Koch Industries: Corporate Rap Sheet

Koch Industries

By Philip Mattera

Koch Industries is best known as the source of the fortunes of Charles and David Koch, billionaires who are major funders of right-wing activist groups such as Americans for Prosperity. The company itself—which began as an oil services business created by the Kochs’ father in the 1940s—was built by the Koch brothers into a privately-held conglomerate with more than $100 billion in annual revenue. Among its holdings are the paper products giant Georgia-Pacific (Dixie Cups, Brawny paper towels, etc.) and Invista, the synthetic fibers business (Lycra, Stainmaster, etc.) spun off by DuPont.

The Kochs claim to run their businesses in accordance with their laissez-faire beliefs—their term for it is Market-Based Management—which means that they have frequently come into conflict with government regulators and prosecutors. They are currently the target of protests over reports that they will try to purchase the Los Angeles Times and other newspapers being sold by the Tribune Co.

Company History

The Koch empire dates back to the late 1920s, when engineer Fred Koch invented a more efficient method for the thermal cracking of crude oil, which yielded higher proportions of usable products, especially gasoline. His innovation threatened the existing oil industry, which tied Koch up in patent infringement lawsuits. He responded by signing a contract with the Stalin regime to construct refineries in the Soviet Union. During the 1940s he built a domestic oil service business called Wood River Oil & Refining based in Wichita, Kansas. It was later renamed Rock Island Oil & Refining.

Koch maintained a low-profile for his company while getting involved in right-wing politics. He helped found the John Birch Society in 1958. After Koch died in 1967, the company was taken over by his 32-year-old son Charles. Another son, David, also joined the firm. The brothers initiated a period of rapid growth that would turn the family’s business, renamed Koch Industries, into one of the country’s largest privately held companies.

William, David’s twin, joined the company in 1971, but he reportedly never fit in. He clashed with Charles over issues such as the large sums the latter was contributing to the Libertarian Party and the limited sums that were being paid in dividends to family shareholders. In 1980 Bill tried to seize control of the company. The effort failed, and William was ousted. He sued Charles and David for corporate mismanagement; they countersued with a $167 million libel action. The situation became ugly as the brothers traded endless accusations. The case was settled in 1983; as part of the deal, William (and a fourth brother, Fred, who took his side) sold their interests back to the company. Two years later, however, William and Fred sued Charles and the company, claiming that the value of their holdings had been misrepresented to them. That charge was rejected in court.

The family squabbles did not slow the growth of Koch Industries, which benefitted from shrewd acquisitions of properties shunned by larger oil producers and by the run-up in oil prices in the 1970s. The company also moved into businesses such as oil pipelines, chemicals, cattle ranching, coal mining and commercial real estate, the latter through the acquisition of Chrysler Realty Corporation.

In 1998 Koch purchased Invista, the synthetic fibers business of DuPont, for $4.4 billion. In 2005 it made its largest deal ever: the $21 billion acquisition of paper products giant Georgia-Pacific. In 2012 Koch acquired a large stake in glass, automotive and building products producer Guardian Industries.

Political Controversies

After the Obama Administration took office, the Kochs became known more for their ideological activities than their business operations. The Kochs were backers of Americans for Prosperity, which starting in 2008 waged an intense campaign against the climate bill being considered by Congress. Even after the bill was dead, it went on getting lawmakers to sign a pledge against such legislation.

In 2009 Greenpeace issued a report identifying the Kochs as leading funders of climate science denial groups. In a widely read 2010 article by Jane Mayer in The New Yorker, David Koch was described as “best known as part of a family that has repeatedly funded stealth attacks on the federal government, and on the Obama Administration in particular.“

Many of these political initiatives served the Kochs’ business interests. Their industrial operations stood to gain if regulation of greenhouse gases and other pollutants remained weak. The Mayer article pointed out that Koch Industries was lobbying vigorously against tougher federal regulation of formaldehyde—widely viewed as a carcinogen though heavily used by the company’s Georgia-Pacific unit in its wood products—at the same time that David Koch was making large contributions to cancer research centers.

In 2010 the Kochs spent heavily to get conservatives elected governor in various states. One of the successful candidates, Wisconsin’s Scott Walker, ended up in an embarrassing situation in 2011 after he had a phone call with someone who identified himself as David Koch and encouraged Walker in his effort to strip public employees of collective bargaining rights. The caller turned out to be an imposter who made a recording of the conversation public. Koch Industries was the target of activists who posted a fake news release in its name purporting to announced that it was ending its funding of climate denial groups. Koch’s consumer brands were a target of a boycott by groups protesting Walker’s policies.

