by Jane Mayer
It’s difficult to disentangle Charles’s philosophical opposition to regulations from his financial interest in avoiding them. As he described it, he was trying to “unceasingly advance the cause of liberty” in the face of “arrogant, intrusive, totalitarian laws.” Critics such as Thomas Frank, the author of What’s the Matter with Kansas? who grew up in Kansas watching the Kochs, saw it quite differently. “Libertarianism is supposed to be all about principles, but what it’s really about is political expedience. It’s basically a corporate front, masked as a philosophy.” What is indisputable is that whatever the motivations were, in the quarter century between 1980 and 2005, under Charles Koch’s leadership, his company developed a stunning record of corporate malfeasance.
In April 1996, for instance, as Bull Carlson was dying of leukemia in Minnesota, Sally Barnes-Soliz, a Koch Industries environmental technician, knocked on the door of government regulators in Corpus Christi, Texas, where the Kochs owned and operated another refinery, and blew the whistle on the company for lying about illegal quantities of benzene that it was leaking into the air. Environmental regulations, even more than those dealing with workplace safety, proved to be constant obstacles for Koch Industries, as the problems at the refinery in Corpus Christi exemplified.
Barnes-Soliz later told Bloomberg Markets magazine, “The refinery was just hemorrhaging benzene into the atmosphere.” Rather than comply with a new 1995 federal regulation requiring reductions in such emissions, Koch Industries had tried to conceal its output in a report that it was required to file with the Texas Natural Resource Conservation Commission. Internally, a Koch lawyer conceded that the company’s self-reporting was “misleading and inaccurate,” so the company had then called in Barnes-Soliz to provide a more accurate account.
She had been working with Koch Industries for five years and loved the job because she felt she was contributing directly to the health and safety of employees and the public. As directed, she carefully re-tabulated the refinery’s benzene emissions and found the company had released fifteen times more than the legal limit. Her bosses were unhappy with her findings. She had a bachelor’s degree in science and environmental health and a master’s of science in industrial hygiene, so she knew what she was doing, but nonetheless she redid the math many times. But she kept getting the same unwelcome results. “There were a lot of meetings to try and get me to change the number. It was hard, but I held firm to my convictions,” she recounted to Bloomberg Markets. She was thus shaken when she saw the subsequent report submitted by Koch to the Texas authorities. It falsified the benzene emissions to 1/149th of the amount she had calculated.
“When I saw they had actually falsified that document, I had no recourse but to notify the authorities,” she told Bloomberg Markets, which described the episode as part of a pattern of outlaw behavior by Koch Industries. On her lunch break, she drove to the state regulators’ office and reported the fraud.
Defenders of Koch Industries have suggested that the whistle-blower was merely a disgruntled employee, looking for a pretext to save her job. But Koch Industries in Corpus Christi was hit with a ninety-seven-count indictment on September 28, 2000, charging it with covering up the discharge of ninety-one metric tons of benzene. The company faced the potential of $352 million in fines, and four Koch employees faced potentially long prison sentences and fines of $1.75 million each. The company fought back hard in the courts, trying to withhold hundreds of internal e-mails about its emissions, but the presiding judge rejected its argument that these were trade secrets, castigating its lawyer as a “front man” who was trying to “impede” regulators from discovering the “extent of its noncompliance.” During the course of the wrangling, the company revealed that it would have cost $7 million to comply with the emission standards. High though the cost might seem, it was dwarfed by the refinery’s profits. Prosecutors testified that the Kochs’ Corpus Christi refinery earned $176 million in profits during 1995 alone.
