Dark Money

by Jane Mayer

  The Senate investigation had penetrated Koch Industries’ well-guarded secrecy, compelling Charles Koch to be deposed at the company headquarters in Wichita. One committee official recalled him as “quietly enraged” by the government intrusion. Under oath, Charles admitted that the company had improperly taken approximately $31 million worth of crude oil over a three-year period from Indian lands but argued that it had been accidental. He told investigators that oil measurement is “a very uncertain art.” The committee, however, produced evidence showing that none of the other companies buying oil from Indian land at the time had substantial problems with measurements. In fact, the other companies, most of which were far better known, had secretly turned Koch in, because they regarded it as cheating.

  The Senate investigation was marked by what was becoming a familiar pattern: those challenging the Kochs began to feel that someone was trying to watch and possibly intimidate them. Richard “Jim” Elroy, who later became a private eye himself, was at the time an FBI agent detailed to the Senate investigation. His specialty had been investigating corruption in Oklahoma, and he had handled a number of tough cases, including some involving organized crime. But he soon faced a situation that he said he had never before encountered even when investigating the Mafia: he became certain that he was being followed.

  One day, Elroy stopped his car, jumped out, and confronted the driver who had been tailing him, dragging him out of his car at gunpoint, flashing his FBI identification, and warning him, “Tell your boss the next time he tries this, you’ll be in a body bag.” Elroy recounted that the driver explained, “I’m a private investigator who works with Koch Industries.” The company’s legal affairs head reportedly denied hiring private investigators to spy on Elroy. But other Senate investigators had unsettling experiences as well. According to the Senate report, another investigator discovered that a Koch employee tried to get dirt on him from his former wife.

  The committee’s chief counsel, Kenneth Ballen, who had previously worked as a prosecutor against organized crime in New Jersey, believed that one of his assistants was paid to get dirt on him. Luckily, Ballen said, there wasn’t any. “It wasn’t like politics; it was like investigating organized crime,” Ballen recalled. Charles Koch, he maintains, “is a scary guy to take on. Most people back off, rather than tangling with them,” Ballen observed. “These people have amassed an amazing amount of unaccountable power.”

  Another young lawyer working on the Senate investigation, Wick Sollers, who later became a managing partner at the blue-chip law firm King & Spalding, also found the experience disturbing. Sollers was an assistant U.S. attorney in Baltimore when the Senate committee recruited him. “The company was unhappy with the investigation,” he noted. “They sent various people to try to stop us—emissaries, lawyers—as well as a senator to try to stop the investigation.” The senator in question was the Oklahoma Republican Don Nickles, a social and fiscal conservative who received many campaign contributions from Koch Industries over the years and whose lobbying firm was later hired by the company.

  Sollers said that several staff members believed that someone was going through their garbage. “We don’t know who sent them,” Sollers said carefully, “but someone hired private investigators to dig up anything they could.” Later, after he left the Senate for King & Spalding, he recalled that an anonymous package was sent to his mentor at the firm, filled with news clippings and court documents meant to sully his reputation. Some of the documents trumpeted the Kochs’ innocence. “I’ve not experienced anything like this in any other part of my practice,” he said. “Someone was trying to intimidate and silence the Kochs’ critics. I’m not political, but it was troubling.”

  Christopher Tucker, a witness against the Kochs who testified to committee investigators, also experienced unusual harassment. After accusing Koch Industries of cheating in its oil measurements, he was smeared in newspaper stories as a perjurer, denounced in a letter by four senators, and tipped off by his landlady’s daughter that men in business suits had taken away his garbage. The basis of the complaint against him was that a professional credential he had cited on his résumé wasn’t finalized until shortly after he testified. In this instance, when pressed, the company acknowledged initiating the senators’ letter against him. “It’s very intimidating,” Tucker told the reporter Robert Parry. “You have a company with lots of money. They’ve got more money than many small countries do.”

