Two of the billionaire Koch brothers – Charles and David – have poured a lot of money into the 2014 mid-term elections, mostly backing Republican and Tea Party candidates. Koch money is one of the prime reasons Republicans may take control of the U.S. Senate this time around.
Some of the Koch fortune (Forbes puts Charles and David Koch’s net worth at about $40 billion each) that makes possible the brothers’ hefty contributions to conservative causes came from cheating American Indian tribes out of oil royalties 30 years ago. An investigation begun in 1988 by a select committee of the Senate Committee on Indian Affairs comprised of Sens. John McCain (R-Ariz.), Dennis DeConcini (D-Ariz.) and Tom Daschle (D-S.D.) found that Koch Oil had cheated American Indian tribes out of millions of dollars in royalties by intentionally and consistently lying about how much crude they had taken out of storage tanks on Indian lands.
The committee issued its report (Senate Report 101-216) in 1989: “Koch Oil, the largest purchaser of Indian oil in the country, was engaged in a widespread and sophisticated scheme to steal crude oil from Indians and others through fraudulent mismeasuring and misreporting.”
The committee sent the report to the Justice Department and DOJ convened a grand jury to examine possible criminal charges, but no indictments had been returned before the group was disbanded in 1992. In 1999, a federal court found Koch Industries guilty in a whistleblower case brought by estranged Koch brothers Bill and Frederick, who got a share of the fines imposed by the government. The tribes got nothing.
The cruel irony here is that two of the Senate seats in contention this November are in states where the Native vote could determine the outcome. In South Dakota, Democrat Rick Weiland, Independent Larry Pressler and Republican Mike Rounds are in a too-close-to-call race for the Senate seat now held by three-term Sen. Tim Johnson, Democrat, who announced his retirement in March 2013.
In Alaska, Sen. Mark Begich, Democrat, is defending his seat against Republican Dan Sullivan. On October 20, Begich was trailing in the polls.
The First Lawsuit
In 1983, Koch Industries bought out the shares owned by Bill and Frederick Koch and members of a related family for $1.1 billion. In 1985, the sellers filed suit alleging they had been cheated because Koch Industries (a privately-held company now owned by Charles and David) had made inaccurate financial statements pertaining to the value of the shares the company purchased from them. They requested $2 billion in damages. They lost in district court in 1998 and on appeal to U.S. Court of Appeals for the 10th Circuit, which ruled in 2000 in favor of the defendants.
Early on in the lawsuit, the plaintiffs alleged that one of the misrepresentations involved the company’s purchase of oil from American Indian tribes, a point confirmed by Melissa Cohimia, a spokeswoman for Koch Industries, Inc. Those allegations piqued the interest of the Senate Committee on Indian Affairs.
A select committee of the Senate Committee on Indian Affairs was convened in 1988 to “uncover fraud, corruption and mismanagement in American Indian affairs, no matter where or to whom it led.” The committee looked at whether federal agencies were meeting their responsibilities to Indian tribes (they weren’t), Indian tribal governments (particularly that of Navajo Nation President Peter MacDonald), natural resources (here they focused on Koch Oil) and health and housing (including abuse at federally-run schools for American Indian children). They issued their report in 1989.
While other companies may also have been stealing oil from tribal lands, the committee focused on Koch Oil, “the largest independent purchaser of crude oil in the United States and Canada.” In fact, the Koch fortune was amassed in the oil fields of several countries from as far back as when the current owners’ father, Fred C. Koch, started the business that would become Koch Industries, Inc., in the 1920s.
The committee examined internal company documents and even sent investigators into the field to look at how Koch Oil employees were measuring the oil they took from tribal lands. The committee found that “Koch’s practice of sophisticated oil theft is carried out primarily by gaugers, the field personnel responsible for measurement of crude oil.” Gaugers report the oil measured and its quality on run tickets, which are the basis on which royalties are paid.
The quantity of the oil was measured by gauging the depth of the oil in the producer’s tanks before any was pumped out, the depth of the oil after the tank was pumped and the temperature of the oil to account for expansion or contraction. A fourth measurement determined the quality of the oil. “Koch gaugers were instructed to misstate each of these elements in the company’s favor and fraudulently report their phony measurements on the run tickets.” A gauger who reports that the company took more oil than it paid for was said to be “long” or “over.”
Comparing Koch Oil’s data with that of 30 other natural resource companies, which represented 80 percent of all gas and oil production on Indian lands, the committee determined that “Koch’s data during the last three years was consistently ‘over’ each year, acquiring $31 million more oil than it paid for…. The records indicated that about one-quarter [emphasis added] of Koch’s 1988 profits in crude oil can be attributed to obtaining oil it did not pay for.” In 2000, CBS 60 Minutes reported that Bill Koch estimated profits from the oil stolen from American Indian and other federal lands would total at least $230 million.
Then the committee sent a covert surveillance team into the field to secretly monitor Koch gaugers’ measurements, and along with the FBI, interviewed dozens of supervisors and current and former employees of Koch. “The Committee’s own investigation indicates that Koch’s figures, which already admit to more than $31 million in oil acquired by the company but not paid for in the past three years are inaccurate and considerably understated, since they fail to fully reflect the theft admitted by Koch personnel on Indian lands.”
