Kochland Read online

  This was how Koch Industries wanted it: Tromberg, interviews by author, 2015.

  On May 12, Faragher called Kriens: Faragher, interviews by author, 2015; Faragher, transcript of interview by MPCA investigators, December 19, 1997.

  Faragher kept her mouth shut at work: Faragher, interviews by author, 2015; Faragher, transcript of interview by MPCA investigators, December 19, 1997; Lien, “Former Koch Employee Says”; Lien, “Koch Casts Doubt.”

  On March 18, 1998, Faragher was home: Faragher, interviews by author, 2015; copies of business cards, John Bonhage and Maureen O’Mara.

  In 1998, the Minnesota Pollution Control Agency fined Koch Industries: “Koch Refinery Hit with Fines,” Oil & Gas Journal, October 11, 1999; United States of America and the State of Minnesota v. Koch Petroleum Group, Consent Decree.

  Koch did not retaliate against Faragher by firing her: Faragher, interviews by author, 2015; Lien, “Former Koch Employee Says.”

  Terry Stormoen, the other shift worker: Interview attempt with Stormoen by author, 2015.

  Not everyone did so poorly: Online job descriptions, résumés, Koch Industries employee listings.

  The illegal activity at Pine Bend was not an isolated incident: Loder and Evans, “The Secret Sins of Koch Industries.”

  CHAPTER 9: OFF THE RAILS

  Koch Industries executives gathered . . . in Wichita: Watson, Hall, interviews by author, 2013–16; John Pitinger, Participant Profile, Aspen Institute, Communications and Society Program; “Innovation: Everyone’s Job,” Discovery: The Quarterly Newsletter of Koch Companies, October 2016.

  Dean Watson joined . . . twenty-two years old: Watson, interviews by author, 2016.

  Watson wasn’t shy about challenging the people around him: Watson, Hall, interviews by author, 2013–16.

  Koch’s fertilizer plant was basically an oil refinery: Joe Hise, former fertilizer plant manager in Enid, Oklahoma, interviews by author, 2013; insight into the American food system derives in part from the author’s previous reporting as national agribusiness reporter for the Associated Press between 2008 and 2012.

  fertilizer business itself was a platform for growth: Watson, Packebush, interviews by author, 2013–16; Bruce Upbin and Brandon Copple, “Creative Destruction 101,” profile of Koch Industries and Koch Agriculture, Forbes, December 14, 1998.

  Koch Agriculture first branched out into the beef business: Watson, Perry Owens (feedlot manager), interviews by author, 2016.

  If the motivations . . . the tactics Bill employed were even darker: Douglas Frantz, “Journalists, or Detectives? Depends on Who’s Asking,” New York Times, July 28, 1999; Burrough, “Wild Bill Koch.”

  The Wall Street Journal published a front-page story: Robert Tomsho, “Blood Feud: Koch Family Is Roiled by Sibling Squabbling over Its Oil Empire,” Wall Street Journal, August 9, 1989.

  During the late 1990s, Charles Koch found himself consumed: Hall, interviews by author, 2013–14; O’Reilly and De Llosa, “The Curse.”

  There was . . . dedicated to expanding the company: Hall, Markel, interviews by author, 2013–14.

  The largest animal feed maker in America: Watson, Hall, interviews by author, 2013–16; Traci Carl, “Koch Agriculture Buys Purina Mills,” Associated Press, January 13, 1998.

  The pig industry was emblematic of this shift: Christopher Leonard, The Meat Racket: The Secret Takeover of America’s Food Business (New York: Simon & Schuster, 2014), 253–69.

  The company operated fifty-eight giant feed mills: Purina Mills, 10-K filing with the Securities and Exchange Commission, Fiscal Year Ended December 31, 1996.

  But 1996 was a down year for Purina Mills: Ibid.

  This didn’t mean . . . excited about selling it: Arnie Sumner, interviews by author, 2016.

  Koch’s ambitions for Purina were vast: Sumner, Watson, Hall, interviews by author, 2016.

  Koch ended up borrowing . . . two massive sources of debt: Purina Mills, SEC Filing, form 10-12G, section 2, “Financial Restructuring Developments,” describing indebtedness as of March 31, 1998, and March 23, 2000.

  One of Dean Watson’s first and most important jobs: Sumner, Watson, interviews by author, 2016.

  Things started to go south . . . government policy: Watson, Hall, interviews by author, 2016; E. C. Pasour Jr. and Randal R. Rucker, Plowshares and Pork Barrels: The Political Economy of Agriculture (Oakland, CA: Independent Institute, 2005).

