Blood And Oil

This is the story of a blood feud, a battle between brothers. As we told you when we first reported this story last November, the Koch family of Wichita, Kansas is among the richest in the United States, worth billions of dollars. Their oil company, Koch Industries, is bigger than Intel, Dupont or Prudential Insurance, and they own it lock stock and barrel. The trouble is a former employee says the brother who controls the company grew rich through fraud and theft, stealing from the taxpayers of the United States.

Unfortunately, for Koch Industries, that disgruntled former employee was Bill Koch, one of the Koch brothers. Blood and oil has destroyed more than one American family. The question is: Was Bill Koch a renegade out to ruin his brother, or did Koch industries really operate the way he says? Scott Pelley reports.

Koch says that Koch Industries engaged in "(o)rganized crime. And management driven from the top down."

"It was – was my family company. I was out of it," he says. "But that’s what appalled me so much... I did not want my family, my legacy, my father’s legacy to be based upon organized crime."

For the Koch family, the fight began in 1980. Bill tried to take control of the company, he failed and was forced out by his older brother, Charles – Koch’s Chief Executive Officer. Koch Industries told 60 Minutes II that Bill "has clearly decided to destroy what he cannot control." There is no doubt Bill Koch is a man driven by obsessions. In 1992, with little experience in sailing, he simply decided to win America’s Cup. He spent millions and did. He’s used the same determination in suing his brothers for nearly 20 years.

"I'll tell you what I’m out to get," says Bill. "It’s not to get Charles. He's going to get himself. The old saying is you're not punished for your sins but by your sins."

One might think this is just another wealthy American family torn apart by greed and jealousy. But there's more. Bill Koch set out to prove his father's company amassed enormous wealth through fraud.

Bill Koch says that his brother Charles made a fortune stealing oil. Much of it from beneath Indian reservations and federal lands - places like national forests. Oil under federal lands belongs to the public. Koch Industries was the middleman – buying oil from the government at the well - then selling it to refineries. Bill Koch says that the company took more oil than it paid for by cheating on measurements.

A gauger measures the volume and the quality of the oil that his company is buying. The buyer leaves his measurements behind on what’s called a "run ticket." It's an IOU to the well owner.

That may not sound like much, but Bill Koch says that it added up. "Well, that was the beauty of the scheme. Because if they’re buying oil from 50,000 different people, and they’re stealing two barrels from each person. What does that add up to? One year, their data showed they stole a million and a half barrels of oil."

Bill Koch filed a lawsuit in federal court claiming that much of the oil collected by Koch Industries was stolen from federal lands. At the trial, 50 former Koch gaugers testified against the company, some in video depositions. They said Koch employees had a name for cheating on the measurements.

"We in the company referred to it as the "Koch Method" because it was a system for cheating the producer out of oil," said one of these gaugers, Mark Wilson.

"I believe that what I was stealing oil and I don't feel good about it," said another, James Jurgens.

"You were expected to get out there and get this oil for them. And – and not be short. And the only way to not be short is to steal oil," says Phil DuBose. He should know. Before he was laid off, he had spent 27 years at Koch Industries. He rose to become the manager of all the Koch gaugers buying oil in four states.

"Nobody ever got in their way. And it was just a license to print money," says DuBose.

Charles Koch, head of the company, testified that his gaugers weren’t stealing, they were making adjustments to compensate for irregularities like sludge or water in the tank.

"There's always a problem of accuracy in the oil field in measurement," says Charles Koch.

The company used the Koch method with virtually all its customers. In the 1980's alone, Koch records show those so-called adjustments brought the company 300 million gallons of oil it never paid for. And it was pure profit.

Bill Koch says that profits from that oil were a minimum of $230 million.

60 Minutes II wanted to hear what Koch executivs had to say about the oil theft. For well over a year, in a series of meetings, phone calls and letters, we requested interviews but the company has declined. One of the people Koch Industries urged us to talk to is Charles Tillman, chief of the Osage Indian tribe in Oklahoma — one of Koch's customers.

