year, the researchers had found evidence of improper payments to secure contracts in six countries dating back to 2002, authorized by the business director of the company's Koch-Glitsch affiliate in France. "Those activities constitute violations of criminal law," Koch Industries wrote in a Dec. 8, 2008, letter giving details of its findings. The letter was made public in a civil court ruling in France in September 2010; the document has never before been reported by the media. Egorova-Farines wasn't rewarded for bringing the illicit payments to the company's attention. Her superiors removed her from the inquiry in August 2008 and fired her in June 2009, calling her incompetent, even after Koch's investigators substantiated her findings. She sued Koch-Glitsch in France for wrongful termination.
Obsessed with Secrecy
Koch-Glitsch is part of a global empire run by billionaire brothers Charles and David Koch, who have taken a small oil company they inherited from their father, Fred, after his death in 1967, and built it into a chemical, textile, trading and refining conglomerate spanning more than 50 countries. Koch Industries is obsessed with secrecy, to the point that it discloses only an approximation of its annual revenue -- $100 billion a year -- and says nothing about its profits. The most visible part of Koch Industries is its consumer brands, including Lycra fiber and Stainmaster carpet. Georgia- Pacific LLC, which Koch owns, makes Dixie cups, Brawny paper towels and Quilted Northern bath tissue. Charles, 75, and David, 71, each worth about $20 billion, are prominent financial backers of groups that believe that excessive regulation is sapping the competitiveness of American business. They inherited their anti-government leanings from their father.
Abolishing Social Security
Fred was an early adviser to the founder of the anti- communist John Birch Society, which fought against the civil rights movement and theUnited Nations. Charles and David have supported the Tea Party, a loosely organized group that aims to shrink the size of government and cut federal spending. These are long-standing tenets for the Kochs. In 1980, David Koch ran for vice president on the Libertarian ticket, pledging to abolish Social Security, the Federal Reserve System, welfare, minimum wage laws and federal agencies -- including the Department of Energy, the Federal Bureau of Investigation and the Central Intelligence Agency. What many people don't know is how the Kochs' anti- regulation political ideology has influenced the way they conduct business. A Bloomberg Markets investigation has found that Koch Industries -- in addition to being involved in improper payments to win business in Africa, India and the Middle East -- has sold millions of dollars of petrochemical equipment to Iran, a country the U.S. identifies as a sponsor of global terrorism.
The Koch Method'
Internal company documents show that the company made those sales through foreign subsidiaries, thwarting a U.S. trade ban. Koch Industries units have also rigged prices with competitors, lied to regulators and repeatedly run afoul of environmental regulations, resulting in five criminal convictions since 1999 in the U.S. andCanada. From 1999 through 2003, Koch Industries was assessed more than $400 million in fines, penalties and judgments. In December 1999, a civil jury found that Koch Industries had taken oil it didn't pay for from federal land by mismeasuring the amount of crude it was extracting. Koch paid a $25 million settlement to the U.S. Phil Dubose, a Koch employee who testified against the company said he and his colleagues were shown by their managers how to steal and cheat -- using techniques they called the Koch Method.
Refused to Falsify
In 1999, a Texas jury imposed a $296 million verdict on a Koch pipeline unit -- the largest compensatory damages judgment in a wrongful death case against a corporation in U.S. history. The jury found that the company's negligence had led to a butane pipeline rupture that fueled an explosion that killed two teenagers. Former Koch employees in the U.S. and Europe have testified or told investigators that they've witnessed wrongdoing by the company or have been asked by Koch managers to take what they saw as improper actions. Sally Barnes-Soliz, who's now an investigator for the State Department of Labor and Industries in Washington, says that when she worked for Koch, her bosses and a company lawyer at the Koch refinery in Corpus Christi, Texas, asked her to falsify data for a report to the state on uncontrolled emissions of benzene, a known cause of cancer. Barnes-Soliz, who testified to a federal grand jury, says she refused to alter the numbers. "They didn't know what to do with me," she says. "They were really kind of baffled that I had ethics." Koch's refinery unit pleaded guilty in 2001 to a federal felony charge of lying to regulators and paid $20 million in fines and penalties.
Corporate Cultures
"How much lawless behavior are we going to tolerate from any one company?" asks David Uhlmann, who oversaw the prosecution of the Koch refinery division when he was chief of the environmental crimes unit at the U.S. Department of Justice. "Corporate cultures reflect the priorities of the corporation and its senior officials." Koch Industries declined to make either Charles Koch, who lives near corporate headquarters in Wichita, or David Koch, who lives in New York, available for interviews. Melissa Cohlmia, Koch's director of corporate communications, said in an e-mailed statement that the company has developed a good relationship with environmental regulators and now complies with all rules. Cohlmia says the company has learned lessons from past mistakes, including the improper payment scheme that Koch outlined in its letter filed in French court.
Steps to Correct'
"We are proud to be a major American employer and manufacturing company with about 50,000 U.S. employees," she wrote. "Given the regulatory complexity of our business, we will, like any business, have issues that arise. When we fall short of our goals, we take steps to correct and address the issues in order to ensure compliance." Cohlmia says Koch fired the employees and sales agents involved in the illicit payments and strengthened internal controls. Regarding sales to Iran, she wrote, "During the relevant time frame covered in your article, U.S. law allowed foreign subsidiaries of U.S. multinational companies to engage in trade involving countries subject to U.S. trade sanctions, including Iran, under certain conditions." Koch has since stopped all of its units from trading with Iran, she says.
Lobbying Washington
The Koch brothers have vaulted into the American political spotlight in recent years. Koch Industries has spent more than $50 million to lobby in Washington since 2006, according to the Center for Responsive Politics, a nonpartisan group that tracks political donations. The company opposed derivatives regulation and greenhouse gas limits. The brothers have backed a foundation that has trained thousands of Tea Party activists. The Tea Party, a popular movement whose name stands for Taxed Enough Already, has grown into a potent force in national politics. Sixty representatives of Congress, out of a total of 435, identify themselves as Tea Party members. Virtually every Republican candidate for president -- including Texas Governor Rick Perry and Minnesota Congresswoman Michele Bachmann -- has solicited the group's support.
Integrity and Compliance
Koch Industries' political action committee, KochPAC, donated $50,000 to Texans for Rick Perry last year for his gubernatorial campaign, according to the Texas Ethics Commission. It has also donated to support Bachmann's congressional campaigns, Federal Election Commission records show. The company tells all of its employees around the world that its top two values, which it calls Guiding Principles, are integrity and compliance. Koch Industries and its subsidiaries have won 436 awards for safety, environmental excellence, community and customer service and innovation since January 2009, Cohlmia says. The U.S. Occupational Safety and Health Administration has recognized several of the company's units for their commitment to the workplace, the company says. Koch Industries has also supported charitable causes in Wichita and beyond, including the Kansas Special Olympics and Big Brothers Big Sisters. The company has also helped enlistees in the U.S. Army Reserve. Koch Industries has donated millions of dollars to the Nature Conservancy, the Red Cross, the Salvation Army and victims of the March 11 earthquake and tsunami in Japan.
Reputation is Critical
David Koch has contributed more than $135 million to cultural institutions, including Lincoln Center for the Performing Arts in New York and the Smithsonian's National Museum of Natural History. Koch Industries zealously guards its public image. "A company's reputation is critical to how it will be treated by others and to its long-term success," Charles Koch wrote in "The Science of Success: How Market-Based Management Built the World's Largest Private Company" (Wiley, 2007). "We must build a positive reputation based on reality, or others will create one for us based on speculation or animus and we won't like what they create." The illicit payments uncovered by Ludmila Egorova-Farines raised the specter of a new blow to the company's effort to improve its reputation following criminal convictions and civil penalties.
Avoiding Scandal
The company wanted to avoid a bribery scandal similar to that of Siemens AG (SIE), says Ged Horner, a managing director at Koch-Glitsch in the U.K. from 2002 until he retired in 2010. "The only thing that would seriously impact the profitability and continuity of Koch Industries was a compliance issue," Horner says. In November 2006, the U.S. Department of Justice and German prosecutors opened an investigation into bribery by Munich-based Siemens, Europe's largest engineering company. Siemens and three of its subsidiaries pleaded guilty in December 2008 to charges of violating the U.S. Foreign Corrupt Practices Act from 1998 to 2007. Siemens paid $1.6 billion in penalties, admitting it had paid bribes to companies in Argentina, Bangladesh, Iraq and Venezuela. "Koch decided that if it could happen to Siemens, it could happen to them," Horner says. Koch Chemical Technology Group, a Koch Industries subsidiary run by David Koch, hired Egorova-Farines in April 2008 for the newly created position of compliance and ethics manager for Europe and Asia.
French Investigation
The division, which makes distillation, pollution control and water filtration equipment, recruited her from accounting firm PricewaterhouseCoopers LLP, where she was a consultant for four years on integrating corporate cultures after mergers. As soon as she joined Koch, the company flew her to Wichita to attend an internal compliance conference, she says. The company then asked her to investigate Koch-Glitsch in France because it had heard that managers were awarding salary increases inappropriately, Egorova-Farines says. The company never mentioned anything about improper payments for contracts when it gave her that assignment, she says. She declines to discuss the details of her findings, saying it would be unprofessional. The specifics of illicit payments for contracts by Koch- Glitsch can be found in two French labor court cases. The complaints were brought separately by Egorova-Farines and Leon Mausen, business director of Koch-Glitsch France from 1998 to 2008.
Illicit Payments
Koch-Glitsch fired Mausen on Dec. 8, 2008, sending him a termination letter that described illicit payments from 2002 to 2008 in Algeria, Egypt, India, Morocco, Nigeria and Saudi Arabia. In the Middle East, Koch-Glitsch paid what the termination letter describes as an exceptionally high commission of 23 percent to one of its sales agents. "A portion of that money was intended to pay a customer's employee in order to secure the contract," Koch wrote. The customer was an unnamed Egyptian company that was partially owned by the state. Koch-Glitsch made similar payments to win other contracts with public and private companies in Egypt and Saudi Arabia, Koch wrote in its letter to Mausen. Koch-Glitsch gave envelopes stuffed with cash to a Moroccan company, Koch wrote in its letter. Koch-Glitsch also made an improper payment to secure a contract with a Moroccan government organization, Koch wrote. The company made similar payments to an unnamed Nigerian government agency to win contracts, Koch wrote.
Koch Blamed Employee
Koch-Glitsch inflated its bid price to a private company in India in 2008, the letter said. A Koch employee explained the reason in an e-mail copied to Mausen and dated Feb. 6, 2008: "Add an extra 2 percent for a third person whose name I would rather give you only on the phone at this time." A Koch-Glitsch agent increased the commission paid to an Algerian agent in 2007 and 2008 to cover what Koch described as an unlawful payment to secure a deal with an unnamed French company. Koch's spokeswoman Cohlmia says Koch Industries acted firmly and decisively in response to what it had learned. In its Dec. 8, 2008, termination letter to Mausen, Koch blamed him for the illegal payments. In July 2009, Mausen sued Koch for severance and performance pay in the Arles Labor Court in southern France. On Sept. 27, 2010, the court said Mausen hadn't acted on his own. "It was not Mr. Mausen alone who was giving authorizations," the court wrote. Company policy required approval from other Koch-Glitsch managers, including Christoph Ender, the president of Koch- Glitsch for Europe and Asia, the court said.
Without Doing Due Diligence'
"Ender, manager of Koch-Glitsch France, as well as the controllers and auditors who were assisting him, allowed such business practices developed with Mr. Mausen to continue without doing due diligence in their reviews concerning the payment of commissions and the final beneficiaries of said commissions," the labor court wrote. An appeals court in Aix-en-Provence issued a second ruling on June 14, 2011, saying the company couldn't justify terminating Mausen for the payment scheme because his managers had been aware of the practices for more than 60 days before he was fired. The court ordered Koch-Glitsch to pay Mausen 150,808 euros ($206,170). Mausen declined to comment, beyond saying he disputed Koch's arguments in court. Ender, who is now a Koch-Glitsch executive in Wichita, didn't respond to requests for comment. Koch's Cohlmia says Ender "had no knowledge of Mr. Mausen's misconduct at the time it occurred, as Mr. Mausen concealed it from him."
Initially On Track
As for Egorova-Farines, her career was initially on track after she exposed bribery. Koch Chemical promoted her to a permanent position after her trial period expired in mid-2008, court records show. She was dispatched to offices in Germany, Russia and Switzerland, she says. "I worked hard to drive cultural change to make these units compliant," she says. Egorova-Farines was hospitalized for seven weeks starting in February 2009, according to the decision in her lawsuit against Koch-Glitsch for wrongful termination. The company fired her on June 16, 2009, saying later in court that she didn't have the skills she'd listed on her resume and that she had failed to share documents with others at the company, according to the court record. She contested Koch's arguments.
Court Ruling
Neither Egorova-Farines nor the labor court knew at the time that Koch had cited the company's six-year pattern of improper payments in its termination letter to Mausen, she says. The court ruled against her on Feb. 11. She filed an appeal two months later in Paris. She said in court that Koch had harassed her and retaliated against her for uncovering the payment scheme. She asked to be reinstated in her Koch job and paid for the time she was out of work. Egorova-Farines, who was born in London, now runs a business practices consulting firm in Paris. Koch's Cohlmia says the labor court found that the company treated Egorova-Farines fairly and provided her with chances to perform adequately. The payments to win contracts documented by Koch investigators may violate U.S. law, saysSara Sun Beale, a professor at Duke Law School in Durham, North Carolina. She says Koch's termination letter to Mausen gives clear guidance to federal prosecutors.
Smoking Gun'
"It sounds like a smoking gun," says Beale, who co- authored "Federal Criminal Law and Its Enforcement" (Thompson West, 2010). "It really should get the Justice Department's attention. When you have a smoking gun, you launch an investigation." Such a probe would fall under the Foreign Corrupt Practices Act, a 1977 law that makes it illegal for companies and their subsidiaries to pay bribes to government officials and employees of state-owned companies. Justice Department spokeswoman Laura Sweeney says the agency won't confirm or deny the existence of any investigation. While Koch-Glitsch was conducting its internal probe of illicit payments for contracts, the U.S. government was investigating Koch's European unit on another front: sales to Iran. On Aug. 14, 2008, investigators from the U.S. Department of Homeland Security met with George Bentu, who had worked as a sales engineer from 2001 to 2007 for Koch-Glitsch in Germany, Bentu says. In a four-hour interview at the U.S. consulate in Frankfurt, the officials asked about documents showing details of the company's trades with Iran, he says.
Legal Sidestep
Homeland Security spokeswoman Barbara Gonzalez declined to comment. Internal company records show that Koch Industries used its foreign subsidiary to sidestep a U.S. trade ban barring American companies from selling materials to Iran. Koch-Glitsch offices in Germany and Italy continued selling to Iran until as recently as 2007, the records show. The company's products helped build a methanol plant for Zagros Petrochemical Co., a unit of Iran's state-owned National Iranian Petrochemical Co., the documents show. The facility, in the coastal city of Bandar Assaluyeh, is now the largest methanol plant in the world, according to IHS Inc., an Englewood, Colorado-based provider of chemicals, energy and economic data.
Engineer Challenged Sales
"Every single chance they had to do business with Iran, or anyone else, they did," Bentu, 46, says. Bentu, a German engineer who earned his master's degree in chemical engineering from Montana State University in Bozeman in 1990, joined Koch-Glitsch in 2001. His duties included drawing up bids for potential buyers of the company's distillation equipment, which is used in making fuels, fertilizers, detergents and other products. Bentu says he had been working at Koch-Glitsch in Viernheim, about 80 kilometers (50 miles) south of Frankfurt, for two months when he first saw an order destined for Iran. Concerned that the transaction might run afoul of U.S. law, Bentu asked his manager about it, he says. Bentu says his boss told him not to worry, that the company's U.S. lawyers made sure the deals with Iran were legal. U.S. companies have been banned from trading with Iran since 1995, when President Bill Clinton declared it a threat to national security. Iran supports Iraqi militants and Taliban fighters as well as terrorist groups, including Hamas and Hezbollah, according to the U.S. State Department.
Getting Around Ban
Koch Industries took elaborate steps to ensure that its U.S.-based employees weren't involved in the sales to Iran, internal documents show. Koch Industries may not have violated the law if no U.S. people or company divisions facilitated trades with Iran, says Avi Jorisch, a Treasury Department policy adviser from 2005 to 2008. That's impossible to determine without a complete investigation, Jorisch says. Internal Koch-Glitsch correspondence shows that the company coordinated with Koch Industries lawyers in the U.S. to make sure that American employees didn't work on sales to Iran. Elena Rigon, now Koch-Glitsch compliance manager for Europe, based in Italy, in December 2000 addressed a memo outlining compliance guidelines to company managers in her region.
