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  Even though his influence is felt throughout Koch Industries, and throughout America’s political system, Charles Koch remains a remarkably opaque figure. He prizes his privacy and cherishes secrecy. Countless people have tried to understand Charles Koch by looking at him from outside the tall walls and dark glass windows of Koch Industries headquarters. One of those people is an FBI special agent named James Elroy. He dedicated many years of his life to investigating the leadership organization of Koch Industries. Elroy was convinced, in 1988, that Charles Koch and his lieutenants were engaged in a massive criminal conspiracy.

  That is why Elroy positioned himself, one day, in the middle of an Oklahoma cow pasture, holding a camera with a wide-angle lens, trying to surveil Charles Koch’s employees. That is the moment where this book begins.

  PART 1

  * * *

  THE KOCH METHOD

  CHAPTER 1

  * * *

  Under Surveillance

  (1987–1989)

  FBI special agent James Elroy stood on a remote expanse of pastureland and waited for the man from Koch Oil to arrive. Elroy had a 600-millimeter camera, a telephoto lens, and plenty of film. Perhaps most importantly, he also had a bag of feed cubes for the cattle. Elroy had arrived early at this carefully chosen spot to stake out his position. He stood at a place with a commanding view of a large, cylindrical oil tank. The tank was one of hundreds just like it that were scattered throughout the Oklahoma countryside, sitting on land that was desolate on its surface but which covered rich deposits of underground crude-oil lakes. The oil was slowly drained by unmanned pumps that bobbed up and down day and night, drawing out the crude and sending it into the big metal tanks. When those tanks were finally full, an employee from Koch Oil would arrive in a big truck, siphon out the fuel, and take it to market. Elroy planned to be ready for him.

  Elroy opened the feed bag, grabbed handfuls of cubes, and scattered them on the ground. Soon enough, the cattle began to congregate around him, lowering their heads to sniff through the grass and pick out pieces of their unexpected meal. As he hoped would happen, Elroy was soon fully encircled by the cattle. On the flatland prairies of Oklahoma, this was about the only way to stay hidden.

  For a long time, it was just Elroy out there, all alone. The nearest town was called Nowata, and it wasn’t much more than a tiny grid of neighborhoods surrounding a strip of one-story brick buildings that passed as downtown. In Nowata, the main drag wasn’t called Main Street: it was called Cherokee Avenue. Elroy was standing in “Indian Country,” as outsiders called it, the Indian reservations that were home to the last remnants of American tribes like the Osage and Cherokee. Elroy was familiar with this country, having been an FBI agent in Oklahoma City for several years. During his time in Oklahoma, Elroy had developed a specialty in breaking open large, complicated fraud schemes—his biggest case was a massive public corruption sting in the early 1980s that netted more than two hundred convictions, including two-thirds of all the sitting county commissioners in the state of Oklahoma.

  So maybe it was inevitable that Elroy would be sucked into this investigation and would find himself standing in the middle of a cattle herd, staring at a lonely oil tank. The surveillance was part of a special detail—the FBI had loaned Elroy out as a special investigator for the US Senate. Although he had a new boss, the job was a familiar one. Elroy was collecting evidence for a sprawling, complex fraud case. Elroy’s new bosses in the Senate were increasingly convinced that the obscure company called Koch Oil was engaged in a conspiracy to steal millions of dollars’ worth of oil from local Indians—and possibly US taxpayers, too. Elroy’s job was to document whether the fraud was real. That’s why he had the 600-millimeter camera at the ready.

  Soon enough, Elroy spotted his target: a lone truck was coming down a narrow road that led to the oil tank. As the truck approached, Elroy was well concealed behind a wall of cattle. He raised his camera and aimed it at the truck as it pulled alongside the oil tanker and a man got out.

  Elroy then trained his telephoto lens on the Koch Oil man as he went about his work, down by the oil tank. The camera went in and out of focus. Blurry, then sharp. Then Elroy could see the Koch Oil man as if he were standing just feet away. His face, his clothing, his hands as he worked. Elroy focused in.