Eventually, Koch Industries pleaded guilty to one felony charge of “concealment of information” about its benzene emissions and paid $10 million in fines, and made another $10 million payment for projects to improve the environment in Corpus Christi. A spokeswoman for the company stressed afterward that the charges against the individual Koch managers had been dropped, and she argued, “The government’s case ultimately collapsed.” David Uhlmann, the career prosecutor who headed the environmental crimes section of the Justice Department at the time, however, said that to the contrary Koch Industries pleaded guilty to “an orchestrated scheme to conceal benzene emissions—a known carcinogen”—from regulators and the community. He calls the suit “one of the most significant cases ever brought under the Clean Air Act.” He notes, “Environmental crimes are almost always motivated by economics and arrogance, and in the Koch case there was a healthy dose of both.”
An eye-opening sideline was the company’s treatment of Barnes-Soliz. For her whistle-blowing, she said she was quarantined to an empty office with no responsibilities and no e-mail access. Eventually, she quit and sued the company for harassment, and in 1999 Koch paid her an undisclosed amount in a sealed settlement.
Around the same time, another would-be whistle-blower, Carnell Green, who was a low-level employee at Koch Industries in Louisiana, said that the company threatened to arrest him if he didn’t recant. According to two statements that Green gave in 1998 and 1999 to a private investigator who was working for Bill Koch, Green was a pipeline technician and gas meter serviceman for Koch Industries when he ran afoul of the management. He had worked for the company from 1976 until 1996, during which time he said that he was told to sweep mercury spills from the thirty-six gas meters that he monitored out the door and onto the ground. He said that he was also told to dispose of the old meters, which contained about a quart of mercury each, in dumpsters and to pour additional containers of mercury down the sink, as he witnessed his supervisor doing. Green said the mercury was so pervasive that when he got home, balls of it would roll off his clothes and out of his shoes.
After attending a class on hazardous materials in 1996, though, Green said that he sent a report to his supervisors alerting them that mercury posed a serious health hazard and should be disposed of more carefully. Green said his supervisors told him not to talk about it. Soon after, Green said, a man who identified himself as “FBI Special Agent Moorman” came to interrogate him and accused him of lying about the mercury. He said the official threatened to arrest him and put him in jail if he did not retract his allegations against the company and also warned him that if he told anyone else, including outside authorities, about the mercury, he would be fired. Green said his immediate supervisor then presented him with a prepared statement to sign, saying there was no mercury at the Koch facilities. Fearing that he would otherwise be imprisoned, Green signed it.
Worried about his health, Green said that he nonetheless filed a complaint with OSHA. Koch Industries subsequently fired him, he said, for “making false statements.”
In his statement, Green added that he later learned that Special Agent Moorman worked not for the FBI but “for Koch Security in Wichita Kansas.” At the time, Larry M. Moorman was an investigator in Koch Industries’ legal department. Moorman later became the director of corporate security for Koch Industries.
According to the private investigator, Richard “Jim” Elroy, soil samples were later taken from one of the locations that Green identified as having been polluted with mercury by Koch Industries and sent to an independent laboratory for testing. The soil samples, according to Elroy’s report, were so highly contaminated with mercury that the lab refused to send them back through the U.S. mail and demanded payment for specialized disposal of hazmat substances. But by then, Green had lost his job. “Green was just a nice, working-class black guy from Louisiana, trying the best he could to make a living,” said Elroy, who took Green’s statement while working on behalf of Bill Koch in his litigation against his brothers Charles and David at the
time. “Koch just runs over these people and then discards them as trash,” Elroy said. Asked about Green’s allegations, neither Moorman nor the spokesman for Koch Industries responded.
But as allegations concerning pollution mounted nationally, federal prosecutors began to piece together an enormous case against the company for violating the Clean Water Act. In 1995, the Justice Department sued Koch for lying about leaking millions of gallons of oil from its pipelines and storage facilities in six different states. Federal investigators documented over three hundred oil spills during the previous five years, including one 100,000-gallon crude oil spill that left a twelve-mile-long slick in the bay off Corpus Christi, not far from where the Koch refinery was located.