Axis of Evil'
In another e-mail, Rigon said all offices had to go through a checklist for each estimate quoted for materials headed to Iran. "Your staff shall send this form to me since I have to send it to the lawyers in the USA as part of the compliance program," Rigon wrote in the e-mail. "If somebody happens to find out that any U.S. persons are involved in this project or U.S. material is delivered to Iran you CANNOT quote." Rigon declined to comment. "Koch-Glitsch had protocols in place that were consistent with applicable U.S. laws allowing such sales at the foreign subsidiary level," Koch's Cohlmia says. In his annual State of the Union address on Jan. 29, 2002, in the wake of the 9/11 attacks in New York and Washington, President George W. Bush said that Iran was part of what he called the "Axis of Evil." A year later, in his Jan. 28, 2003, address to Congress, Bush said, "In Iran, we continue to see a government that represses its people, pursues weapons of mass destruction and supports terror."
Soliciting Iranian Orders
The following day, Koch-Glitsch was sent a purchase order to supply petrochemical equipment for the Zagros plant, which was being designed and built by two engineering firms, Pidec in Iran and Lurgi in Germany, according to company documents. On May 31, 2004, Koch-Glitsch secured another contract for 1.2 million Euros, to help expand the Zagros facility. The plant helped Iran turn its vast natural gas reserves into methanol, which is used for making plastics, paints and chemicals. The Italian office of Koch-Glitsch sought work on other projects in Iran -- the expansion of the Abadan refinery, the country's largest, and the development of South Pars, part of the world's largest natural gas field, the documents show. Koch-Glitsch told employees in 2006 that the company was winding down business in Iran, Bentu says. At that point, he says, his bosses still asked him to work on Iran bids. He says he told them he was no longer willing to sign off on such work, leading to arguments between Bentu and his managers.
Totally Betrayed'
Bentu says he felt dismayed because Koch Industries clearly tells all of its employees around the world that integrity is the company's No. 1 value. "You feel totally betrayed," Bentu says. "Everything Koch stood for was a lie." Bentu, who was earning about 49,000 euros a year, says the company forced him out in April 2007 and paid him 25,000 euros severance. In 2009, Bentu was interviewed as part of a probe by the Bundeskartellamt, the German antitrust agency. It was looking into whether Koch-Glitsch had collaborated with a rival, Montz GmbH, a smaller petrochemical equipment maker in nearby Hilden, to rig bids they made to supply products to companies. In November 2010, Koch-Glitsch and Montz each paid 250,000 euros as part of a settlement with the regulator for sharing information from December 2002 to August 2008. The German regulator said the violations were a minor infraction. Koch- Glitsch closed its office in Viernheim in 2009, Bentu says. Several former employees went to work for Montz. Guenther Frey, general manager for Montz, declined to comment. Cohlmia says of the agency's ruling, "The decision did not find that Koch-Glitsch GmbH engaged in price fixing or any illegal behavior."
Felony Conviction
This wasn't Koch Industries' first brush with complaints of improper competition. In October 2000, the FBI secretly recorded the telephone calls of Troy Stanley Sr., director of textile staples at KoSa, then a Luxembourg company with its main office in Charlotte, North Carolina. Koch Industries and a Mexican company established KoSa as a joint venture in 1998 to buy the Hoechst AG unit that produced polyester staples, which are used in making textiles. KoSa pleaded guilty in October 2002 to a felony charge of conspiracy to restrain trade and paid a $28.5 million fine. Stanley pleaded guilty to one count of conspiring to restrain trade in December 2004 and was sentenced to one year of probation and a $5,000 fine.
Anti-trust Conspiracy'
"Officers, directors, managers or employees participated in the conspiracy" between September 1999 and January 2001, KoSa admitted in the plea agreement. The conspiracy began before KoSa bought the business and continued during its ownership, Stanley testified. Koch bought out its partner in 2001. The criminal activity occurred while Koch was a 50 percent owner. During the next eight years, Koch Industries paid $76 million to settle antitrust claims brought by KoSa's customers, and $59 million in legal fees, according to court records. KoSa is now part of Koch's Invista unit. A prosecution of KoSa by Canada's attorney general for price fixing followed in August 2003. KoSa pleaded guilty and paid a C$1.5 million fine. Cohlmia says a KoSa subsidiary "unknowingly bought into an ongoing antitrust conspiracy." Once the company found out about the wrongdoing, it stopped the conspiracy and cooperated with the U.S. Justice Department, she says.
Benzene Emissions
The price-fixing convictions came after years of investigations, environmental lawsuits and fines that had plagued Koch's oil pipeline and refining divisions. In April 1996, Koch environmental technician Sally Barnes- Soliz walked into the offices of Texas regulators in Corpus Christi and told them the company had lied about spewing benzene into the air. Koch Refining Co. had recruited Barnes-Soliz in 1991 to work in the safety department at the company's Corpus Christi refinery. Barnes-Soliz, then 30, had earned a bachelor's degree in science and environmental health and a Master of Science in industrial hygiene at Colorado State University in Fort Collins. "I loved that job," she says, describing how she helped protect plant workers and neighborhood residents from the many hazards at the refinery. "It's important to me that people are safe and their job is not the reason they die." Federal rules in 1995 required the plant, one of two refineries Koch owns in Corpus Christi, to reduce benzene emissions to less than 6 metric tons a year. Benzene, a chemical compound refined from crude oil, was found to cause leukemia in 1928 by two Italian doctors who detected the cancer in a worker exposed to benzene for five years.
False Report
Four federal agencies -- the National Institutes of Health, the Food and Drug Administration, the Environmental Protection Agency and the Occupational Safety and Health Administration -- say that benzene is a cause of cancer. On Jan. 6, 1995, Koch's refining unit informed the Texas Natural Resource Conservation Commission, or TNRCC, that it had installed a new anti-pollution device called a Thermatrix that used flameless heat to burn off the benzene. The machine lacked sufficient capacity for the job, Barnes-Soliz says, and refinery workers disconnected it within days. "The refinery was just hemorrhaging benzene into the atmosphere," she says. Three months after disconnecting the machine, Koch filed a quarterly report with Texas regulators, while concealing that it had violated the emission rules.
Pressured to Change
On Aug. 17, 1995, Koch Industries attorney Vincent Mietlicki wrote a memo to another company lawyer, Thomas Meek, saying the refinery had given the state incorrect information about its uncontrolled benzene emissions. "I think it goes without saying that there is a need to correct our first quarterly report which is misleading and inaccurate," he wrote. That December, a refinery manager asked Barnes-Soliz to tally the plant's annual benzene emissions for a report to state regulators, Barnes-Soliz says. She found 91 metric tons of uncontrolled benzene emissions, more than 15 times higher than what the rules allowed. "I redid the calculation a lot of times," Barnes-Soliz says. Those levels of emissions could increase the cancer risk to refinery employees and the public, she says. Barnes-Soliz reported the results in a document dated Jan. 4, 1996, to Mietlicki, the same lawyer who had written the memo calling out the inaccuracies in the quarterly report Koch filed with the state. She says Mietlicki and other Koch executives pressured her to lower the figures in her report.
Falsified Document
"There were a lot of meetings to try and get me to change the number," she says. "It was hard, but I held firm to my convictions." Barnes-Soliz's bosses went around her. On April 8, 1996, Koch reported to Texas regulators that its Corpus Christi plant had uncontrolled emissions of 0.61 metric tons for 1995, or 1/149th the quantity she had found. "When I saw they had actually falsified that document, I had no recourse but to notify the authorities," Barnes-Soliz says. On April 18, 1996, on her lunch break, she drove to the state's TNRCC office and reported that Koch had lied about its benzene emissions. By the time Barnes-Soliz walked in, environmental regulators were already investigating Koch in Corpus Christi.
Oil Slick
The EPA had sued Koch Industries a year earlier for a series of pipeline leaks in several states, including one that left a 12-mile-long oil slick on Nueces and Corpus Christi bays in October 1994. Her statement triggered another probe by state regulators and the FBI. During the next three years, investigators compiled evidence that included hundreds of internal memos about benzene emissions. In 1999, Koch's lawyers tried to stop prosecutors from using the documents in court. Koch argued that records of the company's internal investigation regarding benzene rules were protected by attorney-client privilege. U.S. District Judge Janis Graham Jack in Corpus Christi rejected that claim, ruling that the privilege doesn't apply when used to help commit a crime or fraud. She singled out Mietlicki.
Front Man'
"The government has submitted evidence which indicates that Koch was intentionally using Mietlicki and his investigation and expertise in reference not to prior wrongdoing, but to future wrongdoing," the judge wrote. "The February memo strongly suggests that Koch was using Mietlicki (and his investigation and expertise) as a front man' to impede the TNRCC from ascertaining the extent of its noncompliance." The February memo was sealed by the court. A federal grand jury issued a 97-count indictment against Koch Petroleum Group, Mietlicki and three refinery managers on Sept. 28, 2000. Koch Petroleum Group pleaded guilty to a felony charge of lying to the government about its benzene emissions in April 2001. Judge Jack fined Koch Petroleum $10 million and ordered that it pay another $10 million to fund environmental projects in south Texas. Koch earned $176 million in profit from the Corpus Christi plant in 1995, prosecutors told the court. The company said in a hearing that it would have cost $7 million to comply with the benzene emission regulation. Koch Petroleum changed its name to Flint Hills Resources in 2002. In the agreement to plead guilty, prosecutors dropped the charges against the four individuals.
Ultimately Collapsed'
Koch spokeswoman Cohlmia says the company reported its compliance issues to the state before a whistle-blower did so. She says the federal case was flawed, citing testimony by a prosecution expert witness. "The government's case ultimately collapsed after the company finally had an opportunity to challenge the government's key expert witness," she says. Uhlmann, the federal prosecutor who led the probe, says Koch's after-the-fact response is a public relations whitewash. "The Koch case was a classic case of environmental crime, significant violations of law occurring alongside widespread efforts to conceal those violations, which Koch has admitted," Uhlmann says. He now teaches at the University of Michigan Law School in Ann Arbor.
Empty Office
Mietlicki, who is now assistant principal at John Paul II High School in Corpus Christi, says he can't comment on details of the case. "I know all of my actions as a lawyer, throughout all my years of practice, were nothing but honest and truthful," he says. After the company found out that Barnes-Soliz had tipped off state regulators, Koch stripped her of her responsibilities and moved her to an empty office with no tasks and no e-mail access, she says. "They were pressuring me to quit," she says. She left the company in July 1996. Barnes-Soliz sued Koch in January 1997, saying the company harassed and mistreated her after she became a whistle-blower. Koch settled the lawsuit in July 1999 for an undisclosed amount. The Corpus Christi case was one of a series of challenges Koch Industries faced in the 1990s over environmental issues. In 1997, a company now owned by ConocoPhillips sued Koch for toxic waste dumping at a refinery in Duncan, Oklahoma.
Replete With Evidence'
In March 1998, U.S. District Court Judge Vicki Miles- LaGrange in Oklahoma City ordered Koch to pay for 15 percent of the cleanup costs for dumping at the site between 1946 and 1953. That decision was upheld by the U.S. Court of Appeals for the 10th Circuit in May 2000. "The record is replete with evidence Koch used unlined ditches, pits and ponds to dispose of hazardous waste at the site," the appeals court ruled, finding that Koch had tainted groundwater. "The pollution of any Oklahoma waters, including groundwater, has been prohibited by state statute since the early 1900s -- well before Koch's waste disposal activity at the refinery." By March 2007, Koch Industries had paid just $440,899 and still owed $2.97 million for its share of the cleanup, Conoco told the court. "Koch simply refuses to pay its share as ordered by this court," Conoco said.
Companies Settled
The two companies settled in February 2009. Terms weren't disclosed. Cohlmia says, "We understand that appropriate remediation is occurring and Koch has met all of its obligations with respect to this matter." A Koch unit in Rosemount, Minnesota, pleaded guilty in 1999 to two federal misdemeanors ofviolating the Clean Water Act and paid $8 million in fines and penalties. The company used fire hydrants to pump more than a million gallons of wastewater contaminated with ammonia onto the ground. Koch also increased its dumping of wastewater on weekends when it didn't monitor discharges, circumventing the reporting requirement of its permit, the EPA said. Koch also admitted that it negligently released between 200,000 gallons (757 kiloliters) and 600,000 gallons of aviation fuel into a nearby wetland. Cohlmia says the company cooperated with state and federal regulators to resolve the Rosemount issues and has met all of its obligations. "In March, 1999, Koch Petroleum Group took full responsibility for past underlying discharges," she says. Koch Industries also spent much of the 1990s defending itself against what a U.S. Senate subcommittee called a widespread scheme to steal oil on Indian land.
Twin Brother
The Senate held hearings in May 1989 after Bill Koch, David Koch's twin brother, told a U.S. Senate special committee on investigations that Koch Industries was stealing oil on American Indian reservations, cheating the federal government of royalties. Bill Koch had a long-standing feud with his brothers after his failed attempt to take over the company in the early 1980s. He sold his shares in June 1983 and later lost a lawsuit claiming he'd been shortchanged. The Senate committee sent investigators to Oklahoma to secretly observe oil companies, including Koch, buying crude on Indian land. The federal agents hid in ditches, crouched behind scrub cedars and ducked behind cows to avoid detection by Koch Oil's purchasers, FBI agent Richard Elroy testified to the committee in May 1989.
Theft is Widespread'
The investigators caught Koch Oil's employees falsifying records so that the company would get more crude than it paid for, shortchanging Indian families, Elroy said. Koch's records showed that the company took 1.95 million barrels of oil it didn't pay for from 1986 to 1988, according to data compiled by the Senate. "The theft is widespread and pervasive, and these people are being horribly victimized," Elroy testified. Elroy told the committee that Charles Koch gave a deposition that said that no one could make exact measurements. "There was a lot of uncertainty and tremendous variations," Elroy quoted Koch as saying. The full deposition is sealed, which is committee policy. The committee concluded in a November 1989 report that Koch Oil had engaged in a widespread, sophisticated scheme to steal millions of barrels of oil. The Senate referred the case to the Justice Department, which convened a grand jury that never indicted the company. "We believe that our practices were consistent with industry practice," Cohlmia says.
The Civil Trial
Bill Koch brought a lawsuit on behalf of U.S. taxpayers, claiming that Koch Industries' scheme defrauded the government of royalties. The case came to trial in 1999. Former company employees testified that Koch Industries trained them to steal. Phil Dubose, who worked for Koch Industries from 1968 to 1994, told the jury how the scheme worked. "The Koch Method is to cheat the producer out of crude oil," he said. He testified that he was able to steal 2,000 barrels a month from one customer. "You used every available tool to mismeasure the crude oil in Koch's favor," says Dubose, who is now retired. Charles Koch testified in the trial, saying the company had the highest standards. "By 1988, I thought we had developed the best measurement approach, controls and so on of any crude oil purchaser in the industry," Koch said. "And that's why we became the No. 1 crude oil purchaser in the United States."
24,587 False Claims
Two days before Christmas 1999, the jury delivered the verdict: Koch Industries had made 24,587 false claims in buying oil, underpaying the U.S. government for royalties on Native American land from 1985 to 1989. Koch paid the U.S. $25 million to settle the case in 2001. The Koch brothers, meanwhile, reached an agreement, with undisclosed terms, dropping all litigation against each other. While the Koch brothers battled over oil, Koch Industries clashed with regulators over its failure to properly maintain its pipelines. In 1995, the EPA sued the company, saying poor maintenance resulted in corrosion that contributed to hundreds of spills. The following year, before the EPA case was resolved, a leak in a Koch butane pipeline led to an explosion that killed two teenagers.
Burned Alive
On Aug. 24, 1996, Danielle Smalley and her high school friend and neighbor Jason Stone, both 17, smelled gas outside Smalley's mobile home in rural Lively, Texas, 50 miles southeast of Dallas. The house had no telephone, so they decided to drive the Smalley family's pickup truck to a neighbor's home to call 911. They never made it. The truck stalled after the couple drove into a fog-like cloud, says Danielle's father, Danny Smalley, who watched them drive away. It was butane vapor, leaking from a corroded steel pipeline. Seconds later, as Danielle restarted the truck, the gas ignited into a fireball, burning Danielle and Jason to death. Smalley's father sued Koch Industries in 1997 in the Kaufman County, Texas, district court for the wrongful death of his daughter.
