Patrick McMullan/PatrickMcMullan.com
Charles and David Koch, with singer Samuel Ramey at the New York City Opera's Theater Debut Celebration at Lincoln Center in New York in Nov., 2009.
Charles and David Koch, with singer Samuel Ramey at the New York City Opera's Theater Debut Celebration at Lincoln Center in New York in Nov., 2009. Photographer: Patrick McMullan/PatrickMcMullan.com
Oct. 3 (Bloomberg) -- Danny Smalley speaks with Bloomberg's David Evans about his daughter, Danielle Smalley, and the foundation which promotes pipeline safety that bears her name. In 1996 a leak in a Koch Industries Inc. butane pipeline led to an explosion that killed 17 year-old Danielle. The November issue of Bloomberg Markets magazine examines the history of some illegal and improper practices of the global empire run by the billionaire brothers Charles and David Koch. (Source: Bloomberg)
The cover of the November 2011 issue of Bloomberg Markets magazine.
The cover of the November 2011 issue of Bloomberg Markets magazine.
Amanda Gordon/Bloomberg
David H. Koch, executive vice president at Koch Industries Inc., left, poses for a photo with Julia Koch during the opening night at the Metropolitan Opera in New York on Sept. 26, 2011.
David H. Koch, executive vice president at Koch Industries Inc., left, poses for a photo with Julia Koch during the opening night at the Metropolitan Opera in New York on Sept. 26, 2011. Photographer: Amanda Gordon/Bloomberg
Brent Humphreys/Bloomberg Markets via Bloomberg
Phil Dubose, photographed in Church Point, Louisiana on Sept 12, 2011. Phil is a former Koch manager, says company stole oil.
Phil Dubose, photographed in Church Point, Louisiana on Sept 12, 2011. Phil is a former Koch manager, says company stole oil. Photographer: Brent Humphreys/Bloomberg Markets via Bloomberg
David Evans
Judge Janis Graham Jack, photographed at the federal courthouse in Corpus Christi, TX on June 2, 2011.
Judge Janis Graham Jack, photographed at the federal courthouse in Corpus Christi, TX on June 2, 2011. Photographer: David Evans
Corpus Christi Caller-Times via Bloomberg Markets
Sally Barnes-Soliz, a former Koch employee, is seen leaving federal court in Corpus Christi, Texas on Oct. 2000. She testified that the company filed a false report in Corpus Christi.
Sally Barnes-Soliz, a former Koch employee, is seen leaving federal court in Corpus Christi, Texas on Oct. 2000. She testified that the company filed a false report in Corpus Christi. Photographer: Corpus Christi Caller-Times via Bloomberg Markets
Dale Frost/Port of San Diego via Bloomberg Markets
Bill Koch at the America's Cup at San Diego Yacht Club in 1992. His young son is next to him.
Bill Koch at the America's Cup at San Diego Yacht Club in 1992. His young son is next to him. Photographer: Dale Frost/Port of San Diego via Bloomberg Markets
Brent Humphreys/Bloomberg Markets via Bloomberg
Danny Smalley, photographed at the Smalley Fouindation in Texas, Sept. 15, 2011. Smalley started a foundation for his daughter Danielle after she died in an explosion at a Koch Pipeline.
Danny Smalley, photographed at the Smalley Fouindation in Texas, Sept. 15, 2011. Smalley started a foundation for his daughter Danielle after she died in an explosion at a Koch Pipeline. Photographer: Brent Humphreys/Bloomberg Markets via Bloomberg
In May 2008, a unit of Koch Industries Inc., one of the world's largest privately held companies, sent Ludmila Egorova-Farines, its newly hired compliance officer and ethics manager, to investigate the management of a subsidiary in Arles in southern France. In less than a week, she discovered that the company had paid bribes to win contracts.
"I uncovered the practices within a few days," Egorova- Farines says. "They were not hidden at all."
She immediately notified her supervisors in the U.S. A week later, Wichita, Kansas-based Koch Industries dispatched an investigative team to look into her findings, Bloomberg Markets magazine reports in its November issue.
By September of that year, the researchers had found evidence of improper payments to secure contracts in six countries dating back to 2002, authorized by the business director of the company's Koch-Glitsch affiliate in France.
"Those activities constitute violations of criminal law," Koch Industries wrote in a Dec. 8, 2008, letter giving details of its findings. The letter was made public in a civil court ruling in France in September 2010; the document has never before been reported by the media.