  Before the deal . . . warned about Purina’s pig business: Watson, interviews by author, 2016.

  In 1998, the US hog market experienced a shock: Leonard, Meat Racket, 329–33.

  Purina Mills should have been insulated: Watson, Hall, interviews by author, 2016; Purina Mills, SEC Filing, form 10-12G, “Management Discussion and Analysis,” March 23, 2000.

  Watson was named CEO of Purina Mills: Watson, interviews by author, 2016; “Purina Mills Names New CEO,” PR Newswire, December 21, 1998.

  The hog market crisis raced forward faster . . . could respond: Dean Watson, Hall, interviews by author, 2016; Purina Mills, SEC Filing, form 10-12G, section 2, “Financial Restructuring Developments,” March 23, 2000.

  Brad Hall was dispatched from Wichita to St. Louis: Hall, interviews by author, 2013–16; Purina Mills, SEC Filing, form 10-12G, “Management Discussion and Analysis,” March 23, 2000.

  Charles Koch was just returning his full attention: Leslie Wayne, “Zero Is the Verdict in $2 Billion Koch Family Feud,” New York Times, June 20, 1998.

  Most people . . . have never seen him get angry: Cris Franklin, Markel, Paulson, Hall, interviews by author, 2013–16.

  When Brad Hall explained what was happening: Hall, interviews by author, 2016.

  Watson was in Wisconsin: Watson, interviews by author, 2016.

  There was only one way that Purina Mills might survive: Sumner, Hall, interviews by author, 2016.

  “True knowledge results in effective action”: Boulton, “Koch and His Empire.”

  In late August of 1999 . . . no extra money from Wichita: Purina Mills, SEC Filing, form 8-K, November 9, 1999, 22.

  Koch appeared to have . . . protected it from the bankers’ claims: Koch’s use of the corporate veil as a financing structure was first discussed with the author by two sources requesting anonymity; both sources were directly involved with Koch Industries’ financial activity and strategies. Koch’s use of the corporate veil was confirmed by a third source, a financier working for a bank that lent Koch money for the Purina Mills acquisition who also requested anonymity. Also Purina Mills, SEC Filing, form 8-K, November 9, 1999, 27–28, 102–3.

  Lawyers working for the banks . . . first hurdles of a lawsuit: Source directly involved in the matter, background interview by author, 2016.

  Koch finally agreed to pay $60 million: “Purina Mills: Tentative Agreement for $60 Million from Parent,” Troubled Company Reporter, November 12, 1999.

  After the banks were paid off, Charles Koch began to dismantle: Hall, interviews by author, 2016; “Economic Downturn Leads to Layoffs at Koch Industries,” Associated Press, April 13, 1999.

  CHAPTER 10: THE FAILURE

  Charles Koch drove himself to work every day: Charles Koch’s habit of driving his own car to work every day, and arriving very early, was described by several current and former Koch Industries employees, many of them making a special note of it because his car was in the employee parking lot before they arrived. His habits later changed, as noted in ch. 20.

  The previous decade had been a public embarrassment: See endnotes, chs. 1–9.

  This mattered to Charles . . . company’s conduct: Charles Koch deposition with US Senate investigators, transcript, April 24, 1989.

  Charles Koch said . . . difficult times of his life: Charles Koch, interview by author, 2015.

  Charles Koch was in a position to see the seeds of strength: The following passage summarizes the strengths of Koch Industries based on reporting outlined in endnotes for chs. 1–9.

  “I just work harder”: Cha
rles Koch, interview by author, 2015.

  CHAPTER 11: RISE OF THE TEXANS

  Over the course . . . reinvented Koch Industries: Details about Koch Industries’ strategic overhaul effort after the debacles of the 1990s were provided to the author by a source with direct knowledge of events who requested anonymity. Many granular details of the overhaul were included after being confirmed by external sources—Charles Koch’s decision to fire many company presidents, for example, created an external footprint of news releases announcing personnel changes. Broad outlines of the overhaul were also confirmed on the record by senior sources at Koch such as Brad Hall and F. Lynn Markel. (Markel left during the transition but witnessed its aftereffects.)

