When Senator Bob Dole is declared the Republican nominee for President at the GOP convention in San Diego this summer, two wealthy Kansas oilmen almost certainly will be in the wings joining in the applause. They are the brothers Charles G. and David Koch (pronounced "coke"), who together control about 80% of Wichita-based Koch Industries Inc. Koch's $25 billion-plus in annual revenues make it the nation's second-largest privately held corporation and the biggest independent oil company.
The relationship between fellow Kansan Dole and this secretive oil dynasty couldn't be tighter. David Koch, who was the Libertarian Party's candidate for Vice-President in 1980, is a vice-chairman of Dole's '96 campaign, and the Koch family ranks as his third-largest financial backer. From 1979 to 1994, the Kochs contributed $245,000 to Dole's campaign and political causes, according to a recent study by the Center for Public Integrity, a Washington political watchdog group. More recently, Federal Election Commission reports show that Koch employees donated $16,500 to Dole's Presidential campaign in 1995. And just last July, David Koch hosted a birthday party for Dole that raised $150,000 for the senator's White House bid.
STIFLED. Dole, for his part, has used the power and prestige of his office to help Koch when the company has gotten in trouble with federal authorities. Some Washington observers feel his ties with the company could become a liability, much as Bill Clinton's Arkansas business dealings have dogged him. As the Democrats step up their attacks on Dole and independent Ross Perot stirs up voter anger against the Washington buddy system, the Dole-Koch link could haunt the candidate in November.
Koch has had a history of run-ins with the Justice Dept. and other federal agencies. In 1989, a special congressional committee looked into charges that Koch had routinely removed more oil from storage tanks on Indian tribal lands in Oklahoma and other states than it had paid for. Dole tried to influence the Senate committee to soft-pedal the probe. Nevertheless, after a yearlong investigation, the committee said in its final report, "Koch Oil, the largest purchaser of Indian oil in the country, is the most dramatic example of an oil company stealing by deliberate mismeasurement and fraudulent reporting." The report triggered a grand jury probe. The inquiry was dropped in March, 1992, which provoked outrage by congressional investigators.
Then in April, 1995, the Justice Dept. filed a $55 million civil suit against Koch for causing more than 300 oil spills over a five-year period. Dole and other Senators, however, sponsored a bill now awaiting action in Congress that critics charge would help Koch defend itself against the oil-spill charges.
According to legal sources, Justice is now seriously considering expanding the suit into a criminal case. And the agency is taking steps to link the oil-spill action with a 1989 suit that also involved alleged oil thefts by Koch. That action was filed in federal court in Tulsa by William I. Koch, a disaffected brother of Charles and David, and is still pending. The federal government is seeking the records of the Senate's investigation and is obtaining evidence, much of it previously under seal, from the William Koch suit. That evidence is said to be similar to that presented by the Senate committee, according to sources and court records.
Even though the five-year statute of limitations has run out on the grand jury probe of the oil-theft charges, legal sources say the government's ultimate goal is to use evidence in the two actions to establish that Koch has engaged in a broad pattern of criminal behavior. The Justice Dept. declined to comment.
Koch Chief Legal Officer Donald L. Cordes denies that Koch Industries ever perpetrated an oil-theft scheme. And he contends that the "government's own data reflect that Koch's oil-spill record is superior to [that of] most oil companies."
Responding to questions from BUSINESS WEEK, Dole Press Secretary C. Clarkson Hine Jr. said: "Senator Dole simply joined three other senators, on a bipartisan basis, in expressing appropriate and legitimate concerns in an effort to ensure fair treatment by a Senate committee of a Kansas employer.... Your characterization of the nature of our office's role in this matter is absurd."
Koch's troubles with the government were triggered in 1987 by an Arizona Republic series on lax government monitoring of possible thefts of oil and other minerals from Indian-owned lands. The articles piqued the interest of then-Senator Dennis DeConcini of Arizona, the Democrat who headed the Select Senate Committee on Indian Affairs. DeConcini convened hearings on Koch in May, 1989.
During the same period, William Koch was engaged in a nasty legal battle against Koch Industries and his brothers Charles and David. In pursuing a series of lawsuits, William claimed to have found evidence that Koch Industries oil-field personnel, under orders from management in Wichita, made a practice of taking more oil from producers' storage tanks, including those on federal and Indian lands, than they actually paid for.
Armed with these reports, the Indian Affairs panel formed a special investigations subgroup in January, 1988, to study the charges. Evidence suggested that gaugers, the oil-field hands who measure and take delivery of oil collected in tanks, had fudged temperature, specific gravity, and other volume-related measurements in favor of Koch Industries. For instance, in a sworn 1988 statement, Bill Kirton, a former Koch gauger and superintendent in Texas, declared: "If someone was watching, we were instructed to get one-half inch, but if no one were watching then to get two or three inches, or whatever you could get." In "one or two meetings," Chairman Charles Koch himself "urged us to be over" rather than short oil, Kirton testified.
