[120] Story of Donald Carlson, an employee at Koch Refining Company, the booming Pine Bend Refinery in Rosemount, Minnesota. Beginning in 1974, Carlson worked 12-16 hour shifts at the refinery. He cleaned out huge tanks that contained leaded gasoline, scraping them down by hand. And other demanding tasks.
[121] No one warned him about benzene. 1995, he became too sick to work. Even though he had taken government-required blood tests, no one had told him that he had increasingly serious, abnormal blood cell counts between 1990 and 1994. Then the company let him go with 6-months pay.
[122] In 1997, Donald Carlson died of leukemia. His wife, Doreen, waged a one-woman battle to get Koch Industries to acknowledge some responsibility for her husband's death and apologize. Carlson's case was just one of many targeting Koch Industries' corporate conduct in the decades after Charles took over the company.
[123] Charles Koch increased his resistance to government regulations. A Koch Industries environmental technician, Sally Barnes-Soliz, blew the whistle on the company for lying about illegal quantities of benzene that it was leaking into the air. Koch Industries had tried to conceal its output in a report.
[124] [More on the whistle-blowing incident.] Eventually Koch Industries pleaded guilty to one felony charge and paid $10 million in fines, and made another $10 million payment for projects to improve the environment in Corpus Christi.
[125] Another would-be whistle-blower, Carnell Green, a low-level employee, said that the company threatened to arrest him if he didn't recant.
[126] Koch Industries harassed him some more, and then fired him.
But federal prosecutors began to piece together an enormous case against the company for violating the Clean Water Act.
[127] Angela O'Connell, the lead federal prosecutor in the case against Koch Industries developed an uneasy sense that she was being spied on. In 1983, Koch Industries hired a former employee of the U.S. Secret Service, David Nicastro, to assist its security operations. He conducted numerous investigations, and was joined by Charles Dickey, a former FBI agent.
In 2000, O'Connell's division at the Justice Department prevailed. Koch Industries had to pay a $30 million fine (the largest at the time) for violations of the Clean Water Act.
[128] [More details on other ways in which Koch Industries violated environmental regulations.]
[129] Two teenagers were killed by ignition of an invisible cloud of butane gas leaking from a corroded, underground Koch pipeline. The trial uncovered a chilling picture of corporate negligence. The company knew that the pipeline was corroded, and did not notify families living nearby how to handle an emergency. The company decided to revive the older pipeline when it realized it could make an additional $7 million annually by patching it.
[130] But eventually the court rewarded Danny Smalley (the father of one of the teenagers) with a $296 million fine to be paid to him by Koch Industries.
The brothers also faced a growing political crisis. The US Senate opened an investigation into allegations that the company stole tens of millions dollars' worth of oil from wells on Native Americans' tribal lands. Charles admitted that Koch Industries had taken $31 million worth of crude oil over a 3-year period from Indian lands, but argued it had been accidental.
[131] Koch private investigators spied on governmental investigators and harassed them. Details given.
[132] Senator Don Nickles tried toe stop the investigations; someone was going through other people's garbage; a witness, Christopher Tucker, was harassed. In spite of the harassments, the Senate Select Committee on Indian Affairs released a damning report on Koch Industries.
[133] Enmity among the Koch brothers increased. Bill became convinced he had been cheated out of his fair share of the family income. He launched a barrage of litigation against Charles and David. After an 18-month investigation, the Oklahoma City grand jury cleared the company. During the investigations the Kochs attempted to buy political leverage.
[134] Key documents disappeared. Failing at getting his brothers criminally prosecuted, Bill Koch filed a whistle-blower lawsuit against Koch Industries accusing it of stealing oil from government lands. Richard "Jim" Elroy, private investigator and former FBI employee, was employed to gather information, and he interviewed 500 potential witnesses. He and his team of investigators became convinced they were being spyed upon by Charles and David.
[135] There is some evidence that the spying was taking place. Files found in a rental storage locker documented the efforts to find dirt about Bill Koch.
[136] Discussion of the lawsuit brought by Bill Koch alleging stealing of federal oil, supported by testimony of employees of Koch Industries.
[137] More about the investigation. Charles Koch took the stand, but did not convince the jury. It found Koch Industries guilty of making 24,587 in false claims to the government.
