Ex-Massey CEO Don Blankenship indicted for coal mine disaster that killed 29

Ex-Massey CEO Don Blankenship indicted for coal mine disaster that killed 29

By Gail Sullivan
The Washington Post
November 14, 2014

 

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Don Blankenship testifying on Capitol Hill in 2010. (AP Photo/Carolyn Kaster, File)

When mine safety inspectors arrived at Upper Big Branch, a guard at the front gate would radio the mine office to raise the red flag. “We’ve got a man on the property,” he would say. The message was then passed in code to supervisors using a telephone system that connected underground, where they instructed miners to get rid of accumulated coal dust and throw up missing roof supports and ventilation equipment.

“We just got things legal,” Mike Shull, a former miner at Upper Big Branch told NPR in 2010, the year an explosion at the mine killed 29 men. “You probably had an hour and 15 minutes to get ready.”

The tip-off scheme is described in detail in the 43-page indictment handed down Thursday by a federal grand jury against Don Blankenship, the former chief executive officer of Massey Energy.

“Blankenship knew that [Upper Big Branch] was committing hundreds of safety-law violations every year and that he had the ability to prevent most of the violations,” the indictment alleges. “Yet he fostered and participated in an understanding that perpetuated UBB’s practice of routine safety violations in order to produce more coal, avoid the costs of following safety laws, and make more money.”

Blankenship was cited 835 times in the 28 months leading up to the worst coal mine disaster in 40 years, in which a combustible mixture of coal dust and methane ignited, killing 29 men working 1,200 feet below ground. The explosion was a direct result of safety violations at the mine, according to a 2011 report by the Mine Safety and Health Administration. Its findings were corroborated by two independent investigations.

“The carnage that was a recurring nightmare at Massey mines during Blankenship’s tenure at the head of that company was unmatched,” United Mine Workers of America President Cecil E. Roberts told the New York Times.

In 2008, Upper Big Branch was ranked as one of the worst mines in the country. By 2009, the fines for safety violations were piling up on Blankenship’s desk, the indictment said.

The most common violation was not cleaning up explosive coal dust and other combustible materials in the mine. The company was also repeatedly cited for failing to hose down equipment, a tactic used to reduce heat that might ignite explosive gas or dust.

In an area of the mine 100 feet long, where miners had to travel every day, inspectors found the roof had caved. Management had known about it for a month. It did nothing, the indictment said.

Failing to build a ventilation system to clear out dust and gas as work advanced deeper into the mine was another routine violation. On one occasion, airflow in the mine was less than half the legal requirement. Inspectors found miners laboring in air thick with coal dust.

Safety checks were supposed to happen every day. They didn’t.

A year before the explosion, Blankenship got reports almost every single day – 249 in all – detailing the hundreds of safety violations at the mine. He did nothing.

“[H]e chose to maximize profits by depriving [Upper Big Branch] of the coal miners and non-coal-production time that it needed to comply with mandatory federal mine safety standards, concluding that it was less expensive to routinely pay fines for violating such standards than to allocate the necessary funds to following them,” the indictment charges.

Blankenship was more interested in the daily reports on mine production, especially in an area called the longwall section that began operation in 2009. He insisted on getting updates every 30 minutes on production and the reasons for any delays, the indictment said.

That was the money section of the mine, bringing in $600,000 worth of coal per day. Upper Big Branch produced a particularly lucrative kind of coal called metallurgical coal, which is used to make steel. It was used along with coal from nearby Massey mines to create a blend that generated $331 million in revenue for Massey in 2009 alone.

Instead of hiring more miners to bring in the coal, Massey diverted its understaffed crew from doing the work necessary to keep the mine safe, like building ventilation systems. Massey’s non-union miners labored under intense production quotas leaving little time for the understaffed crew to tend to basic safety housekeeping like sweeping up coal dust.

Blankenship knew all this, the indictment alleges. In addition to getting the violation reports, he oversaw every detail of the mine, right down to approval of incremental pay raises and a $750 request to hire a contractor to check the freeze-proving system.

Blankenship chastised one mine executive for failing to produce coal as fast as he wanted, and told him in a memo not to worry about safety. “We’ll worry about ventilation or other issues at an appropriate time. Now is not the time,” the memo said, according to the indictment.

And it wasn’t that he didn’t have the money to fix the problems — he had at least $391 million on hand in the months preceding the tragic explosion, according to the indictment.

Through his lawyer, Blankenship denied the allegations. “Don Blankenship has been a tireless advocate for mine safety,” Massey’s lawyer, William W. Taylor III, said in a statement reported by the New York Times. “His outspoken criticism of powerful bureaucrats has earned this indictment. He will not yield to their effort to silence him.”

http://www.washingtonpost.com/news/morning-mix/wp/2014/11/14/ex-massey-ceo-don-blankenship-indicted-for-coal-mine-disaster-than-killed-29/

 

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The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare

The $9 Billion Witness:  Meet JPMorgan Chase’s Worst Nightmare

Meet the woman JPMorgan Chase paid one of the largest fines in American history to keep from talking.

By Matt Taibbi
Rolling Stone
November 6, 2014

 

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Chase whistle-blower Alayne Fleischmann risked it all.

 

She tried to stay quiet, she really did. But after eight years of keeping a heavy secret, the day came when Alayne Fleischmann couldn’t take it anymore.

“It was like watching an old lady get mugged on the street,” she says. “I thought, ‘I can’t sit by any longer.’”

Fleischmann is a tall, thin, quick-witted securities lawyer in her late thirties, with long blond hair, pale-blue eyes and an infectious sense of humor that has survived some very tough times. She’s had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower.

Fleischmann is the central witness in one of the biggest cases of white-collar crime in American history, possessing secrets that JPMorgan Chase CEO Jamie Dimon late last year paid $9 billion (not $13 billion as regularly reported – more on that later) to keep the public from hearing.

JPMorgan Chase & Co. CEO Jamie Dimon Speaks At An Institute Of International Finance Panel
Jamie Dimon (Photo: Bloomberg/Getty)

Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as “massive criminal securities fraud” in the bank’s mortgage operations.

Thanks to a confidentiality agreement, she’s kept her mouth shut since then. “My closest family and friends don’t know what I’ve been living with,” she says. “Even my brother will only find out for the first time when he sees this interview.”

Six years after the crisis that cratered the global economy, it’s not exactly news that the country’s biggest banks stole on a grand scale. That’s why the more important part of Fleischmann’s story is in the pains Chase and the Justice Department took to silence her.

She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. “Every time I had a chance to talk, something always got in the way,” Fleischmann says.

This past year she watched as Holder’s Justice Department struck a series of historic settlement deals with Chase, Citigroup and Bank of America. The root bargain in these deals was cash for secrecy. The banks paid big fines, without trials or even judges – only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called “statements of facts,” which were conveniently devoid of anything like actual facts.

And now, with Holder about to leave office and his Justice Department reportedly wrapping up its final settlements, the state is effectively putting the finishing touches on what will amount to a sweeping, industrywide effort to bury the facts of a whole generation of Wall Street corruption. “I could be sued into bankruptcy,” she says. “I could lose my license to practice law. I could lose everything. But if we don’t start speaking up, then this really is all we’re going to get: the biggest financial cover-up in history.”

Alayne Fleischmann grew up in Terrace, British Columbia, a snowbound valley town just a brisk 18-hour drive north of Vancouver. She excelled at school from a young age, making her way to Cornell Law School and then to Wall Street. Her decision to go into finance surprised those closest to her, as she always had more idealistic ambitions. “I helped lead a group that wrote briefs to the Human Rights Chamber for those affected by ethnic cleansing in Bosnia-Herzegovina,” she says. “My whole life prior to moving into securities law was human rights work.”

But she had student loans to pay off, and so when Wall Street came knocking, that was that. But it wasn’t like she was dragged into high finance kicking and screaming. She found she had a genuine passion for securities law and felt strongly she was doing a good thing. “There was nothing shady about the field back then,” she says. “It was very respectable.”

In 2006, after a few years at a white-shoe law firm, Fleischmann ended up at Chase. The mortgage market was white-hot. Banks like Chase, Bank of America and Citigroup were furiously buying up huge pools of home loans and repackaging them as mortgage securities. Like soybeans in processed food, these synthesized financial products wound up in everything, whether you knew it or not: your state’s pension fund, another state’s workers’ compensation fund, maybe even the portfolio of the insurance company you were counting on to support your family if you got hit by a bus.

As a transaction manager, Fleischmann functioned as a kind of quality-control officer. Her main job was to help make sure the bank didn’t buy spoiled merchandise before it got tossed into the meat grinder and sold out the other end.

A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.

“If you sent him an e-mail, he would actually come out and yell at you,” she recalls. “The whole point of having a compliance and diligence group is to have policies that are set out clearly in writing. So to have exactly the opposite of that – that was very worrisome.” One former high-ranking federal prosecutor said that if he were taking a criminal case to trial, the information about this e-mail policy would be crucial. “I would begin and end my opening statement with that,” he says. “It shows these people knew what they were doing and were trying not to get caught.”

In late 2006, not long after the “no e-mail” policy was implemented, Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Almost immediately, Fleischmann and some of the diligence managers who worked alongside her began to notice serious problems with this particular package of loans.

For one thing, the dates on many of them were suspiciously old. Normally, banks tried to turn loans into securities at warp speed. The idea was to go from a homeowner signing on the dotted line to an investor buying that loan in a pool of securities within two to three months. Thus it was a huge red flag to see Chase buying loans that were already seven or eight months old.

What this meant was that many of the loans in the GreenPoint deal had either been previously rejected by Chase or another bank, or were what are known as “early payment defaults.” EPDs are loans that have already been sold to another bank and have been returned after the borrowers missed multiple payments. That’s why the dates on them were so old.

In other words, this was the very bottom of the mortgage barrel. They were like used cars that had been towed back to the lot after throwing a rod. The industry had its own term for this sort of loan product: scratch and dent. As Chase later admitted, it not only ended up reselling hundreds of millions of dollars worth of those crappy loans to investors, it also sold them in a mortgage pool marketed as being above subprime, a type of loan called “Alt-A.” Putting scratch-and-dent loans in an Alt-A security is a little like putting a fresh coat of paint on a bunch of junkyard wrecks and selling them as new cars. “Everything that I thought was bad at the time,” Fleischmann says, “turned out to be a million times worse.” (Chase declined to comment for this article.)

When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes – an astronomically high defect rate for any pool of mortgages; Chase’s normal tolerance for error was five percent. One mortgage in particular that sticks out in Fleischmann’s mind involved a manicurist who claimed to have an annual income of $117,000. Fleischmann figured that even working seven days a week, this woman would have needed to work 488 days a year to make that much. “And that’s with no overhead,” Fleischmann says. “It wasn’t possible.”

But when she and others raised objections to the toxic loans, something odd started happening. The number-crunchers who had been complaining about the loans suddenly began changing their reports. The process she describes is strikingly similar to the way police obtain false confessions: The interrogator verbally abuses the target until he starts producing the desired answers. “What happened,” Fleischmann says, “is the head diligence manager started yelling at his team, berating them, making them do reports over and over, keeping them late at night.” Then the loans started clearing.

As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as “stated income unreasonable for profession,” meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.

Then, on December 15th, a Chase sales executive held a lengthy meeting with reps from GreenPoint and the diligence team to examine the remaining loans in the pool. When they got to the manicurist, Fleischmann remembers, one of the diligence guys finally caved under the pressure from the sales executive. “He had his hands up and just said, ‘OK,’ and he cleared it,” says Fleischmann, adding that he was shaking his head “no” even as he was saying yes. Soon afterward, the error rate in the pool had magically dropped below 10 percent – a threshold that itself had just been doubled to clear the way for this deal.

After that meeting, Fleischmann testified, she approached a managing director named Greg Boester and pleaded with him to reconsider. She says she told Boester that the bank could not sell the high-risk loans as low-risk securities without committing fraud. “You can’t securitize these loans without special disclosure about what’s wrong with them,” Fleischmann told him, “and if you make that disclosure, no one will buy them.”

A former Olympic ski jumper, Boester was such an important executive at Chase that when he later defected to the Chicago-based hedge fund Citadel, Dimon cut off trading with Citadel in retaliation. Boester eventually returned to Chase and is still there today despite his role in this affair.

This moment illustrates the most basic element of the case against Chase: The bank knowingly peddled products stuffed with scratch-and-dent loans to investors without disclosing the obvious defects with the underlying loans.

Years later, in its settlement with the Justice Department, Chase would admit that this conversation between Fleischmann and Boester took place (though neither was named; it was simply described as “an employee . . . told . . . a managing director”) and that her warning was ignored when the bank sold those loans off to investors.

A few weeks later, in early 2007, she sent a long letter to another managing director, William Buell. In the letter, she warned Buell of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process.

Fleischmann assumed this letter, which Chase lawyers would later jokingly nickname “The Howler” after the screaming missive from the Harry Potter books, would be enough to force the bank to stop selling the bad loans. “It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”

In February 2008, less than two years after joining the bank, Fleischmann was quietly dismissed in a round of layoffs. A few months later, proof would appear that her bosses knew all along that the boom-era mortgage market was rotten. That September, as the market was crashing, Dimon boasted in a ball-washing Fortune article titled “Jamie Dimon’s Swat Team” that he knew well before the meltdown that the subprime market was toast. “We concluded that underwriting standards were deteriorating across the industry.” The story tells of Dimon ordering Boester’s boss, William King, to dump the bank’s subprime holdings in October 2006. “Billy,” Dimon says, “we need to sell a lot of our positions. . . . This stuff could go up in smoke!”

In other words, two full months before the bank rammed through the dirty GreenPoint deal over Fleischmann’s objections, Chase’s CEO was aware that loans like this were too dangerous for Chase itself to own. (Though Dimon was talking about subprime loans and GreenPoint was technically an Alt-A pool, the Fortune story shows that upper management had serious concerns about industry-wide underwriting problems.)

In January 2010, when Dimon testified before the Financial Crisis Inquiry Commission, he told investigators the exact opposite story, portraying the poor Chase leadership as having been duped, just like the rest of us. “In mortgage underwriting,” he said, “somehow we just missed, you know, that home prices don’t go up forever.”

When Fleischmann found out about all of this years later, she was shocked. Her confidentiality agreement at Chase didn’t bar her from reporting a crime, but the problem was that she couldn’t prove that Chase had committed a crime without knowing whether those bad loans had been sold.

As it turned out, of course, Chase was selling those rotten dog-meat loans all over the place. How bad were they? A single lawsuit by a single angry litigant gives some insight. In 2011, Chase was sued over massive losses suffered by a group of credit unions. One of them had invested $135 million in one of the bank’s mortgage–backed securities. About 40 percent of the loans in that deal came from the GreenPoint pool.

The lawsuit alleged that in just the first year, the security suffered $51 million in losses, nearly 50 times what had been projected. It’s hard to say how much of that was due to the GreenPoint loans. But this was just one security, one year, and the losses were in the tens of millions. And Chase did deal after deal with the same methodology. So did most of the other banks. It’s theft on a scale that blows the mind.

In the spring of 2012, Fleischmann, who’d moved back to Canada after leaving Chase, was working at a law firm in Calgary when the phone rang. It was an investigator from the States. “Hi, I’m from the SEC,” he said. “You weren’t expecting to hear from me, were you?”

A few months earlier, President Obama, giving in to pressure from the Occupy movement and other reformers, had formed the Residential Mortgage-Backed Securities Working Group. At least superficially, this was a serious show of force against banks like Chase. The group would operate like a kind of regulatory Justice League, combining the superpowers of investigators from the SEC, the FBI, the IRS, HUD and a host of other federal agencies. It included noted anti-corruption investigator and New York Attorney General Eric Schneiderman, which gave many observers reason to hope that finally something would be done about the crimes that led to the crash. That makes the fact that the bank would skate with negligible cash fines an even more extra-ordinary accomplishment.

Holder Announces Formation Of Residential Mortgage-Backed Securities Working Group
New York Attorney General Eric Schneiderman (L) speaks while Attorney General Eric Holder listens during a news conference at the Justice Department on January 27th, 2012. (Photo: Mark Wilson/Getty)

By the time the working group was set up, most of the applicable statutes of limitations had either expired or were about to expire. “A conspiratorial way of looking at it would be to say the state waited far too long to look at these cases and is now taking its sweet time investigating, while the last statutes of limitations run out,” says famed prosecutor and former New York Attorney General Eliot Spitzer.

It soon became clear that the SEC wasn’t so much investigating Chase’s behavior as just checking boxes. Fleischmann received no follow-up phone calls, even though she told the investigator that she was willing to tell the SEC everything she knew about the systemic fraud at Chase. Instead, the SEC focused on a single transaction involving a mortgage company called WMC. “I kept trying to talk to them about GreenPoint,” Fleischmann says, “but they just wanted to talk about that other deal.”