Donald Cordes insists that inexperienced gaugers and other workers hired in Texas during the early 1980s oil-boom days were responsible for the vast majority of any discrepancies. "We had to hire a lot of people with no experience.... Maybe there was a failure in the incentive system." He says Kirton's statement was "absolutely false" and Kirton was "fired for cause." Kirton could not be reached for comment.
After examining records of some 30 oil companies and hearing testimony from 28 former Koch employees and supervisors, investigators concluded that Koch was the only oil company routinely stealing oil. The committee's final report asserted that more than $30 million worth of oil had been illegally obtained from Indian lands. Koch's Cordes claims the Senate testimony was "loaded with fabrication, false statements, and perjured testimony."
PRESSURE? Two weeks after the special committee's hearings began, William Koch weighed in with his lawsuit against the company, filed in Tulsa under the 1986 False Claims or "whistleblower" Act, charging it with cheating oil and gas royalty owners and producers on federal and Indian lands. Roy M. Bell, William Koch's attorney, stated in court proceedings that the value of the allegedly stolen oil and gas plus fines and treble damages would total in excess of $600 million for royalty owners alone.
The most controversial--and murky--part of Dole's relationship with Koch is allegations that Dole attempted to influence the investigation on several occasions. According to sources familiar with the Senate probe, Dole's aides, in meetings on Capitol Hill, including at least one in his office, put pressure on the subcommittee staff to blunt the probe.
In two letters to DeConcini in late 1989, as the final report was being prepared, Kansas Senators Dole and Nancy L. Kassebaum and Oklahoma Senator Don Nickles, all Republicans, as well as former Oklahoma Senator David L. Boren, a Democrat, challenged the "reliability" of testimony given before the special committee. The following March, two weeks after the committee was disbanded, Dole complained on the Senate floor that the panel had rushed to judgment in the Koch investigation. Noting that he was speaking for Kassebaum, Boren, and Nickles as well, Dole said he had "very real concerns about some of the evidence on which the special committee was basing its findings." Describing the Senate investigation as "McCarthyism," Cordes says: "We were the objects of political skullduggery."
In August, 1989, in the wake of the Senate hearings and William Koch's lawsuit, senior Koch executives met to draft a plan designed to improve the company's image nationally--but particularly in Oklahoma, documents show. Top officials were assigned to cozy up to the state's most influential citizens, including oil-industry leaders and politicians.
Spearheaded by Ron Howell, Koch's director of state affairs for Oklahoma, this drive was the first in a string of events that may have culminated in the dropping of the government's investigation of the mil-theft charges. Howell, then a Republican district leader, greatly expanded the company's contributions to charitable causes and political campaigns, including that of Nickles, a protege of Bob Dole. From Apr. 19, 1991, through Nov. 2, 1992, David Koch and the Koch Industries political action committee together contributed $7,000 to Nickles' campaign war chest. Around the same time, Nickles sponsored Timothy D. Leonard, an old friend of Nickles, for the post of U.S. Attorney in Oklahoma City, a job Leonard assumed in October, 1989. When the Senate committee probing the oil-theft charges was referred to the U.S. Attorney's office in Oklahoma City, which convened a rare special grand jury, Leonard took over the case.
Initially, questions were raised in the U.S. attorney's office about whether Leonard should recuse himself because Koch Industries purchased oil from wells in which Leonard and his family had royalty interests, documents show. In a Mar. 21, 1991, letter to Leonard, then-Deputy Attorney General William P. Barr granted him a waiver to participate in the case, stating that the amount Leonard received--which is deleted in the copy of the letter that was made public--were not large enough to create a conflict. But some question that decision. Says Walter F. Timpone, a Morristown (N.J.) attorney who until 1994 headed the public corruption unit at the U.S. Attorney's office in Newark: "It's unusual for a U.S. attorney to ask for a waiver of conflict rules, and most U.S. attorneys recuse themselves to avoid even the question of an appearance of impropriety."
In March, 1992, after an 18-month investigation, the U.S. Attorney's office terminated the grand jury probe and informed Koch it anticipated no indictments. There is no evidence that Leonard's office was pressured into making its decision. But people involved in the Senate investigation are still upset. Says DeConcini, who retired from the Senate in January, 1995: "I was surprised and disappointed. Our evidence was so strong. Our investigation was some of the finest work the Senate has ever done. There was an overwhelming case against Koch." As the grand jury investigation was winding down, Nickles sponsored Leonard for a federal judgeship. He was nominated by President Bush in November, 1991, and confirmed by the Senate the following August.
