Kochland Read online

  The investigation might have foundered after Koch’s team left the state offices on May 8. If nobody inside the refinery told the truth to investigators, it was all but impossible for the MPCA to figure out what was happening inside the refinery. This was how Koch Industries wanted it. Ernie Tromberg, the longtime Pine Bend operator and manager who retired in the early 1990s, said Koch’s management team felt that the state had no right to know what happened inside the fence line of Koch’s property. Managers obeyed a code of silence to maintain this wall around Koch’s operations. They didn’t talk about the company’s business to outsiders. This was an unspoken rule among Koch’s tightly knit team of leaders.

  On May 12, Faragher called Kriens. She told him that Steve David had lied during their meeting. She was ready to help the state.

  * * *

  On May 27, Kriens and his team met again with Koch’s managers. This time David, Faragher, and Hall were joined by Roos. Once again, Kriens asked if Koch’s environmental team had been aware of the ammonia dumping prior to January, when Faragher had reported it to the state. Once again, he was told “No.” But this time, Kriens knew the truth. During back-channel meetings, Faragher was helping him understand it.

  * * *

  The state’s investigation grinded on through the spring and summer months of 1997. Koch built a legal wall around its refinery, hiring criminal defense lawyers to represent the employees involved in the ammonia dumping. Jim Voyles traveled to Pine Bend from Wichita and helped coach the employees, preparing them for an intense investigation by the MPCA.

  Faragher kept going in to work every day, as if everything were normal. She had very little choice. Her pregnancy was progressing, and she was always aware that soon she’d have a child to support. The happy days of her early career at Koch were finished. The sense of community, the softball games, the drinking sessions—all of it had disappeared. Faragher had gained a reputation. She was known to be the complainer, the employee who’d fought her bosses on the ammonia issue.

  Faragher kept her mouth shut at work during the long summer months. It was obvious what happened to those who did otherwise. Life had become instantly and thoroughly miserable for Charlie Chadwell and Terry Stormoen, the shift workers who took evidence of Koch’s criminal conduct to state officials and then told their bosses about it. Chadwell was reprimanded after cigarette ashes were found in a work vehicle he used—he said he’d been smoking during his shift but not on refinery property. He was suspended. His managers held disciplinary meetings with him. A Koch attorney interrogated Chadwell about his views on Koch’s environmental policy. Chadwell didn’t cooperate and claimed that he couldn’t answer some of the questions because he had short-term memory loss.

  Chadwell called in sick after that meeting, and, in response, Koch required him to go see a company doctor who could evaluate his health. Koch’s doctor referred Chadwell to a neurologist, who was hired by Koch, and the neurologist, in turn, referred Chadwell to a psychologist, also hired by Koch. The psychologist said that Chadwell did not, in fact, suffer from a memory disorder that would cause short-term memory loss.

  Chadwell became even more confrontational. He took a briefcase full of documents from the refinery and gave them to the state, informing his bosses about it after the fact. Koch suspended Chadwell, saying he would not be reinstated on the job until he returned that evidence. Chadwell started telling people that Koch Industries was trying to kill him. He said someone had detonated an explosive device in his mailbox, an act he thought was orchestrated by the company. On December 9, Chadwell met again with Koch supervisors. This time he said he had been lying about the mailbox explosion and that he simply wanted to be fired.

  Koch granted Chadwell’s wish on December 17. He was terminated.

  News traveled fast around the Pine Bend refinery. Chadwell’s story was well known. Employees like Faragher saw what happened to employees who worked with state regulators.

  * * *

  On October 27, Faragher gave birth to her first child, a healthy girl. She stayed home and began a maternity leave that would last more than two months. The leave gave her time to think. She focused on her daughter. She trained her mind to avoid thoughts of Koch Industries. She thought the stress would only hurt her health, and therefore the health of her new baby. During the holidays of 1997 and the frigid new year, Faragher kept her eyes and her thoughts on her little girl.

  But the problems at Koch came to her doorstep. On March 18, 1998, Faragher was home with her husband and infant daughter when the doorbell rang. She answered it and found a well-dressed man and woman on her front porch.

  It was the woman who would lodge herself in Faragher’s memory. Actually, it was the pistol on the woman’s hip that was memorable. The couple introduced themselves to Faragher as she held the door open. The man was John Bonhage, a special agent with the FBI. The woman was Maureen O’Mara, an agent with the US Environmental Protection Agency. They asked if they could come in and talk, and Faragher said they could. It didn’t appear that she had much choice.

  O’Mara walked through Faragher’s house with the heavy pistol holstered at her side. The pistol said everything that the two agents did not need to say. The full force of the federal government was now investigating the pollution at Pine Bend. Faragher was apparently at the center of the investigation.

  Faragher sat down with the agents and her husband, Greg. They asked her about her history at Koch and the issues surrounding the ammonia dumping. They told her that they wanted her to cooperate with them and become a state’s witness. They also wanted her to keep her involvement secret from Koch Industries. In short, the investigators wanted her to follow the path that Charlie Chadwell and Terry Stormoen had followed; they wanted her to provide evidence that could lead to criminal charges against Koch Industries.

