managers, like Dubose, might have thought that they were stealing. Others simply considered the measurement practices to be “aggressive” but fair overall. After all, measuring oil was an imprecise art. Koch executives simply saw themselves as ensuring that the imprecision did not hurt Koch’s bottom line. Dubose had learned this himself as early as 1968: They saw where they could manipulate this because it’s such a gray area. And they took advantage of it. From this point of view, Koch was just playing hardball.
From an outsider’s point of view, things looked quite different. For someone who was new to the oil business, Koch’s conduct might have looked an awful lot like stealing. This point of view was about to come spilling out into the public realm. And it would do so in ways that endangered everything that Charles Koch had built.
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I. Light crude oil has a low viscosity and flows easily at room temperature. Heavy crude is more dense and doesn’t flow as easily.
CHAPTER 7
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The Enemies Circle
(1985–1992)
During the late 1980s, Koch Industries faced two external threats that changed the company’s future. The threats were separate—one came from the US government; the other came from Bill Koch—but Charles Koch and his leadership team saw the threats as intertwined. It seemed to them that Bill Koch was still bitter at being forced out of the company and was using the government as his proxy to attack Charles. In fact, the government was pursuing its own criminal investigation into Charles Koch and Koch Industries, an investigation that arose from the years of aggressive mismeasurement inside Koch’s oil gathering divisions.
The government threat intensified in May of 1989, when the Senate Select Committee on Indian Affairs held a series of daylong public hearings in Washington, DC. The hearings presented the evidence of oil theft collected by the Senate investigator Ken Ballen and FBI special agent James Elroy, who had surveilled Koch employees.
The issue of oil theft was the subject of one hearing, and that hearing focused exclusively on Koch Industries. The reasons for this were simple. Evidence in the case pointed to Koch Industries as the primary culprit in the oil theft. No other company had such dramatically high overage levels, according to data obtained by the committee. Senate investigators believed that Koch had been caught red-handed, and the other companies had not.I The committee asked Charles Koch to testify at the hearing, but he refused. When the Senate released its final report, it stated declaratively: “Koch Oil (‘Koch’), a subsidiary of Koch Industries and the largest purchaser of Indian oil in the country, is the most dramatic example of an oil company stealing by deliberate mismeasurement and fraudulent reporting.”
When the Senate hearings were complete, Ken Ballen and his team boxed up their evidence and sent it to federal prosecutors with the US Attorney’s office in Oklahoma City. The US Attorney launched a criminal investigation that was aimed squarely at Charles Koch. Agent Jim Elroy stayed on the case and intensified his surveillance.
This legal threat coincided with another attack from Bill Koch. Bill had become suspicious of Charles Koch in 1985, when he learned that Koch Industries had repaid almost all of the $1.1 billion in debt that was taken on to buy out Bill and his brother Fred. Koch Industries paid the debt about three times faster than it had expected to. “I was stunned,” Bill Koch later told a journalist with Fortune magazine. “How could they have so much cash?”
Bill became convinced that his brother Charles had lied to him back in 1983 by dramatically understating the company’s value. To Bill, there was simply no other way to explain Koch’s meteoric profitability since his departure. On June 7, 1985, Bill filed a federal lawsuit against Charles Koch, Sterling Varner, and Koch Industries, alleging that they defrauded him.
The suit was the first volley in a sprawling battle that would last more than twenty years. The conflict spilled outside of the courtroom and spread to every corner of Koch Industries’ business, and into David and Charles Koch’s personal lives. Bill sent spies into the company as fake employees. He used wiretaps and hired private detectives to pose as journalists. His public relations team tried to plant damaging stories about Charles Koch in the media.
When Bill Koch heard the allegations of oil mismeasurement and theft, he incorporated them into his strategy. He tried, on his own, to collect damning evidence about the Koch method.
Inside Koch Industries, Bill’s attack and the government’s investigation