Kochland Page 4

  But there were two big obstacles to making this plan work. The first was the fact that the oil tanks were all located on private property—property owned by oil drillers like Exxon and Mobil. Elroy couldn’t just trespass on the land to take oil measurements. The second obstacle was figuring out when Koch Oil was due to arrive and drain the tanks. It would be cost prohibitive to have Elroy stake out the company around the clock for weeks at a time.

  Ballen turned to the oil majors for help. While none were willing to attack Koch publicly for taking oil from them, they were more than happy to help Ballen behind the scenes. Their assistance was never publicly disclosed, even as videotape of the surveillance was shown publicly during a later Senate hearing. The companies gave Elroy permission to enter their property and to measure their oil. They also told Ballen’s team when the Koch Oil truck was scheduled to arrive, so that Elroy could be there to observe it.

  With the secret help of the oil majors, Ballen and Elroy were ready to build the case against Koch. They had copius amounts of documentation and photographic evidence. They had the testimony of Koch’s own oil gaugers, whom Elroy had interviewed.

  But Ballen knew that they needed more. So the Senate issued subpoenas to senior Koch Industries executives in Wichita—subpoenas that would compel the men to answer questions under oath. Then Ballen bought a plane ticket to Wichita. There he would question one of the men he had just subpoenaed. It was the man who had ultimate control over this enterprise: the chief executive, Charles Koch.

  * * *

  It is almost awe-inspiring to fly into the Wichita airport. During the daytime hours, airplane passengers can look out the window and see the Kansas prairie stretching away toward the horizon like an impossibly long tabletop covered in green. Wichita itself seems minuscule and stranded within this wide expanse, a small jewel of white buildings surrounded by residential neighborhoods and factories. Outside the city limits, the emptiness looked like the far edge of America.

  Ken Ballen arrived in Wichita with his assistant attorney, Wick Sollers, in late April of 1989. They had a grueling schedule ahead of them.

  On April 24, the two Washington attorneys drove to Koch Industries headquarters. They were scheduled to depose, or interview under oath, eleven of the company’s senior executives and employees. As they drove to the headquarters, Ballen and Sollers might have thought they’d been given wrong directions. One of the largest and most profitable companies in Wichita wasn’t located in a skyscraper downtown. Instead, Ballen and Sollers kept heading west on Thirty-Seventh Street, away from the city center, until they reached the far northeastern corner of Wichita’s city limits. On the north side of Thirty-Seventh, the city ended and gave way to a limitless horizon of tall prairie grass. On the south side of the street was their destination: a squat office building of steel and glass with darkened windows.

  They arrived early in the morning. Their first deposition would take place just after nine o’clock, and it was arguably their most important: they would start the day by interviewing Charles Koch.

  Lower-level investigators like Jim Elroy became convinced that Charles Koch must have been aware that his firm was taking far more oil than it paid for from oil wells throughout the Midwest. It seemed that the behavior was so widespread that it must have been directed from the top. It was almost inconceivable that Koch would not be aware of it. Now Ballen would have the chance to question Charles Koch directly.

  But first, they had to get into the building. This turned out to be no easy task. Ballen and Sollers were stopped at a security checkpoint, where security guards asked them to show their identification. They passed through a metal detector. Then they walked down a hallway into the center of the building and came to yet another security checkpoint. They showed their identification for a second time and once again passed through a metal detector. They walked down yet more hallways, twisting and turning through the labyrinthine interior of the building. Then another security checkpoint. It seemed to Ballen that they went through concentric rings of security as they progressed deeper and deeper into the complex. The setup reminded him of traveling to CIA headquarters in Langley, Virginia.

  Eventually, Ballen and Sollers were led into a windowless conference room. They sat down at a table and were joined by four attorneys representing Koch Industries. Two of the attorneys were from Washington, and the other two were in-house Koch lawyers based in Wichita. The contingent of attorneys was clearly led by Don Cordes, a vice president at Koch Industries and the company’s top lawyer.

  When Charles Koch entered the room, it became clear almost instantly that this man was the master of this domain. The people around him treated Charles Koch with deference—a deference that seemed to go deeper than simple respect for a boss. Sollers and Ballen had no way of knowing that Charles was not, in fact, just the boss of the company. He was its leader. Charles Koch did not order people around him to do what he said. He inspired them to do so. He had a command of the people around him that was difficult for outsiders to understand. Visitors like Ballen and Sollers couldn’t have known that Charles Koch had spent decades building up the loyalty and admiration of the people who worked for him. They didn’t know about his management seminars, the classes and lectures that he held to impart his philosophy.

  But what they could see clearly was that Charles Koch’s authority was complete. He was trim and, at fifty-three, still had an athletic build. He had thick blond hair, a square jaw, and bright blue eyes. He sat down at the table across from Ballen and Sollers and he looked at the two of them, these Washington lawyers. Whatever he might have thought about them, it was impossible to say. But it was clear that he was not intimidated.

  “Could you please state your full name for the record?” Ballen began.

  “Charles de Ganahl Koch.”

  “Sir, what is your position with Koch Industries?” Ballen asked.