Definitely Responsible'
"I will tell you Koch Industries is definitely responsible for the death of Danielle Smalley," Bill Caffey, an executive vice president of the company, testified in a 1999 deposition during Smalley's lawsuit. Caffey oversaw pipeline safety at the company. He testified that he thought the pipeline was safe before the explosion. Koch Pipeline Co., the unit that managed the Texas pipeline, knew the line had corroded and didn't fix it, an investigation by the National Transportation Safety Board concluded in November 1998. The 570-mile-long pipeline carrying liquid butane from Medford, Oklahoma, to Mont Belvieu, Texas had corroded so badly that one expert, Edward Ziegler, likened it to Swiss cheese. The company didn't give 40 of the 45 families near the explosion site -- including the Smalley and Stone families -- any information about what to do in case of an emergency, the NTSB wrote. Danny Smalley hired Ziegler, a third-generation oilman and certified safety professional, as an expert witness. Ziegler had previously been retained by Koch Industries as an expert witness in an unrelated case. Ziegler told the jury that he'd never seen a company disregard safety to this extent in his more than 25- year career.
A Total Failure'
"This is an example of a total failure of a company to follow the regulations, keep their pipeline safe and operate it as the regulations require," Ziegler, who now operates his own pipelines, testified. A memo forwarded by Caffey to another Koch executive vice president justified putting a 70-mile section of the pipeline back into operation after being closed for three years because it could earn more than $7 million in operating income a year. "We were to work on reducing wasteful spending," Caffey said in his deposition. In his 2007 book, Charles Koch didn't comment on the pipeline explosion. He did, however, offer this observation: "Our organization does not reward failure." Koch Industries didn't penalize Caffey, the executive in charge of pipeline safety. The company doubled his annual bonus to $900,000 for 1996, the year the fatal blast occurred, according to court records. In his deposition, lawyers asked Caffey whether the disaster came up during his annual review.
I Don't Believe'
"I don't believe we discussed that specifically in my review," he said. Caffey, who stayed with Koch for a decade after the explosion and now runs the BB River Ranch in Comanche, Texas, says the explosion was a one-of-a-kind tragedy. "I have never known any company executive more focused on compliance than Charles Koch," he says. The state jury awarded Danny Smalley $296 million in its Oct. 21, 1999, verdict. The jury found that Koch Industries acted with malice because it had been aware of the extreme risks of using the faulty pipeline. Smalley later settled for an undisclosed amount. Stone's family also settled. Danny Smalley used settlement money to start the Danielle Dawn Smalley Foundation for pipeline safety education. Large pipeline operators such as ExxonMobil Corp., BP Plc and Kinder Morgan Inc. -- and not Koch -- accept free services from the foundation, Smalley says.
Never Forget'
"You see two children burned to death in front of you, you never forget that," he says. "I want to stop other parents from ever having to see that." Cohlmia says Koch Industries used the lessons learned from the explosion to help avoid similar accidents. The company immediately accepted responsibility for the explosion, which was the only one of its kind, she says. Three months after the Smalley verdict, Koch settled the five-year-old EPA case for pipeline leaks, along with a second EPA case brought in 1997. The company paid $35 million to resolve those cases, which covered more than 300 oil spills in six states. For six decades around the world, Koch Industries has blazed a path to riches -- in part, by making illicit payments to win contracts, trading with a terrorist state, fixing prices, neglecting safety and ignoring environmental regulations. At the same time, Charles and David Koch have promoted a form of government that interferes less with company actions.
Overall Concept'
"My overall concept is to minimize the role of government and to maximize the role of the private economy and maximize personal freedoms," David Koch told the National Journal in May 1992. In his 2007 book, Charles Koch says his company had difficulty keeping up with changing government regulations and that it did eventually build an effective compliance program for 20 areas ranging from environmental to antitrust to safety regulations. "We were caught unprepared by the rapid increase in regulation," he wrote. "While business was becoming increasingly regulated, we kept thinking and acting as if we lived in a pure market economy." To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net. David Evans in Los Angeles at davidevans@bloomberg.net.
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
Koch Employee Says Billionaire Kidnapped & Interrogated Him
By IULIA FILIP
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(CN) - Billionaire William Koch imprisoned and interrogated one of his executives at a secluded Aspen ranch, under a sheriff's guard, because the executive suspected Koch's companies of tax evasion, the employee claims in Federal Court.
Kirby Martensen, of Berkeley, Calif., says he was an executive for several companies owned and controlled by William Koch, including Oxbow Carbon & Minerals Inc. (OCM) and Oxbow Carbon & Minerals International (OCM International), until March, when he says he was suddenly fired.
OCM and OCM International are part of the Oxbow Group, an energy development holding company based in West Palm Beach, Fla. Koch founded the Oxbow Group in the 1980s after leaving his family's oil-refining conglomerate, Koch Industries.
Oxbow Carbon is the largest distributor of petroleum coke in the world, with annual shipments of nearly 11 million metric tons to U.S., Asian, European, Latin American and Pacific Rim markets, according to the company's website.
Martensen says OCM International promoted him to senior vice president, Asia, in 2011, and he relocated to the company's Singapore office with promises that his family's expenses and his children's education would be covered.
"Martensen understood that the goal of this assignment was to help legitimize OCM's Bahamian shell company," according to the complaint in the Northern District of California. "This included, but was not limited to, discussions and negotiations concerning the sourcing of pet-coke and sales to Asian customers. Plaintiff was informed that the move to Asia was for tax purposes. More than 75 percent of Oxbow's fuel-grade petroleum coke export profits were derived from its Asian trading business. Plaintiff has information and believes this relocation was part of a plan being implemented to evade paying taxes to the United States on profits in excess of $200,000,000 per year.
"In 2011, William Koch was notified of an anonymous letter alleging that Martensen and another employee Larry Black had been engaging in theft, breaches of fiduciary duty, fraud, and self-dealing against the Oxbow companies. Based on this information William Koch directed a lengthy comprehensive forensic review of thousands of documents, including the written corporate communications files (letters, memoranda, electronic corporate communications, etc) of several employees, including Martensen.
"Based on this surreptitious review of plaintiff's emails and voice communications Koch learned that Martensen and others expressed concern of the legality of what they were doing on behalf of Oxbow and their distrust of upper management. As a result, William Koch promoted and implemented a plan to intimidate and discredit plaintiff for the purpose of chilling his speech and damaging his credibility." (Parentheses in complaint).
Koch is the only defendant named in the lawsuit.
The billionaire allegedly used "false pretenses" to lure Martensen and other executives to Bear Ranch, his property near Aspen, in March.
Martensen says the property was secluded, accessible only through a private road, and had no cellphone reception or other connections with the outside world.
After Martensen flew in from San Francisco, Koch drove him and other employees to Bear Ranch to spend the night, according to the complaint.
Martensen describes the ensuing odyssey in the complaint:
"Martensen and other guests had breakfast at the ranch the next morning followed by a business meeting. Martensen and others were then invited by Mr. Koch to tour his Western town nearby - a collection of approximately 50 buildings designed to appear like an authentic late 19th century western town. This was followed by a helicopter tour of the ranch and a lunch hosted by Mr. Koch in one of the town meeting rooms.
"Following lunch Martensen and others were told by Mr. Koch that they would be interviewed by a compensation specialist as part of a 360 degree peer review. Martensen was then escorted to a small room and interviewed by two agents of Koch. The interview turned into an interrogation that lasted several hours. Martensen was accused of participating in a wide-ranging scheme to defraud Oxbow and Koch of millions of dollars, accepting bribes from competitors and 'diverting freight to a known competitor.'
"Following the interrogation Martensen was escorted to a SUV and directed to sit in [the] back. It was now approximately 5:00 p.m. Just outside of town the vehicle stopped, windows were rolled down, and Martensen was served with his termination papers and a lawsuit. As the vehicle returned to the ranch, Martensen asked where he was being taken. He was told by the driver that he would be taken to Aspen. Martensen then was driven to the main house on the ranch to collect his belongings.
"When collecting his belongings an agent of William Koch searched his suitcase and toiletries. Martensen then was escorted to a SUV and driven to a nearby cabin on the ranch. The driver then ordered Martensen to get out of the vehicle and escorted him to a cabin. While escorting Martensen the driver told Martensen, 'A sheriff is here to make sure you don't wander off.' Martensen observed a marked police vehicle parked nearby with a man in uniform behind the wheel. The police vehicle was clearly visible from the window of the room in which Martensen was imprisoned.
"After three hours of captivity Martensen was told to collect his things and that he would be taken to an airport. Martensen was directed to get in a SUV with a former co-worker, Charlie Zahn, and two agents of William Koch (driver and escort). Martensen asked to be driven to Aspen because he had a scheduled flight from Aspen to San Francisco the next morning. This request was denied. Martensen was told that he was being taken to Denver. Martensen then was kidnapped and kept captive in the vehicle during the trip to Denver.
"Martensen was driven to a small airport in the Denver area and escorted to a private plane. It was now approximately 2:00 a.m. on March 23, 2012. Martensen and Zahn were ordered to get into the plane. The private jet was manned by a pilot, co-pilot and escort Martensen believed was armed. The plane landed in Oakland, Calif. At approximately 4:00 a.m. On arrival Martensen was told that a car was waiting to take him to a nearby Marriot Courtyard Hotel. Martensen refused the request and asked an airport employee to call a cab. A cab arrived and Martensen left." (Parentheses in complaint).
Martensen says he suffered great anxiety, fear, humiliation and emotional distress.
He seeks compensatory and punitive damages for false imprisonment and civil conspiracy.
Martensen is represented by John Houston Scott in San Francisco.
After this story went to press, Brad Goldstein, Oxbow's director of corporate affairs, called the lawsuit "a desperate attempt" to divert attention form Martensen's wrongdoing.
"It's a desperate act by a desperate man," Goldstein told Courthouse News in a telephone interview. "His claims about being held against his will are ludicrous. He had been to Bear Ranch on numerous occasions, and to Mr. Koch's house in West Palm Beach, and to many other corporate retreats. He could have gotten up and left any time."
Goldstein added: "The fact of the matter is many of Martensen's co-conspirators have already confessed and some have implicated him." http://www.courthousenews.com/2012/10/12/51239.htm
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
15-10-2012, 04:35 AM (This post was last modified: 15-10-2012, 05:52 AM by Adele Edisen.)
The Koch Brothers are "no-goodniks" for sure.
What I find most amusing in a strange sort of way, is how their father, Fred Koch, a real right-right-winger, created his wealth originally to pass down to his sons. He had invented a method of refining oil which he tried to get U.S. oil companies to use. They turned him down, so he went to the Soviet Union and pitched his ideas to them and built oil refineries for them, making millions for himself. So much for capitalism's interest in creating and promoting technological progress. There's a lesson to be learned here.
The Koch Brothers are a real threat to democracy, as are other millionaires and billionaires whose greed and desire for power work against democratic principals and people.
Great article about the Koch Brothers, Magda. Thank you.
Koch Brothers Exposed is a hard-hitting investigation of the 1% at its very worst. This full-length documentary film on Charles and David Kochtwo of the world's richest and most powerful menis the latest from acclaimed director Robert Greenwald (Wal-Mart: the High Cost of Low Price, Outfoxed, Rethink Afghanistan). The billionaire brothers bankroll a vast network of organizations that work to undermine the interests of the 99% on issues ranging from Social Security to the environment to civil rights. This film uncovers the Kochs' corruptionand points the way to how Americans can reclaim their democracy.
What can you do to fight back? Get the film. Host a screening. Tell your friends. Get the Koch brothers out of the shadows and into the spotlight.
10 Shocking Facts on the Kochs
1. Koch Industries, which the brothers own, is one of the top ten polluters in the United States -- which perhaps explains why the Kochs have given $60 million to climate denial groups between 1997 and 2010.
2. The Kochs are the oil and gas industry's biggest donors to the congressional committee with oversight of the hazardous Keystone XL oil pipeline. They and their employees gave more than $300,000 to members of the House Energy and Commerce Committee in 2010 alone.
3. From 1998-2008, Koch-controlled foundations gave more than $196 million to organizations that favor polices that would financially enrich the two brothers. In addition, Koch Industries spent $50 million on lobbying and some $8 million in PAC contributions.
4. The Koch fortune has its origins in engineering contracts with Joseph Stalin's Soviet Union.
5. The Kochs are suing to take over the Cato Institute, which has accused the Kochs of attempting to destroy the group's identity as an independent, libertarian think and align it more closely with a partisan agenda.
6. A Huffington Post source who was at a three-day retreat of conservative billionaires said the Koch brothers pledged to donate $60 million to defeat President Obama in 2012 and produce pledges of $40 million more from others at the retreat.
7. Since 2000, the Kochs have collected almost $100 million in government contracts, mostly from the Department of Defense.
8. Koch Industries has an annual production capacity of 2.2 billion pounds of the carcinogen formaldehyde. The company has worked to keep it from being classified as a carcinogen even though David Koch is a prostate cancer survivor.
9. The Koch brothers' combined fortune of roughly $50 billion is exceeded only by that of Bill Gates in the United States.
10. The Senate Select Committee on Indian Affairs accused Koch Oil of scheming to steal $31 million of crude oil from Native Americans. Although the company claimed it was accidental, a former executive in this operation said Charles Koch had known about it and had responded to the overages by saying, "I want my fair share, and that's all of it."
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
Quote:4. The Koch fortune has its origins in engineering contracts with Joseph Stalin's Soviet Union.
:piethrow::loco:
"Let me issue and control a nation's money and I care not who writes the laws. - Mayer Rothschild
"Civil disobedience is not our problem. Our problem is civil obedience! People are obedient in the face of poverty, starvation, stupidity, war, and cruelty. Our problem is that grand thieves are running the country. That's our problem!" - Howard Zinn
"If there is no struggle there is no progress. Power concedes nothing without a demand. It never did and never will" - Frederick Douglass
Quote:Caffey, who stayed with Koch for a decade after the explosion and now runs the BB River Ranch in Comanche, Texas, says the explosion was a one-of-a-kind tragedy.
"I have never known any company executive more focused on compliance than Charles Koch," he says.
The state jury awarded Danny Smalley $296 million in its Oct. 21, 1999, verdict. The jury found that Koch Industries acted with malice because it had been aware of the extreme risks of using the faulty pipeline.
Ah yes, a jury delivering justice.
I'm amazed TPTB haven't gotten rid of this irritating and expensive check on corporate corruption. :piethrow:
"It means this War was never political at all, the politics was all theatre, all just to keep the people distracted...."
"Proverbs for Paranoids 4: You hide, They seek."
"They are in Love. Fuck the War." Gravity's Rainbow, Thomas Pynchon
"Ccollanan Pachacamac ricuy auccacunac yahuarniy hichascancuta." The last words of the last Inka, Tupac Amaru, led to the gallows by men of god & dogs of war
AARON MATÉ: When it comes to the wealthy funders of right-wing causes, the big names are well known: billionaires like the industrialist Koch Brothers and the casino magnate Sheldon Adelson, super PACs like Americans for Prosperity and Karl Rove's Crossroads GPS. Now, through them, hundreds of millions of dollars have poured into right-wing causes and candidates. But now it turns out this web of dark-money donations is even more secretive than we previously thought. That's because the operations of a largely unknown group have now come to light. They're called Donors Trust, a nonprofit charity based in Virginia.
Since 1999, Donors Trust has handed out nearly $400 million in private donations to more than 1,000 right-wing and libertarian groups. The fact Donors Trust has been able to quietly do so appears to explain why it exists: Wealthy donors can back the right-wing causes they want without attracting public scrutiny. Donors Trust is classified as a "donor-advised" fund under U.S. tax law, meaning its funders don't have direct say in where their money goes. That in turn allows them to remain largely anonymous.
AMY GOODMAN: But the most detailed accounting to date shows Donors Trust funds a wish list of right-wing causes, prompting Mother Jones magazine to label it, quote, "the dark-money ATM of the right." Donors Trust recipients include the American Legislative Exchange Council, or ALEC, a mechanism for corporate interests to help write state laws; the Franklin Center for Government and Public Integrity, a media outlet that unabashedly promotes right-wing causes; and the State Policy Network, a number of right-wing think tanks that push so-called "free-market" policies.
But the major focus of Donors Trust appears to be funding the denial of global warming. More than a third of Donors Trust donationsat least $146 millionhas gone to think tanks and other groups that challenge the science of climate change. Later in the broadcast, we'll take a closer look at that funding of climate change denial, but first we turn to an overview of Donors Trust and look at why it's been able to evade public scrutiny until now.
Joining us from Washington, D.C., is John Dunbar, politics editor at the Center for Public Integrity, worked on the group's months-long investigation into Donor's Trust. We did ask Donors Trust to join us, but they declined our request.