"Koch has been taking our oil and – and been fair about it. Until somebody proves different, then I'll stand upon their record and what they've – how they've operated here in the Osage," says Tillman.

In a written statement, Koch blames its problems on Bill Koch – calling him a "disgruntled family member" who has waged a "personal vendetta through lawsuits and the media against his brothers' company."

But in December 1999, the jury found that Koch Industries did steal oil from the public and lied about its purchases – 24 thousand times. The oil theft conviction was a heavy blow, but the troubles of Koch Industries don’t stop there. If the company was fattening its bottom line through theft – there is also evidence Koch was pinching pennies on safety and environmental protection - cutting costs with disastrous results.

Former EPA administrator Carol Browner announced in 2000 that she was hitting Koch Industries with the largest civil penalty in the history of the federal Clean Water Act: a $30 million fine.

She said, Koch Industries spilled over 3 million gallons of crude oil in six states

Koch pipelines make up the largest oil and gas network in the nation. The EPA complaint targeted more than 300 oil spills, some poisoning fisheries and drinking water.

In a statement, Koch Industries claims that it has spent a billion dollars on environmental improvements and reduced leaks by 96 percent. The company urged us to look at its record at the federal Office of Pipeline Safety. We did and discovered that Koch’s records at OPS look good. But we also found that OPS doesn't cover more than half of Koch’s lines - including the lines that leaked.

"They don't care for any loss of human life. Like I said, it was the buck that counted for them," says Danny Smalley. He had the extreme misfortune of living near a Koch Industries underground pipeline that ran through Texas. In August, 1996, Smalley was home with his daughter Danielle and her friend Jason Stone. Danielle was packing to leave for school the next day – the first person in her family to go to college.

She and Jason started smelling gas. It was butane, pouring from a corroded Koch Industries high pressure pipeline, 200 yards from their home. Jason and Danielle set out in a pickup truck to find help. But their truck set off the butane, and caused an explosion.

Danny Smalley filed suit against Koch Industries. His attorney, Ted Lyon, says the investigation exposed a pattern of negligence and coverup involving the pipeline known as Sterling One. Lyon describes the pipeline as like "Swiss Cheese."

Koch is require by law to ensure that its vast pipeline system is protected from corrosion in two ways. The pipe must be wrapped in a protective coating. And, once in the ground, an electrical current is applied all along the pipeline – a technique that inhibits corrosion.

"If you don't have the current and you don’t have coating, you have a big problem. And that's what happened in this case. And the sad thing about it is, they knew it," says Lyon.

Federal investigators blamed the explosion on Koch’s failure to adequately protect the line. Koch industries told us the fatal explosion is the only incident of its kind in the company’s history. Still, in 1999, a jury found Koch Industries guilty of negligence and malice.

“They admitted to me if they had done things the way they should have, my child and Jason would still be alive,” says Danny Smalley.

"They said, 'We're sorry Mr. Smalley, that your child lost her life and Jason lost his life.' Sorry doesn’t get it. They’re not sorry. The only thing they looked at was the bottom dollar. How much money would they lose if they shut the pipeline down. They didn’t care, all they wanted was the money."

"Koch Industries has a philosophy that profits are above everything else," says Bill Koch.

August 2001 Update

In May, 2001, Bill Koch and Koch Industries announced a legal settlement of all their disputes, effectively putting an end to the two-decade family feud. The settlement calls for Koch Industries to pay $25 million in penalties to the U.S. government for improperly taking more oil than it paid for from federal and Indian lands. About a third of it goes to Bill Koch or bringing the lawsuit.

Koch industries has faced other troubles with the government since the original broadcast in November. In April, Koch’s Petroleum Group was fined 20 million dollars after it released huge amounts of cancer-causing benzene from a Texas refinery and then tried to cover it up.

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