Inside the Koch Brothers’ Toxic Empire
Tim Dickinson
Inside the Koch Brothers’ Toxic Empire
ROLLING STONE •
First published on Sept 24, 2014
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
[dropcap]T[/dropcap]he 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.
Koch Industries Responds to Rolling Stone – And We Answer Back (See below in our Appendix)
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.
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.
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-billiondollar 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 Kochlore 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 WinklerKoch 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."
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-oilgathering 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.
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 “volumeenhanced” 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.
Selfinterest 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, MarketBased 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.
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.
PLEASE READ THE REST OF THIS EXPOSE ON ITS ORIGINAL SOURCE, ROLLING STONE.
APPENDIX
UPDATE: Koch Industries Responds to Rolling Stone — And We Answer Back
The Kochs took exemption to Rolling Stone's article, and the magazine promptly filed a rebuttal of their accusations. Given the importance of this exchange, we are reproducing the material in toto.
Koch Industries Responds to Rolling Stone – And We Answer Back
“Koch Facts” calls our story “dishonest and misleading.” A point-by-point rebuttal.
By Tim Dickinson
[dropcap]I[/dropcap] 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 [this should be seen as a redeeming act by the Kochs, but is naturally penalised here, in keeping with mainstream journalists' practice of routinely endorsing US State Dept. positions.—Ed) , 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 repeatedly praised Koch for a productive and collaborative approach 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 reports—significantly 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 empathized with 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 accident—the only such accident of its kind in the history of Koch Pipeline Company—in 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 happened–the 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 many mainstream media pieces 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 directly addressed the rank falsehoods emerging from the story multiple times, 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 other media 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 pipeline—a 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.
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