Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (21 page)

At least for a time. A year into their America’s Cup bid, Jobson grew uncomfortable with Bill’s management style. “Bill is a guy that likes to have competitions between his people,” he explained. “You don’t know you’re in a competition, but he kind of likes to throw stuff out there—‘that guy is saying something about you’ and then he says the same thing to another guy. Then he sits back and watches the show.” In 1991, after receiving a job offer from ESPN, where Jobson saw a brighter future, he abruptly resigned from the team. Bill was incensed. “People don’t leave Bill Koch,” Jobson said.

After Jobson quit, Bill became convinced that his onetime tactician had turned on him and was leaking technical secrets to his America’s Cup opponents. Bill sicced private investigators on the sailor.

Jobson had an inkling something was amiss. “I had a bad vibe,” he remembered. “I’d put the garbage out, and the garbage can would be on the other side of the driveway the next morning and the garbageman hadn’t come yet. And my phone seemed to be tapped. I can’t prove it, but you would hear funny clicking noises when I talked on the phone. Something felt weird.”

Then Jobson arrived home one day to find a thick envelope on the doorstep of his rented home in Point Loma. It contained a 150-page surveillance report from the detective agency Bill had hired to track him—leaked, he surmised, by a member of the America
³
organization who had taken pity on him.

“Holy Christ,” Jobson thought as he paged through the report, finding a terrifyingly detailed account of his comings and goings, “these guys have been following me around for months.” Later, as if in some spy thriller cliché, he peered out his window to see men
snapping photographs of his house. Jobson hired a lawyer, who contacted Bill’s attorney, making clear that his client had hard evidence that Bill was having him watched. Soon after, Jobson said, the surveillance ceased.

Sailing rivals were one thing, but Bill reserved some of his most bellicose tactics for his brothers. His 1983 settlement with Charles and David had netted nearly a half-billion dollars, but not the respect—not even the handshake one competitor gives to a worthy adversary at the end of a hard-fought match—that he craved from Charles. Since then, Bill, often joined by Frederick, had taken his brothers to court repeatedly.

In 1985 Bill filed a lawsuit,
Koch v. Koch Industries
, in federal district court in Wichita, alleging that Koch Industries had obscured assets during the settlement talks. Not long afterward, Bill and Frederick battled their brothers over control of their father’s foundation. In 1991, they contested their mother’s will, which included a clause cutting any of Mary Koch’s children out of her estate if they did not drop pending litigation against each other within a certain time frame; the provision was aimed squarely at Bill and Frederick. The clause, Bill and Frederick argued, was the underhanded work of Charles, and the will itself was tainted because it had been drafted by the law firm representing Koch Industries. (A judge disagreed, finding that Mary was not subject to undue influence; Bill and Frederick also lost their case over the foundation.)

In Bill’s ongoing psychodrama with Charles, nothing was off the table. If he had to drag the family name out of the shadows and through the mud to achieve closure, then so be it.

In the mid-to-late 1980s, PIs working for Bill and his legal team swarmed over windswept towns across the Midwest chasing rumors that Koch Industries had stolen oil at the wellhead from remote production sites, some of them located on Native
American reservations. His investigators deposed dozens of former employees, collecting handwritten affidavits and frequently offering as much as $300 per interview in compensation (a fact that would later allow Koch’s lawyers to argue their testimony had been purchased).

The ex-employees were salt-of-the-earth types who wore handlebar mustaches and had names like Harley. Many had worked as Koch oil gaugers, responsible for measuring the quantity and quality of the crude the company purchased. The process was not cut and dry. Petroleum contracts or expands based on the temperature. It ranges in density, and the amount of sediment and impurities in the product also affects the measurement. The job entailed taking a variety of measurements and readings to accurately calculate how much oil was being purchased. But the numbers could easily be adjusted or fudged, especially at far-flung lease sites that operated on the honor system, where a handwritten “run ticket” filled out by the gauger was the only record of the sale.

Koch gaugers, and others involved in the company’s oil gathering operations, described receiving instruction in how to manipulate measurements—shave an inch here, add one there, goose a temperature reading by 10 degrees—that ensured the company carted off more crude than it paid for. The process, these gaugers said, was known internally as the “Koch method.”