  The Senate Select Committee on Indian Affairs nonetheless released a remarkably damning report on Koch Industries. Afterward, Elroy, who was still an FBI agent, wrote a memo to the U.S. attorney in Oklahoma City referring a potential criminal case against the company, alleging that it stole oil. Before sending the memo, however, Elroy warned Bill Koch that these developments could result in his brothers going to jail. “Then lock ’em up!” Elroy recalled Bill saying. “I did not want my family, my legacy, my father’s legacy, to be based on organized crime,” Bill told one news outlet.

  The level of enmity between the brothers had only grown. Soon after Charles and David bought the other two brothers out in 1983 for a total of some $800 million, Bill became convinced that he had been cheated out of his fair share of the family fortune, because he thought his brothers had deliberately undervalued the company. In retaliation, Bill had launched a barrage of litigation against Charles and David, and even at one point against their mother. But soon Bill Koch again felt outmaneuvered.

  After weighing the committee’s charges against Koch Industries for eighteen months, the Oklahoma City grand jury cleared the company in a decision that was clouded by the kind of intrigue that would characterize the Kochs’ later political involvement. The Nation obtained internal company records showing that in the face of potential criminal charges the Kochs had launched an emergency strategy aimed at buying political leverage. In Oklahoma, where the grand jury was meeting, they made donations to key politicians, including Senator Nickles. Around the same time, Nickles recommended the appointment of a new U.S. attorney in Oklahoma City to oversee the grand jury investigation. In making his recommendation, Senator Nickles passed over the head of the criminal division in the office and chose a protégé, Timothy Leonard, a former Republican state senator with no experience in criminal law whose family had financial interests in oil wells receiving Koch royalties. There were calls for his recusal, but President George H. W. Bush’s Justice Department granted his request for a waiver.

  Nancy Jones, the assistant U.S. attorney in the office who was handling the Oklahoma grand jury investigation of Koch Industries, parsed her words carefully when asked later if political pressure had ended the probe. “You can say this,” she said, after a notably long pause. “The man who was passed over to be U.S. attorney was a liberal Democrat from out of state, and the one they appointed was a Republican with no federal, criminal, or trial experience.” Elroy, the former FBI agent, was less circumspect. In his opinion, “Nickles put the kibosh on the prosecution there. He got involved in the appointment of the U.S. attorney. He was getting a tremendous amount of support from Koch. He was their man. He was the best senator money could buy.”

  Nickles summarily dismissed allegations of political interference, saying he was “not even aware that the U.S. Attorney’s office was involved in a criminal investigation of Koch.” He added that he had “never had a conversation” with Leonard, the U.S. attorney, “about it.” Leonard also denied any impropriety.

  But Arizona’s Democratic senator, Dennis DeConcini, a former prosecutor who had chaired the Select Committee on Indian Affairs, said at the time, “I was surprised and disappointed. Our evidence was so strong. Our investigation was some of the finest work the Senate has ever done. There was an overwhelming case against Koch.”

  The federal criminal investigation had also been stymied by the mysterious disappearance of key Koch Industries documents. Jones had tried to assemble the record corroborating the Senate testimony so that it wasn’t reliant on witnesses whos
e testimony might be dismissed as the word of disgruntled employees. But when she subpoenaed documents from the company, she was told that many had simply vanished. Discouraged, she eventually gave up and resigned. Elroy also departed. He retired from the FBI and went to work for Bill Koch as a full-time private investigator, ensuring that both sides of the family had their own personal detectives. Bill Koch also retained the services of a former Israeli intelligence officer. “You have to have intelligence,” Bill explained when asked about this. “But there are legal ways, and illegal ways to do it.”

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  With his hopes fading of seeing his brothers criminally prosecuted, Bill Koch pressed an alternative legal strategy that stirred even greater problems for Koch Industries. In his own display of the family’s relentlessness, he filed a whistle-blower lawsuit against Koch Industries under the False Claims Act, accusing the company of stealing oil from government lands. A Civil War–era statute allows citizens to bring such qui tam suits in instances where they can prove that private contractors have defrauded the government. It was essentially the same case as the one that the Oklahoma grand jury had rejected, but the level of proof required in civil cases is lower.

