[News] Inside the Koch Brothers' Toxic Empire

[Anti-Imperialist News]

  Inside the Koch Brothers' Toxic Empire

By Tim Dickinson 
<http://www.rollingstone.com/contributor/tim-dickinson>| September 24, 2014*
http://www.rollingstone.com/politics/news/inside-the-koch-brothers-toxic-empire-20140924*

The enormity of the Koch fortune is no mystery. Brothers Charles and 
David are each worth more than $40 billion. The electoral influence of 
the Koch brothers is similarly well-chronicled. The Kochs are our 
homegrown oligarchs; they've cornered the market on Republican politics 
and are nakedly attempting to buy Congress and the White House. Their 
political network helped finance the Tea Party and powers today's GOP. 
Koch-affiliated organizations raised some $400 million during the 2012 
election, and aim to spend another $290 million to elect Republicans in 
this year's midterms. So far in this cycle, Koch-backed entities have 
bought 44,000 political ads to boost Republican efforts to take back the 
Senate.

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 Tudor­style 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.

On the day before Danielle Smalley was to leave for college, she and her 
friend Jason Stone were hanging out in her family's mobile home. 
Seventeen years old, with long chestnut hair, Danielle began to feel 
nauseated. "Dad," she said, "we smell gas." It was 3:45 in the afternoon 
on August 24th, 1996, near Lively, Texas, some 50 miles southeast of 
Dallas. The Smalleys were too poor to own a telephone. So the teens 
jumped into her dad's 1964 Chevy pickup to alert the authorities. As 
they drove away, the truck stalled where the driveway crossed a dry 
creek bed. Danielle cranked the ignition, and a fireball engulfed the 
truck. "You see two children burned to death in front of you -- you 
never forget that," Danielle's father, Danny, would later tell reporters.

Unknown to the Smalleys, a decrepit Koch pipeline carrying liquid butane 
-- literally, lighter fluid -- ran through their subdivision. It had 
ruptured, filling the creek bed with vapor, and the spark from the 
pickup's ignition had set off a bomb. Federal investigators documented 
both "severe corrosion" and "mechanical damage" in the pipeline. A 
National Transportation Safety Board report would cite the "failure of 
Koch Pipeline Company LP to adequately protect its pipeline from corrosion."

Installed in the early Eighties, the pipeline had been out of commission 
for three years. When Koch decided to start it up again in 1995, a 
water-pressure test had blown the pipe open. An inspection of just a few 
dozen miles of pipe near the Smal­ley home found 538 corrosion defects. 
The industry's term of art for a pipeline in this condition is Swiss 
cheese, according to the testimony of an expert witness -- "essentially 
the pipeline is gone."

Koch repaired only 80 of the defects -- enough to allow the pipeline to 
withstand another pressure check -- and began running explosive fluid 
down the line at high pressure in January 1996. A month later, employees 
discovered that a key anti­corrosion system had malfunctioned, but it 
was never fixed. Charles Koch had made it clear to managers that they 
were expected to slash costs and boost profits. In a sternly worded memo 
that April, Charles had ordered his top managers to cut expenditures by 
10 percent "through the elimination of waste (I'm sure there is much 
more waste than that)" in order to increase pre-tax earnings by $550 
million a year.

The Smalley trial underscored something Bill Koch had said about the way 
his brothers ran the company: "Koch Industries has a philosophy that 
profits are above everything else." A former Koch manager, Kenoth 
Whitstine, testified to incidents in which Koch Industries placed 
profits over public safety. As one supervisor had told him, regulatory 
fines "usually didn't amount to much" and, besides, the company had "a 
stable full of lawyers in Wichita that handled those situations." When 
Whitstine told another manager he was concerned that unsafe pipelines 
could cause a deadly accident, this manager said that it was more 
profitable for the company to risk litigation than to repair faulty 
equipment. The company could "pay off a lawsuit from an incident and 
still be money ahead," he said, describing the principles of MBM to a T.

At trial, Danny Smalley asked for a judgment large enough to make the 
billionaires feel pain: "Let Koch take their child out there and put 
their children on the pipeline, open it up and let one of them die," he 
told the jury. "And then tell me what that's worth." The jury was 
emphatic, awarding Smalley $296 million -- then the largest 
wrongful-death judgment in American legal history. He later settled with 
Koch for an undisclosed sum and now runs a pipeline-safety foundation in 
his daughter's name. He declined to comment for this story. "It upsets 
him too much," says an associate.