[138]Koch Industries settled Bill Koch's whistle-blower suit for $25 million. Most of the fines went to the federal government, but the company paid over $7 million to Bill, along with his legal fees. Then the warring brothers agreed to a cease-fire, legally promising no further litigation. The pact bought an uneasy peace. But the damage to the company's image, and to the family's reputation, was already profound.
A spokeswoman for Koch Industries said that the company subsequently stepped up its corporate compliance efforts. Its environmental record did improve some after the 1990s, although in 2010 the company was still rated as one of the top ten air polluters in the US. In 2012, the Environmental Protection Agency revealed Koch Brothers to be the #1 producer of toxic waste in the country.
[139] It was clear that America was far from the laissez-faire utopia the Koch Brothers had idealized in the Freedom School. Koch Industries refueled: They sold off many of their most troublesome pipelines, moved into the finance sector, trading commodities and derivatives, where regulations and oversight were weaker. They diversified rapidly, buying out other companies.
The clash between Koch Industries' corporate interests and David Koch's philanthropic work surfaced publicly in 2009. While David Koch sat on the advisory board of the National Cancer Institute and the National Institutes of Health, these organizations were concluding that formaldehyde should be treated as a "known human carcinogen." Traylor Champion, VP of Georgia-Pacific, sent a letter of protest to NIH, disagreeing. David Koch neither recused himself from the NCI's advisory board nor divested himself of his company's stock while the carcinogenic properties of formaldehyde were evaluated. James Huff, deputy director at the National Institute of Environmental Health Sciences said it was "disgusting" for Koch to be serving on the advisory board.
[140] The Koch's corporate interests clashed with their philosophical positions on other issues as well, including their opposition to government-supported "crony capitalism." Koch Industries gook full advantage of a panoply of federal subsidies. [Other examples of KI belying of their virtuous talks are given.]
As Charles and David continued to plow 90% of their company's profits back into their business, their revenues grew phenomenally and spectacularly.
[141] After humiliating losses in the courts and Congress, the Kochs began to retool their approach not just to business but also to politics. They engaged more strategically. The man behind the transformation was Richard Fink. He had become a devotee of Austrian free-market theory. He hoped Koch would fund a program on it at Rutgers, and Charles did pledge $150,000 for the program. By the late 1980s, Fink had supplanted Cato's Ed Crane as Charles Koch's main political lieutenant.
[142] Fink drew up a blueprint for political change called "The Structure of Social Change." It laid out a three-phase takeover of American politics: (1) Invest in intellectuals whose ideas would serve as the "raw products." (2) Invest in think tanks that would turn the ideas into marketable policies. (3) Subsidize "citizens" groups that would along with "special interests" pressure elected officials to implement the policies. The plan was tailor-made for Koch. Charles later explained -- "To bring about social change requires a strategy that is vertically and horizontally integrated. It must span from idea creation to policy development to education to grassroots organizations to lobbying to political action." And with this, Koch's methods became decidedly more pragmatic. After the public relations fiasco of the Senate hearings into Indian oil theft, Koch Industries hired Robert Strauss, the former chairman of the Democratic National Committee, who was by then Washington's premier lobbyist, and the company soon opened an office in Washington, which grew into a formidable in-house lobbying operation.
[143] Also, the Kochs became major Republican donors. Before that, "Charles had been so far right he was off in the ether. They thought Reagan was a sellout." While the Kochs had been the largest funders by far of libertarian ideas, they became direct funders of Republican politicians for all the same reasons other businesses are.
Their investment quickly transformed the brothers' political status. By 1996, they had grown into major players in the Republican Party. David Koch became the vice-chair of Bob Dole's 1996 presidential campaign against Bill Clinton, and his 3d largest financial backer. In return Dole did them a legislative favor by proposing to indemnify companies like theirs that had been charged with regulatory violations from having to pay huge federal legal fines -- but the proposal died when a sudden outbreak of salmonella in hamburgers scared Congress from weakening such penalties. But Dole did help on another matter, an exemption from a new real estate depreciation schedule, a favor that saved the company millions of dollars. Dole stated decades that "I've always believed when people give big money, they -- maybe silently -- expect something in return."