  “I am chairman and chief executive,” Koch replied.

  Chairman and chief executive. This was much more than a job title. It was a statement that there was no higher authority within Koch Industries than Charles Koch. And this authority was greater than most CEOs’ because Koch Industries was privately held. Charles Koch and his brother David were the primary shareholders; they’d bought out any shareholders who might have challenged them. Many people could criticize Charles Koch, but it was difficult to see how anyone could actually fire him. As long as his brother David agreed with him, Charles Koch had total command over the enterprise.

  Ballen didn’t treat Koch with deference; he certainly wasn’t inspired by Koch. There might have even been a note of disdain in his voice. As Ballen had done in many depositions and many interviews before, he began to bore in with a list of questions.

  “Sir, what were the company’s overall sales in 1988?” Ballen asked.

  “I think about ten billion dollars.”

  “What was the net profit figure for the company last year?”

  “It was about four hundred million.”

  Ballen could not have known exactly how offensive those simple questions were to Charles Koch. The CEO prized his privacy and his ability to keep Koch’s financial performance concealed behind a wall of secrecy. It was privileged information to know what Koch’s annual revenue was. The level of profits was considered top secret. And here was this lawyer, stomping all over Koch’s secrets with total disregard.

  “What percentage of the business involves crude oil—crude oil purchases?” Ballen continued.

  “Percent in what sense?” Koch shot back.

  Percent in what sense? Ballen gamely tried to define the word percent, and the sense in which he meant it.

  “Of sales and profit, approximately,” Ballen said.

  “I would guess about ten percent of the profit and—this is a guess again—about twenty percent of sales,” Koch replied.

  Ballen gave Charles Koch a set of documents—the same documents that had shocked Ballen’s investigators in Washington. These were Koch’
s own internal figures showing that Koch had taken far more oil than it paid for from oil wells. Ballen would see how Charles Koch responded to these documents. Charles Koch might say that the documents were forgeries, or that they did not actually show what they appeared to show. But Charles Koch said none of those things as he looked over the figures.

  “Have you ever seen any of these documents?” Ballen asked.

  “Yes, I typically see the quarterly—”

  “All right,” Ballen interrupted.

  “—figures,” Koch finished.

  Charles Koch said he didn’t review monthly figures that showed whether the firm was long or short on the oil it bought. But he didn’t dispute the authenticity of the numbers.

  Ballen pushed further. Referring to one of the documents, he asked, “And then what is indicated in the first quarter ’86? What do those numbers show?”

  “Well, Louisiana was about two thousand barrels long.”

  “And that would be long?”

  “That would be long.”

  For a prosecuting attorney like Ballen, Charles Koch had just done two important things: he had confirmed that Ballen’s evidence was authentic—that the numbers on oil sales Ballen obtained through the subpoena were correct—and Koch had also confirmed that he had been aware of those numbers, that he had known that Koch was long on its oil sales.

  Ballen’s line of questioning then sought to establish that Charles Koch knew what long really meant. That way, there would be no ambiguity about the case. Charles Koch didn’t seem interested, however, in helping Ballen establish that fact. Charles Koch parsed the definition of long and seemed to indicate that Ballen didn’t understand it. The two men went back and forth over the definition until Ballen finally asked, “So, in other words, if you purchase oil and then sell oil, if there is more oil in the inventory than sold, then you are long. Is that correct?”

  “I am not sure—”

  “Is that correct?”

  “I am not sure I understood that.”

  “All right. Why don’t you explain it again? What do you mean by being ‘over,’ or ‘long,’ on oil?”

  “I am not sure I can do any better than I just did,” Koch replied.

  Around they went.

  Ballen tried a different route: “If Koch purchases crude oil, purchases a hundred barrels, the actual inventory shows a hundred ten barrels, would Koch be over in that example by ten barrels?” Ballen asked.

  “Did we sell any?”

  “Well, why don’t you try the question first,” Ballen said. “Is that an accurate—”

  “Well, it is an incomplete equation. I mean it is—there is no answer. You got two unknowns.”

  “Suppose you sold a hundred ten,” Ballen pressed.

  “Okay. You bought—”

  “One hundred.”

  “And you sold a hundred ten?”

  “Right.”

  “I am going to need my slide rule in a minute,” Koch joked.

  It went on like this for a long time, with the two men discussing barrels of oil, inventory levels, and even hypothetical inventory levels. The other attorneys in the room begin to interject and add their own observations and questions about hypothetical inventories.

  Finally, Ballen’s assistant, Wick Sollers, dove in and started asking questions. Eventually, he pushed Charles Koch into a corner, eliciting a very elegant description of just what it means to be long.

  “I don’t think there is such a thing as an exactly accurate measurement,” Charles Koch said. “But if you just look in dollar terms, yes, we got more money than we paid for oil.”

  There it was: “We got more money than we paid for oil,” Koch had said.

  But there was something else in his statement; the idea that there was no such thing as a perfectly accurate measurement. Earlier in the interview, Charles Koch had interrupted Ballen to press this point and to make it sound as if unsophisticated oil gaugers were making mistakes out in the field that might account for the company’s annual overages.