John Dunbar, lay out just what Donors Trust is.
JOHN DUNBAR: Well, they're essentially a pass through. What they do is, is they act as a kind of a middleman between what are very large, well-known private foundations created bymostly by corporate executives, like the Kochs, for example, and they direct the money of those contributions to a very large network of right-leaning, free-market think tanks across the country, including those that you've named. By doingby running it through the middleman, it essentially obscures the identity of the original donors, of the folks who have provided the funds themselves. And the organization itself actually makes that clear on its own website, essentially saying people who give money to the organization can avoid being identified or being connected with potentially controversial issues.
AARON MATÉ: And John Dunbar, so the figure is $400 million since 1999. Why is it that all this is just coming to light now?
JOHN DUNBAR: Well, we kind of stumbled onto it, to be honest with you. We've been, at the Center for Public Integritythat's publicintegrity.org if you'd like to read our full report on itwe were looking at activities at the state level, and we were noticing a certain continuity. There was a certain sameness to what was going on in various states on these issues. And we have been looking at the American Legislative Exchange Council for quite some time, and we were looking for how these organizations were funded. And this Donors Trust organization kept popping up, and it seemed to be such an amorphously named organization. We couldn't really figure out where it was. So we got to wondering, "Well, who's funding Donors Trust?" And then we backed it up a step, and then we started looking at some of the more better-known right-wing, free-market foundations, particularly those run by the Koch brothersthe Searle Freedom Trust, for example, is another one; the Bradley Foundationthese are all very well-known right-leaning foundationsand found that an enormous amount of the funds that came into Donors Trust came from thosefrom those organizations.
AMY GOODMAN: John Dunbar, in your report, you speak with the Donors Trust president and CEO, Whitney Ball. She says much of the group's focus is on the state level because of, quote, "gridlock" at the federal level of government means donors see, quote, "a better opportunity to make a difference in the states." Ball also sits on the board of the State Policy Network. Can you talk about this focus on activity at the state level?
JOHN DUNBAR: Yeah, I think thatI don't think anybody would argue with her point that it's hard to get anything done in Washington these days. They have been a lot more successful at the state level. And I think that in Washington we have a tendency to sort of get tunnel vision: We don't think that anything that happens outside of Washington really matters, when in fact the laws that are passed in the states are extremely important. Some of the focus of the Donors Trust recipients have been on specific state issues that, you know, affect all of us. You know, some of their favorite issues are right-to-work laws in the states; climate issues; renewable energy, as you'll hear from Suzanne and The Guardian, which has done such great work on that; and as well as, you know, tax issues, etc. People tend to look at states and what's happening in a particular state in isolation; they don't look around and see that the same thing seems to be happening in other states. And it'sthis is clearly a coordinated effort to create state-based think tanks. There's 51 of them that they've funded all across the country to push legislative issues. And then they created their own media empire to supportthey even support the ideas behind those issues.
AARON MATÉ: Well, John Dunbar, if you could follow up on that, this media group, the Franklin Center for Government and Public Integrity. They receive 95 percent of their funding from the Donors Trust?
AMY GOODMAN: John, in 2009, Republicans, bloggers, conservative think tanks began to cite a report that the Obama administration had pumped billions of stimulus funds into phantom congressional districts, suggesting money intended to create jobs and shore up the economy had been misused or lost. One of the key websites to report this was newmexicowatchdog.org, which is almost entirely funded by Donors Trust. The story was picked up by Fox News, like in this report from Stuart Varney.
STUART VARNEY: Take a look at this map, please. The government is claiming jobs created in nine Oklahoma congressional districts; problem: There's only five. Jobs in eight districts of Iowa; big problem: There's only five. Jobs in eight districts in Connecticut; again, there's only five. Jobs in three congressional districts in the Virgin Islands; there is only one. And as you point out, Bill, Puerto Rico, the government claims 17,544 jobs created or saved in six congressional districts; there is only one congressional district in Puerto Rico.
BILL HEMMER: I don't know if we should be laughing or crying over this.
STUART VARNEY: No.
BILL HEMMER: I mean, Puerto Rico alone, 99th Congressional District, 98th Congressional District, a no-number congressional district.
STUART VARNEY: Yes.
BILL HEMMER: I mean, good lord!
STUART VARNEY: Yes, yes, yes. Raise your eyebrows, please. Look, it's very bad, very unreliable statistics, and it really undermines all of these claims, these gross claims of job creation from stimulus.
AMY GOODMAN: That Fox News report was based on a report by newmexicowatchdog.org, one of the many so-called watchdog websites that are almost entirely funded by the Donors Trust. John Dunbar, your response?
JOHN DUNBAR: Well, I think that the implication of that report was that there were millions and millions of dollars that were being misspent, when the reality was it was data errors. I don't think anyone would defend the government's ability to create accurate databases. They clearly didn't do a very good job on that front, at least on the Recovery Act. However, the implication that all of this money was going into a black hole was actually nonsense. It was kind of a phantom issue about phantom districts, as the Associated Press had reported. A lot of the reporting by these different watchdog organizations that are funded by Franklin has been called into question, including by the Nieman Center at Harvard that's called it a lack in context and in some cases actually distortions of facts.
AARON MATÉ: While Donors Trust has given money to a variety of right-wing causes, denying climate change appears to be its top priority. An analysis by the environmentalist group Greenpeace reveals Donors Trust has funneled at least $146 million to more than 100 climate change denial groups over the past decade. In 2010, 12 of these groups received between 30 to 70 percent of their funding from Donors Trust. Some of the recipients include Americans for Prosperity, the Committee for a Constructive Tomorrow, the Heartland Institute and the Competitive Enterprise Institute.
AMY GOODMAN: Although many Donors Trust funders are unknown, at least two of its members include foundations bankrolled by the billionaire Charles Koch, a leading backer of climate denial. According to the most recent figures, the Koch-funded Knowledge and Progress Fund gave Donors Trust nearly $8 million through 2011.
For more on Donors Trust and the denial of global warming, we're joined in Washington, D.C., by Suzanne Goldenberg, U.S. environment correspondent for The Guardian. She has written a series of articles detailing the ties between Donors Trust and opponents of climate change science.
Lay out what you've found, Suzanne.
SUZANNE GOLDENBERG: Well, basically, what you see is thatover the last decade or so, you see a concerted effort by wealthy conservatives, conservative billionaires, to fund up and prop up a whole series of institutions that could work to undermine the science behind climate change and also work to undermine any kind of effort to pass legislation to deal with climate change. This money is going to think tanks. It's going to activist groups. It's going to so-called "scholars." It's going to a wide range of individuals, you know, more than a hundred different organizations.
And, you know, the goal here is to create this illusion, this idea that there is, you know, a really strong movement against the science of climate change and against action on climate change. In fact, that's actually, to an extent, become a reality now: You see that opposition to action on climate change is central to Republican thinking.
AMY GOODMAN: Talk about the different groups.
SUZANNE GOLDENBERG: You've got lots. You know, you've got sort of blue-chip think tanks in Washington, D.C., some of the really big institutions like the American Enterprise Institute. You've got organizations that really wouldn't exist or wouldn't, you know, make much of an impact at all if they didn't get half their budget from Donors Trust. In that category, I would put the Committee for a Constructive Tomorrow. One of its main activities is to run a website that's like a clearing house for articles that try and discredit the science behind climate change or, you know, launch personal attacks against people like Al Gore or climate scientists, you know, people who speak up against climate change. So you've got lots of different efforts going on. I mean, you've seenI don't know if you remember, a few years back, there was this organization called the Energy Citizens that was launched by Americans for Prosperity, you know, grassroots activists against action on climate change. That, it now turns out, had funding from Donors Trust, as well.
AMY GOODMAN: Donors Trust declined our request to join us on today's show, but the group's president and CEO, Whitney Ball, provided us with a statement. She wrote, "DonorsTrust was established to promote liberty and help like-minded donors preserve their charitable intent. We follow the same rules and operate in the same manner as other donor-advised funds which include the Fidelity Charitable Gift Fund, Jewish federations, local community foundations, and the left-of-center Tides Foundation, just to name a few. Donor-advised funds are classified as public charities, and thus are not required to disclose their donors. I do not know of a donor-advised fund that makes their donor lists public. The press has referred to us as a 'black box,' labeled our funding as 'dark money,' and [Suzanne] Goldenberg described us as 'secretive.' These characterizations are unfair and misleading. How is it that the Tides Foundation, which has a record of funding environmental causes and does not publish donor lists, is never characterized in the same way by these same reporters?" Your response, Suzanne Goldenberg, as she names you?
SUZANNE GOLDENBERG: Well, oh, sure. This is the first I've heard of it. Well, you know, I talked to Whitney Ball. I asked her flat out, "Can you tell me who gives to you, what kind of people give to you?" And she said, "No. I mean, that in fact is the purpose of this trust, to make the giving anonymous, to giveto allow these conservative billionaires to remain hidden." And I think, you know, she's trying to cast this as, look, the right have their organizations, the left have their organizations.
I think there's something really different here and that comes into play, in that these organizations being supported by Donors Trust are actually working to spread information that is factually incorrect, that is untrue. You know, it's as if you're sort of funding groups to go around saying, "Oh, you can get the HIV virus from toilet seats." You can't draw this equivalence here. These organizations areyou know, were funded for the express purpose, many of them, of spreading disinformation.
AARON MATÉ: Now, Suzanne, one of the climate denialists funded by Donors Trust is a group called the Committee for a Constructive Tomorrow.
SUZANNE GOLDENBERG: Yes.
AARON MATÉ: They run the website Climate Depot, which consistently attacks scientists and environmentalists who call for taking on global warming. Now, the head of Climate Depot, Marc Morano, appears frequently on Fox News and also mainstream outlets like CNN. On Monday, the day after tens of thousands of people rallied against the Keystone XL pipeline on the National Mall, Morano appeared on Fox News to warn that Keystone opponents could resort to, quote, "ecoterrorism." And he cited as their inspiration the NASA climatologist James Hansen.
MARC MORANO: So, the leaders at NASAand, you know, I call him NASA's resident ex-conis inspiring these people to potential acts of ecoterrorism. These people believe in this doomsday prophecy. And don't think they won't act. I mean, when I was in the U.S. Senate Environment Committee, we had to deal with ecoterrorism when it came to animal rights. We had to dealthere's been ecoterrorism when it deals with property rights out in Colorado. So it's a very real thingtorching SUVs. This movement, if it gets frustrated, particularly frustrated with a Democratic president, Obama, who's supposed to be their standard bearer, and actually goes ahead and approves the pipeline, there are going to be a lot of angry people, not the least of which is probably the NASA scientist going to jail again, James Hansen.
AARON MATÉ: That's Marc Morano of Climate Depot appearing on Fox News.
SUZANNE GOLDENBERG: You know, I wish I'd
AARON MATÉ: Suzanne Goldenberg, if you could talk about his group.
SUZANNE GOLDENBERG: Well, I wish I would seen. I mean, that's quite incredible. Just let's get back to the truth here, is that, yes, James Hansen was arrested, in fact as recently as last week, and what he was doing was just using plastic twist-tie handcuffs to handcuff himself to the gates of the White House and, you know, in an agreement arranged in advance with the D.C. police, arranged to be arrested in a nonviolent fashion with 40-something other activists, you know, to make a symbolic protest against the Keystone pipeline. So I do not know how you can describe these kind of acts, which, you know, were preceded by Mahatma Gandhi, Martin Luther King and other, you know, peaceful resistersI don't know how you can call that ecoterrorism.
But I think it's reallyit's really interesting and important to see what Marc Morano is doing here, and which is that he's deliberately spreading misinformation and lies, really, about what happened and about the means of protest that are taking place against the Keystone pipeline. And this is crucial because it helps create this sort of confusion about what people are doing to oppose the pipeline, and in that confusion, it makes it difficult for people to make an informed choice about what is right, what is wrong, and it makes it really hard for people in Congress or people in government agencies and in state agencies to actually act on a very urgent problem, because there's so much confusion and controversy surrounding it.
AMY GOODMAN: Suzanne, the Donors Trust-backed Heartland Institute sparked controversy last year after it paid for a billboard advertisement in Chicago likening those who accept the reality of global warming to the Unabomber, Ted Kaczynski.
SUZANNE GOLDENBERG: Yes.
AMY GOODMAN: The billboard featured a picture of Kaczynski and the words "I still believe in global warming. Do you?" Talk about the Heartland Institute, this ad.
SUZANNE GOLDENBERG: That's interesting. I just want to add, briefly, first, you know, I asked Whitney Ball about that advertisement, and she laughed. And she said, "Look" and, you know, I was asking, "Well, did your donors like what Heartland did?" And she said, "Some of them did; some of them didn't."
I think that ad was really interesting, because, in a way, it wasyou know, it really exposed Heartland Institute and exposed the way that they seeyou know, exposed the lengths they will go to to try and defend their cause, right? I mean, you know, for a lot of people looking at that, that was really an extreme kind of action. And I think that's true. I think what Heartland and these other groups are promoting is a really extreme view and a wrongheaded view of the science of climate change, of the need for action on climate change. That billboard, for many people, crystallized that extreme view.
To go back there, the reason why Heartland put up that billboard was because they were feeling besieged and under attack because of a disclosure of information about their finances, which showed that they were being heavily financed by the Koch brothers and by conservatives like Donors Trust. So, they had been the victim of a sting, which sort of laid bare all their financials, laid bare their strategy, and they fought back and sort of went overboard with this extremist ad about the Unabomber.
AARON MATÉ: Now, Suzanne, we've talked already about the actions of Donors Trust on the state level, and you've written about their funding of groups trying to fight wind farming in several states. We have 30 seconds.
SUZANNE GOLDENBERG: Yeah, I think that's their new focus, is not to look at trying to oppose action in Washington on climate change, because it's not happening, but they're going to go out into the states and oppose efforts to increase the amount of renewable energy, like wind farms and solar farms. I would also look at them to oppose action forby city councils in coastal communities to protect themselves from climate change in future development planning.
AMY GOODMAN: Suzanne Goldenberg, we want to thank you for being with us, U.S. environment correspondent for The Guardian. Her article, most recently, "Secret Funding Helped Build Vast Network of Climate Denial Thinktanks,"
"Let me issue and control a nation's money and I care not who writes the laws. - Mayer Rothschild
"Civil disobedience is not our problem. Our problem is civil obedience! People are obedient in the face of poverty, starvation, stupidity, war, and cruelty. Our problem is that grand thieves are running the country. That's our problem!" - Howard Zinn
"If there is no struggle there is no progress. Power concedes nothing without a demand. It never did and never will" - Frederick Douglass
Together, Charles and David Koch control one of the world's largest fortunes, which they are using to buy up our political system. But what they don't want you to know is how they made all that money
By Tim Dickinson | September 24, 2014
The enormity of the Koch fortune is no mystery. Brothers Charles and David are each worth more than $40 billion. The electoral influence of the Koch brothers is similarly well-chronicled. The Kochs are our homegrown oligarchs; they've cornered the market on Republican politics and are nakedly attempting to buy Congress and the White House. Their political network helped finance the Tea Party and powers today's GOP. Koch-affiliated organizations raised some $400 million during the 2012 election, and aim to spend another $290 million to elect Republicans in this year's midterms. So far in this cycle, Koch-backed entities have bought 44,000 political ads to boost Republican efforts to take back the Senate.
Related [URL="http://www.rollingstone.com/politics/news/koch-industries-responds-to-rolling-stone-and-we-answer-back-20140929"] Koch Industries Responds to RS And We Answer Back
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What is less clear is where all that money comes from. Koch Industries is headquartered in a squat, smoked-glass building that rises above the prairie on the outskirts of Wichita, Kansas. The building, like the brothers' fiercely private firm, is literally and figuratively a black box. Koch touts only one top-line financial figure: $115 billion in annual revenue, as estimated by Forbes. By that metric, it is larger than IBM, Honda or Hewlett-Packard and is America's second-largest private company after agribusiness colossus Cargill. The company's stock response to inquiries from reporters: "We are privately held and don't disclose this information."
But Koch Industries is not entirely opaque. The company's troubled legal history including a trail of congressional investigations, Department of Justice consent decrees, civil lawsuits and felony convictions augmented by internal company documents, leaked State Department cables, Freedom of Information disclosures and company whistle*-blowers, combine to cast an unwelcome spotlight on the toxic empire whose profits finance the modern GOP.
Under the nearly five-decade reign of CEO Charles Koch, the company has paid out record civil and criminal environmental penalties. And in 1999, a jury handed down to Koch's pipeline company what was then the largest wrongful-death judgment of its type in U.S. history, resulting from the explosion of a defective pipeline that incinerated a pair of Texas teenagers.