Angela O’Connell, the lead federal prosecutor in the case against Koch Industries, later described it as unlike any other oil company she had ever dealt with, noting that over her twenty-five-year career at the Justice Department she dealt with most of them. “They’re always operating outside of the system,” she told Daniel Schulman, who provides a vivid account of the company’s serial lawbreaking in Sons of Wichita. Leaks and spills, she noted, are endemic in the oil business, but she maintained that while other companies would sit down with regulators and admit their failings, Koch Industries “repeatedly lied…to avoid penalties.”
As O’Connell compiled the massive multistate case against Koch Industries, she developed an uneasy sense that she was being spied on. She thought her trash was being searched, and her phone bugged, but she could never prove it. She was rattled badly enough by the situation that from that point on she monitored everything she said and did, to make sure it couldn’t be used against her.
Documents show that beginning in 1983 Koch Industries hired a former employee of the U.S. Secret Service, David Nicastro, to assist its security operations. By 1994, Nicastro had his own small investigative firm in Texas, Secure Source, and “for the next four or five years,” he confirmed, “I worked on different projects” for the Kochs, including the litigation between the brothers. In court papers, he described his role as conducting “numerous investigations” for Koch Industries and what he called its “entities.” Joining Nicastro was Charles Dickey, a former FBI agent.
In looking back many years later, O’Connell said she regarded the Kochs as “dangerous” and still felt uncomfortable talking about them. Dropping her voice, as if they might be listening, she recalled, “They tried to attack my reputation.” She recounted that as she was working on the case against the company, it obtained a meeting with the head of the Environmental Protection Agency at the time, Carol Browner, at which company representatives accused O’Connell of acting overzealously, in an unsuccessful effort to have her removed from the case. “They lie about everything, and they get away with it because they’re a private company,” she says. “They obstructed every step of discovery. It was always, ‘I didn’t do it,’ ‘It’s not our oil,’ ‘It’s not our pipes.’ You can’t believe anything they say. They definitely don’t play the game the way other companies do,” she says.
On January 13, 2000, O’Connell’s division at the Justice Department prevailed. Koch Industries agreed to pay a $30 million fine, which was the biggest in history at that point, for violations of the Clean Water Act. The EPA issued a press release accusing Koch Industries of “egregious violations” and trumpeting that the huge fine proved that “those who try to profit from polluting our environment will pay the price.” But O’Connell, who retired from the Justice Department in 2004, was still haunted by the damage from the oil leaks a decade later. “The thing is, oil sinks to the bottom and poisons the fish. If people eat it, they get really, really sick,” she said. “People die.”
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While a few legal violations could be understood as misfortunate accidents, Koch Industries’ pattern of pollution was striking not just for its egregiousness but also for its willfulness. As the company was settling the oil spill case that O’Connell brought, its Pine Bend Refinery in Rosemount, Minnesota, pleaded guilty to still more violations of the Clean Water Act. The refinery paid an $8 million fine for dumping a million gallons of ammonia-contaminated wastewater onto the ground, along with negligently spilling some 600,000 gallons of fuel into a protected natural wetland and the nearby Mississippi River. Earlier the refinery had already paid a $6.9 million fine to the Minnesota Pollution Control Agency to settle charges stemming from the same violations. In this pollution case, like that in Corpus Christi, government authorities accused Koch of trying to cover up its offenses, in this instance by surreptitiously dumping extra pollutants on weekends and late at night in order to evade monitoring, and later falsifying the records. A former employee, Thomas Holton, who had worked at the Pine Bend Refinery, told the Minnesota Star Tribune, “There were times when…yeah, we lied. We did do that. And I won’t cover that up.”