The following year, the SEC would fine Chase $297 million for misrepresentations in the WMC deal. On the surface, it looked like a hefty punishment. In reality, it was a classic example of the piecemeal, cherry-picking style of justice that characterized the post-crisis era. “The kid-gloves approach that the DOJ and the SEC take with Wall Street is as inexplicable as it is indefensible,” says Dennis Kelleher of the financial reform group Better Markets, which would later file suit challenging the Chase settlement. “They typically charge only one offense when there are dozens. It would be like charging a serial murderer with a single assault and giving them probation.”

Soon Fleischmann’s hopes were raised again. In late 2012 and early 2013, she had a pair of interviews with civil litigators from the U.S. attorney’s office in the Eastern District of California, based in Sacramento.

One of the ongoing myths about the financial crisis is that the government is outmatched by the legal talent representing the banks. But Fleischmann was impressed by the lead attorney in her case, a litigator named Richard Elias. “He sounded like he had been a securities lawyer for 10 years,” she says. “This actually looked like his idea of fun – like he couldn’t wait to run with this case.”

She gave Elias and his team detailed information about everything she’d seen: the edict against e-mails, the sabotaging of the diligence process, the bullying, the written warnings that were ignored, all of it. She assumed that it wouldn’t be long before the bank was hauled into court.

Instead, the government decided to help Chase bury the evidence. It began when Holder’s office scheduled a press conference for the morning of September 24th, 2013, to announce sweeping civil-fraud charges against the bank, all laid out in a detailed complaint drafted by the U.S. attorney’s Sacramento office. But that morning the presser was suddenly canceled, and no complaint was filed. According to later news reports, Dimon had personally called Associate Attorney General Tony West, the third-ranking official in the Justice Department, and asked to reopen negotiations to settle the case out of court.

It goes without saying that the ordinary citizen who is the target of a government investigation cannot simply pick up the phone, call up the prosecutor in charge of his case and have a legal proceeding canceled. But Dimon did just that. “And he didn’t just call the prosecutor, he called the prosecutor’s boss,” Fleischmann says. According to The New York Times, after Dimon had already offered $3 billion to settle the case and was turned down, he went to Holder’s office and upped the offer, but apparently not by enough.

A few days later, Fleischmann, who had by then moved back to Vancouver and was looking for work, was at a mall when she saw a Wall Street Journal headline on her iPhone: JPMorgan Insider Helps U.S. in Probe. The story said that the government had a key witness, a female employee willing to provide damaging testimony about Chase’s mortgage operations. Fleischmann was stunned. Until that moment, she had no idea that she was a major part of the government’s case against Chase. And worse, nobody had bothered to warn her that she was about to be effectively outed in the newspapers. “The stress started to build after I saw that news,” she says. “Especially as I waited to see if my name would come out and I watched my job possibilities evaporate.”

Fleischmann later realized that the government wasn’t interested in having her testify against Chase in court or any other public forum. Instead, the Justice Department’s political wing, led by Holder, appeared to be using her, and her evidence, as a bargaining chip to extract more hush money from Dimon. It worked. Within weeks, Dimon had upped his offer to roughly $9 billion.

In late November, the two sides agreed on a settlement deal that covered a variety of misbehaviors, including the fraud that Fleischmann witnessed as well as similar episodes at Washington Mutual and Bear Stearns, two companies that Chase had acquired during the crisis (with federal bailout aid). The newspapers and the Justice Department described the deal as a “$13 billion settlement,” hailing it as the biggest white-collar regulatory settlement in American history. The deal released Chase from civil liability. And, in what was described by The New York Times as a “major victory for the government,” it left open the possibility that the Justice Department could pursue a further criminal investigation against the bank.

But the idea that Holder had cracked down on Chase was a carefully contrived fiction, one that has survived to this day. For starters, $4 billion of the settlement was largely an accounting falsehood, a chunk of bogus “consumer relief” added to make the payoff look bigger. What the public never grasped about these consumer–relief deals is that the “relief” is often not paid by the bank, which mostly just services the loans, but by the bank’s other victims, i.e., the investors in their bad mortgage securities.

Moreover, in this case, a fine-print addendum indicated that this consumer relief would be allowed only if said investors agreed to it – or if it would have been granted anyway under existing arrangements. This often comes down to either forgiving a small portion of a loan or giving homeowners a little extra time to pay up in full. “It’s not real,” says Fleischmann. “They structured it so that the homeowners only get relief if they would have gotten it anyway.” She pauses. “If a loan shark gives you a few extra weeks to pay up, is that ‘consumer relief’?”

The average person had no way of knowing what a terrible deal the Chase settlement was for the country. The terms were even lighter than the slap-on-the-wrist formula that allowed Wall Street banks to “neither admit nor deny” wrongdoing – the deals that had helped spark the Occupy protests. Yet those notorious deals were like the Nuremberg hangings compared to the regulatory innovation that Holder’s Justice Department cooked up for Dimon and Co.

Instead of a detailed complaint naming names, Chase was allowed to sign a flimsy, 10-and-a-half-page “statement of facts” that was: (a) so short, a first-year law student could read it in the time it takes to eat a tuna sandwich, and (b) so vague, a halfway intelligent person could read it and not know anyone had done anything wrong.

The ink was barely dry on the deal before Chase would have the balls to insinuate its innocence. “The firm has not admitted to violations of the law,” said CFO Marianne Lake. But the deal’s most brazen innovation was the way it bypassed the judicial branch. Previously, federal regulators had had bad luck with judges when trying to dole out slap-on-the-wrist settlements to banks. In a pair of celebrated cases, an unpleasantly honest federal judge named Jed Rakoff had rejected sweetheart deals worked out between banks and slavish regulators and had commanded the state to go back to the drawing board and come up with real punishments.

Seemingly not wanting to deal with even the possibility of such a thing happening, Holder blew off the idea of showing the settlement to a judge. The settlement, says Kelleher, “was unprecedented in many ways, including being very carefully crafted to bypass the court system. . . . There can be little doubt that the DOJ and JP-Morgan were trying to avoid disclosure of their dirty deeds and prevent public scrutiny of their sweetheart deal.” Kelleher asks a rhetorical question: “Can you imagine the outcry if [Bush-era Attorney General] Alberto Gonzales had gone into the backroom and given Halliburton immunity in exchange for a billion dollars?”

The deal was widely considered a good one for both sides, but Chase emerged with barely a scratch. First, the ludicrously nonspecific language surrounding the settlement put you, me and every other American taxpayer on the hook for roughly a quarter of Chase’s check. Because most of the settlement monies were specifically not called fines or penalties, Chase was allowed to treat some $7 billion of the settlement as a tax write-off.

Couple this with the fact that the bank’s share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal. What’s more, to defray the cost of this and other fines, Chase last year laid off 7,500 lower-level employees. Meanwhile, per-employee compensation for everyone else rose four percent, to $122,653. But no one made out better than Dimon. The board awarded a 74 percent raise to the man who oversaw the biggest regulatory penalty ever, upping his compensation package to about $20 million.

While Holder was being lavishly praised for releasing Chase only from civil liability, Fleischmann knew something the rest of the world did not: The criminal investigation was going nowhere.

In the days leading up to Holder’s November 19th announcement of the settlement, the Justice Department had asked Fleischmann to meet with criminal investigators. They would interview her very soon, they said, between December 15th and Christmas.

But December came and went with no follow-up from the DOJ. She began to wonder: If she was the government’s key witness, how was it possible that they were still pursuing a criminal case without talking to her? “My concern,” she says, “was that they were not investigating.”

The government’s failure to speak to Fleischmann lends credence to a theory about the Holder-Dimon settlement: It included a tacit agreement from the DOJ not to pursue criminal charges in earnest. It sounds outrageous, but it wouldn’t be the first time that the government used a wink and a nod to dispose a bank of major liability without saying so publicly. Back in 2010, American Lawyer revealed Goldman Sachs wanted a full release from liability in a dozen crooked mortgage deals, while the SEC didn’t want to give the bank such a big public victory. So the two sides quietly agreed to a grimy compromise: Goldman agreed to pay $550 million to settle a single case, and the SEC privately assured the bank that it wouldn’t recommend charges in any of the other deals.

As Fleischmann was waiting for the Justice Department to call, Chase and its lawyers had been going to tremendous lengths to keep her muzzled. A number of major institutional investors had sued the bank in an effort to recover money lost in investing in Chase’s fraud-ridden home loans. In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines in The Wall Street Journal and other major media outlets.

In response, Dorothy Spenner, an attorney representing Chase, told the court that Fleischmann was not a “relevant custodian.” In other words, she couldn’t testify to anything of importance. Federal Magistrate Judge James C. Francis IV took Chase’s lawyers at their word and rejected the Fort Worth retirees’ request for access to Fleischmann and her evidence.

Other investors bilked by Chase also tried to speak to Fleischmann. The Federal Home Loan Bank of Pittsburgh, which had sued Chase, asked the court to force Chase to turn over a copy of the draft civil complaint that was withheld after Holder’s scuttled press conference. The Pittsburgh litigants also specified that they wanted access to the name of the state’s cooperating witness: namely, Fleischmann.

In that case, the judge actually ordered Chase to turn over both the complaint and Fleischmann’s name. Chase stalled. Later in the fall, the judge ordered the bank to produce the information again; it stalled some more.

Then, in January 2014, Chase suddenly settled with the Pittsburgh bank out of court for an undisclosed amount. Months after being ordered to allow Fleischmann to talk, they once again paid a stiff price to keep her testimony out of the public eye.

Chase’s determination to hide its own dirt while forcing Fleischmann to keep her secret was becoming more and more absurd. “It was a hard time to look for work,” she says. All that prospective employers knew was that she had worked in a department that had just been dinged with what was then the biggest regulatory fine in the history of capitalism. According to the terms of her confidentiality agreement, she couldn’t even tell them that she’d tried to keep the bank from committing fraud.

Despite it all, Fleischmann still had faith that the Justice Department or some other federal agency would make things right. “I guess I was just a trusting person,” she says. “I wasn’t cynical. I kept hoping.”

One day last spring, Fleischmann happened across a video of Holder giving a speech titled “No Company Is Too Big to Jail.” It was classic Holder: full of weird prevarication, distracting eye twitches and other facial contortions. It began with the bold rejection of the idea that overly large financial institutions would receive preferential treatment from his Justice Department.

Then, within a few sentences, he seemed to contradict himself, arguing that one must apply a special sort of care when investigating supersize banks, tweaking the rules so as not to upset the world economy. “Federal prosecutors conducting these investigations,” Holder said, “must go the extra mile to coordinate closely with the regulators who oversee these institutions’ day-to-day operations.” That is, he was saying, regulators have to agree not to allow automatic penalties to kick in, so that bad banks can stay in business.

Fleischmann winced. Fully fluent in Holder’s three-faced rhetoric after years of waiting for him to act, she felt that he was patting himself on the back for having helped companies survive crimes that otherwise might have triggered crippling regulatory penalties. As she watched in mounting outrage, Holder wrapped up his address with a less-than-reassuring pronouncement: “I am resolved to seeing [the investigations] through.” Doing so, he added, would “reaffirm” his principles.

Or, as Fleischmann translates it: “I will personally stay on to make sure that no one can undo the cover-up that I’ve accomplished.”

That’s when she decided to break her silence. “I tried to go on with the things I was doing, but I just stopped sleeping and couldn’t eat,” she says. “It felt like I was trying to keep this secret and my body was literally rejecting it.”

Ironically, over the summer, the government contacted her again. A new set of investigators interviewed her, appearing to have restarted the criminal case. Fleischmann won’t comment on that investigation. Frustrated as she has been by the decisions of the higher-ups in Holder’s Justice Department, she doesn’t want to do anything to get in the way of investigators who might be working the case. But she emphasizes she still has reason to be deeply worried that nothing will be done. Even if the investigators build strong cases against executives who oversaw Chase’s fraud, Holder, or whoever succeeds him, can still make the whole thing disappear by negotiating a soft landing for the company. “That’s the thing I’m worried about,” she says. “That they make the whole thing disappear. If they do that, the truth will never come out.”

In September, at a speech at NYU, Holder defended the lack of prosecutions of top executives on the grounds that, in the corporate context, sometimes bad things just happen without actual people being responsible. “Responsibility remains so diffuse, and top executives so insulated,” Holder said, “that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of any single individual.”

In other words, people don’t commit crimes, corporate culture commits crimes! It’s probably fortunate that Holder is quitting before he has time to apply the same logic to Mafia or terrorism cases.

Fleischmann, for her part, had begun to find the whole situation almost funny.

“I thought, ‘I swear, Eric Holder is gas-lighting me,’ ” she says.

Ask her where the crime was, and Fleischmann will point out exactly how her bosses at JPMorgan Chase committed criminal fraud: It’s right there in the documents; just hand her a highlighter and some Post-it notes – “We lawyers love flags” – and you will not find a more enthusiastic tour guide through a gazillion-page prospectus than Alayne Fleischmann.

She believes the proof is easily there for all the elements of the crime as defined by federal law – the bank made material misrepresentations, it made material omissions, and it did so willfully and with specific intent, consciously ignoring warnings from inside the firm and out.

She’d like to see something done about it, emphasizing that there still is time. The statute of limitations for wire fraud, for instance, has not run out, and she strongly believes there’s a case there, against the bank’s executives. She has no financial interest in any of this, no motive other than wanting the truth out. But more than anything, she wants it to be over.

In today’s America, someone like Fleischmann – an honest person caught for a little while in the wrong place at the wrong time – has to be willing to live through an epic ordeal just to get to the point of being able to open her mouth and tell a truth or two. And when she finally gets there, she still has to risk everything to take that last step. “The assumption they make is that I won’t blow up my life to do it,” Fleischmann says. “But they’re wrong about that.”

Good for her, and great for her that it’s finally out. But the big-picture ending still stings. She hopes otherwise, but the likely final verdict is a Pyrrhic victory.

Because after all this activity, all these court actions, all these penalties (both real and abortive), even after a fair amount of noise in the press, the target companies remain more ascendant than ever. The people who stole all those billions are still in place. And the bank is more untouchable than ever – former Debevoise & Plimpton hotshots Mary Jo White and Andrew Ceresny, who represented Chase for some of this case, have since been named to the two top jobs at the SEC. As for the bank itself, its stock price has gone up since the settlement and flirts weekly with five-year highs. They may lose the odd battle, but the markets clearly believe the banks won the war. Truth is one thing, and if the right people fight hard enough, you might get to hear it from time to time. But justice is different, and still far enough away.

http://www.rollingstone.com/politics/news/the-9-billion-witness-20141106

 

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Get Over the Midterms, Now the Fun Begins

Get Over the Midterms, Now the Fun Begins

With the seemingly inevitable drubbing out of the way, the main event gets underway and for political junkies the real fun begins.

By Reid Cherlin
Rolling Stone
November 6, 2014

Tuesday night’s Republican landslide — or drubbing, or shellacking or whatever we are calling it — was broad, and deep, and for MSNBC viewers, depressing and perhaps a little terrifying. What it wasn’t was surprising. Since the inauguration of Franklin Roosevelt in 1934, multi-term presidents have gained Senate seats in their final term exactly zero times; in every other incidence save one (the 1998 midterms under Clinton, when there was no change) the president’s party has lost anywhere from six to 13 Senate seats. The drama this cycle, if there was any, was mostly to be found in whether various individual officeholders — several of them Democrats in states that Mitt Romney won by huge margins — would manage to hang on (Answer: no). We waited for the Democrats to lose big, and then they did. So much demagoguery, and so much preening, and so little to look forward to.

Maybe, or maybe not. I’m not going to argue that the last several years haven’t been sour and deeply lame — but they also haven’t been particularly meaningful. Lots of people are tired of Obama? They’ve been tired of Obama since the first midterm wipeout, in 2010. I understand that many out there feel personally wrapped up in election the results, either despondent or exultant, and that’s allowed. But believe me, the feeling will pass, and it should. What’s behind us is nothing more than a long and boring formality. What’s ahead of us — for political junkies at least — is the good part.

The battle lines in D.C. have been pretty firmly drawn for years now: Democrats have been crying intransigence, and Republicans have been crying overreach. But because we’ve been stuck in this holding pattern, all of us waiting for the Democratic Senate majority to drain away, everyone has been, in a sense, stalling. Republicans want you to believe not just that Barack Obama is a fraud but that the idea of Obama — what Sarah Palin so nicely called “that hopey changey stuff” — is a fraud, a pernicious sawing away at the fiber of American greatness. For the past two years, though, Republican legislators haven’t been able to do anything about it, because they didn’t have the Senate. That changes today. They may not be able to get anything passed into law so long as Obama remains in the Oval Office, but they are going to get the chance, at least, to articulate what they stand for in terms of a legislative program.

This is where the fun begins. (OK, I know it’s a weird definition of the word, but bear with me.) The GOP is deeply divided — perhaps fatally divided — and has made big, contradictory declarations about what it would do when it finally got Harry Reid out of the way. Bloomberg’s Dave Weigel wrote the other day that Republicans have simultaneously promised to pass their own version of immigration reform and to scuttle immigration reform for good. They have promised to repeal Obamacare and promised to move on from repealing Obamacare. They have wailed about Obama’s handling of Ebola, and ISIS, and Syria, and Benghazi, and entitlements, and Bowe Bergdhal, and executive orders, and Fast and Furious, and engaging with Iran. All they have done about any of this, really, is blame Obama, block whatever he tried to do, and sharpen their knives for the elections that just ended. Now that Congress is theirs, they don’t have the option to be obstructionist anymore: the forces within the party are going to have to come to some sort of reckoning and figure out if they can agree to stand for something. You may not like the results of that process (or you may) but the burden of proving one’s concept, not attack ads or clever tweets, is what Democracy is supposed to be about, right?

