In 1989, Nickles chose a politician and lawyer named Timothy Leonard to fill the US Attorney’s job.III This shocked Jones, who had expected one of Price’s deputies, a longtime prosecutor name Bob Mydans, to be selected. Mydans had years of experience in the office, while one of Leonard’s primary qualifications seemed to be his tenure as a Republican state senator, where he had briefly served with Don Nickles.
Jones quickly developed her own opinion about Leonard. She considered him to be a “political hack.” Leonard was aware of her opinion, and the two of them never had an easy relationship. Leonard thought that Jones was an intelligent lawyer, but he became concerned about her work when a judge ruled against her in a high-profile case. Jones was particularly offended by Leonard’s reaction. He assigned Jones’s boss, Arlene Joplin, to be the “second chair” on one of Jones’s major fraud cases. Being second chair essentially meant that that Joplin would oversee Jones’s work. Jones pressed ahead. Eventually, Joplin approached Nancy Jones to talk about the Koch Industries investigation. Joplin’s comments were not encouraging. She said there was lukewarm enthusiasm over at the FBI for the Koch case. The FBI wasn’t sure it would dedicate more resources to the Koch investigation.
Jones ended up quitting her job. She was tired of working for a boss she didn’t like and was tired of feeling that she was being micromanaged. She was also tired of the lack of cultural life in Oklahoma City. She and her husband wanted to live in a more cosmopolitan city. She said that the Koch Industries investigation was not a major factor in her decision. It wasn’t unusual for an assistant US Attorney to move on to another job and leave a case behind. Jones organized her material and left the case in good shape to be pursued by another attorney.
It would be up to Timothy Leonard to determine how to pursue it.
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In April of 1991, as the Koch case was still moving forward, Don Nickles nominated Timothy Leonard to become a federal judge. It was a prestigious distinction for Leonard. He’d been born and raised in the small town of Beaver, Oklahoma, and now he was offered a lifetime appointment to the federal bench.
In November, President George H. W. Bush confirmed Leonard’s appointment. Less than four months later, while he was still US Attorney, Leonard dropped the case against Koch Industries and his office sent a letter to the company saying that it would not be indicted. Leonard did not explain publicly why the case was dropped, even though Jones said that the grand jury had obtained evidence showing criminal conduct of Koch Industries employees and managers. Whatever evidence Jones obtained could never be made public because of secrecy rules that govern grand juries.
For years afterward, Leonard’s decision raised suspicion that Koch used its political influence to kill the investigation. Koch had obviously deployed its lobbyists and think tanks to influence public figures in Oklahoma, and the trail of influence between Koch, Nickles, and Judge Leonard seemed straightforward: Koch’s political ally Nickles appointed Leonard to the US Attorney’s office, then Nickles nominated Leonard to the federal bench, and Leonard decided to drop the charges. It seemed like Leonard might have been rewarded for dropping the charges.
There is no evidence, however, to support this claim and there is strong evidence to refute it. The FBI’s case file in Oklahoma, released in 2018, shows that there was plenty of reason not to file charges. Dozens of FBI interviews with gaugers failed to corroborate the accusations against Koch. Internal FBI memos also show that it was Assistant US Attorney H. Lee Schmidt, not Leonard, who recommended that the case be dropped.IV It seems that the dozens of FBI interviews convinced Schmidt there simply wasn’t enough evidence to file charges. A handful of interviews pointed to wrongdoing, but they seemed outweighed by dozens that undermined the case. The FBI files did not show what evidence Jones obtained from the secret grand jury proceedings, but Leonard later said that Jones never told him or anyone in his office that there was enough evidence to file charges against Koch managers before she left.
There is also evidence to suggest that Leonard actually fought to protect the investigation from political interference. Leonard said that shortly after he arrived, the FBI briefed him about the US Senate investigation into Koch and the political controversies it had ignited. In late 1989, Leonard sent a letter to the FBI in response, chastising the agency for sending him statements about the Koch case made by US senators in Kansas and Oklahoma. “Your presentation of this letter to this office both puzzles and concerns me,” Leonard wrote. He went on to say that the investigation was independent, and that the “view of any elected official” regarding the Senate investigation of Koch would “have no bearing on the course of the grand jury investigation.”
During an interview in his home, Leonard said that politics played no role in the decision to drop the charges. Leonard said that Nickles did not handpick him for either the US Attorney’s job or the federal bench. Instead, it was Leonard who approached Nickles for the jobs. Leonard decided to apply for the US Attorney’s job in 1989 after he realized that he would never run for governor. US Attorney was the next best thing. Years later, when there was an opening on the federal bench, Leonard once again approached Nickles and applied for that job. In an interview later, Nickles said he selected Leonard for the US Attorney position because they knew each other from the State Senate. Nickles respected Leonard and knew him better than Bob Mydans, the assistant US attorney.
Both Leonard and Nickles said that they never discussed the Koch case, either during Leonard’s job interviews or later. Leonard said he would have remembered if Nickles brought up the case because doing so would have been a major ethical breach. Nickles confirmed this account, also pointing out that it would be inappropriate to do so. “I wouldn’t talk about a case,” he said.