  As the civil case wended its way forward, Elroy went to work, gathering more evidence against Koch Industries. He crisscrossed the country, interviewing five hundred potential witnesses. In a fraternal version of the comic Spy vs. Spy, Bill Koch’s investigators became convinced that Charles and David had private eyes intercepting their communications. Bill’s team resorted to buying a $5,000 secure phone. Suspecting that Bill’s lawyer’s office had been infiltrated, his team also planted a salacious fake memo on a desk as bait, which his investigator, Elroy, claims the other side soon asked about. “They had a mole who was getting into the lawyer’s office,” maintains Elroy. “He worked on another floor in the same building, and they were paying him to get into the legal department.”

  Elroy’s suspicions were not baseless. A Republican political operative who signed a confidentiality agreement, and so asked not to have his name disclosed, admits that Charles and David Koch hired him, through a law firm, to trek across the country for months, scouring for anything he could find in the way of damaging personal, business, or legal information on their brother Bill. He recalled, “It was to find anything that would cause trouble, that could be used like a sharp stick to poke in his eye.”

  The results of one such espionage operation still reside in a padlocked rental storage locker just off a busy highway on the Eastern Shore of Maryland. Inside the locker, boxes of old files document a remarkable effort by private investigators to compile dirt on Bill Koch. The files contain the confidential work records of a now-defunct private investigative firm called Beckett Brown International. Handwritten notes scrawled on the documents reveal that in 1998 the detective firm was hired to find out if Bill Koch was behind a spate of anti-Koch television advertisements that had begun airing. The ads, which were made by a group calling itself Citizens for a Clean America, showed the Koch brothers stuffing money into their pockets while they polluted the environment. The investigation did in fact point to Bill Koch being behind the group. But it appears that the methods used to unmask him were easily as questionable as his ploy.

  The files show that the detective firm set up “D lines,” which is slang for an operation that digs through garbage containers. They also surreptitiously obtained private telephone records, including those belonging to the advertising executive in Richmond, Virginia, whose small firm had produced one of the anti-Koch commercials. The executive, Barbara Fultz, says that she had no idea any of the Kochs were involved. She thought that she was making an ad for a good-government group. When she heard fifteen years later that investigators had somehow obtained her personal phone records, which still sat in a pile of old files in a locked storage unit on Maryland’s Eastern Shore, many with handwritten notes scrawled about whom she was calling, Fultz said, “That blows my mind.”

  “I definitely did not give my phone records to anyone,” said Fultz, a grandmother who is now retired. Fultz remembered that many years earlier the Richmond police had called her at two in the morning to tell her that the door to her office suite was ajar, which struck her as strange. She wondered if this is how her phone records were obtained. “It’s frightening that someone would go into my space looking through my records without me knowing. I’m not political,” she said, “but it makes me sad that the awesome freedom we have in the U.S.A. can be undermined by sneaky, power-hungry, unethical people.”

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  In late 1999, at the same moment that Danny Smalley’s wrongful death case went to trial in Texas, Bill Koch’s whistle-blowing lawsuit alleging that Koch Industries engaged in a “deliberate pattern of fraud” simultaneously went on trial in Tulsa, Oklahoma. Elroy and other investigators working for Bill Koch had produced a devastating list of witnesses. Under oath, one former Koch employee after the next described stealing oil for the company. “I had to do what they said to do or I wouldn’t have a job,” one former employee, L. B. Perry, told the jury. In rebuttal, Koch Industries produced its own witnesses, who defended the company’s practices as commonplace and legal and debunked its accusers as liars and disgruntled employees. But the turning point in the trial was reached when Phil Dubose, a Louisianan who had worked for Koch Industries for twenty-seven years before being laid off in 1994, took the stand.