Now, whether Republicans manage to accomplish anything depends on a bunch of factors, mainly whether the Tea Partiers and the Boehner-types will be able to find policies to agree on, and then, in turn, on whether those policies can survive Democratic filibustering and Obama’s veto pen. But that’s not really my point here. The point is that we are poised to find out, finally, whether a viable alternative to the Obama Way — shoot, let’s just go ahead and call it Big Government — actually exists in practice, and whether real Americans will want it when they see it. (They might!)

That brings us to the presidential election, which in effect, terribly yet also awesomely, begins today. In recent years there has been lot of considered criticism that these races start too soon, go on too long, involve too many debates and entirely too much money. And yet I find myself impatient for this one to get started, for the simple reason that I think it is going to rule. Just look at the possible candidates. We could, in theory, have a Republican primary including all of the following individuals: Ted Cruz, Marco Rubio, Jeb Bush, Mike Huckabee, Rick Perry, Rand Paul, and Chris Christie. Sprinkle in, if you like, Dr. Ben Carson, Rick Santorum, John Bolton, even Lindsey Graham. You hear it said — and if you haven’t heard it, then I’ll say it — that when you listen to Rand Paul, you’re almost sure he’s crazy, but every third thing he says actually makes deep sense. His smash-hit “Stand with Rand” filibuster against our drone policy was actually a pretty liberal move, and personally I think it’s great that the debate over the rule of law and America’s ability to heal the ills in other countries has moved into the interior of the Republican establishment. As for Jeb (who like everyone else, has not said whether he’s running), the conventional wisdom is that America would never vote for another Bush. Really? Why? Seems to me like Jeb is a lot of things that no one else in the field is: open to education reform, for one, pro-immigrant, for two (he’s also fluent in Spanish and his wife is originally from Mexico) and just generally reasonable, for three. Would he have to tack drastically to the right to survive the Republican primary? Of course. But he should run anyway.

Meanwhile, the formidable, inspiring, loathed, loved Hillary Clinton will be running for president, too. Clinton has such a galvanizing effect on her supporters — they’ve already begun plastering the country with “Ready for Hillary” billboards and bumper stickers, just to let her know — that we often forget that she has a less-than-sterling track record as campaigner. She often speaks woodenly, can be destructively overreactive, and has a habit of surrounding herself with staff who spend more time fighting each other than fighting for their boss. She may get a challenger herself — possibly Maryland Governor Martin O’Malley, or Joe Biden, or Montana Governor Brian Schweitzer, or, delight of delights, progressive hero Elizabeth Warren. Latino voters, who made up such a critical voting bloc in the past two presidential cycles, may be feeling, rightly, that Democrats failed them on immigration reform: already, pro-immigration activists have made a habit of heckling Clinton (and her potential Republican opponents) during campaign speeches.

No matter what else happens, it is going to fascinating to watch her try to figure out how to talk about the Obama presidency, and her own huge role in it. Were we right or wrong not to help in Syria? Why does American persuasiveness seem so weak and ineffectual? Was Clintonianism better? Different? Should we return to it? In being forced to articulate this stuff, she may do more than anyone else to help figure out the as-yet unsettled question of what the Obama Era has meant. And then, if all goes according to plan, she’ll get the privilege of going head-to-head with the Republican nominee, in probably the nastiest and most expensive election in human history, live on television.

When the results came in Tuesday night, the Times put up an analysis piece called “President Obama Left Fighting for His Own Relevance.” I think that suggests a false tension. Whether Obama fades into the background or whether he emerges as a newly unfettered pugilist, he won’t really be the story anymore. Republicans have been clamoring for the spotlight, and all the responsibilities and expectations that go with it; you have to think that the president will be glad to cede it to them. No one has any idea what will happen over these crucial next two years. Republicans are going to have to govern, and Democrats are going to have to regroup. Both will have to prepare for the real death match, a year and a half from now. What’s left for the rest of us is the easy part: to watch, and just as important, to enjoy the show.

http://www.rollingstone.com/politics/news/get-over-the-midterms-now-the-fun-begins-20141106

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Koch Industries Responds to Rolling Stone – And We Answer Back

Koch Industries Responds to Rolling Stone – And We Answer Back
“Koch Facts” calls our story “dishonest and misleading.” A point-by-point rebuttal.

By Tim Dickinson
Rolling Stone
September 29, 2014

Koch Industries has written a lengthy response to our feature story on the company in the latest issue of Rolling Stone. In tweets the company apparently paid to promote, Koch bills this write-up as a “point-by-point response to Rolling Stone writer Tim Dickinson’s dishonest and misleading story.” The salient feature of Koch’s response is that the company does not argue the core facts of our 9,000-word expose. Instead, Koch targets the messenger. Koch’s top target here is not even Rolling Stone, but me, Tim Dickinson.

I find it, frankly, amusing that a company that has been convicted of six felonies and numerous misdemeanors; paid out tens of millions of dollars in fines; traded with Iran, and been so reckless in its business practices that two innocent teenagers ended up dead, attempts to impugn my integrity, and on the basis of my association with Mother Jones — where I worked as an editor in the late 1990s and early 2000s, on a team that was twice nominated and once awarded a National Magazine Award for General Excellence.

Koch, in particular, takes umbrage with my reporting practices.

For the record: In the weeks prior to publication, beginning September 4th, Rolling Stone attempted to engage Koch Industries in a robust discussion of the issues raised in our reporting. Rolling Stone requested to interview CEO Charles Koch about his company’s philosophy of Market Based Management; Ilia Bouchouev, who heads Koch’s derivatives trading operations, about the company’s trading practices; and top Koch lawyer Mark Holden about the company’s significant legal and regulatory history.

The requests to speak to Charles Koch and Bouchouev were simply ignored. Ultimately, only Holden responded on the record, only via e-mail and only after Holden baselessly insinuated that I had been given an “opposition research” document dump from the liberal activist David Brock. (This is false.) From my perspective as a reporter, Koch Industries is the most hostile and paranoid organization I’ve ever engaged with — and I’ve reported on Fox News. In a breach of ethics, Koch has also chosen to publish email correspondence characterizing the content of a telephone conversation that was, by Koch’s own insistence, strictly off the record.

In an attempt to negotiate an on-the-record interview, Rolling Stone had sent Holden a series of discussion topics. Holden and the Koch communications team treated these general topics, instead, as though they were specific questions and provided the voluminous responses they have reproduced, inventively, as a Q&A on their website.

These responses were not “ignored,” as Koch suggests. In part, they contain useful background information, and they informed my reporting of the story. But in the main, the Koch responses attempt to re-litigate closed cases — incidents where judges, juries, and, in one case, a Senate Select Committee, have already had a final say. They only muddy waters that have been clarified by a considered legal process.

Where Koch attempted to provide additional context, it was frequently hairsplitting and obfuscatory. For example, in the case of the felony conviction at the Corpus Christi refinery, Holden insisted: “the case did not involve any penalty for benzene emissions.” However the count that Koch pleaded guilty to April 2001 reads, in part: “defendant KOCH PETROLEUM GROUP, L.P., did knowingly and willfully falsify, conceal and cover up by trick, scheme and device material facts in a matter within the jurisdiction of the Texas Natural Resources Conservation Commission and the United States Environmental Protection agency, to wit… the fact that the defendant had failed to measure the level of benzene entering the aeration basin at the West Plant.” [Emphasis added.] Rolling Stone readers are not served by reprinting, in full or in part, what can kindly be called Koch Industries’ distortions.

Ironically, it is now Koch that accuses me of having written a “blatantly dishonest and misleading article.” But in attempting to make that case, Koch itself continues to distort the record.

The chief “gotcha” point in Koch’s write up regards the leak at the refinery it owns in North Pole, Alaska, contributing to the facility’s shuttering this year. Koch writes: “He deceptively omits the undisputed facts that the off-site contamination existed long before Koch bought the refinery in 2004, that the contamination was not disclosed to Koch by the prior owner, and that once discovered Koch quickly and voluntarily began providing alternative water to the community.”

The clear implication, in Koch’s telling, is that the company is not the responsible party for the pollution in North Pole. This precisely contradicts two rulings by a state judge in Alaska, that Koch is solely responsible for the 2.5- by 3-mile plume of the refining solvent sulfolane that has fouled the groundwater for hundreds of residents there.

It is true, as Koch notes, that the refinery’s sulfolane leak began under the previous owner. But the sulfolane leak continued under the ownership of Koch’s refining subsidiary, Flint Hills, with the company’s own documents reportedly estimating that 10,616 gallons of “high sulfolane-laden wastewater” leaked from a faulty sump system at the refinery from 2004, when Koch bought the plant, to 2009.

Koch’s attempts to pin the refinery’s pollution problem on the previous owner have gone nowhere in court. Contrary to Koch’s claim that it took swift action to remediate the problem, the Alaska judge wrote that Koch had been warned of potential groundwater pollution and “failed to heed the advice it was given and failed to conduct a reasonable inquiry into the scope of the sulfolane contamination.” The judge ruled that Koch’s failure to seek redress from the previous owner within the statute of limitations have made the pollution at North Pole Koch’s problem, alone.

Koch also does not mention that it has pressured state regulators to increase the acceptable amount of sulfolane pollution in groundwater — a move that would hugely reduce Koch’s cleanup liability.

Koch is correct that there is more to the story at North Pole, but these facts do not weigh in Koch’s favor.

Let’s now address Koch’s bullet-points, in order:

Number One:

  • Mr. Dickinson makes a number of broad negative claims about Koch’s environmental record, but only passing reference to the more than 900 awards for safety, environmental excellence, and community stewardship Koch has received since 2009 alone – information that we provided to Mr. Dickinson. In an article ostensibly about Koch’s relationship with regulators, the fact that EPA has repeatedly praised Koch for a productive and collaborative approach is surely relevant to Rolling Stone readers. In addition, he excised our explanation of the long and continuing path to improve and enhance our environmental, health, and safety performance. He also ignored the discussion about our ongoing efforts to ensure we understand and meet the expectations of the EPA and other regulators, our communities, and our shareholders.

Here Koch appears to be criticizing me for not adequately doing their own PR for them. The story clearly remarks on the culture change, circa 2000, that made environmental compliance a focus at Koch Industries and quotes Holden about the company’s quest for “10,000 percent” compliance. Given the company’s recent pollution woes it seems that Koch is falling far short of that standard.

Number Two:

  • While he never raised the issue with us, Mr. Dickinson refers to a University of Massachusetts-Amherst report from a radical group that names Koch as an alleged major “polluter” in the United States. Here again he omits key context to mislead readers. As we detailed here in a statement readily available to Mr. Dickinson, that report included virtually every major manufacturer in the United States today, which combined form the lifeblood of the economy and provide good-paying manufacturing jobs to millions of Americans. Moreover, the emissions cited in the report are legal and regulated by the Environmental Protection Agency (EPA). EPA itself notes that Toxic Release Inventory (TRI) information alone does not indicate that the use or release of these chemicals poses a risk. EPA has compiled TRI data for facilities with the same U.S.-based parent company. A parent company is defined as the highest-level company, located in the U.S., which owns at least 50 percent of the voting stock of the manufacturer. These parent companies are ranked by EPA based upon the total volume of production-related waste managed by those facilities. Koch Industries, Inc. is the parent company for the Koch companies. Due to the size and nature of our U.S.-based manufacturing presence, Koch has been among the top 10 parent companies for the last three years. More than 100 Koch company sites submit TRI reports—significantly more than the other top-10 parent companies, which have between 1 and 65 sites reporting.

Koch here characterizes The Political Economy Research Institute at the University of Massachusetts, Amherst as “a radical group.” The only radical thing that PERI does is compile facility-by-facility pollution data published by the Environmental Protection Agency and add it up. Based on a simple ranking of this federal data, Koch is, factually, one of America’s top air, water, and climate polluters.

Number Three:

  • The article states that Koch made the difficult decision to convert a Flint Hills Resources refinery in North Pole, Alaska to a terminal, after “the discovery that a toxic solvent had leaked from the facility, fouling the town’s groundwater.” Mr. Dickinson ignored all the information we provide him on this topic. He deceptively omits the undisputed facts that the off-site contamination existed long before Koch bought the refinery in 2004, that the contamination was not disclosed to Koch by the prior owner, and that once discovered, Koch quickly and voluntarily began providing alternative water to the community. He also ignores that Alaskan public officials like Senator Mark Begich and Governor Sean Parnell empathized with Flint Hills’ difficult decision and that Flint Hills has worked to retain as many of the affected employees as possible at other Koch companies.

This is the North Pole discussion, see above.

Number Four:

  • The article falsely claims that Koch’s petroleum coke business at its KCBX North facility in Chicago is endangering the “health of South Side residents,” despite the fact that we provided Mr. Dickinson the Congressional Research Service research, findings from the city of Chicago that “there are no known illnesses or health effects associated with pet coke dust,” and EPA’s own conclusion that “petroleum coke itself has a low level of toxicity and that there is no evidence of carcinogenicity.” Nor does Mr. Dickinson note that KCBX was honored with the Good Neighbor award from the Southeast Environmental Task Force in 2001 and again in 2005.

Here Koch disputes that petcoke poses a health risk. The characterization of harmful health effects in the piece comes directly from the Notice of Violation EPA sent Koch in June, citing micro-particulate air pollution emanating from Koch’s Chicago terminals — which sit near a little league baseball field and urban homes. It reads, in part, “Environmental Impact of Violations… • irritation of the airways, coughing, and difficulty breathing; • decreased lung function; • aggravated asthma; • chronic bronchitis; • irregular heartbeat; • nonfatal heart attacks; and • premature death in people with heart or lung disease.”

Number Five:

  • Mr. Dickinson rehashes regulatory and legal issues from the 1970s and 1980s regarding Nixon Administration price controls and oil lotteries that have long since been settled. In some instances, Mr. Dickinson fails to note the responses we provided him.

Koch disputes nothing here. Their unpublished responses were not quote worthy.

Number Six:

  • The article falsely declares that Koch “stole” oil from American Indian lands in the 1970s and 1980s. In fact, no oil was “stolen” and there was no finding of theft of any kind in this case. We detailed this to Mr. Dickinson before publication and provided him with a statement and substantiation explaining the issue. He ignores all of it.

This regards Koch’s purchases of Native oil. Koch mischaracterizes and misquotes the piece here. In describing accusations of theft, the piece quotes directly either from the government record — including conclusions of a Senate Select Committee investigation — or sworn court testimony of a former Koch employee. The piece goes on to detail that Koch was never prosecuted criminally, but that a related civil case produced a large judgement against the company. This description is consistent with the factual record and with Koch’s prepublication remarks to Rolling Stone on the matter.

Number Seven:

  • In discussing Koch facilities in Minnesota, Mr. Dickinson accuses us of “treating the Mississippi [River] as a sewer” during the 1990s. This is inaccurate and one-sided. In fact, between 1998 and 2001, Koch Petroleum Group entered into a series of agreements with the Minnesota Pollution Control Agency and EPA to resolve issues at Koch’s Rosemount, Minnesota refinery, taking full responsibility for past discharges from an aviation fuel tank leak, part of which reached a wetland adjacent to the Mississippi River, though not the river itself. We pointed Mr. Dickinson to the fact that our Minnesota refinery is recognized for its exemplary environmental performance, and its cooperative and productive relationships with regulators, environmental groups, and neighbors. His story omits these facts.

Here Koch is discussing its pollution record in Minnesota, although it seems fuzzy on the facts. The description of Koch using the Mississippi as a sewer comes not from the spill of aviation fuel in marshlands near the river, but from unmonitored wastewater dumps into the river. As recalled by the EPA: “In a separate offense, Koch dumped a million gallons of wastewater with high ammonia content on the ground between November 1996 and March 1997 and also increased its flow of wastewater into the Mississippi River on weekends when Koch did not monitor its discharges.”

Number Eight:

  • Mr. Dickinson says Koch was convicted of a “felony count for covering up the fact that it had disconnected a key pollution-control device” at a Corpus Christi facility. In fact, in 1995 an individual Koch employee filed a false report in this case, was terminated for doing so, and Koch voluntarily disclosed the incident to the Texas environmental regulatory agency. We provided Mr. Dickinson with this information in detail, including information demonstrating that someone altered evidence during the grand jury process. The official Texas state government meeting record showed when Koch first learned of the issues in 1995, our employees openly and directly told the state regulator that the refinery was out of compliance and advised they would come back to the regulator when they better understood all the details. In fact, later government records show that our employees did just as they promised. The meeting record that was used by the federal grand jury had that key exculpatory information excised. Ultimately, the 97-count indictment Mr. Dickinson mentions was dismissed after the government’s case cratered when Koch finally had a chance to challenge the evidence in front of the trial judge. As part of a settlement, Koch pled guilty to the incident stemming from the event we voluntarily disclosed back in 1995. The government required the four individuals who were wrongly accused to waive their rights to sue for malicious prosecution as part of this settlement. We gave Mr. Dickinson all this information and provided him copies of the documents, which are in our responses above. He intentionally ignores all of this to repeat the same dishonest and misleading story that many others have written about over the past 13 years.