When pressed on the issue during the interview, Leonard walked into another room and retrieved a weathered copy of the Bible that he said belonged to his grandfather, a Presbyterian minister. Placing his hand on the book, Leonard said: “I never had any contact with Senator Nickles, or any other political person, and there was no political thought or influence that ever entered the US Attorney’s decision” on the Koch Oil case or any case.
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While there is no evidence that Leonard dropped the charges inappropriately, new evidence would emerge that Koch employees had indeed stolen oil, even if FBI agents in Oklahoma and Texas failed to prove it. This new evidence was revealed thanks to the efforts of Bill Koch.
After Leonard dropped the case in 1992, Bill Koch bankrolled a massive civil suit against Koch Industries, filed in federal court, using an obscure law that lets citizens file lawsuits on behalf of the US government. Bill Koch was essentially acting as a whistle-blower. He happily told journalists that the suit was just another weapon in his arsenal to attack his older brother Charles, and Bill spared no expense in making that weapon as dangerous as possible. He had tracked down Jim Elroy and hired him to investigate Koch’s oil gathering business around the country. Elroy spent months combing small towns in rural America, visiting oil gaugers in their homes and collecting their stories. Bill Koch’s interviews were more successful than the FBI’s in digging up damning testimony.
The case went to trial in Tulsa in late 1999. The testimony was devastating for Koch Industries. During the trial, Koch officials admitted that they earned roughly $10 million in profits each year by taking oil without paying for it. Witness after witness described the Koch method of stealing oil. Jack Crossen, a district gauger for Koch in Oklahoma, described under oath how the company trained him to intentionally mismeasure oil. Phil Dubose also testified and said categorically that Koch’s business strategy relied on theft. Tales of theft were told by Koch’s own employees from Kansas, Texas, Oklahoma, North Dakota, and New Mexico. A gauger named Ricky Fisher said he rationalized stealing oil just so he could keep his job.
“You’re programmed to think and believe you take a little from this man, and it won’t hurt him,” Fisher said from the witness stand.
The fines for Koch could have been enormous. The judge could have levied a $214 million fine just for falsifying the oil sale receipts. But Koch’s lawyers were able to settle the case before it went to the penalty phase, paying an undisclosed amount.
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In 1989, Koch Industries had complained that it was “politically unimportant.” In a few short years, Charles Koch eliminated that problem. Charles Koch’s high-minded political network of libertarian thinkers had transformed into an effective, diffuse, and highly specialized lobbying operation. It included front groups like Oklahomans for Judicial Excellence, a campaign finance network, and traditional corporate lobbyists.
Koch’s political operations continued to grow even after the legal threats ended in Oklahoma. The operations weren’t just effective; they were perfectly designed to exploit the structure of American politics in the 1990s. By that time, the US political and economic system had become one that supported big companies over small. A central feature of the political system was massive complexity, and mastering complex systems was Koch Industries’ core specialty.
The deep changes in America’s political system began during the Reagan presidency, which was widely seen as an era of deregulation. But that was only half of the story. Reagan did succeed in cutting taxes and stripping away some government rules. Over eight years, he cut the EPA’s budget by 28 percent. He cut funding for transportation by 12 percent, siphoning money away from the federal highway system. He also reduced antitrust enforcement, allowing big companies to get even bigger through mergers and acquisitions. Reagan did this, in part, by naming attorney William F. Baxter the new chief of antitrust enforcement at the Department of Justice. Antitrust laws were an economic foundation of the New Deal; a critical counterbalance to the power of monopolistic corporations like Standard Oil. Baxter issued a memo to his legal staff telling them not to worry so much about the concentration of corporate power but to focus instead on efficiency and prices. This subtle change ushered in a wave of consolidation that swept across virtually every sector in the economy.
But in spite of these actions, Reagan soon discovered that he could not dismantle the stubborn machinery at the heart of the New Deal. He sought to dismantle Social Security, but his plan died in the Senate, with a vote of 96 to 0. Medicare could not be touched, either. Together those two programs accounted for almost half the federal budget. The entitlement programs were joined by an increase in military spending. During Reagan’s first term, the Department of Defense budget swelled 54 percent to $551.9 billion in 1985. This led to a toxic collision. Reagan cut taxes, but he could not cut spending to a similar degree. The idea behind “Reaganomics” had been that tax cuts would stimulate growth and boost tax revenue. But the federal debt ballooned from $1 trillion when he took office to $2.8 trillion when he left.
The Reagan era created a paradox in the world of governing: key rules were repealed, the free market was praised, but the size and scope of government continued to grow unabated.
The trend continued under Bill Clinton. One of Clinton’s first acts was to pass the North American Free Trade Agreement, a pact that opened markets in Mexico and Canada. NAFTA dramatically weakened America’s labor unions. Companies once avoided unions by moving to southern, right-to-work states; in the 1990s, they began moving to Mexico. At the end of Clinton’s presidency, he signed a law bestowing permanent normal trade relations on China, opening the gates yet wider for companies to shift jobs overseas. Clinton also repealed key banking regulations from the New Deal, like the 1933 Glass-Steagall Act, which created a division between commercial banks that took deposits and investment banks that gambled through speculation. He eliminated decades’ worth of rules to restrict risky financial trading in commodities and derivatives contracts. Banks grew larger than ever before.