The official Koch line is that scandals that caused the company millions 
in fines, judgments and penalties prompted a change in Charles' attitude 
of regulatory resistance. In his 2007 book, /The Science of Success/, he 
begrudgingly acknowledges his company's recklessness. "While business 
was becoming increasingly regulated," he reflects, "we kept thinking and 
acting as if we lived in a pure market economy. The reality was far 
different."

Charles has since committed Koch Industries to obeying federal 
regulations. "Even when faced with laws we think are counterproductive," 
he writes, "we must first comply." Underscoring just how out of bounds 
Koch had ventured in its corporate culture, Charles admits that "it 
required a monumental undertaking to integrate compliance into every 
aspect of the company." In 2000, Koch Petroleum Group entered into an 
agreement with the EPA and the Justice Department to spend $80 million 
at three refineries to bring them into compliance with the Clean Air 
Act. After hitting Koch with a $4.5 million penalty, the EPA granted the 
company a "clean slate" for certain past violations.

Then George W. Bush entered the White House in 2001, his campaign 
fattened with Koch money. Charles Koch may decry cronyism as "nothing 
more than welfare for the rich and powerful," but he put his company to 
work, hand in glove, with the Bush White House. Correspondence, contacts 
and visits among Koch Industries representatives and the Bush White 
House generated nearly 20,000 pages of records, according to a /Rolling 
Stone/ FOIA request of the George W. Bush Presidential Library. In 2007, 
the administration installed a fiercely anti-regulatory academic, Susan 
Dudley, who hailed from the Koch-funded Mercatus Center at George Mason 
University, as its top regulatory official.

Today, Koch points to awards it has won for safety and environmental 
excellence. "Koch companies have a strong record of compliance," Holden, 
Koch's top lawyer, tells /Rolling Stone/. "In the distant past, when we 
failed to meet these standards, we took steps to ensure that we were 
building a culture of 10,000 percent compliance, with 100 percent of our 
employees complying 100 percent." To reduce its liability, Koch has also 
unwound its pipeline business, from 37,000 miles in the late 1990s to 
about 4,000 miles. Of the much smaller operation, he adds, "Koch's 
pipeline practice and operations today are the best in the industry."

But even as compliance began to improve among its industrial operations, 
the company aggressively expanded its trading activities into the Wild 
West frontier of risky financial instruments. In 2000, the Commodity 
Futures Modernization Act had exempted many of these products from 
regulation, and Koch Industries was among the key players shaping that 
law. Koch joined up with Enron, BP, Mobil and J. Aron -- a division of 
Goldman Sachs then run by Lloyd Blankfein -- in a collaboration called 
the Energy Group. This corporate alliance fought to prohibit the federal 
government from policing oil and gas derivatives. "The importance of 
derivatives for the Energy Group companies . . . cannot be 
overestimated," the group's lawyer wrote to the Commodity Futures 
Trading Commission in 1998. "The success of this business can be 
completely undermined by . . . a costly regulatory regime that has no 
place in the energy industry."

Koch had long specialized in "over-the-counter" or OTC trades -- 
private, unregulated contracts not disclosed on any centralized 
exchange. In its own letter to the CFTC, Koch identified itself as "a 
major participant in the OTC derivatives market," adding that the 
company not only offered "risk-management tools for its customers" but 
also traded "for its own account." Making the case for what would be 
known as the Enron Loophole, Koch argued that any big firm's desire to 
"maintain a good reputation" would prevent "widespread abuses in the OTC 
derivatives market," a darkly hilarious claim, given what would become 
not only of Enron, but also Bear Stearns, Lehman Brothers and AIG.

The Enron Loophole became law in December 2000 -- pushed along by Texas 
Sen. Phil Gramm, giving the Energy Group exactly what it wanted. "It 
completely exempted energy futures from regulation," says Michael 
Greenberger, a former director of trading and markets at the CFTC. "It 
wasn't a matter of regulators not enforcing manipulation or excessive 
speculation limits -- this market wasn't covered at all. By law."

Before its spectacular collapse, Enron would use this loophole in 2001 
to help engineer an energy crisis in California, artificially 
constraining the supply of natural gas and power generation, causing 
price spikes and rolling blackouts. This blatant and criminal market 
manipulation has become part of the legend of Enron. But Koch was caught 
up in the debacle. The CFTC would charge that a partnership between Koch 
and the utility Entergy had, at the height of the California crisis, 
reported fake natural-gas trades to reporting firms and also "knowingly 
reported false prices and/or volumes" on real trades.

One of 10 companies punished for such schemes, Entergy-Koch avoided 
prosecution by paying a $3 million fine as part of a 2004 settlement 
with the CFTC, in which it did not admit guilt to the commission's 
charges but is barred from maintaining its innocence.