  The revolution began with a purge: “Koch Industries Names New Vice Chairman, President; New President Only Fourth in Company’s History,” BusinessWire, August 3, 1999; Corliss Nelson, biography and work history, Ryder System; Mike Sutten, biography and work history, Royal Caribbean Cruises; Rex Clevinger, biography and work history, Reliant Energy; Jim Imbler, announcement of replacement by David Robertson, January 24, 2000; Seth Vance, executive profile, Bloomberg; Pedro Haas, departure announcement, Kosa, July 24, 2000; Markel, LinkedIn profile, interview by author, 2016.

  The change in personnel was only the beginning: Source with direct knowledge of events speaking on background to author, 2016.

  This change . . . ushered in a decade of unprecedented growth: See endnotes, chs. 11–17; Leonard, “The New Koch.”

  During this decade . . . impervious strength of its corporate veil: The use of the corporate veil strategy was first revealed to the author by a source with direct knowledge of Koch’s legal and financial strategies. It was later confirmed by a second senior source at Koch Industries with direct knowledge of the matter. Finally, the strategy can be seen by the footprint it leaves at Koch companies, which indeed are operated with a level of autonomy that can seem, at times, to be curiously redundant for a company so focused on efficiency.

  Koch Industries . . . institutionalized this drive to expand: Charles Koch, Hall, Feilmeier, Packebush, Hannan, current and former Koch Industries employees, interviews by author, 2013–16; Leonard, “The New Koch.”

  Koch was seen by outsiders . . . was seen quite differently: Charles Koch, Hall, Feilmeier, O’Neill, Packebush, Hannan, current and former Koch Industries employees, interviews by author, 2013–16; Leonard, “The New Koch.”

  In Washington . . . bitter rain and gray skies: George W. Bush inauguration coverage, January 20, 2001, ABC News.

  The broad, national political consensus . . . no new consensus at all: Readings include: Hacker and Pierson, American Amnesia; Mounk, The People vs. Democracy: Why Our Freedom Is in Danger and How to Save It (Cambridge, MA: Harvard University Press, 2018).

  Bush ran as a . . . “compassionate conservative”; Gore ran as a right-leaning liberal: Gimore and Sugrue, These United States, 591–95.

  In fact . . . Koch Industries built a financial trading desk: Accounts of Koch’s trading operations are based in large part on interviews with senior executives inside Koch’s trading operations, including Brad Hall, who was CFO of Koch Supply & Trading. Senior traders also offered insight, including Brenden O’Neill, Wesley Osbourn, Cris Franklin, Melissa Beckett, and Adam Glassman. Three former senior sources in Koch’s trading division described its operation in detail, on the condition that they not be identified. Also, “Koch Supply & Trading,” Discovery: The Quarterly Newsletter of Koch Companies, January 2009; “Koch Smooths Volatile Waters,” Risk.net, November 10, 2003.

  Koch began trading crude oil . . . in the 1970s: Howell, Hall, interviews by author, 2013–16.

  In the late 1970s, Ron Howell made one of the most significant investments: Howell, interviews by author, 2016.

  In fact, there was no global market for oil: This key insight into the structure of oil markets was first provided in a 2016 interview with Matthew Burkley, CEO of Genscape, which provided real-time intelligence on energy supplies to commodities traders. The insight was bolstered by interviews with Hall, Howell, Osbourn, Beckett, Glassman, and former senior Koch traders speaking on background between 2013–16.

  This supervaluable information . . . Koch Industries had access to: Hall, Howell, senior Koch trading executives speaking on background, interviews by author, 2013–16.

  Other traders began dropping into the room: Howell, interviews by author, 2016.

  Merc . . . also called the NYMEX for short: Emily Lambert, The Futures: The Rise of the Speculators and the Origins of the World’s Biggest Markets (New York: Basic Books, 2011), 151–163, 181–187.

  At first . . . a threat to Koch’s business model: Howell, interviews by author, 2016.

  Koch Industries . . . expertise in trading over the years: Hall, Howell, senior Koch trading executives speaking on background, interviews by author, 2013–16.

  In the stock market, it is illegal to trade on inside information: Nancy Doyle, general attorney at the Commodity Futures Trading Commission; Bart Chilton, former commissioner at the Commodity Futures Trading Commission; source speaking on background, interviews by author, 2016.

  Koch exploited this advantage: Hall, Howell, senior Koch trading executives speaking on background, interviews by author, 2013–16.

  Koch Industries . . . in energy futures markets: Former senior Koch trading official speaking on background, interview by author, 2016; Saule T. Omarova, “The Merchants of Wall Street: Banking, Commerce, and Commodities,” Cornell Law Faculty Publications, Cornell Law School, 2013.

  “We kept getting approached by banks”: Former senior Koch trading executive speaking on background, interview by author, 2016.