[144] In 1997, the Kochs became the focus of yet another Senate investigation led by Democrats. They produced a scathing report exposing an "audacious" scheme by undisclosed big donors to illegally buy elections in the final moments of the 1996 campaign. A suspicious shell corporation called the Triad Management Services had paid more than $3 million for unusually harsh attack ads against Democratic candidates in 29 races. More than half of the money came from the Economic Education Trust. The Senate committee's investigators believed that the trust was in fact financed by Charles and David Koch. This was in violation of campaign-finance laws.
The attack ads were mainly aired in states where Koch Industries did business (Kansas in particular). The funds were suspected of having tipped the outcome in 4 close races. The victories in Kansas had national impact, helping Republicans retain control of the House of Representatives, despite President Clinton['s reelection.
[145] Republicans argued that they were simply trying to balance the score against spending by labor unions, but in 1998, business outspent labor by a ratio of 12 to 1. Charles Lewis, who founded the Center for Public Integrity, a nonpartisan watchdog group, described the Triad scandal of 1996 as a historic moment in American politics. It was a new model: it was the first time a major corporation used a tax-exempt nonprofit as a front group.
What made the Koch family's growing financial role in American politics extraordinary was that it merged all forms of political spending --- campaign, lobbying, and philanthropic -- into one investment aimed at paying huge future dividends to donors. What resulted was a complicated flowchart enabling the Kochs to use their fortune to influence public policy from an astounding number of different directions at once.
[146] Thus they funneled money through 3 different kinds of channels -- political contributions to party committees and candidates; through lobbying; and through funded nonprofit groups.
By 1990, enterprising conservative and libertarian activists were wearing a path to Wichita. E.g., Clint Bolick, a former aide to Clarence Thomas, sought and obtained seed money ($1.5 million) plus $500,000 a year for 3 years to establish an aggressive, right-win public interest law firm. This led to the Institute for Justice that went on to bring numerous successful cases against government regulations, including campaign finance laws, several of which reached the Supreme Court.
Few outside the rarefied world of far-right, laissez-faire economics noticed that the Kochs' multidimensional political spending kept growing.
[147] [Top of page lists some of the project funded by the Kochs.] These investments were largely kept secret because the money was funneled through a labyrinth of nonprofit groups. By law, tax-exempt charities ( listed as 501(c)(3)s ) must refrain from involvement in lobbying. But such laws are rarely enforced and are subject to flexible interpretation. Critics began to complain that the Kochs' approach to philanthropy subverted the purpose of tax-exempt charitable giving. But the Kochs defended the millions they gave to groups fighting environmental regulations and supporting lower taxes on industry and the rich as public-spirited.
[148] (Discussion of actions in favor of corporate self-interest versus the value of philanthropy.) The Kochs exerted unusually tight personal control over their philanthropic endeavors. E.g., in 1981, Charles fired Murray Rothbard, one of the Cato Institute's five original stockholders. Some suspected Rothbard had criticized Koch for watering down unpopular libertarian positions in order to get more votes for his brother's 1980 candidacy.
[149] (Discussion of the Rothbard case emphasizing Charles' desire for absolute control of the nonprofits partly funded by other people.)
In the mid 1980s, as called for in the first phase of Fink's plan, the Kochs began to establish an academic beachhead of their own: George Mason University, a little-known campus of Virginia's prestigious higher-education system. Fink moved his Rutgers Austrian economics program to George Mason, naming it the Mercatus Center. It was totally funded by outside money, but located in the midst of the public university's campus. The Koch family foundations donated some $30 million to the school.
[150] Sharing a building with the Mercatus Center was the heavily Koch-funded Institute for Humane Studies, chaired by Charles Koch. Its aim was to cultivate and subsidize a farm team of the next generation's libertarian scholars. Student applicants' essays had to be run through computers in order to count the number of times they mentioned the free-market icons Ayn Rand and Milton Friedman. The institute also housed the Charles G. Koch summer internship program, a paid fellowship placing students in like-minded nonprofit groups, where they could join the libertarian network.
George Mason's economics department became a hotbed of controversial theories that began to transform Americans' tax bills, serving as an incubator for the supply-side tax cuts in the Reagan administration that hugely advantaged the rich.
