When the Senate hearings were complete, Ken Ballen and his team boxed up their evidence and sent it to federal prosecutors with the US Attorney’s office in Oklahoma City. The US Attorney launched a criminal investigation that was aimed squarely at Charles Koch. Agent Jim Elroy stayed on the case and intensified his surveillance.
This legal threat coincided with another attack from Bill Koch. Bill had become suspicious of Charles Koch in 1985, when he learned that Koch Industries had repaid almost all of the $1.1 billion in debt that was taken on to buy out Bill and his brother Fred. Koch Industries paid the debt about three times faster than it had expected to. “I was stunned,” Bill Koch later told a journalist with Fortune magazine. “How could they have so much cash?”
Bill became convinced that his brother Charles had lied to him back in 1983 by dramatically understating the company’s value. To Bill, there was simply no other way to explain Koch’s meteoric profitability since his departure. On June 7, 1985, Bill filed a federal lawsuit against Charles Koch, Sterling Varner, and Koch Industries, alleging that they defrauded him.
The suit was the first volley in a sprawling battle that would last more than twenty years. The conflict spilled outside of the courtroom and spread to every corner of Koch Industries’ business, and into David and Charles Koch’s personal lives. Bill sent spies into the company as fake employees. He used wiretaps and hired private detectives to pose as journalists. His public relations team tried to plant damaging stories about Charles Koch in the media.
When Bill Koch heard the allegations of oil mismeasurement and theft, he incorporated them into his strategy. He tried, on his own, to collect damning evidence about the Koch method.
Inside Koch Industries, Bill’s attack and the government’s investigation were mistakenly seen as one and the same. This created a paranoid mind-set that seeped through the ranks of Koch’s leadership. The federal government was seen as illegitimate, as a pawn that could be manipulated by billionaires. A universe of varied institutions—from newspapers, magazines, and government agencies, to law firms and competing companies—was divided into two opposing camps: there were those who worked for Charles Koch, and those who worked for Bill. No institution was seen as being neutral.
For Charles Koch, the twin attacks would sharpen and deepen his feelings toward government. He had always been a staunch foe of regulation, but the events of the 1980s would harden his opposition into a kind of loathing. Before this time, Koch Industries had been pestered and harassed by inspectors from the EPA, and by cumbersome rules imposed by the Department of Energy. But now his company was under surveillance from the FBI, whose agents were interrogating Koch employees in their homes. The threat was immediate, and it was personal. The threat would change the course of Koch Industries—and American politics along with it.
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In 1989, the federal investigation into oil theft was transferred to a federal prosecutor named Nancy S. Jones. She was a tough-minded woman from Independence, Missouri, with many years of experience investigating fraud: first for the New York State Attorney General’s Office and then for the US Attorney’s Office in the Northern District of New York.
Jones took over the case after getting a call from Jim Elroy. She didn’t know the FBI agent very well but was receptive when he told her that he had one hell of a case involving theft and corporate fraud.
Jones was skeptical, at first, when Elroy walked her through the evidence he had amassed against Koch Industries. Elroy had obtained compelling material, to be sure, but Jones didn’t think it was strong enough to file criminal charges. She had a high bar for filing charges, and didn’t like to lose in front of a jury. Perhaps more importantly, Jones didn’t like charging low-level employees. To her mind, Elroy’s photos and statements from oil gaugers, which proved theft, were not enough. She wanted to know just how high up the chain of command at Koch Industries the culpability went.
Jones empaneled a federal grand jury, which operated in secret to obtain evidence of any high-level conspiracy at Koch to steal oil. The grand jury investigated Koch Industries for many months.
By 1990, Jones was convinced that criminal wrongdoing was underway at Koch. And she believed the theft might have been ordered from high levels in the company. Even at this early stage, Jones felt she had enough evidence to safely charge multiple Koch Oil gaugers with theft. She believed there was also enough evidence to charge a group of higher-level managers with directing the criminal behavior. Jones and Elroy continued their investigation, however, because they wanted to push even higher up the chain of command at Koch, maybe all the way to the executive suite. Their evidence suggested that they hadn’t yet reached the primary actors. “There was too much at stake in the case, to settle for the underlings,” Jones recalled.
As Jones pressed her case from the US Attorney’s office, executives at Koch Industries saw the hand of Bill Koch at play. In September or October of 1988, Koch’s top attorney, Don Cordes, heard a “cocktail rumor” that Bill Koch was “trying to get the Senate interested in investigating Koch’s measurement practices,” according to court testimony later given by Cordes. That same month, Koch Industries received its first subpoena from the Select Committee on Indian Affairs, asking for a huge cache of documents related to its oil gathering practices in Oklahoma. It must have seemed to Cordes that the two efforts were combined, even though that was not true. The Senate investigation was prompted by the investigative reporting series in the Arizona Republic. According to Mike Masterson, a lead reporter who cowrote the series and was involved in it from the beginning, Bill Koch did not tip off reporters to the story. They came upon it while reporting on persistent problems on Indian reservations and heard claims about rampant oil theft. Bill Koch had heard about the inquiry and adopted it as a weapon to use against his brother.
Koch Industries responded by circling the wagons against investigators and closing down access to vital records at the heart of its oil gathering operation. Almost immediately when the US Senate began its investigation, Koch Industries issued a new set of “Standards of Corporate Conduct” to employees throughout the company. The standards also included a provision that would likely conceal evidence of oil theft that would have occurred through mismeasurement.
The standards of conduct said that no Koch employee should defraud anyone by making false entries into Koch’s books. This would effectively ban the Koch Method of oil measurement, which required oil gaugers to record fraudulent numbers on run tickets and receipts they left behind at oil wells.
The standards imposed a sweeping blanket of secrecy over Koch’s operations, stating that “all financial data, business records, technology and information on corporate strategy, objectives or on modeling and other analytical and/or management techniques” were to be considered secret and proprietary information that belonged to the company. In other words, virtually every piece of information at Koch Industries was confidential. This would include any training documents for oil gaugers or any tally sheets that showed overages or shortages in the oil gathering division. The standards barred any employee from sharing any of this information with an outside party without prior approval from a Koch Industries manager. The flow of information about Koch’s measurement practices was being bottled up.