In a rare interview for a sitting federal judge, Leonard said there was "never direct or indirect pressure brought to bear on me on any investigation when I was in office...." He added that "there was not enough evidence...to return indictments or continue the investigation." Nickles says he was "not even aware that the U.S. Attorney's office was involved in a criminal investigation of Koch. I never had a conversation with Leonard about it." In a Mar. 13 letter to BUSINESS WEEK that said the magazine was considering publishing "false and discredited charges about Koch Industries," Cordes said: "There was not one scintilla of evidence that any pressures were brought to bear on the U.S. Attorney's office or the grand jury."
"SILENT OBSERVER." Throughout the Senate inquiry and criminal investigation, William Koch's litigation remained active. He strengthened his case by winning over the Osage tribe in Oklahoma, on whose land some of the oil thefts allegedly took place. In 1990, the Osage issued a statement exonerating Koch Industries partly based on statements from the Bureau of Indian Affairs, which found no thefts. But the tribe repudiated its original position after receiving evidence that it had been duped--specifically, sworn statements from former Koch employees that described in vivid detail allegedly fraudulent practices with full knowledge of and encouragement by Koch officials. Charles O. Tillman Jr., principal chief of the Osage tribe, wrote in a Nov. 29, 1994, letter to Senator John McCain (R-Ariz.), a member of the investigative committee: "We are left with the inescapable conclusion that the Bureau of Indian Affairs was more concerned with putting a lid on your committee's findings than in providing us with the truth." Adds Stanlee Ann Mattingly, an Osage activist: "We just want to finally get to the bottom of the truth." Retorts Cordes: "The Osage tribe is as political as it can be."
While William Koch's litigation wound its way through the courts during the early 1990s, the U.S. government became a "silent observer" in the case, according to Tulsa court records. By late 1995, the feds were "certainly taking a more active interest in the case," Justice Dept. attorney Gregory H. Gust stated in court hearings. Last Jan. 18, he petitioned the Tulsa court to allow the government to obtain discovery material from the litigation. Over the strong objections of Koch Industries, a federal magistrate ordered the material released to the government as well as the parties in the suit.
One reason for Washington's interest appears to be the environmental lawsuit against Koch Industries filed by the Justice in April, 1995, at the behest of the Environmental Protection Agency and the U.S. Coast Guard. It alleges that since 1990, Koch discharged 2.3 million gallons of oil from its pipelines into the waters of six states in 315 separate incidents. A law-enforcement source says the suit touches on only a fraction of the spills and dumping by Koch. While no single spill is huge, incidents include 29 in Kansas and a handful in Russell, Kan., Dole's hometown.
Nevertheless, in early 1995, Dole took steps that may help Koch defend itself. While Dole was preparing to announce his candidacy in early 1995, he proposed the Comprehensive Regulatory Reform Act of 1995. The legislation, which Dole said was designed to rein in the federal bureaucracy, was drafted at Dole's request by C. Boyden Gray, chief counsel in the Bush White House and now chairman of Citizens for a Sound Economy, a conservative think tank. Koch Industries was an early backer of the CSE and has given more than $7.9 million to it. David Koch served as CSE chairman in 1992 and is currently chairman of CSE's research foundation. Dole's Better America Foundation gave $50,000 to CSE last May. In mid-1995, after critics charged that the foundation was merely a campaign fund rather than a think tank, Dole disbanded it and returned $4.6 million to donors, including about $98,300 to Koch.
Months before the legislation was introduced in early February, 1995, say sources, Koch learned that it could become a target of an environmental lawsuit. Koch and the Justice Dept. met in Dallas in mid-February to discuss the impending suit. In early April, 1995, the draft bill was amended with a provision that critics charge would allow companies facing such suits to defend themselves by citing conflicting federal regulations to prove that regulations had not been enforced uniformly. "Koch could be a potential beneficiary if the bill is enacted into law," says David Hawkins, a senior attorney at the Natural Resources Defense Council.
Cordes insists that other companies, not Koch, lobbied for the measure and that it wouldn't help Koch in its environmental suit. Dole spokesman Hine says the provision was added to the bill by another senator--Kay Bailey Hutchison (R-Tex.), other Senate staffers say. "Dole had nothing to do with it," Hine says. While Dole may not have introduced the language himself, his staff took an active role in overseeing the bill's overhaul. "Dole's staff vetted the bill. It's hard to believe that anything was put in the bill without Dole's knowledge," says Richard Gold, a Washington environmental lawyer involved in the legislation. The bill is still high on Dole's agenda.
Whatever the case, it's a good bet that as Dole pushes toward the White House, Democrats will be looking very carefully at his multifaceted ties with his wealthy home-state benefactor.