  Faragher said she would cooperate. They gave her their business cards and let it be known that they would be in touch.

  As the agents were leaving her home, Faragher asked them if they needed her phone number. She recalled her husband saying, “Heather, they found our house. I think they have our phone number.”

  In this moment of fear, Faragher called her father, Ted Lawrence. She told him everything that had happened.

  “He told me: ‘I raised you to do the right thing. So tell the truth. You can sleep on my couch if you need to.’ ”

  On March 31, 1998, Heather drove to an office building where she met with the FBI and the EPA. She talked to them for twelve hours.

  * * *

  Inside the refinery, Koch’s defense attorneys were meeting extensively with employees, coaching them and questioning them as the federal regulators pursued their criminal probe.

  Faragher sat down with a Koch attorney named Susan Wiens to go over the details of the case. Wiens began the interview by asking a series of perfunctory questions, collecting basic information. Wiens didn’t seem to be paying much attention as she rolled through this series of stock questions. Then she asked Faragher if Faragher had been speaking with federal regulators.

  Faragher answered: “Yes.”

  “The look on [Wiens’s] face was priceless,” Faragher recalled. “She said, ‘Okay. You’ve got to excuse me.’ She left the room immediately to go talk to someone.”

  * * *

  In 1998, the Minnesota Pollution Control Agency fined Koch Industries $6.9 million for the company’s pollution at Pine Bend. It was the largest fine of its type in the history of the state.

  Federal criminal charges quickly followed after that. In 1999, Koch Industries pled guilty in federal court to criminal violations of environmental laws, both for dumping ammonia and for allowing leaks at the refinery to pollute the surrounding area with oil for several years. The company’s plea spared it from fighting the charges in a drawn-out jury trial. No individuals at the company were charged with crimes. The deal allowed Koch to get off easier than it might have. As part of the plea deal, Koch agreed to pay a criminal fine of $6 million while
also paying $2 million to Minnesota’s Dakota County Park System. It was the largest federal fine ever imposed in Minnesota. Koch Industries also reached an agreement to pay a $3.5 million fine to the EPA.

  The guilty plea permanently damaged Koch’s reputation in Minnesota, but Koch’s attorneys could reasonably be credited with getting the company off lightly. The fines, while historic, would not dent Pine Bend’s profitability or cash flow.

  Koch did not retaliate against Faragher by firing her. But she was ignored and felt shunned by management. She contacted the criminal lawyer Koch had hired to defend her and asked if he might be able to get her a severance package from the company. He negotiated a deal on her behalf. Faragher quit and got the severance. She never found another job in Minnesota, where she had so desperately wanted to raise her daughter. The Minnesota Pollution Control Agency offered her a job, but with a significant pay cut. She ended up getting a job in another state.

  After he was fired, Charlie Chadwell sued Koch, claiming the company violated whistle-blower laws by retaliating against him. Chadwell lost the case when a jury decided that Koch had sufficient reason to fire him for his erratic behavior on the job. Terry Stormoen, the other shift worker who reported Koch’s criminal activity, said that he simply quit his job without getting any kind of severance package or settlement from Koch.

  * * *

  Not everyone did so poorly. Brian Roos, the process owner over at Pine Bend’s wastewater plant, was promoted to Wichita. By 2010, he had become a manager of strategic planning at Koch’s petroleum division. Timothy Rusch, the refinery manager at Pine Bend, became Koch’s vice president of construction and refinery services, overseeing projects at both the Pine Bend and Corpus Christi refineries. Jim Voyles, Koch’s attorney, went on to have a successful career in environmental law, leaving Koch to join the fertilizer company Mosaic. In 2013, he spoke at a national conference on corporate sustainability held by the National Association for Environmental Management. In 2016, he was a senior attorney for Chevron in Bakersfield, California.

  * * *

  The illegal activity at Pine Bend was not an isolated incident. There were incidents of lawbreaking across Koch Industries, caused in part by a cultural bias toward maximizing profits and abetted by a general disdain for government.

  At the refinery in Corpus Christi, for example, Koch managers delayed equipment improvements in much the same way that Brian Roos and others hesitated to shut down the Pine Bend refinery to inspect the sour water strippers. In April of 1996, an environmental technician named Sally Barnes-Soliz went to state environmental regulators and told them that Koch Industries had been lying about illegal emissions of the chemical benzene, which causes cancer. Barnes-Soliz worked at the Corpus Christi refinery. The state had ordered Koch Industries to cut benzene emissions from the refinery. Koch had told the state it complied with the order. But Barnes-Soliz said this was a lie. “The refinery was just hemorrhaging benzene into the atmosphere,” she later told Bloomberg Markets magazine.