All the while, the overall size and burden of the federal government continued to grow for most Americans and small businesses. A libertarian group called the Competitive Enterprise Institute marked the increase by tallying the number of pages in the Federal Register, which records rules and regulations. In 1986, there were just more than forty-seven thousand pages. By 1995, there were more than sixty-seven thousand. The burden of these rules fell disproportionally on smaller companies, the CEI found.
There was no longer any clear consensus about the balance of power between government and private enterprise. The New Deal era was over, but it hadn’t been replaced by a new laissez-faire system. It was replaced, instead, by a theory with an appropriately vague and misleading name: neoliberalism. Neoliberal policies sought free-market reforms like NAFTA but retained federal entitlement programs and heavy defense spending. Its hallmarks were massively complex laws and programs that tried to thread the needle of unshackling markets while preserving a role for the state.
Companies that could exploit this complexity thrived. Koch Industries did it as well as anyone. There was no better example of this than Koch’s manipulation of the Clean Air Act, a sprawling set of rules that imposed a perpetual regulatory burden on oil refineries. Oil refineries were a prime target of the Clean Air Act when it was passed because they are a major source of toxic pollution like benzene and smog-producing gases. In 1970, the Clean Air Act put a strict limit on how much pollution the refineries could release.
But a loophole in the act dictated that the regulations would only apply to new oil refineries, not the existing ones. Any refinery already doing business in 1970 was “grandfathered” in to the era of clean air enforcement. This was seen as a way to avoid penalizing existing oil refineries that were built before the era of pollution controls. Congress appears to have thought that the grandfathering clause would be temporary: it was believed at the time that most oil refineries would last about forty years before their equipment wore out. Koch’s Pine Bend refinery, for example, was built in the mid-1950s. It might have been retired as early as 1995.
The old refineries were not phased out, however. The opposite happened. Companies like Koch exploited an obscure bureaucratic program called New Source Review that allowed them to expand their existing refineries. The rule stated that any major new equipment added to an old refinery must comply with the newest clean air standards. But compliance was in the eye of the beholder. Oil refineries and their teams of attorneys fought over the definition of critical terms like “new” and “significant.”
The refiners took advantage of another loophole. The Clean Air Act exempted new sources of pollution from regulation if companies could prove that curbing the pollution would be unreasonably expensive. This was easy to exploit. The oil refiners all cited the best available technology as the current technology they were already using. Any advances beyond that were arguably too expensive. This created a downward spiral: new pollution control technologies never became cheaper because there was no market for them.
Oil companies expanded their existing refineries during the 1980s and 1990s, gaming the New Source Review program and prohibiting any new refiners from entering the game. The EPA, which enforced the Clean Air Act, pushed for the New Source Review process to be updated, but the update didn’t happen. As a result, Koch Industries rapidly expanded its refineries in Minnesota and Texas during the 1990s without obtaining permits that would have limited pollution from the plants, according to data compiled by attorneys at the EPA and the Department of Justice.
DOJ attorney Dianne Shawley later prosecuted Koch and other refineries for illegal expansion. The company was able to exploit the New Source Review in part by overwhelming state regulators who enforced the Clean Air Act on behalf of the EPA. The local regulators were simply not equipped to analyze the reams of data and legal documents heaped upon them when Koch was expanding. The same tactics were used by virtually all major US oil refiner
s, Shawley said.
The grandfathering clause built a protective wall around a group of companies that were lucky enough to be doing business in 1970. The clause froze the oil industry in midplay, leaving the existing players to have the game board to themselves by making it prohibitively expensive for new players to enter the market and compete. The last large-capacity US oil refinery was built in 1977.
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Koch Industries didn’t just benefit from political dysfunction. The company used its newly expanded political operations to shape the government in new and innovative ways, using many of the same techniques it honed in Oklahoma.
After the Watergate scandal of the early 1970s, Congress enacted a strict and complicated set of rules around campaign donations. Individuals and companies were capped in how much they could give to any candidate in an election cycle. Donations had to be disclosed publicly, potentially embarrassing both the donor and the politician. Koch Industries circumvented this system in ways that would become widely imitated.
In 1996, Koch Industries created a nonprofit group called the Economic Education Trust. The group did not need to disclose its donors because it was not ostensibly a lobbying or campaign finance organization. Koch funneled money through the Economic Education Trust to state and federal campaigns in Kansas and other states where it did business. In October of 1996, the Economic Education Trust gave $1.79 million to a company in suburban Washington, DC, called Triad Management Services Inc. Triad was supposedly a political consulting firm, but it had a strange business model: it offered its services for free, to Republican candidates. A US Senate report in 1998 concluded that Triad was “a corporate shell funded by a few wealthy conservative Republican activists.”
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