Trading, which had long been peripheral to the company's core 
businesses, soon took center stage. In 2002, the company launched a 
subsidiary, Koch Supply & Trading. KS&T got off to a rocky start. "A 
series of bad trades," writes a Koch insider, "boiled over in early 2004 
when a large 'sure bet' crude-oil trade went south, resulting in a 
quick, multimillion loss." But Koch traders quickly adjusted to the 
reality that energy markets were no longer ruled just by supply and 
demand -- but by rich speculators trying to game the market. Revamping 
its strategy, Koch Industries soon began bragging of record profits. 
 From 2003 to 2012, KS&T trading volumes exploded -- up 450 percent. By 
2009, KS&T ranked among the world's top-five oil traders, and by 2011, 
the company billed itself as "one of the leading quantitative traders" 
-- though Holden now says it's no longer in this business.

Since Koch Industries aggressively expanded into high finance, the net 
worth of each brother has also exploded -- from roughly $4 billion in 
2002 to more than $40 billion today. In that period, the company 
embarked on a corporate buying spree that has taken it well beyond 
petroleum. In 2005, Koch purchased Georgia Pacific for $21 billion, 
giving the company a familiar, expansive grip on the industrial web that 
transforms Southern pine into consumer goods -- from plywood sold at 
Home Depot to brand-name products like Dixie Cups and Angel Soft toilet 
paper. In 2013, Koch leapt into high technology with the $7 billion 
acquisition of Molex, a manufacturer of more than 100,000 electronics 
components and a top supplier to smartphone makers, including Apple.

Koch Supply & Trading makes money both from physical trades that move 
oil and commodities across oceans as well as in "paper" trades involving 
nothing more than high-stakes bets and cash. In paper trading, Koch's 
products extend far beyond simple oil futures. Koch pioneered, for sale 
to hedge funds, "volatility swaps," in which the actual price of crude 
is irrelevant and what matters is only the "magnitude of daily 
fluctuations in prices." Steve Mawer, until recently the president of 
KS&T, described parts of his trading operation as "black-box stuff."

Like a casino that bets at its own craps table, Koch engages in 
"proprietary trading" -- speculating for the company's own bottom line. 
"We're like a hedge fund and a dealer at the same time," bragged Ilia 
Bouchouev, head of Koch's derivatives trading in 2004. "We can both make 
markets and speculate." The company's many tentacles in the physical oil 
business give Koch rich insight into market conditions and disruptions 
that can inform its speculative bets. When oil prices spiked to record 
heights in 2008, Koch was a major player in the speculative markets, 
according to documents leaked by Vermont Sen. Bernie Sanders, with 
trading volumes rivaling Wall Street giants like Citibank. Koch rode a 
trader-driven frenzy -- detached from actual supply and demand -- that 
drove prices above $147 a barrel in July 2008, battering a global 
economy about to enter a free fall.

Only Koch knows how much money Koch reaped during this price spike. But, 
as a proxy, consider the $20 million Koch and its subsidiaries spent 
lobbying Congress in 2008 -- before then, its biggest annual lobbying 
expense had been $5 million -- seeking to derail a raft of 
consumer-protection bills, including the Federal Price Gouging 
Prevention Act, the Stop Excessive Energy Speculation Act of 2008, the 
Prevent Unfair Manipulation of Prices Act of 2008 and the Close the 
Enron Loophole Act.

In comments to the Federal Trade Commission, Koch lobbyists defended the 
company's right to rack up fantastic profits at the expense of American 
consumers. "A mere attempt to maximize profits cannot constitute market 
manipulation," they wrote, adding baldly, "Excessive profits in the face 
of shortages are desirable."

When the global economy crashed in 2008, so did oil prices. By December, 
crude was trading more than $100 lower per barrel than it had just 
months earlier -- around $30. At the same time, oil traders anticipated 
that prices would eventually rebound. Futures contracts for delivery of 
oil in December 2009 were trading at nearly $55 per barrel. When future 
delivery is more valuable than present inventory, the market is said to 
be "in contango." Koch exploited the contango market to the hilt. The 
company leased nine supertankers and filled them with cut-rate crude and 
parked them quietly offshore in the Gulf of Mexico, banking virtually 
risk-free profits by selling contracts for future delivery.

All in, Koch took about 20 million barrels of oil off the market, 
putting itself in a position to bet on price disruptions the company 
itself was creating. Thanks to these kinds of trading efforts, Koch 
could boast in a 2009 review that "the performance of Koch Supply & 
Trading actually grew stronger last year as the global economy 
worsened." The cost for those risk-free profits was paid by consumers at 
the pump. Estimates pegged the cost of the contango trade by Koch and 
others at up to 40 cents a gallon.