In 2011 and 2012 the Kochs were at the center of a new controversy over their role in funding the American Legislative Exchange Council (ALEC), an organization that disseminates corporate-written model legislation on a wide range of issues (such as paid sick leave) to state legislators. An article that year in Politico reported that, in addition to using their own money, the Kochs were mobilizing other conservative donors to contribute more to groups such as Americans for Limited Government and the American Future Fund.

A December 2012 report by the International Forum on Globalization accused the Kochs of paralyzing U.S. climate policy and thus helping to undermine UN talks on addressing the climate crisis.

A new controversy emerged in 2013 in response to reports that Koch Industries was considering a bid to purchase the Tribune Co.’ s eight regional newspapers, including the Los Angeles Times and the Chicago Tribune. The reaction was most intense in Los Angeles, where labor unions and others launched a campaign to mobilize both newspaper subscribers and holders of Tribune stock to oppose such a deal.

The Tribune Co. issue spilled over into a controversy over David Koch's relationship to public television. A new article by Jane Mayer in The New Yorker questioned whether the fact that Koch sat on the boards of two PBS stations played a role in the decision by PBS to cancel plans to broadcast a film called Citizen Koch about the Koch empire. (Koch was was apparently not happy about the airing on PBS of a previous film about him called Park Avenue).

In September 2013 Politico reported that Freedom Partners, a low-profile political funding vehicle linked to the Koch Brothers, had been responsible for some $236 million in grants to conservative groups.

Fraud, False Claims, Bribery, Price-Fixing and Other Corrupt Practices

In 1974 Koch was one of four oil companies accused by the Federal Energy Administration of overcharging customers by some $58 million. In 1980 Koch Industries was fined $50,000 by a federal court for manipulating a Bureau of Land Management lottery of oil and gas leases. That same year, the Carter Administration’s Council on Wage and Price Stability chastised Koch for refusing to cooperate with a price survey designed to assist a program to combat inflation (AP, March 7, 1980).

As part of his feud with his brothers, William Koch hired private investigators to document claims that Koch Industries had engaged in fraud while purchasing oil from Indian reservations. A Senate committee looked into the matter and in 1989 found some validity to the charges. Itsubmitted its findings to the Department of Justice, but a grand jury declined to issue indictments. In 1999 a federal jury, acting in a whistleblower case that had been initiated by William Koch, found that Koch Industries had underreported the amount of oil it obtained from federal and Indian leases. In 2001 the company agreed to pay $25 million to settle the case.

In 2002 KoSa, a Luxembourg-based producer of synthetic fibers controlled by Koch, pleaded guilty to U.S. Justice Department charges of participating in a price-fixing cartel involving polyester staple and paid a $28.5 million criminal fine.

In 2006 Koch paid a fine of $75,000 and signed a consent decree with the Federal Communications to resolve charges that the company’s applications for private radio licenses failed to mention that it had been convicted of felonies on three occasions in federal and state courts. The consent decree did not provide details of the cases, but they presumably involved the environmental violations below.

In November 2011 the magazine Bloomberg Markets published a lengthy article entitled “The Secret Sins of Koch Industries” that made some explosive accusations against the company: “For six decades around the world, Koch Industries has blazed a path to riches—in part, by making illicit payments to win contracts, trading with a terrorist state, fixing prices, neglecting safety and ignoring environmental regulations. At the same time, Charles and David Koch have promoted a form of government that interferes less with company actions.”

The environmental cases had been previously reported and are summarized below. What Bloomberg revealed for the first time were the allegations involving bribery and dealing with Iran. The article reported that the company’s subsidiary Koch-Glitsch paid bribes to secure contracts in six countries (Algeria, Egypt, India, Morocco, Nigeria and Saudi Arabia) and that it violated U.S. sanctions by doing business with Iran, including the sale of materials that helped the country build the world’s largest plant to convert natural gas to methanol used in plastics, paints and chemicals.

Environmental and Safety Record

In 1994 an ammonia leak at a pipeline-to-barge fertilizer facility near St. Louis owned by a Koch subsidiary killed one worker and sent another to the hospital (Journal of Commerce, February 23, 1994). The Coast Guard ordered the operation to be shut down for several weeks while conditions were examined.

In 1995 the U.S Justice Department, the Environmental Protection Agency and the United Stated Coast Guard filed a civil suit against Koch Industries and several of its affiliates for unlawfully discharging millions of gallons of oil into the waters of six states. In one of the largest Clean Water Act cased ever brought up to that time, the agencies accused Koch of being responsible for more than 300 separate spills in Alabama, Kansas, Louisiana, Missouri, Oklahoma and Texas. The largest incident occurred in Nueces Bay and Corpus Christi Bay in 1994 along the eastern coast of Texas.

In 1997 Tosco Corporation (now part of ConocoPhillips) sued Koch in a dispute over costs related to the clean-up of toxic waste at an oil refinery in Duncan, Oklahoma that used to be owned and operated by Koch. In 1998 a federal judge ordered Koch to contribute to those costs, and that ruling was upheld by an appeals court in 2000. The companies later settled the matter out of court.