The volume of Koch Industries' toxic output is staggering. According to the University of Massachusetts Amherst's Political Economy Research Institute, only three companies rank among the top 30 polluters of America's air, water and climate: ExxonMobil, American Electric Power and Koch Industries. Thanks in part to its 2005 purchase of paper-mill giant Georgia-Pacific, Koch Industries dumps more pollutants into the nation's waterways than General Electric and International Paper combined. The company ranks 13th in the nation for toxic air pollution. Koch's climate pollution, meanwhile, outpaces oil giants including Valero, Chevron and Shell. Across its businesses, Koch generates 24 million metric tons of greenhouse gases a year.
Related [URL="http://www.rollingstone.com/politics/news/three-new-ways-the-koch-brothers-are-screwing-america-20140604"] Three New Ways the Koch Brothers Are Screwing America
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For Koch, this license to pollute amounts to a perverse, hidden subsidy. The cost is borne by communities in cities like Port Arthur, Texas, where a Koch-owned facility produces as much as 2 billion pounds of petrochemicals every year. In March, Koch signed a consent decree with the Department of Justice requiring it to spend more than $40 million to bring this plant into compliance with the Clean Air Act.
The toxic history of Koch Industries is not limited to physical pollution. It also extends to the company's business practices, which have been the target of numerous federal investigations, resulting in several indictments and convictions, as well as a whole host of fines and penalties.
And in one of the great ironies of the Obama years, the president's financial-regulatory reform seems to benefit Koch Industries. The company is expanding its high-flying trading empire precisely as Wall Street banks facing tough new restrictions, which Koch has largely escaped are backing away from commodities speculation.
It is often said that the Koch brothers are in the oil business. That's true as far as it goes but Koch Industries is not a major oil producer. Instead, the company has woven itself into every nook of the vast industrial web that transforms raw fossil fuels into usable goods. Koch-owned businesses trade, transport, refine and process fossil fuels, moving them across the world and up the value chain until they become things we forgot began with hydrocarbons: fertilizers, Lycra, the innards of our smartphones.
The company controls at least four oil refineries, six ethanol plants, a natural-gas-fired power plant and 4,000 miles of pipeline. Until recently, Koch refined roughly five percent of the oil burned in America (that percentage is down after it shuttered its 85,000-barrel-per-day refinery in North Pole, Alaska, owing, in part, to the discovery that a toxic solvent had leaked from the facility, fouling the town's groundwater). From the fossil fuels it refines, Koch also produces billions of pounds of petrochemicals, which, in turn, become the feedstock for other Koch businesses. In a journey across Koch Industries, what enters as a barrel of West Texas Intermediate can exit as a Stainmaster carpet.
Koch's hunger for growth is insatiable: Since 1960, the company brags, the value of Koch Industries has grown 4,200-fold, outpacing the Standard & Poor's index by nearly 30 times. On average, Koch projects to double its revenue every six years. Koch is now a key player in the fracking boom that's vaulting the United States past Saudi Arabia as the world's top oil producer, even as it's endangering America's groundwater. In 2012, a Koch subsidiary opened a pipeline capable of carrying 250,000 barrels a day of fracked crude from South Texas to Corpus Christi, where the company owns a refinery complex, and it has announced plans to further expand its Texas pipeline operations. In a recent acquisition, Koch bought Frac-Chem, a top provider of hydraulic fracturing chemicals to drillers. Thanks to the Bush administration's anti-regulatory* agenda which Koch Industries helped craft Frac-Chem's chemical cocktails, injected deep under the nation's aquifers, are almost entirely exempt from the Safe Drinking Water Act. A 1996 explosion of a Koch-owned pipeline in Texas killed two teens. (Photo: National Transportation Safety Board)
Koch is also long on the richest but also the dirtiest and most carbon-polluting oil deposits in North America: the tar sands of Alberta. The company's Pine Bend refinery, near St. Paul, Minnesota, processes nearly a quarter of the Canadian bitumen exported to the United States which, in turn, has created for Koch Industries a lucrative sideline in petcoke exports. Denser, dirtier and cheaper than coal, petcoke is the dregs of tar-sands refining. U.S. coal plants are largely forbidden from burning petcoke, but it can be profitably shipped to countries with lax pollution laws like Mexico and China. One of the firm's subsidiaries, Koch Carbon, is expanding its Chicago terminal operations to receive up to 11 million tons of petcoke for global export. In June, the EPA noted the facility had violated the Clean Air Act with petcoke particulates that endanger the health of South Side residents. "We dispute that the two elevated readings" behind the EPA notice of violation "are violations of anything," Koch's top lawyer, Mark Holden, told Rolling Stone, insisting that Koch Carbon is a good neighbor.
Over the past dozen years, the company has quietly acquired leases for 1.1 million acres of Alberta oil fields, an area larger than Rhode Island. By some estimates, Koch's direct holdings nearly double ExxonMobil's and nearly triple Shell's. In May, Koch Oil Sands Operating LLC of Calgary, Alberta, sought permits to embark on a multi-billion*dollar tar-sands-extraction operation. This one site is projected to produce 22 million barrels a year more than a full day's supply of U.S. oil.
Charles Koch, the 78-year-old CEO and chairman of the board of Koch Industries, is inarguably a business savant. He presents himself as a man of moral clarity and high integrity. "The role of business is to produce products and services in a way that makes people's lives better," he said recently. "It cannot do so if it is injuring people and harming the environment in the process."
The Koch family's lucrative blend of pollution, speculation, law-bending and self-righteousness stretches back to the early 20th century, when Charles' father first entered the oil business. Fred C. Koch was born in 1900 in Quanah, Texas a sunbaked patch of prairie across the Red River from Oklahoma. Fred was the second son of Hotze "Harry" Koch, a Dutch immigrant who as recalled in Koch literature ran "a modest newspaper business" amid the dusty poverty of Quanah. In the family legend, Fred Koch emerged from the nothing of the Texas range to found an empire. But like many stories the company likes to tell about itself, this piece of Koch*lore takes liberties with the truth. Fred was not a simple country boy, and his father was not just a small-town publisher. Harry Koch was also a local railroad baron who used his newspaper to promote the Quanah, Acme & Pacific railways. A director and founding shareholder of the company, Harry sought to build a rail line across Texas to El Paso. He hoped to turn Quanah into "the most important railroad center in northwest Texas and a metropolitan city of first rank." He may not have fulfilled those ambitions, but Harry did build up what one friend called "a handsome pile of dinero."
Harry was not just the financial springboard for the Koch dynasty, he was also its wellspring of far-right politics. Harry editorialized against fiat money, demanded hangings for "habitual criminals" and blasted Social Security as inviting sloth. At the depths of the Depression, he demanded that elected officials in Washington should stop trying to fix the economy: "Business," he wrote, "has always found a way to overcome various recessions."
In the company's telling, young Fred was an innovator whose inventions helped revolutionize the oil industry. But there is much more to this story. In its early days, refining oil was a dirty and wasteful practice. But around 1920, Universal Oil Products introduced a clean and hugely profitable way to "crack" heavy crude, breaking it down under heat and heavy pressure to boost gasoline yields. In 1925, Fred, who earned a degree in chemical engineering from MIT, partnered with a former Universal engineer named Lewis Winkler and designed a near carbon copy of the Universal cracking apparatus making only tiny, unpatentable tweaks. Relying on family connections, Fred soon landed his first client an Oklahoma refinery owned by his maternal uncle L.B. Simmons. In a flash, Winkler-Koch Engineering Co. had contracts to install its knockoff cracking equipment all over the heartland, undercutting Universal by charging a one-time fee rather than ongoing royalties.
It was a boom business. That is, until Universal sued in 1929, accusing Winkler*Koch of stealing its intellectual property. With his domestic business tied up in court, Fred started looking for partners abroad and was soon doing business in the Soviet Union, where leader Joseph Stalin had just launched his first Five Year Plan. Stalin sought to fund his country's industrialization by selling oil into the lucrative European export market. But the Soviet Union's reserves were notoriously hard to refine. The USSR needed cracking technology, and the Oil Directorate of the Supreme Council of the National Economy took a shining to Winkler-Koch primarily because Koch's oil-industry competitors were reluctant to do business with totalitarian Communists. Outside its London offices, protesters gather. (Photo: P.Wolmuth/REPORT DIGITAL-REA/Re)
Between 1929 and 1931, Winkler-Koch built 15 cracking units for the Soviets. Although Stalin's evil was no secret, it wasn't until Fred visited the Soviet Union, that these dealings seemed to affect his conscience. "I went to the USSR in 1930 and found it a land of hunger, misery and terror," he would later write. Even so, he agreed to give the Soviets the engineering know-how they would need to keep building more.
Back home, Fred was busy building a life of baronial splendor. He met his wife, Mary, the Wellesley-educated daughter of a Kansas City surgeon, on a polo field and soon bought 160 acres across from the Wichita Country Club, where they built a Tudor*style mansion. As chronicled in Sons of Wichita, Daniel Schulman's investigation of the Koch dynasty, the compound was quickly bursting with princes: Frederick arrived in 1933, followed by Charles in 1935 and twins David and Bill in 1940. Fred Koch lorded over his domain. "My mother was afraid of my father," said Bill, as were the four boys, especially first-born Frederick, an artistic kid with a talent for the theater. "Father wanted to make all his boys into men, and Freddie couldn't relate to that regime," Charles recalled. Frederick got shipped East to boarding school and was all but disappeared from Wichita.
With Frederick gone, Charles forged a deep alliance with David, the more athletic and assertive of the young twins. "I was closer with David because he was better at everything," Charles has said.
Fred Koch's legal battle with Universal would drag on for nearly a quarter-century. In 1934, a lower court ruled that Winkler-Koch had infringed on Universal's technology. But that judgment would be vacated, after it came out in 1943 that Universal had bought off one of the judges* handling the appeal. A year later, the Supreme Court decided that Fred's cracker, by virtue of small technical differences, did not violate the Universal patent. Fred countersued on antitrust grounds, arguing that Universal had wielded patents anti-competitively. He'd win a $1.5 million settlement in 1952.
Around that time, Fred had built a domestic oil empire under a new company eventually called Rock Island Oil & Refining, transporting crude from wellheads to refineries by truck or by pipe. In those later years, Fred also became a major benefactor and board member of the John Birch Society, the rabidly anti-communist organization founded in 1958 by candy magnate and virulent racist Robert Welch. Bircher publications warned that the Red endgame was the creation of the "Negro Soviet* Republic" in the Deep South. In his own writing, Fred described integration as a Red plot to "enslave both the white and black man."
Like his father, Charles Koch attended MIT. After he graduated in 1959 with two master's degrees in engineering, his father issued an ultimatum: Come back to Wichita or I'll sell the business. "Papa laid it on the line," recalled David. So Charles returned home, immersing himself in his father's world not simply joining the John Birch Society, but also opening a Bircher bookstore. The Birchers had high hopes for young Charles. As Koch family friend Robert Love wrote in a letter to Welch: "Charles Koch can, if he desires, finance a large operation, however, he must continually be brought along."
But Charles was already falling under the sway of a charismatic radio personality named Robert LeFevre, founder of the Freedom School, a whites-only* libertarian boot camp in the foothills above Colorado Springs, Colorado. LeFevre preached a form of anarchic capitalism in which the individual should be freed from almost all government power. Charles soon had to make a choice. While the Birchers supported the Vietnam War, his new guru was a pacifist who equated militarism with out-of-control state power. LeFevre's stark influence on Koch's thinking is crystallized in a manifesto Charles wrote for the Libertarian Review in the 1970s, recently unearthed by Schulman, titled "The Business Community: Resisting Regulation." Charles lays out principles that gird today's Tea Party movement. Referring to regulation as "totalitarian," the 41-year-old Charles claimed business leaders had been "hoodwinked" by the notion that regulation is "in the public interest." He advocated the "barest possible obedience" to regulation and implored, "Do not cooperate voluntarily, instead, resist whenever and to whatever extent you legally can in the name of justice."
After his father died in 1967, Charles, now in command of the family business, renamed it Koch Industries. It had grown into one of the 10 largest privately owned firms in the country, buying and selling some 80 million barrels of oil a year and operating 3,000 miles of pipeline. A black-diamond skier and white-water kayaker, Charles ran the business with an adrenaline junkie's aggressiveness. The company would build pipelines to promising oil fields without a contract from the producers and park tanker trucks beside wildcatters' wells, waiting for the first drops of crude to flow. "Our willingness to move quickly, absorb more risk," Charles would write, "enabled us to become the leading crude-oil*gathering company."
Charles also reconnected with one of his father's earliest insights: There's big money in dirty oil. In the late 1950s, Fred Koch had bought a minority stake in a Minnesota refinery that processed heavy Canadian crude. "We could run the lousiest crude in the world," said his business partner J. Howard Marshall II the future Mr. Anna Nicole Smith. Sensing an opportunity for huge profits, Charles struck a deal to convert Marshall's ownership stake in the refinery into stock in Koch Industries. Suddenly the majority owner, the company soon bought the rest of the refinery outright.
Almost from the beginning, Koch Industries' risk-taking crossed over into recklessness. The OPEC oil embargo hit the company hard. Koch had made a deal giving the company the right to buy a large share of Qatar's export crude. At the time, Koch owned five supertankers and had chartered many others. When the embargo hit, Koch had upward of half a billion dollars in exposure to tankers and couldn't deliver OPEC oil to the U.S. market, creating what Charles has called "large losses." Soon, Koch Industries was caught overcharging American customers. The Ford administration in the summer of 1974 compelled Koch to pay out more than $20 million in rebates and future price reductions.
Koch Industries' manipulations were about to get more audacious. In the late 1970s, the federal government parceled out exploration tracts, using a lottery in which anyone could score a 10-year lease at just $1 an acre a game of chance that gave wildcat prospectors the same shot as the biggest players. Koch didn't like these odds, so it enlisted scores of frontmen to bid on its behalf. In the event they won the lottery, they would turn over their leases to the company. In 1980, Koch Industries pleaded guilty to five felonies in federal court, including conspiracy to commit fraud. The Koch family, mid-1950s. (Photo: Wichita State University Libraries)
With Republicans and Democrats united in regulating the oil business, Charles had begun throwing his wealth behind the upstart Libertarian Party, seeking to transform it into a viable third party. Over the years, he would spend millions propping up a league of affiliated think tanks and front groups a network of Libertarians that became known as the "Kochtopus."
Charles even convinced David to stand as the Libertarian Party's vice-presidential candidate in 1980 a clever maneuver that allowed David to lavish unlimited money on his own ticket. The Koch-funded 1980 platform was nakedly in the brothers' self-interest slashing federal regulatory agencies, offering a 50 percent tax break to top earners, ending the "cruel and unfair" estate tax and abolishing a $16 billion "windfall profits" tax on the oil industry. The words of Libertarian presidential candidate Ed Clark's convention speech in Los Angeles ring across the decades: "We're sick of taxes," he declared. "We're ready to have a very big tea party." In a very real sense, the modern Republican Party was on the ballot that year and it was running against Ronald Reagan.
Charles' management style and infatuation with far-right politics were endangering his grip on the company. Bill believed his brothers' political spending was bad for business. "Pretty soon, we would get the reputation that the company and the Kochs were crazy," he said.
In late 1980, with Frederick's backing, Bill launched an unsuccessful battle for control of Koch Industries, aiming to take the company public. Three years later, Charles and David bought out their brothers for $1.1 billion. But the speed with which Koch Industries paid off the buyout debt left Bill convinced, but never quite able to prove, he'd been defrauded. He would spend the next 18 years suing his brothers, calling them "the biggest crooks in the oil industry."
Bill also shared these concerns with the federal government. Thanks in part to his efforts, in 1989 a Senate committee investigating Koch business with Native Americans would describe Koch Oil tactics as "grand larceny." In the late 1980s, Koch was the largest purchaser of oil from American tribes. Senate investigators suspected the company was making off with more crude from tribal oil fields than it measured and paid for. They set up a sting, sending an FBI agent to coordinate stakeouts of eight remote leases. Six of them were Koch operations, and the agents reported "oil theft" at all of them.
One of Koch's gaugers would refer to this as "volume enhancement." But in sworn testimony before a Texas jury, Phillip Dubose, a former Koch pipeline manager, offered a more succinct definition: "stealing." The Senate committee concluded that over the course of three years Koch "pilfered" $31 million in Native oil; in 1988, the value of that stolen oil accounted for nearly a quarter of the company's crude-oil profits. "I don't know how the company could have figures like that," the FBI agent testified, "and not have top management know that theft was going on." In his own testimony, Charles offered that taking oil readings "is a very uncertain art" and that his employees "aren't rocket scientists." Koch's top lawyer would later paint the company as a victim of Senate "McCarthyism."