By adjusting various measurements, Bob Gould, who worked for the company for nearly two decades, explained that “on an average I would gain from 3 to 4 barrels of oil that Koch Oil Co. didn’t buy on each tank of oil” he processed. This didn’t sound like much. But multiplied by ten tanks a day, five days a week, and the overages would add up. And Gould was just one of dozens of Koch oil gaugers.

The gaugers said their superiors never told them explicitly to steal; rather they described coming under relentless pressure from higher-ups to “work the oil” in the company’s favor. “Let’s help
Charlie out. That was a big phrase. Always help Charlie out, referring to Charles Koch,” remembered David Toliver, one former Koch gauger. Some of the company’s employees joked that Koch really stood for “Keep Old Charlie Happy.”

Bill’s self-initiated oil-theft probe was fortuitously timed. In 1987, the Senate had created a special investigative committee, chaired by Arizona Democrat Dennis DeConcini, to look into fraud and mismanagement afflicting Native American lands and institutions. With assistance from Bill, who opened up his files to the congressional investigators and teed up witnesses, the investigation expanded to include allegations of oil theft from tribal lands. If Charles treasured his reputation as a man of high principle and integrity, this would be an ideal opportunity to demolish it, Bill must have thought.

In 1988, an FBI agent named Richard J. “Jim” Elroy led a team of committee investigators into Oklahoma’s Indian country in the hopes of catching Koch and other oil companies in the act of stealing oil. Elroy, who was on loan from the bureau to assist with the committee’s investigation, was in his late forties, his dark hair graying at the temples. The tenacious FBI veteran could tell a good yarn, of which he had many from his eighteen years working public corruption cases, largely from the bureau’s Oklahoma City field office. Soon he would have another tale to tell.

Elroy and his team staked out eight randomly selected oil leases, struggling to find cover in the flat, wide-open terrain. The investigators crouched in ditches, behind cedar bushes, and in one case, hid among a herd of Hereford cattle, training a camera with a 600-millimeter lens on gaugers as they came and went. Once a gauger had pulled away, an investigator hurried out to conduct his own measurements of how much oil had been extracted. He compared that to how much oil the gauger said he’d taken on a handwritten “run ticket.”

A year later, on an overcast May morning in the nation’s capital,
the committee held a widely covered hearing in the Dirksen Senate Office Building, where the panel’s chief counsel, Ken Ballen, questioned Elroy. (In a sign of just how closely Bill worked with the Senate investigators, he would later develop close ties to Ballen and Elroy. After retiring from the FBI, Elroy joined Bill’s retinue of private eyes.)

“Agent Elroy,” Ballen asked, “could you provide to the members of the committee… the results of the surveillance on the eight leases that was conducted by committee investigators?”

“On six of the eight we found they were stealing oil,” the FBI agent responded. “Two of the leases we found they were quite accurate.”

In each of the six cases where theft had occurred, Elroy testified, Koch Industries had been the purchaser.

Charles had told committee investigators earlier that year that gauging was “a very uncertain art” practiced by people who “aren’t rocket scientists.” Elroy had a different take: “I don’t know how you could draw any other conclusion but that this is top management-directed theft,” he told the committee.

Blindsided by the allegations, Koch Industries entered crisis mode. It hastily released a 57-page statement rebutting the charges and claiming that they were the product of Bill’s “vendetta.” The company’s general counsel, Don Cordes, alleged that the company had become the object of “political skullduggery.”

Koch Industries enlisted a quartet of current and former senators from Kansas and Oklahoma to complain to their colleagues on the committee about the “reliability” of the evidence and testimony investigators had gathered. And it hired a group of high-powered Democratic lobbyists, including the wife of Iowa Senator Tom Harkin, in an effort to soften the language in the committee report released later that year.

These overtures had no effect. The Senate panel’s scathing report accused Koch Industries of “systematic theft” and of
engaging “in a widespread and sophisticated scheme to steal crude oil from Indians and others through fraudulent mismeasuring and reporting.” Based on documents subpoenaed from Koch, the committee reported that the company had stolen at least $31 million worth of oil in the previous three years alone.