  Throughout the 1990s . . . derivatives trading: Gimore and Sugrue, These United States, 583–84.

  After analyzing the McKinsey report, Koch Industries decided: Three former senior Koch trading employees speaking on background, Hall, interviews by author, 2013–16.

  Naturally, the consolidated office . . . was based in Houston: Monica Perin, “Koch Investment Group Moves Base from Kansas to Houston,” Houston Business Journal, June 17, 2001.

  CHAPTER 12: INFORMATION ASYMMETRIES

  It was still dark when Brenden O’Neill drove: O’Neill, interviews by author, 2016.

  There was no single morning for a commodities trader: Glassman, former Koch Industries derivatives trader, interviews by author, 2014.

  The headlights . . . as he approached: O’Neill, interviews by author, 2016; notes from reporting at Koch Supply & Trading office, 2016; historic weather reports for Houston.

  The interior lobby . . . like a geode hidden inside a black stone: Notes, photos, and video from reporting in lobby of 20 Greenway Plaza, 2016.

  Koch’s trading floor . . . several thousand square feet: Photos of trading floor taken from David Barboza, “Energy Traders Continue to Prowl the Floor That Enron Helped Build,” New York Times, December 6, 2001; other photos of trading floors taken from LinkedIn profile pictures of Koch Supply & Trading employees; descriptions of trading offices taken from Franklin, O’Neill, Osbourn, two sources speaking on background, interviews by author, 2013–16.

  Koch’s in-house meteorologist was hard at work: Former employee of Koch Supply & Trading meteorologist team speaking on background, interviews by author, 2016.

  O’Neill settled into his desk and turned on his computer: O’Neill, interviews by author, 2016.

  overseen by a man named Sam Soliman: Franklin, O’Neill, Hall, Lou Ming (former Koch Industries quantitative trader), interviews by author, 2013–16; Perin, “Koch Investment Group Moves Base.”

  Koch maximized the advantage . . . other assets: Hall, Beckett, Osbourn, three former senior Koch Industries trading executives (executives in this case, including senior managers of the rank of vice president or higher), interviews by author, 2013–16.

  On the first day he reported to work: O’Neill, interviews by author, 2016.

  Koch purchased these pipelines and the
company that owned them: Larry Foster, “United Flashes New Wealth—and New Faces—After Koch Takeover,” Inside FERC, November 16, 1992; “Koch Industries Buys United Gas Pipeline,” PR Newswire, November 9, 1992.

  Prior to the first Bush administration . . . wasn’t too different: Paul W. MacAvoy, The Natural Gas Market: Sixty Years of Regulation and Deregulation (New Haven, CT: Yale University Press, 2000), 1–120.

  Senior managers . . . the growing natural gas marketplace: Hall, O’Neill, former senior Koch Industries trading executive speaking on background, interviews by author, 2013–16.

  Koch went so far as to fold its origination group: Former senior Koch Industries trading executive speaking on background, interviews by author, 2016.

  O’Neill spent his day on the phone: O’Neill, interviews by author, 2016.

  Koch’s traders often got off work early . . . after US market trading ceased: O’Neill, Osbourn, Franklin, interviews by author, 2016.

  Inside, the bar was pleasingly dim and cave-like: Notes and photos from author’s reporting trip inside the Ginger Man bar, 2016. Comparison with the Coates Bar taken from notes and photos from author’s reporting trip inside Coates Bar, 2015.

  Koch had hired engineers to staff its trading desk: O’Neill, Osbourn, former senior Koch Industries trading executive speaking on background, interviews by author, 2016–17.

  It might have been disappointing . . . wasn’t an easy path to riches: O’Neill, interviews by author, 2016.

  Sam Soliman stretched his top traders: O’Neill, Franklin, Ming, interviews by author, 2016.

  Here is a brief description of a derivatives contract: The author is indebted to Nancy Doyle, general attorney for the Commodities Futures Trading Commission, for letting him audit her class at Georgetown Law School, entitled Complex Derivative Transactions, during the spring semester of 2013. This class was absolutely invaluable in helping the author grasp the complex world of futures, derivatives, and swaps markets and the regulatory framework around them. The author was also assisted by his auditing classmate Lina Khan, who helped him work through complex issues during many long discussions. The author answered only one question during the class, which he answered incorrectly (which is mortifying to do in front of a group of competitive Georgetown Law students), but Doyle was exceedingly generous in taking time in and out of class to help clarify important elements of these opaque markets.