This bullet point disputes our accurate characterization of what began, in the Clinton administration, as a 97-count criminal indictment over pollution controls at the Corpus Christi refinery, and concluded, in the W. Bush years, with a single felony conviction, as discussed in detail earlier. There is nothing dishonest or misleading about our reporting here.

Number Nine:

  • The article shamefully uses the circumstances of a tragic 1997 fatal accident—the only such accident of its kind in the history of Koch Pipeline Company—in a cowardly effort to smear Koch as more concerned with a “10 percent” increase in profit than with human lives. [Ed Note: The accident occurred in 1996.] As with so many other issues, Mr. Dickinson omits our point of view, even though we have publicly addressed the accident on multiple occasions since it happened–the only such accident of its kind in the history of Koch Pipeline Company) and have always accepted responsibility for this tragedy.

Koch here complains that Rolling Stone omitted their response to the Danielle Smalley case. But Koch provided Rolling Stone with no comment on Smalley’s death. It was listed along with the other topics the company treated as questions and responded to vigorously. If there was any error of omission, here, it was Koch’s.

Number 10:

  • Mr. Dickinson quotes former EPA administrator Carol Browner negatively on Koch, and seems to suggest that Koch’s 2000 Clean Air agreement with the EPA is evidence of misdeeds. In fact, Ms. Browner described that very agreement as “innovative and comprehensive” and praised the “unprecedented cooperation” of Koch in stepping forward ahead of its industry peers. The agency also deemed the agreement as a “major step in fulfilling the promise of the Clean Air Act.”

Koch misleadingly conflates two incidents here. The negative Carol Browner quote — “They simply did not believe the law applied to them.” — stems from the case involving Koch’s extensive pipeline spills. It is accurate. The story clearly places the 2000 Clean Air agreement with the EPA in the context of Charles Koch’s come-to-Jesus moment on compliance. The evidence of past misdeeds, however, is clear in EPA’s concurrent imposition of a $4.5 million fine with this settlement.

Number 11:

  • Mr. Dickinson never raised with us many of the issues in Koch’s financial and trading operations that he later addresses in the article, and on other issues he again fails to note the responses we provided. In discussing a legal settlement with Commodity Futures Trading Commission (CFTC) over energy trading, for instance, Mr. Dickinson fails to note that CFTC praised Koch for full cooperation with its investigation (and also omits that it was a 50-50 joint venture between Entergy and Koch Trading). This was an industry-wide effort by CFTC, Mr. Dickinson fails to mention, and not focused solely on Entergy-Koch Trading (EKT). And in a lengthy discussion of futures trading issues, Mr. Dickinson appears to rely heavily on an article published by left-wing activists in the spring of 2011, despite the fact that the article and its author, Lee Fang, were thoroughly and utterly debunked at the time by multiple independent sources.

Here Koch complains that I did not raise questions about their financial and trading operations. This is not true. I requested multiple times to speak with the head of Koch’s derivatives trading operations. Those requests were ignored. Specific questions about Koch’s trading practices and profit and loss were stonewalled. For example:

Q: Can you provide a rough breakdown of Koch profits last year from trading, refining, and other operations?

RESPONSE: We are privately held and don’t disclose this information.

Q: How much exposure did subsidiary Koch Financial have to credit default swaps at the time of Lehman Brothers bankruptcy?

RESPONSE: We don’t disclose this type of information.

To other Koch points here: I clearly acknowledge Koch’s partnership with Entergy, so I do not understand their objection here. The fact that other industry players were also punished for wrongdoing at the same is not mitigating. “Everyone else was doing it” is a child’s defense.

Koch also evidently has deep issues with Lee Fang, a fine reporter in my estimation, that it should work out with him.

Number 12:

  • Despite providing Mr. Dickinson with links to the many mainstream media pieces that mocked, discredited, and criticized a Bloomberg Markets article on a Koch foreign subsidiary’s lawful business in Iran, he fails to include any of that information. Koch directly addressed the rank falsehoods emerging from the story multiple times, a repetition made necessary by political partisans and agenda-driven activists who spread known falsehoods in much the same way Mr. Dickinson does here. If he would have bothered to include our statement or link to our responses or other media coverage, he would have seen key information that impeaches the credibility of Bloomberg Market’s key source for his story – a former European employee who praised the company previously and never raised any issue about trade with Iran before he left. In any event, the fact that last decade a European subsidiary did some limited business in Iran is irrelevant since, as we have explained multiple times, that was permissible under the law at that time. We ultimately made a voluntary decision not to do business in Iran even when U.S. law allowed it. If Mr. Dickinson had any desire to be open and honest with his readers, he might have noted that many companies continued to do business in Iran long after Koch ceased doing so voluntarily, and that some still do business there.

This details Koch’s foreign subsidiary trading with Iran. If you read closely, Koch does not dispute any of the facts as we reported them. We noted that the trade was not illegal, and included Koch’s declaration that it has ceased such trade. Koch refused to answer follow up questions about its trade with a member of the “Axis of Evil,” including: “Why did any subsidiary business of Koch — regardless of the legality — engage in trade with Iran?”

Number 13:

  • Mr. Dickinson’s discussion of the Keystone XL pipeline is inaccurate and contradictory. He implies that Koch stands to gain from approval of the pipeline—a claim refuted here and more than a dozen times since such as here, here, here, and here. Yet in the next breath Mr. Dickinson admits that the approval of Keystone XL would actually “eat into [Koch] profit margins.” He then offers a third distinct claim, that uncertainty over whether Keystone XL will be approved benefits Koch.

Regarding Keystone XL, we quoted a noted economics professor in Alberta who observed that Koch has conflicting financial interests when it comes to the completion of the pipeline — interests that, on balance, might be best served by a continuation of the status quo. Koch calls this inaccurate, but does not explain why. It refused to answer questions about its oil sands lease-holdings in Canada.: “RESPONSE: We don’t disclose our business plans or strategies.”

Number 14:

  • Other bizarre internal contradictions emerge throughout the article. For instance, Mr. Dickinson first implies Koch was guilty of patent infringement nearly a century ago, then pages later notes that the patent decision against Koch was thrown out when it was discovered the other party had illegally bribed the judge in the case, and that Koch in fact won at the Supreme Court and successfully countersued for anti-trust violations. Elsewhere in the article, Fred Koch is criticized for being both too soft on Stalinism and too “rabidly anti-Communist.”

Here Koch takes issue with our characterizations of company founder Fred Koch. The story takes pains to describe the decades-long progression of Fred Koch’s legal saga, including the court reversals and bribery scandal Koch refers to. Separately, the fact that Fred Koch made millions enabling the industrialization of the bloody regime of Stalin and later then became a rabid anti-communist does have a contradictory element to it, but that speaks to a complexity within Fred Koch, not a flaw of our reporting.

http://www.rollingstone.com/politics/news/koch-industries-responds-to-rolling-stone-and-we-answer-back-20140929?page=3

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Inside the Koch Brothers’ Toxic Empire

Inside the Koch Brothers’ Toxic Empire

Together, Charles and David Koch control one of the world’s largest fortunes, which they are using to buy up our political system. But what they don’t want you to know is how they made all that money.

By Tim Dickinson
Rolling Stone
September 24, 2014

The enormity of the Koch fortune is no mystery. Brothers Charles and David are each worth more than $40 billion. The electoral influence of the Koch brothers is similarly well-chronicled. The Kochs are our homegrown oligarchs; they’ve cornered the market on Republican politics and are nakedly attempting to buy Congress and the White House. Their political network helped finance the Tea Party and powers today’s GOP. Koch-affiliated organizations raised some $400 million during the 2012 election, and aim to spend another $290 million to elect Republicans in this year’s midterms. So far in this cycle, Koch-backed entities have bought 44,000 political ads to boost Republican efforts to take back the Senate.

What is less clear is where all that money comes from. Koch Industries is headquartered in a squat, smoked-glass building that rises above the prairie on the outskirts of Wichita, Kansas. The building, like the brothers’ fiercely private firm, is literally and figuratively a black box. Koch touts only one top-line financial figure: $115 billion in annual revenue, as estimated by Forbes. By that metric, it is larger than IBM, Honda or Hewlett-Packard and is America’s second-largest private company after agribusiness colossus Cargill. The company’s stock response to inquiries from reporters: “We are privately held and don’t disclose this information.”

But Koch Industries is not entirely opaque. The company’s troubled legal history – including a trail of congressional investigations, Department of Justice consent decrees, civil lawsuits and felony convictions – augmented by internal company documents, leaked State Department cables, Freedom of Information disclosures and company whistle­-blowers, combine to cast an unwelcome spotlight on the toxic empire whose profits finance the modern GOP.

Under the nearly five-decade reign of CEO Charles Koch, the company has paid out record civil and criminal environmental penalties. And in 1999, a jury handed down to Koch’s pipeline company what was then the largest wrongful-death judgment of its type in U.S. history, resulting from the explosion of a defective pipeline that incinerated a pair of Texas teenagers.

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A 1996 explosion of a Koch-owned pipeline in Texas killed two teens. (Photo: National Transportation Safety Board)

The volume of Koch Industries’ toxic output is staggering. According to the University of Massachusetts Amherst’s Political Economy Research Institute, only three companies rank among the top 30 polluters of America’s air, water and climate: ExxonMobil, American Electric Power and Koch Industries. Thanks in part to its 2005 purchase of paper-mill giant Georgia-Pacific, Koch Industries dumps more pollutants into the nation’s waterways than General Electric and International Paper combined. The company ranks 13th in the nation for toxic air pollution. Koch’s climate pollution, meanwhile, outpaces oil giants including Valero, Chevron and Shell. Across its businesses, Koch generates 24 million metric tons of greenhouse gases a year.

For Koch, this license to pollute amounts to a perverse, hidden subsidy. The cost is borne by communities in cities like Port Arthur, Texas, where a Koch-owned facility produces as much as 2 billion pounds of petrochemicals every year. In March, Koch signed a consent decree with the Department of Justice requiring it to spend more than $40 million to bring this plant into compliance with the Clean Air Act.

The toxic history of Koch Industries is not limited to physical pollution. It also extends to the company’s business practices, which have been the target of numerous federal investigations, resulting in several indictments and convictions, as well as a whole host of fines and penalties.

And in one of the great ironies of the Obama years, the president’s financial-regulatory reform seems to benefit Koch Industries. The company is expanding its high-flying trading empire precisely as Wall Street banks – facing tough new restrictions, which Koch has largely escaped – are backing away from commodities speculation.

It is often said that the Koch brothers are in the oil business. That’s true as far as it goes – but Koch Industries is not a major oil producer. Instead, the company has woven itself into every nook of the vast industrial web that transforms raw fossil fuels into usable goods. Koch-owned businesses trade, transport, refine and process fossil fuels, moving them across the world and up the value chain until they become things we forgot began with hydrocarbons: fertilizers, Lycra, the innards of our smartphones.

The company controls at least four oil refineries, six ethanol plants, a natural-gas-fired power plant and 4,000 miles of pipeline. Until recently, Koch refined roughly five percent of the oil burned in America (that percentage is down after it shuttered its 85,000-barrel-per-day refinery in North Pole, Alaska, owing, in part, to the discovery that a toxic solvent had leaked from the facility, fouling the town’s groundwater). From the fossil fuels it refines, Koch also produces billions of pounds of petrochemicals, which, in turn, become the feedstock for other Koch businesses. In a journey across Koch Industries, what enters as a barrel of West Texas Intermediate can exit as a Stainmaster carpet.

Koch’s hunger for growth is insatiable: Since 1960, the company brags, the value of Koch Industries has grown 4,200-fold, outpacing the Standard & Poor’s index by nearly 30 times. On average, Koch projects to double its revenue every six years. Koch is now a key player in the fracking boom that’s vaulting the United States past Saudi Arabia as the world’s top oil producer, even as it’s endangering America’s groundwater. In 2012, a Koch subsidiary opened a pipeline capable of carrying 250,000 barrels a day of fracked crude from South Texas to Corpus Christi, where the company owns a refinery complex, and it has announced plans to further expand its Texas pipeline operations. In a recent acquisition, Koch bought Frac-Chem, a top provider of hydraulic fracturing chemicals to drillers. Thanks to the Bush administration’s anti-regulatory­ agenda – which Koch Industries helped craft – Frac-Chem’s chemical cocktails, injected deep under the nation’s aquifers, are almost entirely exempt from the Safe Drinking Water Act.

Koch is also long on the richest – but also the dirtiest and most carbon-polluting – oil deposits in North America: the tar sands of Alberta. The company’s Pine Bend refinery, near St. Paul, Minnesota, processes nearly a quarter of the Canadian bitumen exported to the United States – which, in turn, has created for Koch Industries a lucrative sideline in petcoke exports. Denser, dirtier and cheaper than coal, petcoke is the dregs of tar-sands refining. U.S. coal plants are largely forbidden from burning petcoke, but it can be profitably shipped to countries with lax pollution laws like Mexico and China. One of the firm’s subsidiaries, Koch Carbon, is expanding its Chicago terminal operations to receive up to 11 million tons of petcoke for global export. In June, the EPA noted the facility had violated the Clean Air Act with petcoke particulates that endanger the health of South Side residents. “We dispute that the two elevated readings” behind the EPA notice of violation “are violations of anything,” Koch’s top lawyer, Mark Holden, told Rolling Stone, insisting that Koch Carbon is a good neighbor.

Over the past dozen years, the company has quietly acquired leases for 1.1 million acres of Alberta oil fields, an area larger than Rhode Island. By some estimates, Koch’s direct holdings nearly double ExxonMobil’s and nearly triple Shell’s. In May, Koch Oil Sands Operating LLC of Calgary, Alberta, sought permits to embark on a multi-billion­dollar tar-sands-extraction operation. This one site is projected to produce 22 million barrels a year – more than a full day’s supply of U.S. oil.

Charles Koch, the 78-year-old CEO and chairman of the board of Koch Industries, is inarguably a business savant. He presents himself as a man of moral clarity and high integrity. “The role of business is to produce products and services in a way that makes people’s lives better,” he said recently. “It cannot do so if it is injuring people and harming the environment in the process.”

The Koch family’s lucrative blend of pollution, speculation, law-bending and self-righteousness stretches back to the early 20th century, when Charles’ father first entered the oil business. Fred C. Koch was born in 1900 in Quanah, Texas – a sunbaked patch of prairie across the Red River from Oklahoma. Fred was the second son of Hotze “Harry” Koch, a Dutch immigrant who – as recalled in Koch literature – ran “a modest newspaper business” amid the dusty poverty of Quanah. In the family legend, Fred Koch emerged from the nothing of the Texas range to found an empire. But like many stories the company likes to tell about itself, this piece of Koch­lore takes liberties with the truth. Fred was not a simple country boy, and his father was not just a small-town publisher. Harry Koch was also a local railroad baron who used his newspaper to promote the Quanah, Acme & Pacific railways. A director and founding shareholder of the company, Harry sought to build a rail line across Texas to El Paso. He hoped to turn Quanah into “the most important railroad center in northwest Texas and a metropolitan city of first rank.” He may not have fulfilled those ambitions, but Harry did build up what one friend called “a handsome pile of dinero.”

Harry was not just the financial springboard for the Koch dynasty, he was also its wellspring of far-right politics. Harry editorialized against fiat money, demanded hangings for “habitual criminals” and blasted Social Security as inviting sloth. At the depths of the Depression, he demanded that elected officials in Washington should stop trying to fix the economy: “Business,” he wrote, “has always found a way to overcome various recessions.”

In the company’s telling, young Fred was an innovator whose inventions helped revolutionize the oil industry. But there is much more to this story. In its early days, refining oil was a dirty and wasteful practice. But around 1920, Universal Oil Products introduced a clean and hugely profitable way to “crack” heavy crude, breaking it down under heat and heavy pressure to boost gasoline yields. In 1925, Fred, who earned a degree in chemical engineering from MIT, partnered with a former Universal engineer named Lewis Winkler and designed a near carbon copy of the Universal cracking apparatus – making only tiny, unpatentable tweaks. Relying on family connections, Fred soon landed his first client – an Oklahoma refinery owned by his maternal uncle L.B. Simmons. In a flash, Winkler-Koch Engineering Co. had contracts to install its knockoff cracking equipment all over the heartland, undercutting Universal by charging a one-time fee rather than ongoing royalties.

It was a boom business. That is, until Universal sued in 1929, accusing Winkler­Koch of stealing its intellectual property. With his domestic business tied up in court, Fred started looking for partners abroad and was soon doing business in the Soviet Union, where leader Joseph Stalin had just launched his first Five Year Plan. Stalin sought to fund his country’s industrialization by selling oil into the lucrative European export market. But the Soviet Union’s reserves were notoriously hard to refine. The USSR needed cracking technology, and the Oil Directorate of the Supreme Council of the National Economy took a shining to Winkler-Koch – primarily because Koch’s oil-industry competitors were reluctant to do business with totalitarian Communists.

