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.