By this time, the Kochs had soured on the Libertarian Party, concluding that control of a small party would never give them the muscle they sought in the nation's capital. Now they would spend millions in efforts to influence and ultimately take over the GOP. The work began close to home; the Kochs had become dedicated patrons of Sen. Bob Dole of Kansas, who ran interference for Koch Industries in Washington. On the Senate floor in March 1990, Dole gloatingly cautioned against a "rush to judgment" against Koch, citing "very real concerns about some of the evidence on which the special committee was basing its findings." A grand jury investigated the claims but disbanded in 1992, without issuing indictments.
Arizona Sen. Dennis DeConcini was "surprised and disappointed" at the decision to drop the case. "Our investigation was some of the finest work the Senate has ever done," he said. "There was an overwhelming case against Koch." But Koch did not avoid all punishment. Under the False Claims Act, which allows private citizens to file lawsuits on behalf of the government, Bill sued the company, accusing it of defrauding the feds of royalty income on its "volume*enhanced" purchases of Native oil. A jury concluded Koch had submitted more than 24,000 false claims, exposing Koch to some $214 million in penalties. Koch later settled, paying $25 million.
Self*interest continued to define Koch Industries' adventures in public policy. In the early 1990s, in a high-profile initiative of the first-term Clinton White House, the administration was pushing for a levy on the heat content of fuels. Known as the BTU tax, it was the earliest attempt by the federal government to recoup damages from climate polluters. But Koch Industries could not stand losing its most valuable subsidy: the public policy that allowed it to treat the atmosphere as an open sewer. Richard Fink, head of Koch Company's Public Sector and the longtime mastermind of the Koch brothers' political empire, confessed to The Wichita Eagle in 1994 that Koch could not compete if it actually had to pay for the damage it did to the environment: "Our belief is that the tax, over time, may have destroyed our business."
To fight this threat, the Kochs funded a "grassroots" uprising one that foreshadowed the emergence, decades later, of the Tea Party. The effort was run through Citizens for a Sound Economy, to which the brothers had spent a decade giving nearly $8 million to create what David Koch called "a sales force" to communicate the brothers' political agenda through town hall meetings and anti-tax rallies designed to look like spontaneous demonstrations. In 1994, David Koch bragged that CSE's campaign "played a key role in defeating the administration's plans for a huge and cumbersome BTU tax."
Despite the company's increasingly sophisticated political and public-relations operations, Charles' philosophy of regulatory resistance was about to bite Koch Industries in the form of record civil and criminal financial penalties imposed by the Environmental Protection Agency.
Koch entered the 1990s on a pipeline-buying spree. By 1994, its network measured 37,000 miles. According to sworn testimony from former Koch employees, the company operated its pipelines with almost complete disregard for maintenance. As Koch employees understood it, this was in keeping with their CEO's trademarked business philosophy, Market*Based Management.
For Charles, MBM first communicated to employees in 1991 was an attempt to distill the business practices that had grown Koch into one of the largest oil businesses in the world. To incentivize workers, Koch gives employees bonuses that correlate to the value they create for the company. "Salary is viewed only as an advance on compensation for value," Koch wrote, "and compensation has an unlimited upside."
To prevent the stagnation that can often bog down big enterprises, Koch was also determined to incentivize risk-taking. Under MBM, Koch Industries books opportunity costs "profits foregone from a missed opportunity" as though they were actual losses on the balance sheet. Koch employees who play it safe, in other words, can't strike it rich.
On paper, MBM sounds innovative and exciting. But in Koch's hyperaggressive corporate culture, it contributed to a series of environmental disasters. Applying MBM to pipeline maintenance, Koch employees calculated that the opportunity cost of shutting down equipment to ensure its safety was greater than the profit potential of pushing aging pipe to its limits.
The fact that preventive pipeline maintenance is required by law didn't always seem to register. Dubose, a 26-year Koch veteran who oversaw pipeline areas in Louisiana, would testify about the company's lax attitude toward maintenance. "It was a question of money. It would take away from our profit margin." The testimony of another pipeline manager would echo that of Dubose: "Basically, the philosophy was 'If it ain't broke, don't work on it.'"
When small spills occurred, Dubose testified, the company would cover them up. He recalled incidents in which the company would use the churn of a tugboat's engine to break up waterborne spills and "just kind of wash that thing on down, down the river." On land, Dubose said, "They might pump it [the leaked oil] off into a drum, then take a shovel and just turn the earth over." When larger spills were reported to authorities, the volume of the discharges was habitually low-balled, according to Dubose.
Managers pressured employees to falsify pipeline-maintenance records filed with federal authorities; in a sworn affidavit, pipeline worker Bobby Conner recalled arguments with his manager over Conner's refusal to file false reports: "He would always respond with anger," Conner said, "and tell me that I did not know how to be a Koch employee." Conner was fired and later settled a wrongful-termination suit with Koch Gateway Pipeline. Dubose testified that Charles was not in the dark about the company's operations. "He was in complete control," Dubose said. "He was the one that was line-driving this Market-Based Management at meetings."
Before the worst spill from this time, Koch employees had raised concerns about the integrity of a 1940s-era pipeline in South Texas. But the company not only kept the line in service, it increased the pressure to move more volume. When a valve snapped shut in 1994, the brittle pipeline exploded. More than 90,000 gallons of crude spewed into Gum Hollow Creek, fouling surrounding marshlands and both Nueces and Corpus Christi bays with a 12-mile oil slick.
By 1995, the EPA had seen enough. It sued Koch for gross violations of the Clean Water Act. From 1988 through 1996, the company's pipelines spilled 11.6 million gallons of crude and petroleum products. Internal Koch records showed that its pipelines were in such poor condition that it would require $98 million in repairs to bring them up to industry standard.
Ultimately, state and federal agencies forced Koch to pay a $30 million civil penalty then the largest in the history of U.S. environmental law for 312 spills across six states. Carol Browner, the former EPA administrator, said of Koch, "They simply did not believe the law applied to them." This was not just partisan rancor. Texas Attorney General John Cornyn, the future Republican senator, had joined the EPA in bringing suit against Koch. "This settlement and penalty warn polluters that they cannot treat oil spills simply as the cost of doing business," Cornyn said. (The Kochs seem to have no hard feelings toward their one-time tormentor; a lobbyist for Koch was the number-two bundler for Cornyn's primary campaign this year.)
Koch wasn't just cutting corners on its pipelines. It was also violating federal environmental law in other corners of the empire. Through much of the 1990s at its Pine Bend refinery in Minnesota, Koch spilled up to 600,000 gallons of jet fuel into wetlands near the Mississippi River. Indeed, the company was treating the Mississippi as a sewer, illegally dumping ammonia-laced wastewater into the river even increasing its discharges on weekends when it knew it wasn't being monitored. Koch Petroleum Group eventually pleaded guilty to "negligent discharge of a harmful quantity of oil" and "negligent violation of the Clean Water Act," was ordered to pay a $6 million fine and $2 million in remediation costs, and received three years' probation. This facility had already been declared a Superfund site in 1984.
In 2000, Koch was hit with a 97-count indictment over claims it violated the Clean Air Act by venting massive quantities of benzene at a refinery in Corpus Christi and then attempted to cover it up. According to the indictment, Koch filed documents with Texas regulators indicating releases of just 0.61 metric tons of benzene for 1995 one-tenth of what was allowed under the law. But the government alleged that Koch had been informed its true emissions that year measured 91 metric tons, or 15 times the legal limit. Charles Koch (Photo: Larry W. Smith / Polaris)
By the time the case came to trial, however, George W. Bush was in office and the indictment had been significantly pared down Koch faced charges on only seven counts. The Justice Department settled in what many perceived to be a sweetheart deal, and Koch pleaded guilty to a single felony count for covering up the fact that it had disconnected a key pollution-control device and did not measure the resulting benzene emissions receiving five years' probation. Despite skirting stiffer criminal prosecution, Koch was handed $20 million in fines and reparations another historic judgment.
On the day before Danielle Smalley was to leave for college, she and her friend Jason Stone were hanging out in her family's mobile home. Seventeen years old, with long chestnut hair, Danielle began to feel nauseated. "Dad," she said, "we smell gas." It was 3:45 in the afternoon on August 24th, 1996, near Lively, Texas, some 50 miles southeast of Dallas. The Smalleys were too poor to own a telephone. So the teens jumped into her dad's 1964 Chevy pickup to alert the authorities. As they drove away, the truck stalled where the driveway crossed a dry creek bed. Danielle cranked the ignition, and a fireball engulfed the truck. "You see two children burned to death in front of you you never forget that," Danielle's father, Danny, would later tell reporters.
Unknown to the Smalleys, a decrepit Koch pipeline carrying liquid butane literally, lighter fluid ran through their subdivision. It had ruptured, filling the creek bed with vapor, and the spark from the pickup's ignition had set off a bomb. Federal investigators documented both "severe corrosion" and "mechanical damage" in the pipeline. A National Transportation Safety Board report would cite the "failure of Koch Pipeline Company LP to adequately protect its pipeline from corrosion."
Installed in the early Eighties, the pipeline had been out of commission for three years. When Koch decided to start it up again in 1995, a water-pressure test had blown the pipe open. An inspection of just a few dozen miles of pipe near the Smal*ley home found 538 corrosion defects. The industry's term of art for a pipeline in this condition is Swiss cheese, according to the testimony of an expert witness "essentially the pipeline is gone."
Koch repaired only 80 of the defects enough to allow the pipeline to withstand another pressure check and began running explosive fluid down the line at high pressure in January 1996. A month later, employees discovered that a key anti*corrosion system had malfunctioned, but it was never fixed. Charles Koch had made it clear to managers that they were expected to slash costs and boost profits. In a sternly worded memo that April, Charles had ordered his top managers to cut expenditures by 10 percent "through the elimination of waste (I'm sure there is much more waste than that)" in order to increase pre-tax earnings by $550 million a year.
The Smalley trial underscored something Bill Koch had said about the way his brothers ran the company: "Koch Industries has a philosophy that profits are above everything else." A former Koch manager, Kenoth Whitstine, testified to incidents in which Koch Industries placed profits over public safety. As one supervisor had told him, regulatory fines "usually didn't amount to much" and, besides, the company had "a stable full of lawyers in Wichita that handled those situations." When Whitstine told another manager he was concerned that unsafe pipelines could cause a deadly accident, this manager said that it was more profitable for the company to risk litigation than to repair faulty equipment. The company could "pay off a lawsuit from an incident and still be money ahead," he said, describing the principles of MBM to a T.
At trial, Danny Smalley asked for a judgment large enough to make the billionaires feel pain: "Let Koch take their child out there and put their children on the pipeline, open it up and let one of them die," he told the jury. "And then tell me what that's worth." The jury was emphatic, awarding Smalley $296 million then the largest wrongful-death judgment in American legal history. He later settled with Koch for an undisclosed sum and now runs a pipeline-safety foundation in his daughter's name. He declined to comment for this story. "It upsets him too much," says an associate.
The official Koch line is that scandals that caused the company millions in fines, judgments and penalties prompted a change in Charles' attitude of regulatory resistance. In his 2007 book, The Science of Success, he begrudgingly acknowledges his company's recklessness. "While business was becoming increasingly regulated," he reflects, "we kept thinking and acting as if we lived in a pure market economy. The reality was far different."
Charles has since committed Koch Industries to obeying federal regulations. "Even when faced with laws we think are counterproductive," he writes, "we must first comply." Underscoring just how out of bounds Koch had ventured in its corporate culture, Charles admits that "it required a monumental undertaking to integrate compliance into every aspect of the company." In 2000, Koch Petroleum Group entered into an agreement with the EPA and the Justice Department to spend $80 million at three refineries to bring them into compliance with the Clean Air Act. After hitting Koch with a $4.5 million penalty, the EPA granted the company a "clean slate" for certain past violations.
Then George W. Bush entered the White House in 2001, his campaign fattened with Koch money. Charles Koch may decry cronyism as "nothing more than welfare for the rich and powerful," but he put his company to work, hand in glove, with the Bush White House. Correspondence, contacts and visits among Koch Industries representatives and the Bush White House generated nearly 20,000 pages of records, according to a Rolling Stone FOIA request of the George W. Bush Presidential Library. In 2007, the administration installed a fiercely anti-regulatory academic, Susan Dudley, who hailed from the Koch-funded Mercatus Center at George Mason University, as its top regulatory official.
Today, Koch points to awards it has won for safety and environmental excellence. "Koch companies have a strong record of compliance," Holden, Koch's top lawyer, tells Rolling Stone. "In the distant past, when we failed to meet these standards, we took steps to ensure that we were building a culture of 10,000 percent compliance, with 100 percent of our employees complying 100 percent." To reduce its liability, Koch has also unwound its pipeline business, from 37,000 miles in the late 1990s to about 4,000 miles. Of the much smaller operation, he adds, "Koch's pipeline practice and operations today are the best in the industry."
But even as compliance began to improve among its industrial operations, the company aggressively expanded its trading activities into the Wild West frontier of risky financial instruments. In 2000, the Commodity Futures Modernization Act had exempted many of these products from regulation, and Koch Industries was among the key players shaping that law. Koch joined up with Enron, BP, Mobil and J. Aron a division of Goldman Sachs then run by Lloyd Blankfein in a collaboration called the Energy Group. This corporate alliance fought to prohibit the federal government from policing oil and gas derivatives. "The importance of derivatives for the Energy Group companies . . . cannot be overestimated," the group's lawyer wrote to the Commodity Futures Trading Commission in 1998. "The success of this business can be completely undermined by . . . a costly regulatory regime that has no place in the energy industry."
Koch had long specialized in "over-the-counter" or OTC trades private, unregulated contracts not disclosed on any centralized exchange. In its own letter to the CFTC, Koch identified itself as "a major participant in the OTC derivatives market," adding that the company not only offered "risk-management tools for its customers" but also traded "for its own account." Making the case for what would be known as the Enron Loophole, Koch argued that any big firm's desire to "maintain a good reputation" would prevent "widespread abuses in the OTC derivatives market," a darkly hilarious claim, given what would become not only of Enron, but also Bear Stearns, Lehman Brothers and AIG.
The Enron Loophole became law in December 2000 pushed along by Texas Sen. Phil Gramm, giving the Energy Group exactly what it wanted. "It completely exempted energy futures from regulation," says Michael Greenberger, a former director of trading and markets at the CFTC. "It wasn't a matter of regulators not enforcing manipulation or excessive speculation limits this market wasn't covered at all. By law."
Before its spectacular collapse, Enron would use this loophole in 2001 to help engineer an energy crisis in California, artificially constraining the supply of natural gas and power generation, causing price spikes and rolling blackouts. This blatant and criminal market manipulation has become part of the legend of Enron. But Koch was caught up in the debacle. The CFTC would charge that a partnership between Koch and the utility Entergy had, at the height of the California crisis, reported fake natural-gas trades to reporting firms and also "knowingly reported false prices and/or volumes" on real trades.
One of 10 companies punished for such schemes, Entergy-Koch avoided prosecution by paying a $3 million fine as part of a 2004 settlement with the CFTC, in which it did not admit guilt to the commission's charges but is barred from maintaining its innocence. David Koch (Photo: Alexis C. Glenn /Landov)
Trading, which had long been peripheral to the company's core businesses, soon took center stage. In 2002, the company launched a subsidiary, Koch Supply & Trading. KS&T got off to a rocky start. "A series of bad trades," writes a Koch insider, "boiled over in early 2004 when a large 'sure bet' crude-oil trade went south, resulting in a quick, multimillion loss." But Koch traders quickly adjusted to the reality that energy markets were no longer ruled just by supply and demand but by rich speculators trying to game the market. Revamping its strategy, Koch Industries soon began bragging of record profits. From 2003 to 2012, KS&T trading volumes exploded up 450 percent. By 2009, KS&T ranked among the world's top-five oil traders, and by 2011, the company billed itself as "one of the leading quantitative traders" though Holden now says it's no longer in this business.
Since Koch Industries aggressively expanded into high finance, the net worth of each brother has also exploded from roughly $4 billion in 2002 to more than $40 billion today. In that period, the company embarked on a corporate buying spree that has taken it well beyond petroleum. In 2005, Koch purchased Georgia Pacific for $21 billion, giving the company a familiar, expansive grip on the industrial web that transforms Southern pine into consumer goods from plywood sold at Home Depot to brand-name products like Dixie Cups and Angel Soft toilet paper. In 2013, Koch leapt into high technology with the $7 billion acquisition of Molex, a manufacturer of more than 100,000 electronics components and a top supplier to smartphone makers, including Apple.