[151] A star on the faculty of George Mason's economic department was James Buchanan, who categorized elected officials and public servants as just another greedy, self-aggrandizing private interest group. In 1986, Buchanan was awarded a Nobel Prize in economics. Liberal economists were aghast.
The many hats Richard Fink wore grew. He left Mercatus Center, and joined Koch Industries as its head of lobbying but remained on the university's prestigious Board of Visitors. (Other examples here.)
[152] Crane's influence at the Cato Institute waned as he criticized Charles Koch. Koch had insisted that personnel in all corners of his enterprise adhere to his system (that businesses' corporate culture should replicate the competitiveness of the free market.)
[153] With the Cato Institute and the Institute for Humane Studies in place, the Kochs checked off the first item on Fink's shopping list for social change -- institutions that could hatch scholarly ideas in line with their own thinking with the Mercatus Center.
Discussion of environmental issues, and the EPA.
[154 ] A court opinion had ruled that the EPA had overstepped its authority. Afterward, the Constitutional Accountability Center, a watchdog group, revealed that the judges in the majority had previously attended one of the all-expenses-paid legal seminars for judges that were heavily funded by the Koch foundation. The judges claimed that their decision was unaffected by the junket. Their embrace of the Mercatus Center's novel argument, however, soon proved embarrassing. The Supreme Court overruled their position unanimously.
The most fateful Mercatus Center hire might have been Wendy Gramm, an economist and director at the giant Texas energy company Enron who was the wife of Senator Phil Gramm, the powerful Texas Republican. She became the head of Mercatus' Regulatory Studies Program. She pushed Congress to support which came to be known as the Enron Loophole, exempting the type of energy derivatives from which Enron profited from regulatory oversight. Both Enron and Koch Industries lobbied desperately for the loophole. In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission warned that the risky derivatives market needed more government oversight. But Senator Graham, who chaired the Senate Banking Committee, ignored such warnings, crafting a deregulatory bill made to order for Enron and Koch, called the Commodity Futures Modernization Act. Despite Born's warning, the Clinton administration embraced the exemptions too, swayed by Wall Street pressure.
In 2001, Enron collapsed in a heap of bogus financial statements and fraudulent accounting practices. But Wendy Gramm had pocketed up to $1.8 million from Enron the year after arguing for the loophole. And it emerged that Enron had made substantial campaign contributions to Senator Gramm, while its chairman, Kenneth Lay, had given money to the Mercatus Center.
[155 ] George Mason University was not the only libertarian project of the Kochs. By 2015, the Charles Koch Foundation was subsidizing pro-business, antiregulatory, and antitax programs in 307 different institutions of higher education in America and had plans to expand into 18 more, including West Virginia University and Brown University.
At Brown, often thought of as the most liberal of the Ivy schools, Charles Koch's foundation gave $147,154 in 2009 to the Political Theory Project, a freshman seminar in free-market classics taught by a libertarian, Professor John Tomasi. Additional funds were given to Brown to support faculty research and postdoctoral candidates in such topics as why bank deregulation is good for the poor.
At West Virginia University, The Charles Koch Foundation's donation of $96,000 to create the Center for Free Enterprise came with some strings attached. The foundation required the school to give it a say over the professors it funded, in violation of traditional standards of academic independence. One of the WVU professors approved for funding, Russell Sobel, edited a 2007 book called Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, arguing that mine safety and clean water regulations only hurt workers. "Are workers really better off being safer but making less income?" it asked.
[156] Soon Sobel was briefing Virginia's governor and cabinet, as well as a joint session of the Senate and the house Finance Committees. The state Republican Party chairman declared Sobel's antiregulatory book the blue print for its party platform.
In 2014, a West Virginia company, Freedom Industries, spilled 10,000 gallons of chemical into the drinking water of Charleston, a city of 300,000 residents. By then, though, Sobel was gone, being a visiting scholar at the Citadel in South Carolina, and an expert at the Mercatus Center at George Mason University.
Defenders of the Kochs' growing academic influence argued that their grants were bringing ideological diversity and debate to campuses. But in the eyes of critics, the Kochs had not so much enriched as corrupted academic, sponsoring courses that would otherwise fail to meet the standards of legitimate scholarship.