The scandal played out a year before Mary Koch’s death, forcing her to bear witness to another wave of negative publicity concerning the family. After the Senate report’s release, Frederick, who left the investigations and legal maneuvering to Bill, sent an extract of the report to his mother with the most damning passages neatly underlined in red pen. It was an apparent effort to illustrate the righteousness of their legal battle against Charles and David, and to convince Mary that if Charles was capable of stealing from Native Americans, he had it in him to cheat his brothers. In a letter that accompanied the report, Frederick wrote that “the pattern of oil theft is so pervasive against Koch Industries” and the “evidence is too overwhelming” for Charles’s denial of wrongdoing to be taken seriously. “You must agree that Father would be appalled to observe the way his company reveals to the world today a callow lack of respect for those values which he held in high esteem—honesty and integrity.”

As if allegations of rampant larceny weren’t bad enough, the report also accused Koch Industries of investigating the private lives of committee staff. “One Koch employee in Oklahoma even went so far as to interview the ex-wife of a Committee investigator about the circumstances of their divorce,” the Senate report stated. In a separate episode, Elroy claimed that he had nabbed one of Koch’s investigators tailing him in Oklahoma City. He pulled the man from his car at gunpoint and snapped open his FBI credentials. “You might take a message back to your employer,” Elroy growled. “Your next person might come back in a body bag.”

Based on the committee’s investigation, the Justice Department opened a criminal probe into the oil-theft allegations, a case that it
later closed without issuing indictments. Bill, meanwhile, launched another front in his legal bombardment. Since the alleged oil thefts had occurred on federal lands, depriving the government of royalties, he filed a whistleblower lawsuit under the False Claims Act for which he could claim a percentage of any money recovered.

Charles seemed caught off guard by Bill’s scorched earth tactics. “Why,” he wondered, “would someone in your own family try to get the U.S. government to brand you as a racketeer?”

In Bill’s bare-knuckled world the answer was simple: The charges “have a sting,” he said. “They bring people to the negotiating table sooner.” He admitted, “I was cold-blooded and Machiavellian about coming up with it.… I don’t want to see my brothers in jail. But I’m at war.”

Over the course of the litigation with his brothers, Bill often stressed that he was not acting based on emotion. This was business. He was merely a ruthless tactician plotting his way through a corporate conflict using every weapon (litigation, publicity, PIs) in his arsenal. But then, almost in the same breath, he expounded on grievances that went back to childhood—his absentee parents, poor self-image, the bully of an older brother who instigated fights between the twins, and who every time Bill neared the top of the storm cellar during games of King of the Hill, shoved him roughly to the ground. Bill seemed to consider the brutal legal in-fighting an adult version of King of the Hill. A game of dominance. “I almost wish,” he once said of Charles, “I would have started a fight with him 30 years ago.”

Sam Crow, the World War II veteran and onetime military judge shepherding the
Koch v. Koch Industries
litigation, saw clearly that congressional hearing rooms and courtrooms, especially his, had “become the stage for the unraveling of a family.”

In August 1997, after nearly a decade-and-a-half of legal skirmishing, Crow finally scheduled the case for trial the following
April. He had whittled the suit, initially loaded with charges of secret Swiss bank accounts, hidden assets, and widespread racketeering, down to two claims: Koch had used devious accounting gimmicks, the plaintiffs alleged, to artificially understate its assets and operating profits as the company and the dissident shareholders brokered the buyout. The other charge was that Charles and the company’s management had deceived Bill, Frederick, and the Simmons family about expansion plans at Koch’s Pine Bend refinery in Minnesota and an associated pipeline deal that vastly improved Koch’s competitive position in the Midwest. Because of these alleged deceptions, the plaintiffs believed Koch Industries had defrauded them by as much as $2 billion, adjusting for inflation and interest.

Motions piled up on Judge Crow’s desk in the months leading up to the trial, both sides jousting over what evidence he should permit. Koch fought efforts by Bill’s legal team to present information that it had destroyed incriminating documents during discovery. Bill’s lawyers, meanwhile, battled to keep the defendants from highlighting their client’s “lifelong history of feelings of inferiority,” “obsessive hatred” toward his brothers, and background of psychoanalysis. Citing Bill and Frederick’s attempt to drag their late mother into court against the advice of her doctor, Charles and David’s attorneys argued that these topics were indeed fair game. “These are not the acts of rational men; these are the acts of a man consumed by hatred and willingly followed by his weaker brother.”