Koch Supply & Trading makes money both from physical trades that move oil and commodities across oceans as well as in "paper" trades involving nothing more than high-stakes bets and cash. In paper trading, Koch's products extend far beyond simple oil futures. Koch pioneered, for sale to hedge funds, "volatility swaps," in which the actual price of crude is irrelevant and what matters is only the "magnitude of daily fluctuations in prices." Steve Mawer, until recently the president of KS&T, described parts of his trading operation as "black-box stuff."
Like a casino that bets at its own craps table, Koch engages in "proprietary trading" speculating for the company's own bottom line. "We're like a hedge fund and a dealer at the same time," bragged Ilia Bouchouev, head of Koch's derivatives trading in 2004. "We can both make markets and speculate." The company's many tentacles in the physical oil business give Koch rich insight into market conditions and disruptions that can inform its speculative bets. When oil prices spiked to record heights in 2008, Koch was a major player in the speculative markets, according to documents leaked by Vermont Sen. Bernie Sanders, with trading volumes rivaling Wall Street giants like Citibank. Koch rode a trader-driven frenzy detached from actual supply and demand that drove prices above $147 a barrel in July 2008, battering a global economy about to enter a free fall.
Only Koch knows how much money Koch reaped during this price spike. But, as a proxy, consider the $20 million Koch and its subsidiaries spent lobbying Congress in 2008 before then, its biggest annual lobbying expense had been $5 million seeking to derail a raft of consumer-protection bills, including the Federal Price Gouging Prevention Act, the Stop Excessive Energy Speculation Act of 2008, the Prevent Unfair Manipulation of Prices Act of 2008 and the Close the Enron Loophole Act.
In comments to the Federal Trade Commission, Koch lobbyists defended the company's right to rack up fantastic profits at the expense of American consumers. "A mere attempt to maximize profits cannot constitute market manipulation," they wrote, adding baldly, "Excessive profits in the face of shortages are desirable."
When the global economy crashed in 2008, so did oil prices. By December, crude was trading more than $100 lower per barrel than it had just months earlier around $30. At the same time, oil traders anticipated that prices would eventually rebound. Futures contracts for delivery of oil in December 2009 were trading at nearly $55 per barrel. When future delivery is more valuable than present inventory, the market is said to be "in contango." Koch exploited the contango market to the hilt. The company leased nine supertankers and filled them with cut-rate crude and parked them quietly offshore in the Gulf of Mexico, banking virtually risk-free profits by selling contracts for future delivery.
All in, Koch took about 20 million barrels of oil off the market, putting itself in a position to bet on price disruptions the company itself was creating. Thanks to these kinds of trading efforts, Koch could boast in a 2009 review that "the performance of Koch Supply & Trading actually grew stronger last year as the global economy worsened." The cost for those risk-free profits was paid by consumers at the pump. Estimates pegged the cost of the contango trade by Koch and others at up to 40 cents a gallon.
Artificially constraining oil supplies is not the only source of dark, unregulated profit for Koch Industries. In the years after George W. Bush branded Iran a member of the "Axis of Evil," the Koch brothers profited from trade with the state sponsor of terror and reckless would-be nuclear power. For decades, U.S. companies have been forbidden from doing business with the Ayatollahs, but Koch Industries exploited a loophole in 1996 sanctions that made it possible for foreign subsidiaries of U.S. companies to do some business in Iran.
In the ensuing years, according to Bloomberg Markets, the German and Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment for oil fields and refineries, won lucrative contracts to supply Iran's Zagros plant, the largest methanol plant in the world. And thanks in part to Koch, methanol is now one of Iran's leading non-oil exports. "Every single chance they had to do business with Iran, or anyone else, they did," said Koch whistle-blower George Bentu. Having signed on to work for a company that lists "integrity" as its top value, Bentu added, "You feel totally betrayed. Everything Koch stood for was a lie."
Koch reportedly kept trading with Tehran until 2007 after the regime was exposed for supplying IEDs to Iraqi insurgents killing U.S. troops. According to lawyer Holden, Koch has since "decided that none of its subsidiaries would engage in trade involving Iran, even where such trade is permissible under U.S. law."
These days, Koch's most disquieting foreign dealings are in Canada, where the company has massive investments in dirty tar sands. The company's 1.1 million acres of leases in northern Alberta contain reserves of economically recoverable oil numbering in the billions of barrels. With these massive leaseholdings, Koch is poised to continue profiting from Canadian crude whether or not the Keystone XL pipeline gains approval, says Andrew Leach, an energy and environmental economist at the business school of the University of Alberta.
Counterintuitively, approval of Keystone XL could actually harm one of Koch's most profitable businesses its Pine Bend refinery in Minnesota. Because tar-sands crude presently has no easy outlet to the global market, there's a glut of Canadian oil in the midcontinent, and Koch's refinery is a beneficiary of this oversupply; the resulting discount can exceed $20 a barrel compared to conventional crude. If it is ever built, the Keystone XL pipeline will provide a link to Gulf Coast refineries and thus the global export market, which would erase much of that discount and eat into company profit margins.
Leach says Koch Industries' tar-sands leaseholdings have them hedged against the potential approval of Keystone XL. The pipeline would increase the value of Canadian tar-sands deposits overnight. Koch could then profit handsomely by flipping its leases to more established producers. "Optimizing asset value through trading," Koch literature says of these and other holdings, is a "key" company strategy.
The one truly bad outcome for Koch would be if Keystone XL were to be defeated, as many environmentalists believe it must be. "If the signal that sends is that no new pipelines will be built across the U.S. border for carrying oil-sands product," Leach says, "that's going to have an impact not just on Koch leases, but on everybody's asset value in oil sands." Ironically, what's best for Koch's tar-sands interests is what the Obama administration is currently delivering: "They're actually ahead if Keystone XL gets delayed a while but hangs around as something that still might happen," Leach says.
The Dodd-Frank bill was supposed to put an end to economy*endangering speculation in the $700 trillion global derivatives market. But Koch has managed to defend and even expand its turf, trading in largely unregulated derivatives, once dubbed "financial weapons of mass destruction" by billionaire Warren Buffett.
In theory, the Enron Loophole is no longer open the government now has the power to police manipulation in the market for energy derivatives. But the Obama administration has not yet been able to come up with new rules that actually do so. In 2011, the CFTC mandated "position limits" on derivative trades of oil and other commodities. These would have blocked any single speculator from owning futures contracts representing more than a quarter of the physical market reducing the danger of manipulation. As part of the International Swaps and Derivatives Association, which also reps many Wall Street giants including Goldman Sachs and JPMorgan Chase, Koch fought these new restrictions. ISDA sued to block the position limits and won in court in September 2012. Two years later, CFTC is still spinning its wheels on a replacement. Industry traders like Koch are, Greenberger says, "essentially able to operate as though the Enron Loophole were still in effect."
Koch is also reaping the benefits from Dodd-Frank's impacts on Wall Street. The so-called Volcker Rule, implemented at the end of last year, bans investment banks from "proprietary trading" investing on their own behalf in securities and derivatives. As a result, many Wall Street banks are unloading their commodities-trading units. But Volcker does not apply to nonbank traders like Koch. They're now able to pick up clients who might previously have traded with JPMorgan. In its marketing materials for its trading operations, Koch boasts to potential clients that it can provide "physical and financial market liquidity at times when others pull back." Koch also likely benefits from loopholes that exempt the company from posting collateral for derivatives trades and allow it to continue trading swaps without posting the transactions to a transparent electronic exchange. Though competitors like BP and Cargill have registered with the CFTC as swaps dealers subjecting their trades to tightened regulation Koch conspicuously has not. "Koch is compliant with all CFTC regulations, including those relating to swaps dealers," says Holden, the Koch lawyer.
That a massive company with such a troubling record as Koch Industries remains unfettered by financial regulation should strike fear in the heart of anyone with a stake in the health of the American economy. Though Koch has cultivated a reputation as an economically conservative company, it has long flirted with danger. And that it has not suffered a catastrophic loss in the past 15 years would seem to be as much about luck as about skillful management.
The Kochs have brushed up against some of the major debacles of the crisis years. In 2007, as the economy began to teeter, Koch was gearing up to plunge into the market for credit default swaps, even creating an affiliate, Koch Financial Products, for that express purpose. KFP secured a AAA rating from Moody's and reportedly sought to buy up toxic assets at the center of the financial crisis at up to 50-times leverage. Ultimately, Koch Industries survived the experiment without losing its shirt.
More recently, Koch was exposed to the fiasco at MF Global, the disgraced brokerage firm run by former New Jersey Gov. Jon Corzine that improperly dipped into customer accounts to finance reckless bets on European debt. Koch, one of MF Global's top clients, reportedly told trading partners it was switching accounts about a month before the brokerage declared bankruptcy then the eighth-largest in U.S. history. Koch says the decision to pull its funds from MF Global was made more than a year before. While MF's small-fry clients had to pick at the carcass of Corzine's company to recoup their assets, Koch was already swimming free and clear.
Because it's private, no one outside of Koch Industries knows how much risk Koch is taking or whether it could conceivably create systemic risk, a concern raised in 2013 by the head of the Futures Industry Association. But this much is for certain: Because of the loopholes in financial-regulatory reform, the next company to put the American economy at risk may not be a Wall Street bank but a trading giant like Koch. In 2012, Gary Gensler, then CFTC chair, railed against the very loopholes Koch appears to be exploiting, raising the specter of AIG. "[AIG] had this massive risk built up in its derivatives just because it called itself an insurance company rather than a bank," Gensler said. When Congress adopted Dodd-Frank, Gensler added, it never intended to exempt financial heavy hitters just because "somebody calls themselves an insurance
In "the science of success," Charles Koch highlights the problems created when property owners "don't benefit from all the value they create and don't bear the full cost from whatever value they destroy." He is particularly concerned about the "tragedy of the commons," in which shared resources are abused because there's no individual accountability. "The biggest problems in society," he writes, "have occurred in those areas thought to be best controlled in common: the atmosphere, bodies of water, air. . . ."
But in the real world, Koch Industries has used its political might to beat back the very market-based mechanisms including a cap-and-trade market for carbon pollution needed to create the ownership rights for pollution that Charles says would improve the functioning of capitalism.
In fact, it appears the very essence of the Koch business model is to exploit breakdowns in the free market. Koch has profited precisely by dumping billions of pounds of pollutants into our waters and skies essentially for free. It racks up enormous profits from speculative trades lacking economic value that drive up costs for consumers and create risks for our economy.
The Koch brothers get richer as the costs of what Koch destroys are foisted on the rest of us in the form of ill health, foul water and a climate crisis that threatens life as we know it on this planet. Now nearing 80 owning a large chunk of the Alberta tar sands and using his billions to transform the modern Republican Party into a protection racket for Koch Industries' profits Charles Koch is not about to see the light. Nor does the CEO of one of America's most toxic firms have any notion of slowing down. He has made it clear that he has no retirement plans: "I'm going to ride my bicycle till I fall off." UPDATE: Koch Industries Responds to Rolling Stone And We Answer Back
Paul Zimmerman/WireImage; Bo Rader/Wichita Eagle/MCT via Getty Images
David and Charles Koch.
By Tim Dickinson | September 29, 2014 Koch Industries has written a lengthy response to our feature story on the company in the latest issue of Rolling Stone. In tweets the company apparently paid to promote, Koch bills this write-up as a "point-by-point response to Rolling Stone writer Tim Dickinson's dishonest and misleading story." The salient feature of Koch's response is that the company does not argue the core facts of our 9,000-word expose. Instead, Koch targets the messenger. Koch's top target here is not even Rolling Stone, but me, Tim Dickinson.
Related [URL="http://www.rollingstone.com/politics/news/inside-the-koch-brothers-toxic-empire-20140924"] Inside the Koch Brothers' Toxic Empire
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I find it, frankly, amusing that a company that has been convicted of six felonies and numerous misdemeanors; paid out tens of millions of dollars in fines; traded with Iran, and been so reckless in its business practices that two innocent teenagers ended up dead, attempts to impugn my integrity, and on the basis of my association with Mother Jones where I worked as an editor in the late 1990s and early 2000s, on a team that was twice nominated and once awarded a National Magazine Award for General Excellence.
Koch, in particular, takes umbrage with my reporting practices.
For the record: In the weeks prior to publication, beginning September 4th, Rolling Stone attempted to engage Koch Industries in a robust discussion of the issues raised in our reporting. Rolling Stone requested to interview CEO Charles Koch about his company's philosophy of Market Based Management; Ilia Bouchouev, who heads Koch's derivatives trading operations, about the company's trading practices; and top Koch lawyer Mark Holden about the company's significant legal and regulatory history.
The requests to speak to Charles Koch and Bouchouev were simply ignored. Ultimately, only Holden responded on the record, only via e-mail and only after Holden baselessly insinuated that I had been given an "opposition research" document dump from the liberal activist David Brock. (This is false.) From my perspective as a reporter, Koch Industries is the most hostile and paranoid organization I've ever engaged with and I've reported on Fox News. In a breach of ethics, Koch has also chosen to publish email correspondence characterizing the content of a telephone conversation that was, by Koch's own insistence, strictly off the record.
In an attempt to negotiate an on-the-record interview, Rolling Stone had sent Holden a series of discussion topics. Holden and the Koch communications team treated these general topics, instead, as though they were specific questions and provided the voluminous responses they have reproduced, inventively, as a Q&A on their website.
These responses were not "ignored," as Koch suggests. In part, they contain useful background information, and they informed my reporting of the story. But in the main, the Koch responses attempt to re-litigate closed cases incidents where judges, juries, and, in one case, a Senate Select Committee, have already had a final say. They only muddy waters that have been clarified by a considered legal process.
Where Koch attempted to provide additional context, it was frequently hairsplitting and obfuscatory. For example, in the case of the felony conviction at the Corpus Christi refinery, Holden insisted: "the case did not involve any penalty for benzene emissions." However the count that Koch pleaded guilty to April 2001 reads, in part: "defendant KOCH PETROLEUM GROUP, L.P., did knowingly and willfully falsify, conceal and cover up by trick, scheme and device material facts in a matter within the jurisdiction of the Texas Natural Resources Conservation Commission and the United States Environmental Protection agency, to wit... the fact that the defendant had failed to measure the level of benzene entering the aeration basin at the West Plant." [Emphasis added.] Rolling Stone readers are not served by reprinting, in full or in part, what can kindly be called Koch Industries' distortions.
Ironically, it is now Koch that accuses me of having written a "blatantly dishonest and misleading article." But in attempting to make that case, Koch itself continues to distort the record.
The chief "gotcha" point in Koch's write up regards the leak at the refinery it owns in North Pole, Alaska, contributing to the facility's shuttering this year. Koch writes: "He deceptively omits the undisputed facts that the off-site contamination existed long before Koch bought the refinery in 2004, that the contamination was not disclosed to Koch by the prior owner, and that once discovered Koch quickly and voluntarily began providing alternative water to the community."
The clear implication, in Koch's telling, is that the company is not the responsible party for the pollution in North Pole. This precisely contradicts two rulings by a state judge in Alaska, that Koch is solely responsible for the 2.5- by 3-mile plume of the refining solvent sulfolane that has fouled the groundwater for hundreds of residents there.
It is true, as Koch notes, that the refinery's sulfolane leak began under the previous owner. But the sulfolane leak continued under the ownership of Koch's refining subsidiary, Flint Hills, with the company's own documents reportedly estimating that 10,616 gallons of "high sulfolane-laden wastewater" leaked from a faulty sump system at the refinery from 2004, when Koch bought the plant, to 2009.
Koch's attempts to pin the refinery's pollution problem on the previous owner have gone nowhere in court. Contrary to Koch's claim that it took swift action to remediate the problem, the Alaska judge wrote that Koch had been warned of potential groundwater pollution and "failed to heed the advice it was given and failed to conduct a reasonable inquiry into the scope of the sulfolane contamination." The judge ruled that Koch's failure to seek redress from the previous owner within the statute of limitations have made the pollution at North Pole Koch's problem, alone.
Koch also does not mention that it has pressured state regulators to increase the acceptable amount of sulfolane pollution in groundwater a move that would hugely reduce Koch's cleanup liability.
Koch is correct that there is more to the story at North Pole, but these facts do not weigh in Koch's favor.