Artificially constraining oil supplies is not the only source of dark, 
unregulated profit for Koch Industries. In the years after George W. 
Bush branded Iran a member of the "Axis of Evil," the Koch brothers 
profited from trade with the state sponsor of terror and reckless 
would-be nuclear power. For decades, U.S. companies have been forbidden 
from doing business with the Ayatollahs, but Koch Industries exploited a 
loophole in 1996 sanctions that made it possible for foreign 
subsidiaries of U.S. companies to do some business in Iran.

In the ensuing years, according to Bloomberg Markets, the German and 
Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment for 
oil fields and refineries, won lucrative contracts to supply Iran's 
Zagros plant, the largest methanol plant in the world. And thanks in 
part to Koch, methanol is now one of Iran's leading non-oil exports. 
"Every single chance they had to do business with Iran, or anyone else, 
they did," said Koch whistle-blower George Bentu. Having signed on to 
work for a company that lists "integrity" as its top value, Bentu added, 
"You feel totally betrayed. Everything Koch stood for was a lie."

Koch reportedly kept trading with Tehran until 2007 -- after the regime 
was exposed for supplying IEDs to Iraqi insurgents killing U.S. troops. 
According to lawyer Holden, Koch has since "decided that none of its 
subsidiaries would engage in trade involving Iran, even where such trade 
is permissible under U.S. law."

These days, Koch's most disquieting foreign dealings are in Canada, 
where the company has massive investments in dirty tar sands. The 
company's 1.1 million acres of leases in northern Alberta contain 
reserves of economically recoverable oil numbering in the billions of 
barrels. With these massive leaseholdings, Koch is poised to continue 
profiting from Canadian crude whether or not the Keystone XL pipeline 
gains approval, says Andrew Leach, an energy and environmental economist 
at the business school of the University of Alberta.

Counterintuitively, approval of Keystone XL could actually harm one of 
Koch's most profitable businesses -- its Pine Bend refinery in 
Minnesota. Because tar-sands crude presently has no easy outlet to the 
global market, there's a glut of Canadian oil in the midcontinent, and 
Koch's refinery is a beneficiary of this oversupply; the resulting 
discount can exceed $20 a barrel compared to conventional crude. If it 
is ever built, the Keystone XL pipeline will provide a link to Gulf 
Coast refineries -- and thus the global export market, which would erase 
much of that discount and eat into company profit margins.

Leach says Koch Industries' tar-sands leaseholdings have them hedged 
against the potential approval of Keystone XL. The pipeline would 
increase the value of Canadian tar-sands deposits overnight. Koch could 
then profit handsomely by flipping its leases to more established 
producers. "Optimizing asset value through trading," Koch literature 
says of these and other holdings, is a "key" company strategy.

The one truly bad outcome for Koch would be if Keystone XL were to be 
defeated, as many environmentalists believe it must be. "If the signal 
that sends is that no new pipelines will be built across the U.S. border 
for carrying oil-sands product," Leach says, "that's going to have an 
impact not just on Koch leases, but on everybody's asset value in oil 
sands." Ironically, what's best for Koch's tar-sands interests is what 
the Obama administration is currently delivering: "They're actually 
ahead if Keystone XL gets delayed a while but hangs around as something 
that still might happen," Leach says.

The Dodd-Frank bill was supposed to put an end to economy­endangering 
speculation in the $700 trillion global derivatives market. But Koch has 
managed to defend -- and even expand -- its turf, trading in largely 
unregulated derivatives, once dubbed "financial weapons of mass 
destruction" by billionaire Warren Buffett.

In theory, the Enron Loophole is no longer open -- the government now 
has the power to police manipulation in the market for energy 
derivatives. But the Obama administration has not yet been able to come 
up with new rules that actually do so. In 2011, the CFTC mandated 
"position limits" on derivative trades of oil and other commodities. 
These would have blocked any single speculator from owning futures 
contracts representing more than a quarter of the physical market -- 
reducing the danger of manipulation. As part of the International Swaps 
and Derivatives Association, which also reps many Wall Street giants 
including Goldman Sachs and JPMorgan Chase, Koch fought these new 
restrictions. ISDA sued to block the position limits -- and won in court 
in September 2012. Two years later, CFTC is still spinning its wheels on 
a replacement. Industry traders like Koch are, Greenberger says, 
"essentially able to operate as though the Enron Loophole were still in 
effect."