The first two steps of Fink's plan were now complete. Yet the Koch brothers concluded that these steps were still not enough to effect change. They needed the third and final phase of Fink's plan -- a mechanism to deliver their ideas to the street and to mobilize the public's support behind them.
[159 ] Less than a decade after Charles Koch stressed the need to use “all modern sales and motivational techniques,” he set out to launch a private political sales force, called Citizens for a Sound Economy (CSE). It was a new kind of weapon in the arsenal of several of America’s biggest business – a fake populist movement secretly manufactured by corporate sponsors – not grass roots, but “Astroturf” as such synthetic groups came to be known. Unlike corporate lobbying or campaign spending, contributions could be kept hidden because it classified itself as a non-profit “education” group. The Kochs gave it at least $7.9 million between 1986 and 1993.
[160 ] CSE used its money to market the spread of libertarianism and give it the aura of a mass movement. “We learned that we needed boots on the ground to sell ideas, not candidates.” Although the Kochs were the founders, it soon served as a front for dozens of the country’s largest corporations. A procession of large companies ranging from Exxon to Microsoft had made contributions to the organization after which it had mobilized public support for their agendas.
[161 ] By the time Bill Clinton became president, CSE had become a prototype for the kinds of corporate-backed opposition campaigns that would proliferate after Obama was elected. In 1993 it waged a successful assault on Clinton’s proposed tax on energy, which would have taxed fossil fuel use but exempted renewable energy sources.
David Glickman, one of the Democrats who supported the energy tax believes that secret money they funneled against him ended his 18-year congressional career.
CSE’s success in helping to kill Clinton’s energy tax emboldened the group. Next, it went after his proposed tax increase on high earners.
[162 ] CSE’s ads were misleading, focusing on owners of car washes and other small businesses, implying that the tax was aimed at the middle class when in fact it would affect only the wealthiest 4%. It was the kind of exaggerated scare tactic that would become a Koch trademark during the Obama years.
But at the end of 2003, internal rivalries caused CSE to split apart. The split was about control. One veteran said that while the Kochs loved liberty as an abstraction, “They were very controlling, very top-down. You can’t build an organization with them. They run it.
Dick Armey (The former Republican House majority leader from Texas who chaired CSE after leaving Congress) went on to start another conservative free-market group, Freedom Works.
It was at this moment in 2003 that the Kochs inaugurated the first of their twice-a-year donor summits, which were originally designed as a means of off-loading the costs of Koch Industries’ environmental and regulatory fights onto others.
[163 ] The first conference was a dismal affair with fewer than 20 participants, and dull lectures. Meanwhile David Koch and Richard Fink created a new but similar non-profit advocacy group out of the shards of CSE, which they called Americans for Prosperity. The new group had several different divisions, with different tax statuses. One wing was the Americans for Prosperity Foundation, a 501(c)(3) educational organization, so donations to it could be written off as tax-deductible charitable gifts. But it could not participate in politics. Another division was an advocacy organization, just called Americans for Prosperity. It was a 501(c)(4) “social welfare” group, which meant it could participate in electoral politics so long as this was not its “primary” purpose. Donations could be made in secret, but were not tax deductible. To run this more political side, the Kochs hired Tim Phillips, a political veteran who had worked with Ralph Reed, the former head of the Christian Coalition. (The Christian Coalition had handled casino cash for Jack Abramoff, a lobbyist who went to prison for defrauding millions of dollars from Native American casino owners.) Phillips was part of a tough, hardball-playing group, far from the wonky, intellectual mists of Charles Koch’s early libertarian musings.
[164 ] A Southern Baptist, Phillips enrolled in Liberty University, Jerry Falwell’s evangelical school in Lynchburg, Virginia. But he ran out of money and dropped out. Then with Reed, he founded Century Strategies, turning out evangelical voters in 2004 to reelect George Bush. Then in 2005, David Koch and Art Pope drafted him to run Americans for Prosperity. Phillips’ online biography described him as an expert in “grassroots” political organizing. His appointment signaled a tough new phase for the Kochtopus. Phase three of Fink’s plan could now begin in earnest.