Let's now address Koch's bullet-points, in order:
Number One:
Mr. Dickinson makes a number of broad negative claims about Koch's environmental record, but only passing reference to the more than 900 awards for safety, environmental excellence, and community stewardship Koch has received since 2009 alone - information that we provided to Mr. Dickinson. In an article ostensibly about Koch's relationship with regulators, the fact that EPA has repeatedlypraised Koch for a productive and collaborativeapproach is surely relevant to Rolling Stone readers. In addition, he excised our explanation of the long and continuing path to improve and enhance our environmental, health, and safety performance. He also ignored the discussion about our ongoing efforts to ensure we understand and meet the expectations of the EPA and other regulators, our communities, and our shareholders.
Here Koch appears to be criticizing me for not adequately doing their own PR for them. The story clearly remarks on the culture change, circa 2000, that made environmental compliance a focus at Koch Industries and quotes Holden about the company's quest for "10,000 percent" compliance. Given the company's recent pollution woes it seems that Koch is falling far short of that standard.
Number Two:
While he never raised the issue with us, Mr. Dickinson refers to a University of Massachusetts-Amherst report from a radical group that names Koch as an alleged major "polluter" in the United States. Here again he omits key context to mislead readers. As we detailed here in a statement readily available to Mr. Dickinson, that report included virtually every major manufacturer in the United States today, which combined form the lifeblood of the economy and provide good-paying manufacturing jobs to millions of Americans. Moreover, the emissions cited in the report are legal and regulated by the Environmental Protection Agency (EPA). EPA itself notes that Toxic Release Inventory (TRI) information alone does not indicate that the use or release of these chemicals poses a risk. EPA has compiled TRI data for facilities with the same U.S.-based parent company. A parent company is defined as the highest-level company, located in the U.S., which owns at least 50 percent of the voting stock of the manufacturer. These parent companies are ranked by EPA based upon the total volume of production-related waste managed by those facilities. Koch Industries, Inc. is the parent company for the Koch companies. Due to the size and nature of our U.S.-based manufacturing presence, Koch has been among the top 10 parent companies for the last three years. More than 100 Koch company sites submit TRI reportssignificantly more than the other top-10 parent companies, which have between 1 and 65 sites reporting.
Koch here characterizes The Political Economy Research Institute at the University of Massachusetts, Amherst as "a radical group." The only radical thing that PERI does is compile facility-by-facility pollution data published by the Environmental Protection Agency and add it up. Based on a simple ranking of this federal data, Koch is, factually, one of America's top air, water, and climate polluters.
Number Three:
The article states that Koch made the difficult decision to convert a Flint Hills Resources refinery in North Pole, Alaska to a terminal, after "the discovery that a toxic solvent had leaked from the facility, fouling the town's groundwater." Mr. Dickinson ignored all the information we provide him on this topic. He deceptively omits the undisputed facts that the off-site contamination existed long before Koch bought the refinery in 2004, that the contamination was not disclosed to Koch by the prior owner, and that once discovered, Koch quickly and voluntarily began providing alternative water to the community. He also ignores that Alaskan public officials like Senator Mark Begich and Governor Sean Parnell empathizedwith Flint Hills' difficult decision and that Flint Hills has worked to retain as many of the affected employees as possible at other Koch companies.
This is the North Pole discussion, see above.
Number Four:
The article falsely claims that Koch's petroleum coke business at its KCBX North facility in Chicago is endangering the "health of South Side residents," despite the fact that we provided Mr. Dickinson the Congressional Research Service research, findings from the city of Chicago that "there are no known illnesses or health effects associated with pet coke dust," and EPA's own conclusion that "petroleum coke itself has a low level of toxicity and that there is no evidence of carcinogenicity." Nor does Mr. Dickinson note that KCBX was honored with the Good Neighbor award from the Southeast Environmental Task Force in 2001 and again in 2005.
Here Koch disputes that petcoke poses a health risk. The characterization of harmful health effects in the piece comes directly from the Notice of Violation EPA sent Koch in June, citing micro-particulate air pollution emanating from Koch's Chicago terminals which sit near a little league baseball field and urban homes. It reads, in part, "Environmental Impact of Violations… irritation of the airways, coughing, and difficulty breathing; decreased lung function; aggravated asthma; chronic bronchitis; irregular heartbeat; nonfatal heart attacks; and premature death in people with heart or lung disease."
Number Five:
Mr. Dickinson rehashes regulatory and legal issues from the 1970s and 1980s regarding Nixon Administration price controls and oil lotteries that have long since been settled. In some instances, Mr. Dickinson fails to note the responses we provided him.
Koch disputes nothing here. Their unpublished responses were not quote worthy.
Number Six:
The article falsely declares that Koch "stole" oil from American Indian lands in the 1970s and 1980s. In fact, no oil was "stolen" and there was no finding of theft of any kind in this case. We detailed this to Mr. Dickinson before publication and provided him with a statement and substantiation explaining the issue. He ignores all of it.
This regards Koch's purchases of Native oil. Koch mischaracterizes and misquotes the piece here. In describing accusations of theft, the piece quotes directly either from the government record including conclusions of a Senate Select Committee investigation or sworn court testimony of a former Koch employee. The piece goes on to detail that Koch was never prosecuted criminally, but that a related civil case produced a large judgement against the company. This description is consistent with the factual record and with Koch's prepublication remarks to Rolling Stone on the matter.
Number Seven:
In discussing Koch facilities in Minnesota, Mr. Dickinson accuses us of "treating the Mississippi [River] as a sewer" during the 1990s. This is inaccurate and one-sided. In fact, between 1998 and 2001, Koch Petroleum Group entered into a series of agreements with the Minnesota Pollution Control Agency and EPA to resolve issues at Koch's Rosemount, Minnesota refinery, taking full responsibility for past discharges from an aviation fuel tank leak, part of which reached a wetland adjacent to the Mississippi River, though not the river itself. We pointed Mr. Dickinson to the fact that our Minnesota refinery is recognized for its exemplary environmental performance, and its cooperative and productive relationships with regulators, environmental groups, and neighbors. His story omits these facts.
Here Koch is discussing its pollution record in Minnesota, although it seems fuzzy on the facts. The description of Koch using the Mississippi as a sewer comes not from the spill of aviation fuel in marshlands near the river, but from unmonitored wastewater dumps into the river. As recalled by the EPA: "In a separate offense, Koch dumped a million gallons of wastewater with high ammonia content on the ground between November 1996 and March 1997 and also increased its flow of wastewater into the Mississippi River on weekends when Koch did not monitor its discharges."
Number Eight:
Mr. Dickinson says Koch was convicted of a "felony count for covering up the fact that it had disconnected a key pollution-control device" at a Corpus Christi facility. In fact, in 1995 an individual Koch employee filed a false report in this case, was terminated for doing so, and Koch voluntarily disclosed the incident to the Texas environmental regulatory agency. We provided Mr. Dickinson with this information in detail, including information demonstrating that someone altered evidence during the grand jury process. The official Texas state government meeting record showed when Koch first learned of the issues in 1995, our employees openly and directly told the state regulator that the refinery was out of compliance and advised they would come back to the regulator when they better understood all the details. In fact, later government records show that our employees did just as they promised. The meeting record that was used by the federal grand jury had that key exculpatory information excised. Ultimately, the 97-count indictment Mr. Dickinson mentions was dismissed after the government's case cratered when Koch finally had a chance to challenge the evidence in front of the trial judge. As part of a settlement, Koch pled guilty to the incident stemming from the event we voluntarily disclosed back in 1995. The government required the four individuals who were wrongly accused to waive their rights to sue for malicious prosecution as part of this settlement. We gave Mr. Dickinson all this information and provided him copies of the documents, which are in our responses above. He intentionally ignores all of this to repeat the same dishonest and misleading story that many others have written about over the past 13 years.
This bullet point disputes our accurate characterization of what began, in the Clinton administration, as a 97-count criminal indictment over pollution controls at the Corpus Christi refinery, and concluded, in the W. Bush years, with a single felony conviction, as discussed in detail earlier. There is nothing dishonest or misleading about our reporting here.
Number Nine:
The article shamefully uses the circumstances of a tragic 1997 fatal accidentthe only such accident of its kind in the history of Koch Pipeline Companyin a cowardly effort to smear Koch as more concerned with a "10 percent" increase in profit than with human lives. [Ed Note: The accident occurred in 1996.] As with so many other issues, Mr. Dickinson omits our point of view, even though we have publicly addressed the accident on multiple occasions since it happenedthe only such accident of its kind in the history of Koch Pipeline Company) and have always accepted responsibility for this tragedy.
Koch here complains that Rolling Stone omitted their response to the Danielle Smalley case. But Koch provided Rolling Stone with no comment on Smalley's death. It was listed along with the other topics the company treated as questions and responded to vigorously. If there was any error of omission, here, it was Koch's.
Number 10:
Mr. Dickinson quotes former EPA administrator Carol Browner negatively on Koch, and seems to suggest that Koch's 2000 Clean Air agreement with the EPA is evidence of misdeeds. In fact, Ms. Browner described that very agreement as "innovative and comprehensive" and praised the "unprecedented cooperation" of Koch in stepping forward ahead of its industry peers. The agency also deemed the agreement as a "major step in fulfilling the promise of the Clean Air Act."
Koch misleadingly conflates two incidents here. The negative Carol Browner quote "They simply did not believe the law applied to them." stems from the case involving Koch's extensive pipeline spills. It is accurate. The story clearly places the 2000 Clean Air agreement with the EPA in the context of Charles Koch's come-to-Jesus moment on compliance. The evidence of past misdeeds, however, is clear in EPA's concurrent imposition of a $4.5 million fine with this settlement.
Number 11:
Mr. Dickinson never raised with us many of the issues in Koch's financial and trading operations that he later addresses in the article, and on other issues he again fails to note the responses we provided. In discussing a legal settlement with Commodity Futures Trading Commission (CFTC) over energy trading, for instance, Mr. Dickinson fails to note that CFTC praised Koch for full cooperation with its investigation (and also omits that it was a 50-50 joint venture between Entergy and Koch Trading). This was an industry-wide effort by CFTC, Mr. Dickinson fails to mention, and not focused solely on Entergy-Koch Trading (EKT). And in a lengthy discussion of futures trading issues, Mr. Dickinson appears to rely heavily on an article published by left-wing activists in the spring of 2011, despite the fact that the article and its author, Lee Fang, were thoroughly and utterly debunked at the time by multiple independent sources.
Here Koch complains that I did not raise questions about their financial and trading operations. This is not true. I requested multiple times to speak with the head of Koch's derivatives trading operations. Those requests were ignored. Specific questions about Koch's trading practices and profit and loss were stonewalled. For example:
Q: Can you provide a rough breakdown of Koch profits last year from trading, refining, and other operations?
RESPONSE: We are privately held and don't disclose this information.
Q: How much exposure did subsidiary Koch Financial have to credit default swaps at the time of Lehman Brothers bankruptcy?
RESPONSE: We don't disclose this type of information.
To other Koch points here: I clearly acknowledge Koch's partnership with Entergy, so I do not understand their objection here. The fact that other industry players were also punished for wrongdoing at the same is not mitigating. "Everyone else was doing it" is a child's defense.
Koch also evidently has deep issues with Lee Fang, a fine reporter in my estimation, that it should work out with him.
Number 12:
Despite providing Mr. Dickinson with links to the manymainstreammediapieces that mocked, discredited, and criticized a Bloomberg Markets article on a Koch foreign subsidiary's lawful business in Iran, he fails to include any of that information. Koch directlyaddressed the rankfalsehoodsemerging from the storymultipletimes, a repetition made necessary by political partisans and agenda-driven activists who spread known falsehoods in much the same way Mr. Dickinson does here. If he would have bothered to include our statement or link to our responses or othermedia coverage, he would have seen key information that impeaches the credibility of Bloomberg Market's key source for his story a former European employee who praised the company previously and never raised any issue about trade with Iran before he left. In any event, the fact that last decade a European subsidiary did some limited business in Iran is irrelevant since, as we have explained multiple times, that was permissible under the law at that time. We ultimately made a voluntary decision not to do business in Iran even when U.S. law allowed it. If Mr. Dickinson had any desire to be open and honest with his readers, he might have noted that many companies continued to do business in Iran long after Koch ceased doing so voluntarily, and that some still do business there.
This details Koch's foreign subsidiary trading with Iran. If you read closely, Koch does not dispute any of the facts as we reported them. We noted that the trade was not illegal, and included Koch's declaration that it has ceased such trade. Koch refused to answer follow up questions about its trade with a member of the "Axis of Evil," including: "Why did any subsidiary business of Koch regardless of the legality engage in trade with Iran?"
Number 13:
Mr. Dickinson's discussion of the Keystone XL pipeline is inaccurate and contradictory. He implies that Koch stands to gain from approval of the pipelinea claim refuted here and more than a dozen times since such as here, here, here, and here. Yet in the next breath Mr. Dickinson admits that the approval of Keystone XL would actually "eat into [Koch] profit margins." He then offers a third distinct claim, that uncertainty over whether Keystone XL will be approved benefits Koch.
Regarding Keystone XL, we quoted a noted economics professor in Alberta who observed that Koch has conflicting financial interests when it comes to the completion of the pipeline interests that, on balance, might be best served by a continuation of the status quo. Koch calls this inaccurate, but does not explain why. It refused to answer questions about its oil sands lease-holdings in Canada.: "RESPONSE: We don't disclose our business plans or strategies."
Number 14:
Other bizarre internal contradictions emerge throughout the article. For instance, Mr. Dickinson first implies Koch was guilty of patent infringement nearly a century ago, then pages later notes that the patent decision against Koch was thrown out when it was discovered the other party had illegally bribed the judge in the case, and that Koch in fact won at the Supreme Court and successfully countersued for anti-trust violations. Elsewhere in the article, Fred Koch is criticized for being both too soft on Stalinism and too "rabidly anti-Communist."
Here Koch takes issue with our characterizations of company founder Fred Koch. The story takes pains to describe the decades-long progression of Fred Koch's legal saga, including the court reversals and bribery scandal Koch refers to. Separately, the fact that Fred Koch made millions enabling the industrialization of the bloody regime of Stalin and later then became a rabid anti-communist does have a contradictory element to it, but that speaks to a complexity within Fred Koch, not a flaw of our reporting.
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
![[Image: 100x100-koch.jpg]](http://assets.rollingstone.com/assets/2014/article/koch-industries-responds-to-rolling-stone-and-we-answer-back-20140929/170090/small_square/1412018830/100x100-koch.jpg)
Koch Industries Responds to RS And We Answer Back ![[Image: 20140603-kotchx306-1401826374.jpg]](http://assets.rollingstone.com/assets/images/story/three-new-ways-the-koch-brothers-are-screwing-america-20140604/20140603-kotchx306-1401826374.jpg)
Three New Ways the Koch Brothers Are Screwing America ![[Image: 1035x533-kaufman%20county%20tx%20NTSB.JPG]](http://assets.rollingstone.com/assets/2014/media/169456/_original/1411506211/1035x533-kaufman%20county%20tx%20NTSB.JPG)
A 1996 explosion of a Koch-owned pipeline in Texas killed two teens. (Photo: National Transportation Safety Board) ![[Image: 1035x689-h_6.03586741.JPG]](http://assets.rollingstone.com/assets/2014/media/169458/_original/1411506415/1035x689-h_6.03586741.JPG)
Outside its London offices, protesters gather. (Photo: P.Wolmuth/REPORT DIGITAL-REA/Re) ![[Image: 1035x776-20140923_KochFamily_x548.jpg]](http://assets.rollingstone.com/assets/2014/media/169459/_original/1411506711/1035x776-20140923_KochFamily_x548.jpg)
The Koch family, mid-1950s. (Photo: Wichita State University Libraries) ![[Image: 1035x754-20140923_koch_x1401.jpg]](http://assets.rollingstone.com/assets/2014/media/169462/_original/1411507079/1035x754-20140923_koch_x1401.jpg)
Charles Koch (Photo: Larry W. Smith / Polaris) ![[Image: 1035x582-20140923_koch1_x1401.jpg]](http://assets.rollingstone.com/assets/2014/media/169468/_original/1411507321/1035x582-20140923_koch1_x1401.jpg)
David Koch (Photo: Alexis C. Glenn /Landov) ![[Image: 720x405-koch.jpg]](http://assets.rollingstone.com/assets/2014/article/koch-industries-responds-to-rolling-stone-and-we-answer-back-20140929/170090/medium_rect/1412018830/720x405-koch.jpg)
![[Image: 100x100-20140923_kotch_x1401.jpg]](http://assets.rollingstone.com/assets/2014/article/inside-the-koch-brothers-toxic-empire-20140924/169451/small_square/1411505576/100x100-20140923_kotch_x1401.jpg)
Inside the Koch Brothers' Toxic Empire