  Snap. Snap. Snap.

  * * *

  Elroy’s photos were developed in a darkroom. The images were vague at first, but the picture clarified with each dip in a chemical bath, shapes and profiles refining and sharpening until the complete picture came into view. The Koch Oil man approaching the oil tank. Opening it. Measuring the oil within. Writing a receipt. The images were crisp and clear. Inarguable evidence. Over time, Elroy developed a stack of images like this, high-quality shots that allowed him to see the Koch Oil man perfectly. The 600-millimeter telephoto lens had done its job.

  As clear as the photos were, Elroy did not plan to use them as evidence in court. They were going to be a tool for his investigation—a way to exploit human weakness.

  Elroy learned how to investigate large conspiracies for the FBI during the 1980s. To break open a large conspiracy, you start at the edges. You find the most vulnerable link in the large chain of corruption, and you exploit it. That’s why Elroy decided to focus on the Koch Oil employees who actually emptied the oil tanks. These were the kind of people who were very quick to start talking when an FBI agent knocked on their door. They were the working stiffs; the most visible players in what Elroy was increasingly convinced was a complex conspiracy.

  Elroy wasn’t the typical FBI man, with the stereotypical crew cut and shiny black shoes. When he graduated from the FBI Academy in Quantico, Virginia, in 1970, Elroy looked as much like a young corporate attorney as anything else, with a slightly shaggy mop of dark hair and a knowing smirk on his face. He knew American criminal code inside and out, was foulmouthed and well trained with a rifle. In spite of his irreverence, he was a law-and-order man through and through. He revered Director J. Edgar Hoover, whom he saw as a visionary leader rather than the bureaucratic despot that many historians judged him to be. When Elroy was told he’d be working for the US Senate, he wasn’t thrilled. As a rule, Elroy thought that Senate investigations were political theater. As an FBI man, he was accustomed to operating under strict legal rules about gathering evidence to ultimately prosecute a criminal case. The Senate investigations seemed lightweight compared to that: the senators only seemed to ever want enough evidence to support a public hearing in Washington so they could have a show. But Elroy’s bosses knew him well. They knew that when he was assigned to a case, he became borderline obsessed. And that is exactly what happened in the case of Koch Oil.

  The Senate had gotten a tip that Koch Oil was stealing oil from Indian reservations throughout Oklahoma. These Indian lands were administrated by the federal government, so the Senate took a keen interest in the allegations. Elroy was told that the scheme was relatively simple: Koch Oil was an oil transportation company. The company would show up at the metal oil tanks, drain the oil, and then ship it to the market by truck or pipeline. But every time Koch drained the oil, it would intentionally underreport just how much it was taking. If Koch drained a hundred barrels, for example, it would say it had only gathered ninety-nine barrels. This meant that Koch was getting one barrel for free every time it bought oil.

  While the alleged scheme was simple, it proved remarkably difficult to investigate. Koch Oil seemed to be built for the very purpose of avoiding outside scrutiny.

  The company was owned by Koch Industries, a conglomerate based in Wichita. The company was family-owned and private. It seemed that nobody in either the Senate or the FBI had ever heard of the firm when they began investigating it in 1988. They mistook it for Coca-Cola, the soft drink maker in Atlanta, or they mispronounced the company name altogether in a way that rhymed with “watch” rather than the correct pronunciation, which rhymed with “smoke.” But for all its obscurity, it turned out that Koch Industries was a
sprawling and vitally important company. Senate investigators learned that Koch Oil was the single largest purchaser of crude oil in the United States. Over the decades, it had quietly bought up tens of thousands of miles of pipelines and trucking services. As a result, when oil drillers like Exxon or Chevron wanted to ship their oil from remote wells in places like Oklahoma, Koch Oil was sometimes the only buyer for their product. It was the only way to get oil from the well to market. Millions of Americans used Koch’s products when they filled up their car’s gas tank, but no one seemed to even know the company’s name.