  “I mean, in the oil field, as I understand it, it is—you got a lot of small tanks, you got a lot of changing conditions, and it is a very uncertain art,” Charles Koch had said. “And you have people who aren’t rocket scientists, necessarily,” he continued. “I mean, good people. I don’t mean to imply—good people, trying to do a good job, and they are always not fully trained, either.”

  This defense contradicted everything that Agent Elroy had been hearing in his field interviews with the Koch gaugers. Those gaugers told him that they faced constant pressure from above to be “long.” They knew that if they were not long, then the consequences would be dire. They weren’t making mistakes, the gaugers said; they were following orders. And these orders were apparently conveyed in meetings where Koch managers discussed the company’s policy of continuous improvement. It was on this point that Ballen began to press.

  Just what was continuous improvement, exactly? Ballen asked.

  “How much time do you have?” Koch replied.

  “How much time do you have?” Ballen replied.

  “Continuous improvement philosophy is a philosophy developed by a man called J. Edward Deming, who is a statistician,” Koch said.II “So he set up a philosophy based on statistics, how companies can improve their competitive position by improving the quality for the customer and your own productivity.”

  Koch went on for a long time, talking about this guy named Deming, whom Koch seemed to truly admire. Deming’s ideas seemed to revolve around coming up with mathematical models for how to improve a business, and then continually driving workers to make those improvements and hold true to the plan.

  “This is a long-term program,” Koch said. “As [Deming] puts it: ‘You never get out of this hospital.’ You are going to be working at this forever.”

  The digressions about Deming and statistics didn’t matter much to the case that Ballen was building. Charles Koch had already laid out what continuous improvement might mean for gaugers.

  “What our policy is, is to be as accurate as possible and not have a loss; try to avoid losses within that,” Koch had said. He denied that the company had a stated policy of stealing oil, but he supported the notion that gaugers would face pressure to be long.

  When the interview was over, Charles Koch stood up and left the room, walking down the corridor. He eventually went back to the company’s executive suite and his office, a large room with a wide-open view of the Kansas prairie.

  Ballen kept working through the day in the building’s interior. He and Sollers interviewed nearly a dozen more Koch Industries executives, slowly building a case that the investigators would soon present before the Senate, slowly gathering evidence that they would hand over to the US Department of Justice.

  At the end of the long day, Ballen and Sollers packed up their papers and left. They caught a flight back to Washington and continued their work up on the ninth floor of the Hart Senate Office Building.

  But even after all the time they’d spent at Koch headquarters, even after all the time they’d spent digging through boxes of Koch Industries’ confidential documents, and even after all the time they’d spent interviewing Charles Koch himself, Ken Ballen and Wick Sollers were no closer to answering one of the most perplexing questions at the center of their case. It was a question that would be asked later, by Senator DeConcini himself, as the Senate panel held public hearings on Koch’s alleged oil theft.

  At one point during the hearings, DeConcini was questioning Agent Elroy. DeConcini stopped, as if perplexed, and asked the FBI man the most important question of them all:

  “Who is Charles Koch? Can you explain that?”

  * * *

  I. Some gaugers and Koch managers used an interchangeable set of terms, saying “under” rather than “short,” and “over” rather than “long.”

  II. Charles Koch appears to have misspoken here. The statistician’s name is W. Edwards Deming, and his influence on Koch Industries i
s discussed at length in Chapter 6.

  CHAPTER 2

  * * *

  The Age of Volatility Begins

  (1967–1972)

  It was a Friday in mid-November, just one week before Thanksgiving 1967. A multimillionaire named Fred Koch sat in a duck blind watching the sky, his gun at the ready.

  Fred Koch was a large man, and he had a forceful personality to match his physical presence. He was one of those people whom midwesterners call “larger than life,” meaning that he filled a room when he entered it; one of those very rare breed of people who are unquestionably the masters of their own realm. He was an engineer, an entrepreneur, and a self-described patriot. At the age of sixty-seven, Fred Koch had built a small business empire, and as the master of this empire, Koch was the hub of so many spinning wheels: He was chairman of the board for his growing company. He was a cofounder of a right-wing political group called the John Birch Society. He was a self-published author who sold anti-Communist pamphlets through the mail for 25 cents a copy. He was also the father of four rowdy and brilliant boys, boys in whom he’d worked to instill the values that mattered most to him: intelligence, a hard work ethic, integrity, and drive.

  If Fred Koch’s life was a noisy one, then the duck blind where he sat that Friday in November was pristinely silent. Maybe that’s why he traveled to the place, which was about a thousand miles from his home in Wichita. The duck blind was near the Bear River, just outside the small town of Ogden, Utah. The natural beauty of the place was overwhelming. When visitors turned and faced east, they saw a craggy wall of mountains rise up, the sharp and irregular peaks often painted white with snow. Turning to the west, a visitor could see where the land immediately flattened out into a hard plateau of ranchland and salt marshes. The Great Salt Lake was nearby, and the glittering marshes around it lured flocks of migrating ducks as they made their way south from Yellowstone Park and the forests of Idaho.