Koch is also reaping the benefits from Dodd-Frank's impacts on Wall 
Street. The so-called Volcker Rule, implemented at the end of last year, 
bans investment banks from "proprietary trading" -- investing on their 
own behalf in securities and derivatives. As a result, many Wall Street 
banks are unloading their commodities-trading units. But Volcker does 
not apply to nonbank traders like Koch. They're now able to pick up 
clients who might previously have traded with JPMorgan. In its marketing 
materials for its trading operations, Koch boasts to potential clients 
that it can provide "physical and financial market liquidity at times 
when others pull back." Koch also likely benefits from loopholes that 
exempt the company from posting collateral for derivatives trades and 
allow it to continue trading swaps without posting the transactions to a 
transparent electronic exchange. Though competitors like BP and Cargill 
have registered with the CFTC as swaps dealers -- subjecting their 
trades to tightened regulation -- Koch conspicuously has not. "Koch is 
compliant with all CFTC regulations, including those relating to swaps 
dealers," says Holden, the Koch lawyer.

That a massive company with such a troubling record as Koch Industries 
remains unfettered by financial regulation should strike fear in the 
heart of anyone with a stake in the health of the American economy. 
Though Koch has cultivated a reputation as an economically conservative 
company, it has long flirted with danger. And that it has not suffered a 
catastrophic loss in the past 15 years would seem to be as much about 
luck as about skillful management.

The Kochs have brushed up against some of the major debacles of the 
crisis years. In 2007, as the economy began to teeter, Koch was gearing 
up to plunge into the market for credit default swaps, even creating an 
affiliate, Koch Financial Products, for that express purpose. KFP 
secured a AAA rating from Moody's and reportedly sought to buy up toxic 
assets at the center of the financial crisis at up to 50-times leverage. 
Ultimately, Koch Industries survived the experiment without losing its 
shirt.

More recently, Koch was exposed to the fiasco at MF Global, the 
disgraced brokerage firm run by former New Jersey Gov. Jon Corzine that 
improperly dipped into customer accounts to finance reckless bets on 
European debt. Koch, one of MF Global's top clients, reportedly told 
trading partners it was switching accounts about a month before the 
brokerage declared bankruptcy -- then the eighth-largest in U.S. 
history. Koch says the decision to pull its funds from MF Global was 
made more than a year before. While MF's small-fry clients had to pick 
at the carcass of Corzine's company to recoup their assets, Koch was 
already swimming free and clear.

Because it's private, no one outside of Koch Industries knows how much 
risk Koch is taking -- or whether it could conceivably create systemic 
risk, a concern raised in 2013 by the head of the Futures Industry 
Association. But this much is for certain: Because of the loopholes in 
financial-regulatory reform, the next company to put the American 
economy at risk may not be a Wall Street bank but a trading giant like 
Koch. In 2012, Gary Gensler, then CFTC chair, railed against the very 
loopholes Koch appears to be exploiting, raising the specter of AIG. 
"[AIG] had this massive risk built up in its derivatives just because it 
called itself an insurance company rather than a bank," Gensler said. 
When Congress adopted Dodd-Frank, Gensler added, it never intended to 
exempt financial heavy hitters just because "somebody calls themselves 
an insurance

In "the science of success," Charles Koch highlights the problems 
created when property owners "don't benefit from all the value they 
create and don't bear the full cost from whatever value they destroy." 
He is particularly concerned about the "tragedy of the commons," in 
which shared resources are abused because there's no individual 
accountability. "The biggest problems in society," he writes, "have 
occurred in those areas thought to be best controlled in common: the 
atmosphere, bodies of water, air. . . ."

But in the real world, Koch Industries has used its political might to 
beat back the very market-based mechanisms -- including a cap-and-trade 
market for carbon pollution -- needed to create the ownership rights for 
pollution that Charles says would improve the functioning of capitalism.

In fact, it appears the very essence of the Koch business model is to 
exploit breakdowns in the free market. Koch has profited precisely by 
dumping billions of pounds of pollutants into our waters and skies -- 
essentially for free. It racks up enormous profits from speculative 
trades lacking economic value that drive up costs for consumers and 
create risks for our economy.

The Koch brothers get richer as the costs of what Koch destroys are 
foisted on the rest of us -- in the form of ill health, foul water and a 
climate crisis that threatens life as we know it on this planet. Now 
nearing 80 -- owning a large chunk of the Alberta tar sands and using 
his billions to transform the modern Republican Party into a protection 
racket for Koch Industries' profits -- Charles Koch is not about to see 
the light. Nor does the CEO of one of America's most toxic firms have 
any notion of slowing down. He has made it clear that he has no 
retirement plans: "I'm going to ride my bicycle till I fall off."

 From The Archives Issue 1219: October 9, 2014

-- 
Freedom Archives 522 Valencia Street San Francisco, CA 94110 415 
863.9977 www.freedomarchives.org
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