  The only thing that was clear about Koch was that it harbored a deep antipathy toward the federal government and toward regulation in general. David Koch, one of the company’s primary owners and executives, had run for vice president on the national ticket for the Libertarian Party in 1980. Its platform had called for the abolishment of everything from the US Post Office to the Environmental Protection Agency to public schooling. The company itself had tangled with federal energy regulators for years over price control laws and other matters. Koch executives consistently argued that energy companies should operate in markets untrammeled by federal regulations. Koch Industries sat at the nexus of America’s energy supply, but for all its power and influence, Koch was a hidden giant. The company had somehow insinuated itself into nearly every corner of America’s energy infrastructure without ever revealing its position.

  How, then, could Elroy hope to prove whether the company was stealing oil or not? He went after the employees who drained the oil tanks, known as “gaugers” in the business. The only benefit they could possibly get from mismeasuring oil was their paychecks. They lived in small towns, worked hard to support their families, and some of them probably didn’t even fully grasp what they were doing when they took the oil. They were just doing what their bosses told them to, Elroy suspected. Elroy visited their houses in the evenings. He pulled up at the houses with a partner, walked up to the front door, and knocked. When someone answered, Elroy identified himself as an FBI agent and asked if he could come in and talk. It was highly likely that these men had never met an FBI agent before. This gave Elroy the advantage: the Koch Oil men were confused, knocked off balance, wondering why in the world two men from the FBI were standing in their living room. He, on the other hand, was prepared with a list of specific questions and some evidence on hand to back up very serious allegations of theft.

  Elroy sat down and began to run through his list of questions, asking the men about their daily jobs and the business of measuring oil. It must have been surreal for them, their minds racing, trying to figure out why the FBI was asking them about their relatively mundane days at work. Asking questions about wood-backed thermometers and oil gauges. The men must have wondered, Did I do something wrong? Am I in trouble?

  An FBI agent is an expert at asking such questions in a way that leaves a witness to slowly ponder the terrible possibilities that might result from his answers. And then the agent, Elroy in this case, drops the terrible word that no one wants to hear: “Wouldn’t you consider this kind of mismeasurement to be stealing? Aren’t you basically getting oil without paying for it?”

  To finish them off, Elroy brought out the photos taken with a telephoto lens. He could put the crystal-clear pictures on the table, and the men would look down at them and know that they had been made. Elroy could ask them, as quietly and innocently as possible, “Isn’t this you in this photo? Isn’t this you measuring the oil?” And then Elroy could tell them that, in fact, he had been there as well, and he had measured the same tank of oil right after the Koch Oil man had left, and, boy, was there a difference in the measurements! Significant differences. The Koch Oil man had some explaining to do.

  In this way, Elroy rolled up several witnesses who began to describe what life was like at Koch Industries and how the company went about measuring the oil that it took. Each witness statement gave him more ammunition to use against the next witness. Soon he could start asking about specific meetings, specific managers, specific directives that were sent down from management.

  Over the months, Elroy would interview more than fifteen employees. He granted many of them the promise of anonymity so that they could talk openly about their employer. As he gathered their stories, a picture began to emerge.

  Koch managers never told their employees to go out and steal. It was never that obvious. Instead, the company put relentless pressure on the employees to meet certain standards. Koch managers made clear to the gaugers that they were never to be “short”—meaning they reported taking more oil from the tanks than they actually delivered to Koch—on too many tanks of oil. If a gauger was short week after week, he wouldn’t be working for Koch much longer. So the gaugers found ways to be perpetually “long.”I That meant they were consistently underreporting how much oil they drained from the tanks. They told the producer they were taking 100 barrels, and then they were delivering 101 barrels to Koch’s pipeline. As a result, the company ran a profitable surplus every year, collecting far more oil than it paid for, at least in the state of Oklahoma.

  The Koch employees told Elroy that the need to be long on oil was constantly drilled home to them in something called “continuous improvement” meetings. These meetings seemed to be the way that employees got their marching orders from Koch headquarters in Wichita. Elroy soon became convinced that Koch Oil was “a corporate-directed criminal enterprise.”