These misdeeds paled, however, in comparison with what befell two teenagers in the rural town of Lively, Texas, some fifty miles southeast of Dallas, on August 24, 1996. That afternoon, Danielle Smalley, a newly minted high school graduate, was at home in the family trailer, packing her things for college. A friend, Jason Stone, was over, to talk about the farewell party they were planning for her that night. Smalley’s father, Danny, a mechanic, was home too, watching sports on television. A faint but increasingly nauseating gassy smell was the only sign that something was amiss. After they could find no source, Danielle and Jason decided to drive to a neighbor’s house to report a possible gas leak. The family had no phone of their own. Borrowing Danny Smalley’s truck, they set out, but the truck stalled a few hundred yards away. When Danielle, who was at the wheel, tried to restart it, the ignition lit an invisible cloud of butane gas that was leaking from a corroded, underground Koch pipeline that ran not far from the house, setting off a monstrous blast. A towering fireball utterly consumed the truck. Danielle and Jason burned to death.
Koch Industries offered Danny Smalley, Danielle’s father, money to drop the wrongful death lawsuit he subsequently brought against the company. Like Doreen Carlson, however, the surviving family member wanted more than cash.
The pretrial maneuvering was fierce, with Koch Industries reportedly hiring a fleet of top-flight lawyers and a private investigator to tail Smalley. Smalley’s lead lawyer, Ted Lyon, meanwhile, suspected his law office was being bugged. He hired a security firm to inspect, which discovered that tiny transmitters had been planted in his office. “I’m not saying the Kochs did it,” the lawyer later said. “I just thought it was very interesting that it happened during the period we were litigating the case.”
As the two sides prepared for trial, a chilling picture of corporate negligence emerged. An investigation by the National Transportation Safety Board found that Koch Pipeline Company, the unit in charge, knew that the pipeline was corroded and had neither made all of the necessary repairs nor told the forty or so families living near the explosion site how to handle an emergency. An expert witness for the Smalleys described the pipeline as “Swiss cheese.” The explosion, according to the witness, Edward Ziegler, a certified oil industry safety expert, resulted from “a total failure of a company to follow the regulations, keep their pipeline safe and operate it as the regulations require.”
For three years, the company had in fact stopped using the old pipeline in favor of a newer one. But the company decided to revive the older pipeline when it realized it could make an additional $7 million annually by patching it and using it to carry liquid butane. Bill Caffey, an executive vice president at Koch Industries, admitted in a deposition, “Koch Industries is definitely responsible for the death of Danielle Smalley,” but he stressed that he had believed that the pipeline was safe when he authorized its use. He praised Charles Koch as admirably focused on complying with safety and other regulations but acknowledged there were financial pressures. “We were to work on reducing wasteful spending,” he explained. A former employee, Kenoth Whitstine, testified in a deposition that when he brought conce
rns to his boss at the company about another corroding pipeline, which he feared could cause a fatal accident if ruptured, he was told that it would be cheaper to pay off damages from a lawsuit than make the repairs.
Finally getting the chance he had waited for, Danny Smalley took the stand as the last witness in the trial and delivered an enraged soliloquy denouncing the Kochs as caring only about money. As he later told 60 Minutes, “They said, ‘We’re sorry, Mr. Smalley, that your child lost her life and Jason lost his life.’ Sorry doesn’t get it. They’re not sorry. The only thing they looked at was the bottom dollar. How much money would they lose if they shut the pipeline down. They didn’t care, all they wanted was the money.”
If the Kochs’ cavalier safety practices were a gamble, they lost when the jury rendered its verdict. On October 21, 1999, it found Koch Industries guilty not just of negligence but of malice, too, because it had known about the extreme hazard its decaying pipeline had posed. In his suit, Danny Smalley had asked for $100 million in damages from the company, a staggering sum. The jury, however, imposed a fine almost three times larger, demanding Koch Industries pay him $296 million. At the time, it was the largest wrongful death award on record.
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As they reeled from the verdict, the brothers also faced a growing political crisis. The U.S. Senate had opened an investigation into allegations that the company stole tens of millions of dollars’ worth of oil from wells on Native Americans’ tribal land. After a yearlong investigation in 1989, it released a scathing report accusing Koch Oil of “a widespread and sophisticated scheme to steal crude oil from Indians and others through fraudulent mis-measuring.”