Manifestation a Londres devant le siege social londonnien de Koch Industries
Outside its London offices, protesters gather. (Photo: P.Wolmuth/REPORT DIGITAL-REA/Re)

Between 1929 and 1931, Winkler-Koch built 15 cracking units for the Soviets. Although Stalin’s evil was no secret, it wasn’t until Fred visited the Soviet Union, that these dealings seemed to affect his conscience. “I went to the USSR in 1930 and found it a land of hunger, misery and terror,” he would later write. Even so, he agreed to give the Soviets the engineering know-how they would need to keep building more.

Back home, Fred was busy building a life of baronial splendor. He met his wife, Mary, the Wellesley-educated daughter of a Kansas City surgeon, on a polo field and soon bought 160 acres across from the Wichita Country Club, where they built a Tudor­style mansion. As chronicled in Sons of Wichita, Daniel Schulman’s investigation of the Koch dynasty, the compound was quickly bursting with princes: Frederick arrived in 1933, followed by Charles in 1935 and twins David and Bill in 1940. Fred Koch lorded over his domain. “My mother was afraid of my father,” said Bill, as were the four boys, especially first-born Frederick, an artistic kid with a talent for the theater. “Father wanted to make all his boys into men, and Freddie couldn’t relate to that regime,” Charles recalled. Frederick got shipped East to boarding school and was all but disappeared from Wichita.

With Frederick gone, Charles forged a deep alliance with David, the more athletic and assertive of the young twins. “I was closer with David because he was better at everything,” Charles has said.

Fred Koch’s legal battle with Universal would drag on for nearly a quarter-century. In 1934, a lower court ruled that Winkler-Koch had infringed on Universal’s technology. But that judgment would be vacated, after it came out in 1943 that Universal had bought off one of the judges­ handling the appeal. A year later, the Supreme Court decided that Fred’s cracker, by virtue of small technical differences, did not violate the Universal patent. Fred countersued on antitrust grounds, arguing that Universal had wielded patents anti-competitively. He’d win a $1.5 million settlement in 1952.

Around that time, Fred had built a domestic oil empire under a new company eventually called Rock Island Oil & Refining, transporting crude from wellheads to refineries by truck or by pipe. In those later years, Fred also became a major benefactor and board member of the John Birch Society, the rabidly anti-communist organization founded in 1958 by candy magnate and virulent racist Robert Welch. Bircher publications warned that the Red endgame was the creation of the “Negro Soviet­ Republic” in the Deep South. In his own writing, Fred described integration as a Red plot to “enslave both the white and black man.”

Like his father, Charles Koch attended MIT. After he graduated in 1959 with two master’s degrees in engineering, his father issued an ultimatum: Come back to Wichita or I’ll sell the business. “Papa laid it on the line,” recalled David. So Charles returned home, immersing himself in his father’s world – not simply joining the John Birch Society, but also opening a Bircher bookstore. The Birchers had high hopes for young Charles. As Koch family friend Robert Love wrote in a letter to Welch: “Charles Koch can, if he desires, finance a large operation, however, he must continually be brought along.”

But Charles was already falling under the sway of a charismatic radio personality named Robert LeFevre, founder of the Freedom School, a whites-only­ libertarian boot camp in the foothills above Colorado Springs, Colorado. LeFevre preached a form of anarchic capitalism in which the individual should be freed from almost all government power. Charles soon had to make a choice. While the Birchers supported the Vietnam War, his new guru was a pacifist who equated militarism with out-of-control state power. LeFevre’s stark influence on Koch’s thinking is crystallized in a manifesto Charles wrote for the Libertarian Review in the 1970s, recently unearthed by Schulman, titled “The Business Community: Resisting Regulation.” Charles lays out principles that gird today’s Tea Party movement. Referring to regulation as “totalitarian,” the 41-year-old Charles claimed business leaders had been “hoodwinked” by the notion that regulation is “in the public interest.” He advocated the “barest possible obedience” to regulation and implored, “Do not cooperate voluntarily, instead, resist whenever and to whatever extent you legally can in the name of justice.”

After his father died in 1967, Charles, now in command of the family business, renamed it Koch Industries. It had grown into one of the 10 largest privately owned firms in the country, buying and selling some 80 million barrels of oil a year and operating 3,000 miles of pipeline. A black-diamond skier and white-water kayaker, Charles ran the business with an adrenaline junkie’s aggressiveness. The company would build pipelines to promising oil fields without a contract from the producers and park tanker trucks beside wildcatters’ wells, waiting for the first drops of crude to flow. “Our willingness to move quickly, absorb more risk,” Charles would write, “enabled us to become the leading crude-oil­gathering company.”

Charles also reconnected with one of his father’s earliest insights: There’s big money in dirty oil. In the late 1950s, Fred Koch had bought a minority stake in a Minnesota refinery that processed heavy Canadian crude. “We could run the lousiest crude in the world,” said his business partner J. Howard Marshall II – the future Mr. Anna Nicole Smith. Sensing an opportunity for huge profits, Charles struck a deal to convert Marshall’s ownership stake in the refinery into stock in Koch Industries. Suddenly the majority owner, the company soon bought the rest of the refinery outright.

Almost from the beginning, Koch Industries’ risk-taking crossed over into recklessness. The OPEC oil embargo hit the company hard. Koch had made a deal giving the company the right to buy a large share of Qatar’s export crude. At the time, Koch owned five supertankers and had chartered many others. When the embargo hit, Koch had upward of half a billion dollars in exposure to tankers and couldn’t deliver OPEC oil to the U.S. market, creating what Charles has called “large losses.” Soon, Koch Industries was caught overcharging American customers. The Ford administration in the summer of 1974 compelled Koch to pay out more than $20 million in rebates and future price reductions.

Koch Industries’ manipulations were about to get more audacious. In the late 1970s, the federal government parceled out exploration tracts, using a lottery in which anyone could score a 10-year lease at just $1 an acre – a game of chance that gave wildcat prospectors the same shot as the biggest players. Koch didn’t like these odds, so it enlisted scores of frontmen to bid on its behalf. In the event they won the lottery, they would turn over their leases to the company. In 1980, Koch Industries pleaded guilty to five felonies in federal court, including conspiracy to commit fraud.

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The Koch family, mid-1950s. (Photo: Wichita State University Libraries)

With Republicans and Democrats united in regulating the oil business, Charles had begun throwing his wealth behind the upstart Libertarian Party, seeking to transform it into a viable third party. Over the years, he would spend millions propping up a league of affiliated think tanks and front groups – a network of Libertarians that became known as the “Kochtopus.”

Charles even convinced David to stand as the Libertarian Party’s vice-presidential candidate in 1980 – a clever maneuver that allowed David to lavish unlimited money on his own ticket. The Koch-funded 1980 platform was nakedly in the brothers’ self-interest – slashing federal regulatory agencies, offering a 50 percent tax break to top earners, ending the “cruel and unfair” estate tax and abolishing a $16 billion “windfall profits” tax on the oil industry. The words of Libertarian presidential candidate Ed Clark’s convention speech in Los Angeles ring across the decades: “We’re sick of taxes,” he declared. “We’re ready to have a very big tea party.” In a very real sense, the modern Republican Party was on the ballot that year – and it was running against Ronald Reagan.

Charles’ management style and infatuation with far-right politics were endangering his grip on the company. Bill believed his brothers’ political spending was bad for business. “Pretty soon, we would get the reputation that the company and the Kochs were crazy,” he said.

In late 1980, with Frederick’s backing, Bill launched an unsuccessful battle for control of Koch Industries, aiming to take the company public. Three years later, Charles and David bought out their brothers for $1.1 billion. But the speed with which Koch Industries paid off the buyout debt left Bill convinced, but never quite able to prove, he’d been defrauded. He would spend the next 18 years suing his brothers, calling them “the biggest crooks in the oil industry.”

Bill also shared these concerns with the federal government. Thanks in part to his efforts, in 1989 a Senate committee investigating Koch business with Native Americans would describe Koch Oil tactics as “grand larceny.” In the late 1980s, Koch was the largest purchaser of oil from American tribes. Senate investigators suspected the company was making off with more crude from tribal oil fields than it measured and paid for. They set up a sting, sending an FBI agent to coordinate stakeouts of eight remote leases. Six of them were Koch operations, and the agents reported “oil theft” at all of them.

One of Koch’s gaugers would refer to this as “volume enhancement.” But in sworn testimony before a Texas jury, Phillip Dubose, a former Koch pipeline manager, offered a more succinct definition: “stealing.” The Senate committee concluded that over the course of three years Koch “pilfered” $31 million in Native oil; in 1988, the value of that stolen oil accounted for nearly a quarter of the company’s crude-oil profits. “I don’t know how the company could have figures like that,” the FBI agent testified, “and not have top management know that theft was going on.” In his own testimony, Charles offered that taking oil readings “is a very uncertain art” and that his employees “aren’t rocket scientists.” Koch’s top lawyer would later paint the company as a victim of Senate “McCarthyism.”

By this time, the Kochs had soured on the Libertarian Party, concluding that control of a small party would never give them the muscle they sought in the nation’s capital. Now they would spend millions in efforts to influence – and ultimately take over – the GOP. The work began close to home; the Kochs had become dedicated patrons of Sen. Bob Dole of Kansas, who ran interference for Koch Industries in Washington. On the Senate floor in March 1990, Dole gloatingly cautioned against a “rush to judgment” against Koch, citing “very real concerns about some of the evidence on which the special committee was basing its findings.” A grand jury investigated the claims but disbanded in 1992, without issuing indictments.

Arizona Sen. Dennis DeConcini was “surprised and disappointed” at the decision to drop the case. “Our investigation was some of the finest work the Senate has ever done,” he said. “There was an overwhelming case against Koch.” But Koch did not avoid all punishment. Under the False Claims Act, which allows private citizens to file lawsuits on behalf of the government, Bill sued the company, accusing it of defrauding the feds of royalty income on its “volume­enhanced” purchases of Native oil. A jury concluded Koch had submitted more than 24,000 false claims, exposing Koch to some $214 million in penalties. Koch later settled, paying $25 million.

Self­ interest continued to define Koch Industries’ adventures in public policy. In the early 1990s, in a high-profile initiative of the first-term Clinton White House, the administration was pushing for a levy on the heat content of fuels. Known as the BTU tax, it was the earliest attempt by the federal government to recoup damages from climate polluters. But Koch Industries could not stand losing its most valuable subsidy: the public policy that allowed it to treat the atmosphere as an open sewer. Richard Fink, head of Koch Company’s Public Sector and the longtime mastermind of the Koch brothers’ political empire, confessed to The Wichita Eagle in 1994 that Koch could not compete if it actually had to pay for the damage it did to the environment: “Our belief is that the tax, over time, may have destroyed our business.”

To fight this threat, the Kochs funded a “grassroots” uprising – one that foreshadowed the emergence, decades later, of the Tea Party. The effort was run through Citizens for a Sound Economy, to which the brothers had spent a decade giving nearly $8 million to create what David Koch called “a sales force” to communicate the brothers’ political agenda through town hall meetings and anti-tax rallies designed to look like spontaneous demonstrations. In 1994, David Koch bragged that CSE’s campaign “played a key role in defeating the administration’s plans for a huge and cumbersome BTU tax.”

Despite the company’s increasingly sophisticated political and public-relations operations, Charles’ philosophy of regulatory resistance was about to bite Koch Industries – in the form of record civil and criminal financial penalties imposed by the Environmental Protection Agency.

Koch entered the 1990s on a pipeline-buying spree. By 1994, its network measured 37,000 miles. According to sworn testimony from former Koch employees, the company operated its pipelines with almost complete disregard for maintenance. As Koch employees understood it, this was in keeping with their CEO’s trademarked business philosophy, Market­Based Management.

For Charles, MBM – first communicated to employees in 1991 – was an attempt to distill the business practices that had grown Koch into one of the largest oil businesses in the world. To incentivize workers, Koch gives employees bonuses that correlate to the value they create for the company. “Salary is viewed only as an advance on compensation for value,” Koch wrote, “and compensation has an unlimited upside.”

To prevent the stagnation that can often bog down big enterprises, Koch was also determined to incentivize risk-taking. Under MBM, Koch Industries books opportunity costs – “profits foregone from a missed opportunity” – as though they were actual losses on the balance sheet. Koch employees who play it safe, in other words, can’t strike it rich.

On paper, MBM sounds innovative and exciting. But in Koch’s hyperaggressive corporate culture, it contributed to a series of environmental disasters. Applying MBM to pipeline maintenance, Koch employees calculated that the opportunity cost of shutting down equipment to ensure its safety was greater than the profit potential of pushing aging pipe to its limits.

The fact that preventive pipeline maintenance is required by law didn’t always seem to register. Dubose, a 26-year Koch veteran who oversaw pipeline areas in Louisiana, would testify about the company’s lax attitude toward maintenance. “It was a question of money. It would take away from our profit margin.” The testimony of another pipeline manager would echo that of Dubose: “Basically, the philosophy was ‘If it ain’t broke, don’t work on it.’”

When small spills occurred, Dubose testified, the company would cover them up. He recalled incidents in which the company would use the churn of a tugboat’s engine to break up waterborne spills and “just kind of wash that thing on down, down the river.” On land, Dubose said, “They might pump it [the leaked oil] off into a drum, then take a shovel and just turn the earth over.” When larger spills were reported to authorities, the volume of the discharges was habitually low-balled, according to Dubose.

Managers pressured employees to falsify pipeline-maintenance records filed with federal authorities; in a sworn affidavit, pipeline worker Bobby Conner recalled arguments with his manager over Conner’s refusal to file false reports: “He would always respond with anger,” Conner said, “and tell me that I did not know how to be a Koch employee.” Conner was fired and later settled a wrongful-termination suit with Koch Gateway Pipeline. Dubose testified that Charles was not in the dark about the company’s operations. “He was in complete control,” Dubose said. “He was the one that was line-driving this Market-Based Management at meetings.”

Before the worst spill from this time, Koch employees had raised concerns about the integrity of a 1940s-era pipeline in South Texas. But the company not only kept the line in service, it increased the pressure to move more volume. When a valve snapped shut in 1994, the brittle pipeline exploded. More than 90,000 gallons of crude spewed into Gum Hollow Creek, fouling surrounding marshlands and both Nueces and Corpus Christi bays with a 12-mile oil slick.

By 1995, the EPA had seen enough. It sued Koch for gross violations of the Clean Water Act. From 1988 through 1996, the company’s pipelines spilled 11.6 million gallons of crude and petroleum products. Internal Koch records showed that its pipelines were in such poor condition that it would require $98 million in repairs to bring them up to industry standard.

Ultimately, state and federal agencies forced Koch to pay a $30 million civil penalty – then the largest in the history of U.S. environmental law – for 312 spills across six states. Carol Browner, the former EPA administrator, said of Koch, “They simply did not believe the law applied to them.” This was not just partisan rancor. Texas Attorney General John Cornyn, the future Republican senator, had joined the EPA in bringing suit against Koch. “This settlement and penalty warn polluters that they cannot treat oil spills simply as the cost of doing business,” Cornyn said. (The Kochs seem to have no hard feelings toward their one-time tormentor; a lobbyist for Koch was the number-two bundler for Cornyn’s primary campaign this year.)

Koch wasn’t just cutting corners on its pipelines. It was also violating federal environmental law in other corners of the empire. Through much of the 1990s at its Pine Bend refinery in Minnesota, Koch spilled up to 600,000 gallons of jet fuel into wetlands near the Mississippi River. Indeed, the company was treating the Mississippi as a sewer, illegally dumping ammonia-laced wastewater into the river – even increasing its discharges on weekends when it knew it wasn’t being monitored. Koch Petroleum Group eventually pleaded guilty to “negligent discharge of a harmful quantity of oil” and “negligent violation of the Clean Water Act,” was ordered to pay a $6 million fine and $2 million in remediation costs, and received three years’ probation. This facility had already been declared a Superfund site in 1984.

In 2000, Koch was hit with a 97-count indictment over claims it violated the Clean Air Act by venting massive quantities of benzene at a refinery in Corpus Christi – and then attempted to cover it up. According to the indictment, Koch filed documents with Texas regulators indicating releases of just 0.61 metric tons of benzene for 1995 – one-tenth of what was allowed under the law. But the government alleged that Koch had been informed its true emissions that year measured 91 metric tons, or 15 times the legal limit.

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Charles Koch (Photo: Larry W. Smith / Polaris)

By the time the case came to trial, however, George W. Bush was in office and the indictment had been significantly pared down – Koch faced charges on only seven counts. The Justice Department settled in what many perceived to be a sweetheart deal, and Koch pleaded guilty to a single felony count for covering up the fact that it had disconnected a key pollution-control device and did not measure the resulting benzene emissions – receiving five years’ probation. Despite skirting stiffer criminal prosecution, Koch was handed $20 million in fines and reparations – another historic judgment.