  What wasn’t clear to anyone in the government was just how far up the chain of command the control of this enterprise went. Who was putting the pressure on gaugers to “continuously improve”? Who was telling them to fudge the numbers when they measured how much oil they were taking?

  Elroy sought to answer these questions as he roamed from living room to living room in rural Oklahoma. His efforts would bring Koch into direct confrontation with the federal government that the company so deeply disdained.

  * * *

  It was almost an accident that Koch Industries found itself the target of Elroy’s efforts. A strange and unlikely series of events put the company in the crosshairs of US Senate investigators to begin with, and that chain of events began on a quiet Sunday morning in Phoenix.

  It was the morning of October 4, 1987. Early that day, newspaper boys rode their bikes through the neighborhoods of Phoenix and threw fat copies of the Arizona Republic Sunday edition onto lawns and driveways. The front page was plastered with an explosive story that carried the headline “Fraud in Indian Country: A Billion-Dollar Betrayal.”

  The story was the first in a series that the Arizona Republic would publish over the next week. The series consisted of thirty stories covering several full newspaper pages, and it focused mostly on rampant corruption and incompetence at a federal agency called the Bureau of Indian Affairs, or BIA.

  The front-page story on that first Sunday said that federal Indian programs were “a shambles, plagued by fraud, incompetence, and deceit and strangled by a morass of red tape that has all but destroyed their effectiveness.” And that was just the first sentence.

  While the central target of the stories was the federal government, the bulk of the first day’s investigation focused on US oil companies that drilled on Indian lands. A headline across the front of the Sunday paper declared that the federal system allowing oil companies to drill on Indian reservations was really nothing more than a “license to loot.”

  The looting happened in a complicated and insidious way. The Arizona Republic story showed that the oil companies themselves were responsible for reporting how much oil they drilled on the Indian reservations: the companies would drill wells, pump the oil, and then report to the government how much oil they had taken out of the ground. The government was not effectively double-checking the companies’ reports to verify how much oil they were actually getting from the Indian reservations. The whole thing worked on an honor system, and the Arizona Republic alleged that firms were abusing it by consistently underreporting how much oil they pumped
out of the ground. The stories said that oil companies were carting off at least millions of dollars in free oil every year.

  The Arizona Republic series garnered the kind of attention, and outrage, that most reporters can only dream of. In particular, the series captured the attention of Arizona’s Democratic US senator, Dennis DeConcini. He told reporters that the series was “devastating.” The stories, he said, “indicate criminality as well as mismanagement.”

  There was something about the allegations that seemed to particularly bother DeConcini. Crime and bureaucratic mismanagement were always offensive, but it seemed especially offensive when the victims were Native Americans. DeConcini sat on a Senate committee that oversaw affairs on Indian reservations. He was intimately familiar with the fact that Native Americans in his home state were among the most beleaguered people in America. On paper, America’s Indian tribes were considered sovereign nations. By the late 1980s, those nations were really nothing more than a giant, failed Socialist state. After being hounded and dislocated and, finally, penned into reservations, the tribes signed treaties that left them with land and natural resources. However, the land was held in trust by the United States and administered by the BIA, so that, in short, the treaties made the federal government a paternalistic overlord of the supposedly sovereign tribes. It seemed that every aspect of life on Indian reservations was governed by the BIA, from health care to housing, education to oil drilling.

  By the late 1980s, the results of this arrangement were truly ruinous. About 45 percent of all Indians lived below the poverty line, the unemployment rate was above 50 percent, and fewer than half of Indian households had a telephone. Most of the people lucky enough to have a job earned about $7,000 a year. Town squares were boarded up, and business was booming at liquor stores; some of the villages resembled shantytowns. This squalor was all the more offensive because a tidal wave of taxpayer money washed up on the shores of Indian reservations every year. The federal government spent about $3.3 billion a year to support the BIA and Indian programs. Strangely, the entire Native American population managed to earn less than $3.3 billion a year even when government assistance from Indian programs was factored in. The federal bureaucracy was sucking up cash while managing to infuriate the very Indians it was supposedly helping.