In interviews, the gaugers told investigators they “were specifically instructed to engage in ‘volume enhancement,’ bumping the temperature about 10 degrees, taking anywhere from one to four inches of oil off the gauge, and increasing the sediment and water.” Interviewees told investigators that gaugers were explicitly trained in the “Koch method” of measurement and reporting.
Koch Oil CEO and Chairman of the Board Charles Koch, while admitting under oath in testimony before committee investigators that the company was taking more than $10 million a year in oil it did not pay for, said “[Oil measurement] is a very uncertain art … And you have people [measuring] who aren’t rocket scientists … [No] one can ever make an exact measurement … There is a lot of uncertainty … and you [have] got tremendous variations.”
However, the committee examined the records of comparable companies including Sun, Kerr-McGee, Phillips and Conoco and found their measurements were accurate, without significant overages or shortages and “they did not acquire a significant amount of crude oil without paying for it.”
The company issued a statement blaming estranged brother Bill for “fueling” the investigation. It claimed, falsely, that it was only a minor player on Indian land.
Osage Tribe Principal Chief Charles O. Tillman Jr., at first defended Koch Industries, but in 1994 wrote in a letter to McCain, “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.”
The report states that by time 101-216 was released, the committee had already referred the Koch Oil matter to the Department of Justice for criminal investigation. DOJ convened a grand jury to examine possible criminal charges, but no indictments were returned before the grand jury was dissolved in 1992.
The Second Lawsuit
In 1989, Bill Koch and William Presley filed suit in federal district court in Oklahoma against Koch Industries, Inc., alleging that the company had “engaged in a systematic, management-directed scheme to steal crude oil from producers on federal and Indian lands throughout the United States … and “cheated oil producers and royalty owners out of hundreds of millions of dollars by deliberately falsifying measurements on lease tanks,” according to a news release from the plaintiffs. “…8,965 producers were cheated out of 5,373,076 barrels of oil, totaling $133,337,000 ($206 million in 1998 dollars) by Koch Industries,” read the news release.
Bill Koch and Presley filed the case under the False Claims Act, which allows private individuals to sue on behalf of the federal government on grounds of fraud. In the course of dealing with pre-trial motions, the court found that Koch Industries had destroyed documents relevant to the case that it should have preserved and awarded the plaintiffs $200,000 to reconstruct some of those records.
In 1999, a jury returned a verdict of guilty against Koch Industries. “The jury found that Koch Industries made 24,587 false claims during the late 1980s, resulting in $553,504 in underpayment of royalties owed to the government and tribes, said Bill Koch’s spokesman, Brad Goldstein,” the Wichita Eagle reported. Knight Ridder/Tribune Business News wrote, “The Wichita-based company could be held liable for about $215 million in total damages for filing false claims that caused underpayment of oil royalties to government agencies and federally protected tribes.”
But that did not happen. In 2001, DOJ and District Judge Terry Kern of Tulsa, who had heard the case, approved a settlement reached by the plaintiffs and Koch Industries under which the company would pay the U.S. government $25 million to dismiss all charges. Bill Koch and Presley got $7.4 million for their role as whistleblowers.
In a joint news release, Koch spokesman Jay Rosser said, “We reached the conclusion that a settlement now, putting an end to this whole matter, is in the best interests of Koch Industries, our employees, customers and the communities we serve. We are pleased at the productive dialogue and the good faith efforts of all involved who have made this settlement possible.”
Koch Industries continues to maintain that its dealings with American Indian tribes in the late 1980s were above-board. Koch Industries spokeswoman Melissa Cohlmia provided a statement to ICTMN: “No oil was ‘stolen’ and there was no finding of theft in this case. This case, originally filed in 1989 by an individual who had sued the company repeatedly and unsuccessfully in the 1980s, involved oil measurement practices by Koch during the 1970s and 1980s on Federal and Indian lands. It went to trial in 1999. Given the imprecision involved with field conditions and hand gauging to measure oil during this time period, we believe that our practices were consistent with, and in many respects, better than industry practice. In fact, our customers, including the producers, pumpers, and royalty owners, who testified at the trial, said if they ever had any issues with Koch’s measurements, they raised questions and any issues were resolved amicably by agreement. No evidence was introduced that Koch intentionally mismeasured oil on Federal and Indian lands. … After more than a week of deliberations, the jury returned a verdict against Koch.”
This is expected to be the most expensive mid-term election for Senate seats in history. As of October 21, two weeks before the November 4 election, $437,313,225 had already been raised for the Senate races, according to Open Secrets.org. Since the Supreme Court’s 2010 ruling in Citizens United, much of that is “dark money,” money contributed to campaigns by social welfare [501(c)(4)] and trade association [501(c)(6)] non-profits, which are not required to disclose who contributed the money to them. Charles and David have ties to dozens of such non-profits, including Americans for Prosperity, Freedom Partners, Center to Protect Patient Rights, 60 Plus and Americans for Job Security, reports Open Secrets.org.
So where did all this money now being used to manipulate the outcome of U.S. elections come from? In the whistleblower trial Koch Industries admitted it had taken $170 million worth of oil from American Indian and other federal lands without paying for it, AP reported. The eventual “price” of that oil was the $25 million fine.
You do the math.