On the day before Danielle Smalley was to leave for college, she and her friend Jason Stone were hanging out in her family’s mobile home. Seventeen years old, with long chestnut hair, Danielle began to feel nauseated. “Dad,” she said, “we smell gas.” It was 3:45 in the afternoon on August 24th, 1996, near Lively, Texas, some 50 miles southeast of Dallas. The Smalleys were too poor to own a telephone. So the teens jumped into her dad’s 1964 Chevy pickup to alert the authorities. As they drove away, the truck stalled where the driveway crossed a dry creek bed. Danielle cranked the ignition, and a fireball engulfed the truck. “You see two children burned to death in front of you – you never forget that,” Danielle’s father, Danny, would later tell reporters.

Unknown to the Smalleys, a decrepit Koch pipeline carrying liquid butane – literally, lighter fluid – ran through their subdivision. It had ruptured, filling the creek bed with vapor, and the spark from the pickup’s ignition had set off a bomb. Federal investigators documented both “severe corrosion” and “mechanical damage” in the pipeline. A National Transportation Safety Board report would cite the “failure of Koch Pipeline Company LP to adequately protect its pipeline from corrosion.”

Installed in the early Eighties, the pipeline had been out of commission for three years. When Koch decided to start it up again in 1995, a water-pressure test had blown the pipe open. An inspection of just a few dozen miles of pipe near the Smal­ley home found 538 corrosion defects. The industry’s term of art for a pipeline in this condition is Swiss cheese, according to the testimony of an expert witness – “essentially the pipeline is gone.”

Koch repaired only 80 of the defects – enough to allow the pipeline to withstand another pressure check – and began running explosive fluid down the line at high pressure in January 1996. A month later, employees discovered that a key anti­corrosion system had malfunctioned, but it was never fixed. Charles Koch had made it clear to managers that they were expected to slash costs and boost profits. In a sternly worded memo that April, Charles had ordered his top managers to cut expenditures by 10 percent “through the elimination of waste (I’m sure there is much more waste than that)” in order to increase pre-tax earnings by $550 million a year.

The Smalley trial underscored something Bill Koch had said about the way his brothers ran the company: “Koch Industries has a philosophy that profits are above everything else.” A former Koch manager, Kenoth Whitstine, testified to incidents in which Koch Industries placed profits over public safety. As one supervisor had told him, regulatory fines “usually didn’t amount to much” and, besides, the company had “a stable full of lawyers in Wichita that handled those situations.” When Whitstine told another manager he was concerned that unsafe pipelines could cause a deadly accident, this manager said that it was more profitable for the company to risk litigation than to repair faulty equipment. The company could “pay off a lawsuit from an incident and still be money ahead,” he said, describing the principles of MBM to a T.

At trial, Danny Smalley asked for a judgment large enough to make the billionaires feel pain: “Let Koch take their child out there and put their children on the pipeline, open it up and let one of them die,” he told the jury. “And then tell me what that’s worth.” The jury was emphatic, awarding Smalley $296 million – then the largest wrongful-death judgment in American legal history. He later settled with Koch for an undisclosed sum and now runs a pipeline-safety foundation in his daughter’s name. He declined to comment for this story. “It upsets him too much,” says an associate.

The official Koch line is that scandals that caused the company millions in fines, judgments and penalties prompted a change in Charles’ attitude of regulatory resistance. In his 2007 book, The Science of Success, he begrudgingly acknowledges his company’s recklessness. “While business was becoming increasingly regulated,” he reflects, “we kept thinking and acting as if we lived in a pure market economy. The reality was far different.”

Charles has since committed Koch Industries to obeying federal regulations. “Even when faced with laws we think are counterproductive,” he writes, “we must first comply.” Underscoring just how out of bounds Koch had ventured in its corporate culture, Charles admits that “it required a monumental undertaking to integrate compliance into every aspect of the company.” In 2000, Koch Petroleum Group entered into an agreement with the EPA and the Justice Department to spend $80 million at three refineries to bring them into compliance with the Clean Air Act. After hitting Koch with a $4.5 million penalty, the EPA granted the company a “clean slate” for certain past violations.

Then George W. Bush entered the White House in 2001, his campaign fattened with Koch money. Charles Koch may decry cronyism as “nothing more than welfare for the rich and powerful,” but he put his company to work, hand in glove, with the Bush White House. Correspondence, contacts and visits among Koch Industries representatives and the Bush White House generated nearly 20,000 pages of records, according to a Rolling Stone FOIA request of the George W. Bush Presidential Library. In 2007, the administration installed a fiercely anti-regulatory academic, Susan Dudley, who hailed from the Koch-funded Mercatus Center at George Mason University, as its top regulatory official.

Today, Koch points to awards it has won for safety and environmental excellence. “Koch companies have a strong record of compliance,” Holden, Koch’s top lawyer, tells Rolling Stone. “In the distant past, when we failed to meet these standards, we took steps to ensure that we were building a culture of 10,000 percent compliance, with 100 percent of our employees complying 100 percent.” To reduce its liability, Koch has also unwound its pipeline business, from 37,000 miles in the late 1990s to about 4,000 miles. Of the much smaller operation, he adds, “Koch’s pipeline practice and operations today are the best in the industry.”

But even as compliance began to improve among its industrial operations, the company aggressively expanded its trading activities into the Wild West frontier of risky financial instruments. In 2000, the Commodity Futures Modernization Act had exempted many of these products from regulation, and Koch Industries was among the key players shaping that law. Koch joined up with Enron, BP, Mobil and J. Aron – a division of Goldman Sachs then run by Lloyd Blankfein – in a collaboration called the Energy Group. This corporate alliance fought to prohibit the federal government from policing oil and gas derivatives. “The importance of derivatives for the Energy Group companies . . cannot be overestimated,” the group’s lawyer wrote to the Commodity Futures Trading Commission in 1998. “The success of this business can be completely undermined by . . . a costly regulatory regime that has no place in the energy industry.”

Koch had long specialized in “over-the-counter” or OTC trades – private, unregulated contracts not disclosed on any centralized exchange. In its own letter to the CFTC, Koch identified itself as “a major participant in the OTC derivatives market,” adding that the company not only offered “risk-management tools for its customers” but also traded “for its own account.” Making the case for what would be known as the Enron Loophole, Koch argued that any big firm’s desire to “maintain a good reputation” would prevent “widespread abuses in the OTC derivatives market,” a darkly hilarious claim, given what would become not only of Enron, but also Bear Stearns, Lehman Brothers and AIG.

The Enron Loophole became law in December 2000 – pushed along by Texas Sen. Phil Gramm, giving the Energy Group exactly what it wanted. “It completely exempted energy futures from regulation,” says Michael Greenberger, a former director of trading and markets at the CFTC. “It wasn’t a matter of regulators not enforcing manipulation or excessive speculation limits – this market wasn’t covered at all. By law.”

Before its spectacular collapse, Enron would use this loophole in 2001 to help engineer an energy crisis in California, artificially constraining the supply of natural gas and power generation, causing price spikes and rolling blackouts. This blatant and criminal market manipulation has become part of the legend of Enron. But Koch was caught up in the debacle. The CFTC would charge that a partnership between Koch and the utility Entergy had, at the height of the California crisis, reported fake natural-gas trades to reporting firms and also “knowingly reported false prices and/or volumes” on real trades.

One of 10 companies punished for such schemes, Entergy-Koch avoided prosecution by paying a $3 million fine as part of a 2004 settlement with the CFTC, in which it did not admit guilt to the commission’s charges but is barred from maintaining its innocence.

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David Koch (Photo: Alexis C. Glenn /Landov)

Trading, which had long been peripheral to the company’s core businesses, soon took center stage. In 2002, the company launched a subsidiary, Koch Supply & Trading. KS&T got off to a rocky start. “A series of bad trades,” writes a Koch insider, “boiled over in early 2004 when a large ‘sure bet’ crude-oil trade went south, resulting in a quick, multimillion loss.” But Koch traders quickly adjusted to the reality that energy markets were no longer ruled just by supply and demand – but by rich speculators trying to game the market. Revamping its strategy, Koch Industries soon began bragging of record profits. From 2003 to 2012, KS&T trading volumes exploded – up 450 percent. By 2009, KS&T ranked among the world’s top-five oil traders, and by 2011, the company billed itself as “one of the leading quantitative traders” – though Holden now says it’s no longer in this business.

Since Koch Industries aggressively expanded into high finance, the net worth of each brother has also exploded – from roughly $4 billion in 2002 to more than $40 billion today. In that period, the company embarked on a corporate buying spree that has taken it well beyond petroleum. In 2005, Koch purchased Georgia Pacific for $21 billion, giving the company a familiar, expansive grip on the industrial web that transforms Southern pine into consumer goods – from plywood sold at Home Depot to brand-name products like Dixie Cups and Angel Soft toilet paper. In 2013, Koch leapt into high technology with the $7 billion acquisition of Molex, a manufacturer of more than 100,000 electronics components and a top supplier to smartphone makers, including Apple.

Koch Supply & Trading makes money both from physical trades that move oil and commodities across oceans as well as in “paper” trades involving nothing more than high-stakes bets and cash. In paper trading, Koch’s products extend far beyond simple oil futures. Koch pioneered, for sale to hedge funds, “volatility swaps,” in which the actual price of crude is irrelevant and what matters is only the “magnitude of daily fluctuations in prices.” Steve Mawer, until recently the president of KS&T, described parts of his trading operation as “black-box stuff.”

Like a casino that bets at its own craps table, Koch engages in “proprietary trading” – speculating for the company’s own bottom line. “We’re like a hedge fund and a dealer at the same time,” bragged Ilia Bouchouev, head of Koch’s derivatives trading in 2004. “We can both make markets and speculate.” The company’s many tentacles in the physical oil business give Koch rich insight into market conditions and disruptions that can inform its speculative bets. When oil prices spiked to record heights in 2008, Koch was a major player in the speculative markets, according to documents leaked by Vermont Sen. Bernie Sanders, with trading volumes rivaling Wall Street giants like Citibank. Koch rode a trader-driven frenzy – detached from actual supply and demand – that drove prices above $147 a barrel in July 2008, battering a global economy about to enter a free fall.

Only Koch knows how much money Koch reaped during this price spike. But, as a proxy, consider the $20 million Koch and its subsidiaries spent lobbying Congress in 2008 – before then, its biggest annual lobbying expense had been $5 million – seeking to derail a raft of consumer-protection bills, including the Federal Price Gouging Prevention Act, the Stop Excessive Energy Speculation Act of 2008, the Prevent Unfair Manipulation of Prices Act of 2008 and the Close the Enron Loophole Act.

In comments to the Federal Trade Commission, Koch lobbyists defended the company’s right to rack up fantastic profits at the expense of American consumers. “A mere attempt to maximize profits cannot constitute market manipulation,” they wrote, adding baldly, “Excessive profits in the face of shortages are desirable.”

When the global economy crashed in 2008, so did oil prices. By December, crude was trading more than $100 lower per barrel than it had just months earlier – around $30. At the same time, oil traders anticipated that prices would eventually rebound. Futures contracts for delivery of oil in December 2009 were trading at nearly $55 per barrel. When future delivery is more valuable than present inventory, the market is said to be “in contango.” Koch exploited the contango market to the hilt. The company leased nine supertankers and filled them with cut-rate crude and parked them quietly offshore in the Gulf of Mexico, banking virtually risk-free profits by selling contracts for future delivery.

All in, Koch took about 20 million barrels of oil off the market, putting itself in a position to bet on price disruptions the company itself was creating. Thanks to these kinds of trading efforts, Koch could boast in a 2009 review that “the performance of Koch Supply & Trading actually grew stronger last year as the global economy worsened.” The cost for those risk-free profits was paid by consumers at the pump. Estimates pegged the cost of the contango trade by Koch and others at up to 40 cents a gallon.

Artificially constraining oil supplies is not the only source of dark, unregulated profit for Koch Industries. In the years after George W. Bush branded Iran a member of the “Axis of Evil,” the Koch brothers profited from trade with the state sponsor of terror and reckless would-be nuclear power. For decades, U.S. companies have been forbidden from doing business with the Ayatollahs, but Koch Industries exploited a loophole in 1996 sanctions that made it possible for foreign subsidiaries of U.S. companies to do some business in Iran.

In the ensuing years, according to Bloomberg Markets, the German and Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment for oil fields and refineries, won lucrative contracts to supply Iran’s Zagros plant, the largest methanol plant in the world. And thanks in part to Koch, methanol is now one of Iran’s leading non-oil exports. “Every single chance they had to do business with Iran, or anyone else, they did,” said Koch whistle-blower George Bentu. Having signed on to work for a company that lists “integrity” as its top value, Bentu added, “You feel totally betrayed. Everything Koch stood for was a lie.”

Koch reportedly kept trading with Tehran until 2007 – after the regime was exposed for supplying IEDs to Iraqi insurgents killing U.S. troops. According to lawyer Holden, Koch has since “decided that none of its subsidiaries would engage in trade involving Iran, even where such trade is permissible under U.S. law.”

These days, Koch’s most disquieting foreign dealings are in Canada, where the company has massive investments in dirty tar sands. The company’s 1.1 million acres of leases in northern Alberta contain reserves of economically recoverable oil numbering in the billions of barrels. With these massive leaseholdings, Koch is poised to continue profiting from Canadian crude whether or not the Keystone XL pipeline gains approval, says Andrew Leach, an energy and environmental economist at the business school of the University of Alberta.

Counterintuitively, approval of Keystone XL could actually harm one of Koch’s most profitable businesses – its Pine Bend refinery in Minnesota. Because tar-sands crude presently has no easy outlet to the global market, there’s a glut of Canadian oil in the midcontinent, and Koch’s refinery is a beneficiary of this oversupply; the resulting discount can exceed $20 a barrel compared to conventional crude. If it is ever built, the Keystone XL pipeline will provide a link to Gulf Coast refineries – and thus the global export market, which would erase much of that discount and eat into company profit margins.

Leach says Koch Industries’ tar-sands leaseholdings have them hedged against the potential approval of Keystone XL. The pipeline would increase the value of Canadian tar-sands deposits overnight. Koch could then profit handsomely by flipping its leases to more established producers. “Optimizing asset value through trading,” Koch literature says of these and other holdings, is a “key” company strategy.

The one truly bad outcome for Koch would be if Keystone XL were to be defeated, as many environmentalists believe it must be. “If the signal that sends is that no new pipelines will be built across the U.S. border for carrying oil-sands product,” Leach says, “that’s going to have an impact not just on Koch leases, but on everybody’s asset value in oil sands.” Ironically, what’s best for Koch’s tar-sands interests is what the Obama administration is currently delivering: “They’re actually ahead if Keystone XL gets delayed a while but hangs around as something that still might happen,” Leach says.

The Dodd-Frank bill was supposed to put an end to economy-­endangering speculation in the $700 trillion global derivatives market. But Koch has managed to defend – and even expand – its turf, trading in largely unregulated derivatives, once dubbed “financial weapons of mass destruction” by billionaire Warren Buffett.

In theory, the Enron Loophole is no longer open – the government now has the power to police manipulation in the market for energy derivatives. But the Obama administration has not yet been able to come up with new rules that actually do so. In 2011, the CFTC mandated “position limits” on derivative trades of oil and other commodities. These would have blocked any single speculator from owning futures contracts representing more than a quarter of the physical market – reducing the danger of manipulation. As part of the International Swaps and Derivatives Association, which also reps many Wall Street giants including Goldman Sachs and JPMorgan Chase, Koch fought these new restrictions. ISDA sued to block the position limits – and won in court in September 2012. Two years later, CFTC is still spinning its wheels on a replacement. Industry traders like Koch are, Greenberger says, “essentially able to operate as though the Enron Loophole were still in effect.”

Koch is also reaping the benefits from Dodd-Frank’s impacts on Wall Street. The so-called Volcker Rule, implemented at the end of last year, bans investment banks from “proprietary trading” – investing on their own behalf in securities and derivatives. As a result, many Wall Street banks are unloading their commodities-trading units. But Volcker does not apply to nonbank traders like Koch. They’re now able to pick up clients who might previously have traded with JPMorgan. In its marketing materials for its trading operations, Koch boasts to potential clients that it can provide “physical and financial market liquidity at times when others pull back.” Koch also likely benefits from loopholes that exempt the company from posting collateral for derivatives trades and allow it to continue trading swaps without posting the transactions to a transparent electronic exchange. Though competitors like BP and Cargill have registered with the CFTC as swaps dealers – subjecting their trades to tightened regulation – Koch conspicuously has not. “Koch is compliant with all CFTC regulations, including those relating to swaps dealers,” says Holden, the Koch lawyer.

That a massive company with such a troubling record as Koch Industries remains unfettered by financial regulation should strike fear in the heart of anyone with a stake in the health of the American economy. Though Koch has cultivated a reputation as an economically conservative company, it has long flirted with danger. And that it has not suffered a catastrophic loss in the past 15 years would seem to be as much about luck as about skillful management.