  Dubose had started as a “gauger,” one of the grunts who measure crude oil as it’s bought from suppliers, and had worked his way up to a senior management post supervising the company’s transport of oil up and down the Eastern Seaboard. He oversaw four thousand miles of pipeline, 186 trucks, and a full marine division of barges. Dubose took the stand and testified about what he and other employees called “the Koch Method.” As he later described it, “They were just mis-measuring crude oil from the Indian reservations as they did all over the U.S. If you bought crude, you’d shorten the gauge. They’d show you how. They had meters in the field. They’d recalibrate them, so if it showed a barrel, they’d say it was just three-quarters of a barrel when they were buying it. You did it in different ways. You cheated. If we sold a barge with fifteen hundred barrels, you’d say it was two thousand. It all involved weights and measurements, and they had their thumb on the scale. That was the Koch Method.”

  Bill Koch’s investigators said they had stumbled across Dubose blindly, going down a list of former Koch employees. Not long before they knocked on Dubose’s door, he had suffered a family tragedy and become more religious. When they arrived to ask him questions about Koch Industries, Dubose said he’d try to answer as best he could. As he began talking, in his Louisiana drawl, they knew they had struck another kind of gusher—an invaluable witness.

  Dubose contended, “The Kochs never did play by the rules. They had their own playing field. They just didn’t abide by anything. Not the EPA or anything else. They constantly polluted. If they got fined, it didn’t matter, because they made so much money doing it. We never reported things like busted pipeline out in the field. Otherwise, we’d get fined. When we spilled oil, we never reported the real amount. We were told to do that, to keep our costs down. The Kochs expected us to lie and try to cover it up,” he said.

  Dubose maintained that the pressure to keep costs low was intense and, he believed, sprang from the top, infusing every level of the company. “If your books were short for more than a month or two, you’d be looking for a job,” he said. Perhaps because he had been laid off without explanation, he was bitter, but he made an indelible impression. “They got that money dishonestly,” he asserted. “They made it off the girls and the boys in the trenches, through their deceit. You don’t have to be a genius like Bill Gates to make money the way they did,” he concluded. “They just did it by breaking the rules all over the country.”

  Before the trial ended, Charles Koch himself took the stand, while his wife as well as David and David’s wife, Julia, all watched. He denied defrau
ding the government and argued that if oil producers believed his company cheated, they would have sold their oil to the Kochs’ competitors instead.

  Evidently, the jury wasn’t convinced. On December 23, 1999, it found Koch Industries guilty of making 24,587 false claims to the government. The company faced a potential fine of more than $200 million. As an additional insult, it would have to pay up to a quarter of the penalty to Bill Koch, who triumphantly declared to the press, “This shows they are the biggest crooks in the oil industry.”

  “It was the first time they were defeated,” said Dubose, looking back. “We won because they didn’t have a weapon as big as the one we used.” Asked to what he was referring, he answered, “The truth.”

  In the end, Koch Industries settled Bill Koch’s whistle-blower suit for $25 million. While most of the fines went to the federal government, the company paid over $7 million to Bill, along with his legal fees. As part of what came to be known in the family as the “global settlement,” by mid-2001 the warring brothers finally also agreed to a cease-fire. Charles, David, and Bill signed a pact promising no further litigation and agreeing to a binding non-disparagement clause that imposed hefty escalating financial penalties for violations. On at least one occasion when Bill spoke too freely about his brothers, the general counsel for Koch Industries warned him that he was risking a fine. The pact bought an uneasy peace. But the damage to the company’s image, and to the family’s reputation, was already profound.

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  The Koch Industries’ spokeswoman Melissa Cohlmia has said that the Kochs’ serious legal losses were a learning experience and that as a result the company stepped up its corporate compliance efforts. After the 1990s, the company’s overall environmental record did improve some, although in 2010 the company was still rated as one of the top ten air polluters in the United States by the Political Economy Research Institute at the University of Massachusetts Amherst. In 2012, the Environmental Protection Agency’s database revealed Koch Industries to be the number one producer of toxic waste in the country. Producing 950 million pounds of toxic waste, it topped the list of 8,000 companies required by law to account for their handling of 650 toxic and carcinogenic chemicals spun off by industrial processes.