  Barnes-Soliz reported the high emissions levels to her bosses. But like Faragher, she said, she was sidelined. Koch reported much lower levels to the state, filing false reports that undercounted how much benzene it was emitting. Thanks in part to assistance from Barnes-Soliz, federal prosecutors filed a ninety-seven-count criminal indictment against Koch. The company disputed that Barnes-Soliz was a whistle-blower, pointing out that Koch managers themselves reported wrongdoing to authorities when they discovered that a manager had falsified pollution reports. Most of the ninety-seven counts against Koch were later dropped, a sign, Koch’s attorney said, that prosecutors had been overzealous. A federal judge ended up fining the company $10 million for the violations and ordering it to pay another $10 million to Texas authorities to fund environmental work. Barnes-Soliz said Koch retaliated against her whistle-blowing: “They were pressuring me to quit,” she told Bloomberg Markets. She did so in 1996. Koch insisted that Barnes-Soliz had a poor performance record and her departure was unrelated to the benzene pollution.

  In Koch’s pipeline division, managers delayed needed repairs to boost profits. Phil Dubose, the onetime oil gauger who rose to senior levels in the transportation department, said he was shocked at the sorry state of Koch’s pipelines. They were leaky and poorly cared for. Koch often didn’t even trim foliage that grew over and around the pipes as it was supposed to do to keep a clean right-of-way. The EPA sued Koch in 1995 for negligence of the pipeline system. The agency alleged that Koch spilled roughly twelve million gallons of oil between 1988 and 1996 and caused 312 spills in six states. The company was eventually fined $30 million for the pipeline leaks, which was the largest fine of its kind in US history.

  The most tragic case happened in Texas. One of Koch’s neglected pipelines began to leak butane vapors into the air in the summer of 1996. Two teenagers named Danielle Smalley and Jason Stone were driving near the pipeline leak when it ignited and caused an explosion. The two kids were burned alive. Smalley’s family sued Koch and won a judgment of $296 million, another record-breaking amount. The family later settled for an undisclosed amount. These fines and charges, combined with those for the ammonia dumping at Pine Bend, marked Koch Industries as one of the largest, most flagrant violators of environmental laws in the United States during the 1990s.

  But the judgments and indictments did not slow Koch down. This was a period when Charles Koch was focused more than ever on expanding, and expanding rapidly. The problems exposed at Pine Bend and elsewhere were not being isolated and contained. They were being exported.

  * * *

  I. Other nonprofit groups included accountants, the human resources team, lobbyists, and lawyers.

  II. In regulatory parlance, releases with enough pollution are called a reportable quantity, or an RQ.

  III. While the area in question was referred to as a “wetland” and was near the Mississippi River, the area was not on a list of state-designated wetlands.

  IV. Burgess left Koch after these events, and in 2002 he won an election to become a state district court judge in Sedgwick County, Kansas, where Wichita is located. He remained a state judge in 2015.

  CHAPTER 9

  * * *

  Off the Rails

  (1995–2000)

  Koch Industries executives gathered for a secret meeting at an offsite corporate conference room in Wichita. They were gathered to be told about a new strategic initiative. It is safe to say that this meeting is where the problems started.

  The business leaders heard a presentation from a young Koch employee named John C. Pittenger. He was a new breed of Koch employee. He didn’t graduate from Kansas State University or the University of Oklahoma; he went to Princeton University for his undergrad and to Harvard for his master’s degree in business. Koch hired him from a consulting firm called Monitor Group, which was run by Michael Porter, the Harvard management guru who’d given some of the earliest seminars on competition strategy at Koch Industries in the 1980s.

  Pittenger moved easily in the world of East Coast money. He knew the latest management theories, consulting trends, and buzzwords being handed down by the Ivy League. He could have easily worked for any firm on Wall Street, but he decided to leave that world and work for Koch. He did this after seeing firsthand how the company operated when Koch had hired him as a contract consultant.

  Lots of other business school graduates were following in Pittenger’s footsteps. Koch was hiring more Ivy Leaguers and MBAs than ever before. The educated business class was finally catching on to what was happening inside the Tower in Wichita.

  During the offsite meeting with Koch’s top executives, Pittenger helped explain how they’d be running their business over the next decade. They learned that growth would be more important than ever. It was time to expand. Time to take advantage of the economic conditions encouraging bigness in corporate America. In typical Koch fashion, the company developed a specific strategy to grow, one that came complete with its own vocabulary. The
framework was called the Value Creation Strategy, or VCS.

  Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required.

  This change rippled out through the ranks. Deals were proposed and sent to Wichita—everybody wanted a big acquisition under their belt. Charles Koch had historically been merciless when it came to assessing these deals, but a certain bias toward acquisitions crept into Koch Industries’ decision-making by 1995. Koch’s own track record fostered this bias. Koch Industries’ sales were roughly $24 billion a year, more than 135 times what they had been when Charles Koch assumed control in 1967. The profits and the cash flowing in the door seemed to be proof that Koch’s philosophies worked. The company knew how to grow—the market itself had delivered its verdict. Charles Koch listened to that verdict. He pushed the company forward even more aggressively.