The Kochs have brushed up against some of the major debacles of the crisis years. In 2007, as the economy began to teeter, Koch was gearing up to plunge into the market for credit default swaps, even creating an affiliate, Koch Financial Products, for that express purpose. KFP secured a AAA rating from Moody’s and reportedly sought to buy up toxic assets at the center of the financial crisis at up to 50-times leverage. Ultimately, Koch Industries survived the experiment without losing its shirt.

More recently, Koch was exposed to the fiasco at MF Global, the disgraced brokerage firm run by former New Jersey Gov. Jon Corzine that improperly dipped into customer accounts to finance reckless bets on European debt. Koch, one of MF Global’s top clients, reportedly told trading partners it was switching accounts about a month before the brokerage declared bankruptcy – then the eighth-largest in U.S. history. Koch says the decision to pull its funds from MF Global was made more than a year before. While MF’s small-fry clients had to pick at the carcass of Corzine’s company to recoup their assets, Koch was already swimming free and clear.

Because it’s private, no one outside of Koch Industries knows how much risk Koch is taking – or whether it could conceivably create systemic risk, a concern raised in 2013 by the head of the Futures Industry Association. But this much is for certain: Because of the loopholes in financial-regulatory reform, the next company to put the American economy at risk may not be a Wall Street bank but a trading giant like Koch. In 2012, Gary Gensler, then CFTC chair, railed against the very loopholes Koch appears to be exploiting, raising the specter of AIG. “[AIG] had this massive risk built up in its derivatives just because it called itself an insurance company rather than a bank,” Gensler said. When Congress adopted Dodd-Frank, Gensler added, it never intended to exempt financial heavy hitters just because “somebody calls themselves an insurance

In “the science of success,” Charles Koch highlights the problems created when property owners “don’t benefit from all the value they create and don’t bear the full cost from whatever value they destroy.” He is particularly concerned about the “tragedy of the commons,” in which shared resources are abused because there’s no individual accountability. “The biggest problems in society,” he writes, “have occurred in those areas thought to be best controlled in common: the atmosphere, bodies of water, air. . . .”

But in the real world, Koch Industries has used its political might to beat back the very market-based mechanisms – including a cap-and-trade market for carbon pollution – needed to create the ownership rights for pollution that Charles says would improve the functioning of capitalism.

In fact, it appears the very essence of the Koch business model is to exploit breakdowns in the free market. Koch has profited precisely by dumping billions of pounds of pollutants into our waters and skies – essentially for free. It racks up enormous profits from speculative trades lacking economic value that drive up costs for consumers and create risks for our economy.

The Koch brothers get richer as the costs of what Koch destroys are foisted on the rest of us – in the form of ill health, foul water and a climate crisis that threatens life as we know it on this planet. Now nearing 80 – owning a large chunk of the Alberta tar sands and using his billions to transform the modern Republican Party into a protection racket for Koch Industries’ profits – Charles Koch is not about to see the light. Nor does the CEO of one of America’s most toxic firms have any notion of slowing down. He has made it clear that he has no retirement plans: “I’m going to ride my bicycle till I fall off.”

http://www.rollingstone.com/politics/news/inside-the-koch-brothers-toxic-empire-20140924

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The Fake Terror Threat Used To Justify Bombing Syria

The Fake Terror Threat Used To Justify Bombing Syria

By Glenn Greenwald and Murtaza Hussain
The Intercept
September 28, 2014

Featured photo - The Fake Terror Threat Used To Justify Bombing Syria

As the Obama Administration prepared to bomb Syria without congressional or U.N. authorization, it faced two problems. The first was the difficulty of sustaining public support for a new years-long war against ISIS, a group that clearly posed no imminent threat to the “homeland.” A second was the lack of legal justification for launching a new bombing campaign with no viable claim of self-defense or U.N. approval.

The solution to both problems was found in the wholesale concoction of a brand new terror threat that was branded “The Khorasan Group.” After spending weeks depicting ISIS as an unprecedented threat — too radical even for Al Qaeda! — administration officials suddenly began spoon-feeding their favorite media organizations and national security journalists tales of a secret group that was even scarier and more threatening than ISIS, one that posed a direct and immediate threat to the American Homeland. Seemingly out of nowhere, a new terror group was created in media lore.

The unveiling of this new group was performed in a September 13 article by the Associated Press, who cited unnamed U.S. officials to warn of this new shadowy, worse-than-ISIS terror group:

While the Islamic State group [ISIS] is getting the most attention now, another band of extremists in Syria — a mix of hardened jihadis from Afghanistan, Yemen, Syria and Europe — poses a more direct and imminent threat to the United States, working with Yemeni bomb-makers to target U.S. aviation, American officials say.

At the center is a cell known as the Khorasan group, a cadre of veteran al-Qaida fighters from Afghanistan and Pakistan who traveled to Syria to link up with the al-Qaida affiliate there, the Nusra Front.

But the Khorasan militants did not go to Syria principally to fight the government of President Bashar Assad, U.S. officials say. Instead, they were sent by al-Qaida leader Ayman al-Zawahiri to recruit Europeans and Americans whose passports allow them to board a U.S.-bound airliner with less scrutiny from security officials.

AP warned Americans that “the fear is that the Khorasan militants will provide these sophisticated explosives to their Western recruits who could sneak them onto U.S.-bound flights.” It explained that although ISIS has received most of the attention, the Khorasan Group “is considered the more immediate threat.”

The genesis of the name was itself scary: “Khorasan refers to a province under the Islamic caliphate, or religious empire, of old that included parts of Afghanistan.” AP depicted the U.S. officials who were feeding them the narrative as engaging in some sort of act of brave, unauthorized truth-telling: “Many U.S. officials interviewed for this story would not be quoted by name talking about what they said was highly classified intelligence.”

On the morning of September 18, CBS News broadcast a segment that is as pure war propaganda as it gets: directly linking the soon-to-arrive U.S. bombing campaign in Syria to the need to protect Americans from being exploded in civilian jets by Khorasan. With ominous voice tones, the host narrated:

This morning we are learning of a new and growing terror threat coming out of Syria. It’s an Al Qaeda cell you probably never heard of. Nearly everything about them is classified. Bob Orr is in Washington with new information on a group some consider more  dangerous than ISIS.

Orr then announced that while ISIS is “dominating headlines and terrorist propaganda,” Orr’s “sources” warn of “a more immediate threat to the U.S. Homeland.” As Orr spoke, CBS flashed alternating video showing scary Muslims in Syria and innocent westerners waiting in line at airports, as he intoned that U.S. officials have ordered “enhanced screening” for “hidden explosives.” This is all coming, Orr explained, from  ”an emerging threat in Syria” where “hardened terrorists” are building “hard to detect bombs.”


The U.S. government, Orr explained, is trying to keep this all a secret; they won’t even mention the group’s name in public out of security concerns! But Orr was there to reveal the truth, as his “sources confirm the Al Qaeda cell goes by the name Khorasan.” And they’re “developing fresh plots to attack U.S. aviation.”

Later that day, Obama administration officials began publicly touting the group, when Director of National Intelligence James Clapper warned starkly: “In terms of threat to the homeland, Khorasan may pose as much of a danger as the Islamic State.” Then followed an avalanche of uncritical media reports detailing this Supreme Threat, excitingly citing anonymous officials as though they had uncovered a big secret the government was trying to conceal.

On September 20, The New York Times devoted a long article to strongly hyping the Khorasan Group. Headlined “U.S. Suspects More Direct Threats Beyond ISIS,” the article began by announcing that U.S. officials believe a different group other than ISIS “posed a more direct threat to America and Europe.” Specifically:

American officials said that the group called Khorasan had emerged in the past year as the cell in Syria that may be the most intent on hitting the United States or its installations overseas with a terror attack. The officials said that the group is led by Muhsin al-Fadhli, a senior Qaeda operative who, according to the State Department, was so close to Bin Laden that he was among a small group of people who knew about the Sept. 11, 2001, attacks before they were launched.

Again, the threat they posed reached all the way to the U.S.: “Members of the cell are said to be particularly interested in devising terror plots using concealed explosives.”

This Khorasan-attacking-Americans alarm spread quickly and explosively in the landscape of U.S. national security reporting. The Daily Beast‘s Eli Lake warned on September 23 — the day after the first U.S. bombs fell in Syria — that “American analysts had pieced together detailed information on a pending attack from an outfit that informally called itself ‘the Khorasan Group’ to use hard-to-detect explosives on American and European airliners.” He added even more ominously: “The planning from the Khorasan Group … suggests at least an aspiration to launch more-coordinated and larger attacks on the West in the style of the 9/11 attacks from 2001″ (days later, Lake, along with Josh Rogin, actually claimed that “Iran has long been harboring senior al Qaeda, al Nusra, and so-called Khorasan Group leaders as part of its complicated strategy to influence the region”).

On the day of the bombing campaign, NBC News’ Richard Engel tweeted this:

That tweet linked to an NBC Nightly News report in which anchor Brian Williams introduced Khorasan with a graphic declaring it “The New Enemy,” and Engel went on to explain that the group is “considered a threat to the U.S. because, U.S. intelligence officials say, it wants to bring down airplanes with explosives.”

Once the bombing campaign was underway, ISIS — the original theme of the attack — largely faded into the background, as Obama officials and media allies aggressively touted attacks on Khorasan leaders and the disruption of its American-targeting plots. On the first day of the bombing, The Washington Post announced that “the United States also pounded a little-known but well-resourced al-Qaeda cell that some American officials fear could pose a direct threat to the United States.” It explained:

The Pentagon said in a statement early Tuesday that the United States conducted eight strikes west of Aleppo against the cell, called the Khorasan Group, targeting its “training camps, an explosives and munitions production facility, a communications building and command and control facilities.”

The same day, CNN claimed that “among the targets of U.S. strikes across Syria early Tuesday was the Khorasan Group.” The bombing campaign in Syria was thus magically transformed into an act of pure self-defense, given that ”the group was actively plotting against a U.S. homeland target and Western targets, a senior U.S. official told CNN on Tuesday.” The bevy of anonymous sources cited by CNN had a hard time keep their stories straight:

The official said the group posed an “imminent” threat. Another U.S. official later said the threat was not imminent in the sense that there were no known targets or attacks expected in the next few weeks.

The plots were believed to be in an advanced stage, the second U.S. official said. There were indications that the militants had obtained materials and were working on new improvised explosive devices that would be hard to detect, including common hand-held electronic devices and airplane carry-on items such as toiletries.

Nonetheless, what was clear was that this group had to be bombed in Syria to save American lives, as the terrorist group even planned to conceal explosive devices in toothpaste or flammable clothing as a means to target U.S. airliners. The day following the first bombings, Attorney General Eric Holder claimed: “We hit them last night out of a concern that they were getting close to an execution date of some of the plans that we have seen.”

CNN’s supremely stenographic Pentagon reporter, Barbara Starr, went on air as videos of shiny new American fighter jets and the Syria bombing were shown and explained that this was all necessary to stop a Khorasan attack very close to being carried out against the west:

What we are hearing from a senior US official is the reason they struck Khorasan right now is they had intelligence that the group — of Al Qaeda veterans — was in the stages of planning an attack against the US homeland and/or an attack against a target in Europe, and the information indicated Khorasan was well on its way — perhaps in its final stages — of planning that attack.

All of that laid the fear-producing groundwork for President Obama to claim self-defense when he announced the bombing campaign on September 23 with this boast: “Once again, it must be clear to anyone who would plot against America and try to do Americans harm that we will not tolerate safe havens for terrorists who threaten our people.”

The very next day, a Pentagon official claimed a U.S. airstrike killed “the Khorasan leader,” and just a few days after that, U.S. media outlets celebrated what they said was the admission by jihadi social media accounts that “the leader of the al Qaeda-linked Khorasan group was killed in a U.S. air strike in Syria.”

But once it served its purpose of justifying the start of the bombing campaign in Syria, the Khorasan narrative simply evaporated as quickly as it materialized. Foreign Policy‘s Shane Harris, with two other writers, was one of the first to question whether the “threat” was anywhere near what it had been depicted to be:

But according to the top U.S. counterterrorism official, as well as Obama himself, there is “no credible information” that the militants of the Islamic State were planning to attack inside the United States. Although the group could pose a domestic terrorism threat if left unchecked, any plot it tried launching today would be “limited in scope” and “nothing like a 9/11-scale attack,” Matthew Olsen, the director of the National Counterterrorism Center, said in remarks at the Brookings Institution earlier this month. That would suggest that Khorasan doesn’t have the capability either, even if it’s working to develop it.

“Khorasan has the desire to attack, though we’re not sure their capabilities match their desire,” a senior U.S. counterterrorism official told Foreign Policy.

On September 25, The New York Times — just days after hyping the Khorasan threat to the homeland — wrote that “the group’s evolution from obscurity to infamy has been sudden.” And the paper of record began, for the first time, to note how little evidence actually existed for all those claims about the imminent threats posed to the homeland:

American officials have given differing accounts about just how close the group was to mounting an attack, and about what chance any plot had of success. One senior American official on Wednesday described the Khorasan plotting as “aspirational” and said that there did not yet seem to be a concrete plan in the works.

Literally within a matter of days, we went from “perhaps in its final stages of planning its attack” (CNN) to “plotting as ‘aspirational’” and “there did not yet seem to be a concrete plan in the works” (NYT).

Late last week, Associated Press’ Ken Dilanian — the first to unveil the new Khorasan Product in mid-September — published a new story explaining that just days after bombing “Khorasan” targets in Syria, high-ranking U.S. officials seemingly backed off all their previous claims of an “imminent” threat from the group. Headlined “U.S. Officials Offer More Nuanced Take on Khorasan Threat,” it noted that “several U.S. officials told reporters this week that the group was in the final stages of planning an attack on the West, leaving the impression that such an attack was about to happen.” But now:

Senior U.S. officials offered a more nuanced picture Thursday of the threat they believe is posed by an al-Qaida cell in Syria targeted in military strikes this week, even as they defended the decision to attack the militants.

James Comey, the FBI director, and Rear Adm. John Kirby, the Pentagon spokesman, each acknowledged that the U.S. did not have precise intelligence about where or when the cell, known as the Khorasan Group, would attempt to strike a Western target. . . .

Kirby, briefing reporters at the Pentagon, said, “I don’t know that we can pin that down to a day or month or week or six months….We can have this debate about whether it was valid to hit them or not, or whether it was too soon or too late…We hit them. And I don’t think we need to throw up a dossier here to prove that these are bad dudes.”

Regarding claims that an attack was “imminent,” Comey said: “I don’t know exactly what that word means…’imminent’” — a rather consequential admission given that said imminence was used as the justification for launching military action in the first place.

Even more remarkable, it turns out the very existence of an actual “Khorasan Group” was to some degree an invention of the American government. NBC’s Engel, the day after he reported on the U.S. government’s claims about the group for Nightly News, seemed to have serious second thoughts about the group’s existence, tweeting:

Indeed, a Nexis search for the group found almost no mentions of its name prior to the September 13 AP article based on anonymous officials. There was one oblique reference to it in a July 31 CNN op-ed by Peter Bergen. The other mention was an article in the LA Times from two weeks earlier about Pakistan which mentioned the group’s name as something quite different than how it’s being used now: as “the intelligence wing of the powerful Pakistani Taliban faction led by Hafiz Gul Bahadur.” Tim Shorrock noted that the name appears in a 2011 hacked Stratfor email published by WikiLeaks, referencing a Dawn article that depicts them as a Pakistan-based group which was fighting against and “expelled by” (not “led by”) Bahadur.

There are serious questions about whether the Khorasan Group even exists in any meaningful or identifiable manner. Aki Peritz, a CIA counterterrorism official until 2009, told Time: “I’d certainly never heard of this group while working at the agency,” while Obama’s former U.S. ambassador to Syria Robert Ford said: ”We used the term [Khorasan] inside the government, we don’t know where it came from….All I know is that they don’t call themselves that.” As The Intercept was finalizing this article, former terrorism federal prosecutor Andrew McCarthy wrote in National Review that the group was a scam: “You haven’t heard of the Khorosan Group because there isn’t one. It is a name the administration came up with, calculating that Khorosan … had sufficient connection to jihadist lore that no one would call the president on it.”

What happened here is all-too-familiar. The Obama administration needed propagandistic and legal rationale for bombing yet another predominantly Muslim country. While emotions over the ISIS beheading videos were high, they were not enough to sustain a lengthy new war.

So after spending weeks promoting ISIS as Worse Than Al Qaeda™, they unveiled a new, never-before-heard-of group that was Worse Than ISIS™. Overnight, as the first bombs on Syria fell, the endlessly helpful U.S. media mindlessly circulated the script they were given: this new group was composed of “hardened terrorists,” posed an “imminent” threat to the U.S. homeland, was in the “final stages” of plots to take down U.S. civilian aircraft, and could “launch more-coordinated and larger attacks on the West in the style of the 9/11 attacks from 2001.””