Egorova-Farines wasn't rewarded for bringing the illicit payments to the company's attention. Her superiors removed her from the inquiry in August 2008 and fired her in June 2009, calling her incompetent, even after Koch's investigators substantiated her findings. She sued Koch-Glitsch in France for wrongful termination.
Koch-Glitsch is part of a global empire run by billionaire brothers Charles and David Koch, who have taken a small oil company they inherited from their father, Fred, after his death in 1967, and built it into a chemical, textile, trading and refining conglomerate spanning more than 50 countries.
Koch Industries is obsessed with secrecy, to the point that it discloses only an approximation of its annual revenue -- $100 billion a year -- and says nothing about its profits.
The most visible part of Koch Industries is its consumer brands, including Lycra fiber and Stainmaster carpet. Georgia- Pacific LLC, which Koch owns, makes Dixie cups, Brawny paper towels and Quilted Northern bath tissue.
Charles, 75, and David, 71, each worth about $20 billion, are prominent financial backers of groups that believe that excessive regulation is sapping the competitiveness of American business. They inherited their anti-government leanings from their father.
Fred was an early adviser to the founder of the anti- communist John Birch Society, which fought against the civil rights movement and the United Nations. Charles and David have supported the Tea Party, a loosely organized group that aims to shrink the size of government and cut federal spending.
These are long-standing tenets for the Kochs. In 1980, David Koch ran for vice president on the Libertarian ticket, pledging to abolish Social Security, the Federal Reserve System, welfare, minimum wage laws and federal agencies -- including the Department of Energy, the Federal Bureau of Investigation and the Central Intelligence Agency.
What many people don't know is how the Kochs' anti- regulation political ideology has influenced the way they conduct business.
A Bloomberg Markets investigation has found that Koch Industries -- in addition to being involved in improper payments to win business in Africa, India and the Middle East -- has sold millions of dollars of petrochemical equipment to Iran, a country the U.S. identifies as a sponsor of global terrorism.
Internal company documents show that the company made those sales through foreign subsidiaries, thwarting a U.S. trade ban. Koch Industries units have also rigged prices with competitors, lied to regulators and repeatedly run afoul of environmental regulations, resulting in five criminal convictions since 1999 in the U.S. and Canada.
From 1999 through 2003, Koch Industries was assessed more than $400 million in fines, penalties and judgments. In December 1999, a civil jury found that Koch Industries had taken oil it didn't pay for from federal land by mismeasuring the amount of crude it was extracting. Koch paid a $25 million settlement to the U.S.
Phil Dubose, a Koch employee who testified against the company said he and his colleagues were shown by their managers how to steal and cheat -- using techniques they called the Koch Method.
In 1999, a Texas jury imposed a $296 million verdict on a Koch pipeline unit -- the largest compensatory damages judgment in a wrongful death case against a corporation in U.S. history. The jury found that the company's negligence had led to a butane pipeline rupture that fueled an explosion that killed two teenagers.
Former Koch employees in the U.S. and Europe have testified or told investigators that they've witnessed wrongdoing by the company or have been asked by Koch managers to take what they saw as improper actions.
Sally Barnes-Soliz, who's now an investigator for the State Department of Labor and Industries in Washington, says that when she worked for Koch, her bosses and a company lawyer at the Koch refinery in Corpus Christi, Texas, asked her to falsify data for a report to the state on uncontrolled emissions of benzene, a known cause of cancer. Barnes-Soliz, who testified to a federal grand jury, says she refused to alter the numbers.
"They didn't know what to do with me," she says. "They were really kind of baffled that I had ethics."
Koch's refinery unit pleaded guilty in 2001 to a federal felony charge of lying to regulators and paid $20 million in fines and penalties.
"How much lawless behavior are we going to tolerate from any one company?" asks David Uhlmann, who oversaw the prosecution of the Koch refinery division when he was chief of the environmental crimes unit at the U.S. Department of Justice. "Corporate cultures reflect the priorities of the corporation and its senior officials."
Koch Industries declined to make either Charles Koch, who lives near corporate headquarters in Wichita, or David Koch, who lives in New York, available for interviews.
Melissa Cohlmia, Koch's director of corporate communications, said in an e-mailed statement that the company has developed a good relationship with environmental regulators and now complies with all rules. Cohlmia says the company has learned lessons from past mistakes, including the improper payment scheme that Koch outlined in its letter filed in French court.
"We are proud to be a major American employer and manufacturing company with about 50,000 U.S. employees," she wrote. "Given the regulatory complexity of our business, we will, like any business, have issues that arise. When we fall short of our goals, we take steps to correct and address the issues in order to ensure compliance."
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