In 1998 Koch agreed to pay $6.9 million to settle charges brought by state environmental regulators relating to large oil spills at the company’s Rosemount refinery in Minnesota. The following year it agreed to plead guilty to related federal criminal charges and pay $8 million in fines.

Also in 1998, the National Transportation Safety Board found that the failure of a Koch subsidiary to protect a liquid butane pipeline from corrosion was responsible for a 1996 rupture that released a butane vapor. When a pickup truck drove into the vapor it ignited an explosion that killed the driver and a passenger. In a wrongful death lawsuit a Texas jury awarded the father of one of the victims $296 million in damages.

In 2000 the U.S. Justice Department and the EPA announced that Koch Industries would pay what was then a record civil environmental fine of $30 million to settle the 1995 charges relating to more than 300 oil spills plus additional charges filed in 1997. Along with the penalty, Koch agreed to spend $5 million on environmental projects in Texas, Kansas and Oklahoma, the states where most of its spills had occurred. In announcing the settlement, EPA head Carol Browner said that Koch had quit inspecting its pipelines and instead found flaws by waiting for ruptures to happen.

Later in 2000, DOJ and the EPA announced that Koch Industries would pay a penalty of $4.5 million in connection with Clean Air Act violations at its refineries in Minnesota and Texas. The company also agreed to spend up to $80 million to install improved pollution-control equipment at the facilities.

In a third major environmental case against Koch that year, a federal grand jury in Texasreturned a 97-count indictment against the company and four of its employees for violating federal air pollution and hazardous waste laws in connection with benzene emissions at the Koch refinery near Corpus Christi. The Bloomberg Markets article cited above reported that a former Koch employee said she was told to falsify data in a report to the state on the emissions.

The company was reportedly facing potential penalties of some $350 million, but in early 2001 the newly installed Bush Administration’s Justice Department negotiated a settlement in which many of the charges were dropped and the company pled guilty to concealing violations of air quality laws and paid just $10 million in criminal fines and $10 million for environmental projects in the Corpus Christi area. In 2010 the EPA stripped Texas of its jurisdiction over the air-quality permits held by the Corpus Christi refinery.

In 2002 Koch Petroleum Group, the Koch Industries entity involved in most of these environment problems, was renamed Flint Hills Resources.

With the purchase of Georgia-Pacific, Koch acquired a company with its own environmental and safety problems, some of which remained unresolved. For example, in 1984 a G-P plant in Columbus, Ohio had spilled 2,000 pounds of phenol and formaldehyde that reached a nearby community. Residents complained of health problems from that incident and from a hugeindustrial waste pond that the company continued to maintain at the plant.

In 2006 the U.S. Occupational Safety and Health Administration cited Georgia-Pacific for safety violations linked to the death of a worker in an accident at a Georgia paper mill and proposed a fine of $63,000.

In 2009 the U.S. Justice Department and the EPA announced that G-P would spend $13 million to perform clean-up activities at a Michigan Superfund site where it previously had a paper mill. In 2010 G-P was one of ten companies sued by the Justice Department over PCB contamination of the Fox River in Wisconsin. Unlike the other defendants, G-P had already settled with DOJ by agreeing to a $7 million penalty and to pay for the costs of a portion of the clean-up. One of the other defendants, Appleton Papers, called the settlement a “sweetheart deal.”

In 2009 Invista agreed to pay a $1.7 million civil penalty after disclosing more than 680 violations of various environmental regulations at its plants in seven states that it said dated back to when those facilities were operated by DuPont.

More recently, Koch Industries has been caught up in the controversy over the Keystone XL pipeline. In 2011 Inside Climate News reported that Koch already responsible for 25 percent of the tar sands oil being imported from Canada into the United States and stood to benefit greatly from the new pipeline. Koch denied its involvement, but Inside Climate News founddocuments filed with Canada’s Energy Board contradicting that statement.

An August 2012 report by the Political Economy Research Institute at the University of Massachusetts-Amherst identified Koch as being among the top five corporate air polluters in the United States.

A November 2012 article in the Texas Observer reported on the high level of illnesses among people living near the Corpus Christi refinery owned by Koch subsidiary Flint Hills Resources.

Subsidies

The Kochs’ free-market ideology has not prevented their companies from taking economic development subsidies from state and local governments. In 2013 it was reported that Koch Industries was the largest investor in the Big River Steel project in Arkansas that was slated to receive some $139 million in state and local financial assistance.

Watchdog Groups and Campaigns

ALEC Exposed

Bridge Project

Center for Media and Democracy

Center for Public Integrity

Oil Change International

Oil Watchdog

Sourcewatch