As usual, anonymity was granted to U.S. officials to make these claims. As usual, there was almost no evidence for any of this. Nonetheless, American media outlets — eager, as always, to justify American wars — spewed all of this with very little skepticism. Worse, they did it by pretending that the U.S. government was trying not to talk about all of this — too secret! — but they, as intrepid, digging journalists, managed to unearth it from their courageous “sources.” Once the damage was done, the evidence quickly emerged about what a sham this all was. But, as always with these government/media propaganda campaigns, the truth emerges only when it’s impotent.

https://firstlook.org/theintercept/2014/09/28/u-s-officials-invented-terror-group-justify-bombing-syria/

 

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How Former Treasury Officials and the UAE Are Manipulating American Journalists

How Former Treasury Officials and the UAE Are Manipulating American Journalists

By Glenn Greenwald
The Intercept
September 25, 2014

The tiny and very rich Persian Gulf emirate of Qatar has become a hostile target for two nations with significant influence in the U.S.: Israel and the United Arab Emirates. Israel is furious over Qatar’s support for Palestinians generally and (allegedly) Hamas specifically, while the UAE is upset that Qatar supports the Muslim Brotherhood in Egypt (UAE supports the leaders of the military coup) and that Qatar funds Islamist rebels in Libya (UAE supports forces aligned with Ghadaffi (see update below)).

This animosity has resulted in a new campaign in the west to demonize the Qataris as the key supporter of terrorism. The Israelis have chosen the direct approach of publicly accusing their new enemy in Doha of being terrorist supporters, while the UAE has opted for a more covert strategy: paying millions of dollars to a U.S. lobbying firm – composed of former high-ranking Treasury officials from both parties – to plant anti-Qatar stories with American journalists. That more subtle tactic has been remarkably successful, and shines important light on how easily political narratives in U.S. media discourse can be literally purchased.

This murky anti-Qatar campaign was first referenced by New York Times article two weeks ago by David Kirkpatrick, which reported that “an unlikely alignment of interests, including Saudi Arabia, the United Arab Emirates, Egypt and Israel” is seeking to depict Doha as “a godfather to terrorists everywhere” (Qatar vehemently denies the accusation). One critical component of that campaign was mentioned in passing:

The United Arab Emirates have retained an American consulting firm, Camstoll Group, staffed by several former United States Treasury Department officials. Its public disclosure forms, filed as a registered foreign agent, showed a pattern of conversations with journalists who subsequently wrote articles critical of Qatar’s role in terrorist fund-raising.

How that process worked is fascinating, and its efficacy demonstrates how American public perceptions and media reports are manipulated with little difficulty.

The Camstoll Group was formed on November 26, 2012. Its key figures are all former senior Treasury Department officials in both the Bush and Obama administrations whose responsibilities included managing the U.S. government’s relationships with Persian Gulf regimes and Israel, as well as managing policies relating to funding of designated terrorist groups. Most have backgrounds as neoconservative activists. Two of the Camstoll principals, prior to their Treasury jobs, worked with one of the country’s most extremist neocon anti-Muslim activists, Steve Emerson.

Camstoll’s founder, CEO and sole owner, Matthew Epstein, was a Treasury Department official from 2003 through 2010, a run that included a position as the department’s Financial Attaché to Saudi Arabia and the UAE. A 2007 diplomatic cable leaked by Chelsea Manning and published by WikiLeaks details Epstein’s meetings with high-level Abu Dhabi representatives as they plotted to cut off Iran’s financial and banking transactions. Those cables reveal multiple high-level meetings between Epstein in his capacity as a Treasury official and high-level officials of the Emirates, officials who are now paying his company millions of dollars to act as its agent inside the U.S.

Prior to his Treasury appointment by the Bush administration, Epstein was a neoconservative activist, writing articles for National Review and working with Emerson’s aggressively anti-Muslim Investigative Project (Epstein’s published resume omits his work with Emerson). His pre-Treasury work for Emerson’s group, obsessed with The Muslim Threat Within, presaged Peter King’s 2011 anti-Muslim witch hunts.

In 2003, for instance, Epstein told the U.S. Senate that “large sections of the institutional Islamic leadership in America do not support U.S. counterterrorism policy” and that “the radicalization of the Islamic political leadership in the United States has developed parallel to the radicalization of the Islamic leadership worldwide, sharing a conspiratorial view that Muslims in the United States are being persecuted on the basis of their religion and an acceptance that violence in the name of Islam is justified.” He declared: “the rise of militant Islamic leadership in the United States requires particular attention if we are to succeed in the War on Terror.”

Camstoll’s Managing Director, Howard Mendelsohn, was Acting Assistant Secretary of Treasury, where he also had ample policy responsibilities involving the Emirates; a 2010 WikiLeaks cable details how he “met with senior officials from the UAE’s State Security Department (SSD) and Dubai’s General Department of State Security (GDSS)” to coordinate disruption of Taliban financing. Another Managing Director, Benjamin Schmidt, worked with Epstein at Emerson’s Investigative Project before his own appointment to Treasury; a 2009 diplomatic cable shows him working with Israel on controlling financing to Palestinians. A Camstoll director, Benjamin Davis, was the Treasury Department’s Financial Attaché in Jerusalem.

On December 2, 2012 – less than a week after Camstoll was incorporated – it entered into a lucrative, open-ended consulting contract with an entity wholly owned by the Emirate of Abu Dhabi, Outlook Energy Investments, LLC (its Emir, the President of UAE, is pictured above). A week later, Camstoll registered as a foreign agent working on behalf of the Emirate. The consultancy agreement calls for Camstoll to be paid a monthly fee of $400,000, wired each month into a Camstoll account. Two weeks after it was formed, Camstoll was paid by the Emirates entity a retainer fee of $4.3 million, and then another $3.2 million in 2013.

In other words, a senior Treasury official responsible for U.S. policy toward the Emirates leaves the U.S. government and forms a new lobbying company, which is then instantly paid millions of dollars by the very same country for which he was responsible, all to use his influence, access and contacts for its advantage. The UAE spends more than any other country in the world to influence U.S. policy and shape domestic debate, and it pays former high-level government officials who worked with it – such as Epstein and his company – to carry out its agenda within the U.S.

What did Camstoll do for these millions of dollars? They spent enormous of amounts of time cajoling friendly reporters to plant anti-Qatar stories, and they largely succeeded. Their strategy was clear: target neocon/pro-Israel writers such as the Daily Beast‘s Eli Lake, Free Beacon‘s Alana Goodman, Iran-contra convict Elliott Abrams, The Washington Post‘s Jennifer Rubin, and American Enterprise Institute’s Michael Rubin – all eager to promote the Qatar-funds-terrorists line being pushed by Israel. They also targeted establishment media figures such as CNN’s Erin Burnett, Reuters’ Mark Hosenball, and The Washington Post‘s Joby Warrick.

In the latter half of 2013, Camstoll reported 15 separate contacts with Lake, all on behalf of UAE’s agenda; in the month of December alone, there were 10 separate contacts with Goodman. They also spoke multiple times with Warrick. At the same time, they were speaking on behalf of their Emirates client with their former colleagues who were still working as high-level Treasury officials, including Kate Bauer, the Treasury Department’s Emirates-based Financial Attaché, and Deputy Assistant Secretary Danny McGlynn.

In the first half of 2014, as the Emirates attack on Qatar intensified, Camstoll spoke multiple times with Lake, Hosenball, and Erin Burnett’s CNN show “Out Front,” and had conversations with Goodman and the NYT‘s David Kirkpatrick. They continued to meet with high-level Treasury officials as well, including Assistant Secretary for Terrorist Financing Daniel Glaser (highlights added):
comstall-fara-docThis work paid dividends for the UAE. In June, when the Obama administration announced a plan to release Guantanamo detainees to Qatar, Lake published a widely cited Daily Beast article depicting Qatar as friends of the terrorists; it quoted anonymous officials as claiming that “many wealthy individuals in Qatar are raising money for jihadists in Syria every day” and “we also know that we have sent detainees to them before, and their security services have magically lost track of them.” Lake himself pronounced that “Qatar’s track record is troubling” and that “the emirate is a good place to raise money for terrorist organizations.”

He then went on Fox News and said that “there still is a major issue with just terrorist financing in Qatar” and that in Doha there are “individuals who are roaming free who have raised a lot of money for al Qaeda, Hamas and other groups like that.”

Meanwhile, CNN sent Burnett to Doha where she broadcast a “special report” entitled: “Is Qatar a haven for terror funding”? CNN touted it as “an in-depth look into the people funding Al Qaeda and Al Qaeda-linked groups, including ISIS.” She began her report by noting that “the terror group ISIS is committing atrocities in Iraq. The Iraqi prime minister Nouri al-Maliki blames Saudi Arabia and Qatar for providing ISIS militants with money and weapons.” She then put on a source, former Bush deputy national security adviser and Treasury official Juan Zarate, to say that “Qatar is at the center of this. Qatar has now taken its place in the lead of countries that are supporting al Qaeda and al Qaeda-related groups.”

On camera, Burnett asked her source: “So how high up in the government in Qatar does the support for Islamic extremism for these al Qaeda-linked groups go?” The answer: “Well, these are decisions made at the top. So Qatar operates as a monarchy. Its officials, its activities follow the orders of the government. And to the extent that there’s a policy of supporting extremists in the region, that’s a policy that comes from the top.” She then brought on the GOP Chairman of the House Homeland Security Committee, Michael McCaul, and asked whether he agrees that “money out of Qatar could end up being used to fuel the ambition, the dream, of attacks against the United States directly,” and he quickly said he did.

Camstoll’s work with the Post‘s Warrick also proved quite productive. Camstoll spoke with Warrick on December 17, 2013. The very next day, the Post reporter published an article stating that “private Qatar-based charities have taken a more prominent role in recent weeks in raising cash and supplies for Islamist extremists in Syria, according to current and former U.S. and Middle Eastern officials.”

Camstoll representatives spoke again with Warrick on December 20 and December 21. The day after, he published another more accusatory article citing “increasing U.S. concern about the role of Qatari individuals and charities in supporting extreme elements within Syria’s rebel alliance” and linking the Qatari royal family to a professor and U.S. foreign policy critic alleged by the U.S. government to be ”working secretly as a financier for al-Qaeda.”

As one of his sources, Warrick in the first of his articles cited “a former U.S. official who specialized in tracking Gulf-based jihadist movements and who spoke on the condition of anonymity because much of his work for the government was classified.” That perfectly describes several Camstoll Group members, though Warrick did not respond to questions from The Intercept about whether this anonymous source was indeed a paid agent of the UAE working at Camstoll.

Also on Camstoll’s list of journalistic contacts was Kirkpatrick, who produced the article in the NYT two weeks ago headlined “Qatar’s Support of Islamists Alienates Allies Near and Far.” It noted that Qatar “has tacitly consented to open fund-raising” for Al Qaeda affiliates.

But unlike all the other reports helpfully produced by Camstoll’s journalistic allies, Kirkpatrick expressly described, and cast skeptical light on, the concerted campaign to focus on Qatar, not only mentioning Camstoll’s behind-the-scenes work but also reporting that “Qatar is finding itself under withering attack by an unlikely alignment of interests, including Saudi Arabia, the United Arab Emirates, Egypt and Israel, which have all sought to portray it as a godfather to terrorists everywhere.” Kirkpatrick also noted that “some in Washington have accused it of directly supporting the Islamic State in Iraq and Syria,” a claim he called “implausible and unsubstantiated.”

In response to questions from The Intercept about Camstoll’s role in his reporting, Lake refused to answer any questions, stating: “I don’t talk about how I do my reporting. I meet with many representatives and officials of foreign governments in the course of my job.” (So many journalists pride themselves on demanding transparency and accountability from others while adopting a posture of absolute secrecy for their own work that would make even a Pentagon spokesperson blush: “I don’t talk about how I do my reporting”). Goodman similarly said: “as I’m sure you understand, I can’t discuss my private conversations with contacts.” Camstoll’s contacts with Goodman and Hosenball appear to have produced no identifiable reports. Camstoll, Warwick, and Hosenball all provided no response to questions from The Intercept.

The point here is not that Qatar is innocent of supporting extremists. Nor is it a reflection on any inappropriate conduct by the journalists, who are taking information from wherever they can get it (although one would certainly hope that, as Kirkpatrick did, they would make clear what the agenda and paid campaign behind this narrative is).

The point is that this coordinated media attack on Qatar – using highly paid former U.S. officials and their media allies – is simply a weapon used by the Emirates, Israel, the Saudis and others to advance their agendas. Kirkpatrick explained: ”propelling the barrage of accusations against Qatar is a regional contest for power in which competing Persian Gulf monarchies have backed opposing proxies in contested places like Gaza, Libya and especially Egypt.” As political science professor As’ad AbuKhalil wrote this week about conflicts in Syria and beyond, “the two Wahhabi regimes [Saudi Arabia and Qatar] are fighting over many issues but they both wish to speak on behalf of political Islam.”

What’s misleading isn’t the claim that Qatar funds extremists but that they do so more than other U.S. allies in the region (a narrative implanted at exactly the time Qatar has become a key target of Israel and the Emirates). Indeed, some of Qatar’s accusers here do the same to at least the same extent, and in the case of the Saudis, far more so. As Kirkpatrick noted: “Qatar is hardly the only gulf monarchy to allow open fund-raising by sheikhs that the United States government has linked to Al Qaeda’s Syrian franchise, the Nusra Front: Sheikh Ajmi and most of the others are based in Kuwait and readily tap donors in Saudi Arabia, sometimes even making their pitches on Saudi- and Kuwaiti-owned television networks.”

One U.S. government cable from 2009, also published by WikiLeaks, identified Saudi Arabia, not Qatar, as the greatest danger in this regard:

Donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide.

The writer of that cable complained that “it has been an ongoing challenge to persuade Saudi officials to treat terrorist financing emanating from Saudi Arabia as a strategic priority.”

Prior to his appointment as a Treasury official – and before he began working as a paid agent of the UAE to finger Qatar as the key threat – Camstoll’s founder and CEO, Epstein, himself fingered Saudis as the key financiers of Al Qaeda and anti-American terrorism. His 2003 Senate testimony included this statement: “the Saudi Wahhabists have bankrolled a series of Islamic institutions in the United States that actively seek to undermine U.S. counterterrorism policy at home and abroad”; he added: “in the United States, the Saudi Wahhabis regularly subsidize the organizations and individuals adhering to the militant ideology espoused by the Muslim Brotherhood and its murderous offshoots Hamas, Palestinian Islamic Jihad and al-Qaeda, all three of which are designated terrorist.”

While the 2009 cable claimed claimed that ”Qatar’s overall level of CT cooperation with the U.S. is considered the worst in the region,” it said this was “out of concern for appearing to be aligned with the U.S. and provoking reprisals.” But the cable also identified other U.S. allies in the region as key conduits for terrorist financing, stating, for instance, that “Al-Qa’ida and other groups continue to exploit Kuwait both as a source of funds and as a key transit point.” It also heavily implicated the Emirates themselves: ”UAE-based donors have provided financial support to a variety of terrorist groups, including al-Qa’ida, the Taliban, LeT and other terrorist groups, including Hamas.”

One of the most critical points illustrated by all of this tawdry influence-peddling is the alignment driving so much of US policy in that region. The key principals of Camstoll have hard-core neoconservative backgrounds. Here they are working hand in hand with neocon journalists to publicly trash a new enemy of Israel, in service of the agenda of Gulf dictators. This is the bizarre neocon/Israel/Gulf-dictator coalition now driving not only U.S. policy but, increasingly, U.S. discourse as well.

Margot Williams and Andrew Fishman contributed additional reporting

Photo: Sheik Khalifa bin Zayed Al Nahyan, president of the United Arab Emirates (Murat Cetinmuhurdar/Turkish Presidency Press Office/AP)

UPDATE [Fri.]: It’s obviously ancillary to the article, but several people have raised valid objections about the claim here that the forces in Libya now being supported by the UAE are accurately characterized as Gadaffi loyalists, arguing that the UAE supported anti-Gadaffi rebels during the NATO intervention and many they now support are still opposed to Gadaffi loyalists. The evidence for the original reference is found in articles such as this one, describing how those UAE-supported factions are fighting with “many pro-Gaddafi prisoners” who have been released. But those raising the question are right that the description is an over-simplification about the groups fighting in Libya who are supported by the UAE. The important point is that Qatar and the UAE are supporting different factions, but it’s more complex than the phrase “supports forces aligned with Ghadaff” suggested.

UPDATE II [Fri.]: Prior to publication of this article, Lake categorically refused to talk about his reporting in response to questions from The Intercept (“I don’t talk about how I do my reporting”)He has now apparently changed his mind, claiming today on Twitter:

I spoke to no camstoll officials for this piece http://www.thedailybeast.com/articles/2014/06/05/u-s-spies-worry-qatar-will-magically-lose-track-of-released-taliban.html … as @ggreenwald implies in his piece.

Lake does not deny the more-than-a-dozen contacts with Camstoll, nor, when asked, would he deny that he spoke with them about Qatari funding of or support for terrorism prior to his article (indeed, he expressly said he is not denying that). Nor has he contested any of the specific claims actually made here. Everyone should review the evidence presented – both here and in Kirkpatrick’s original NYT article – and decide for themselves what it shows.

https://firstlook.org/theintercept/2014/09/25/uae-qatar-camstoll-group/

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