Thursday, October 27th, 2011

UPDATED Koch General Counsel Mark Holden Responds to Bloomberg Markets Magazine

Bloomberg’s substandard reporting contains major inaccuracies. They relied heavily on unreliable sources despite our warnings and the documented evidence we gave them that these sources were misrepresenting the facts. In addition, the article grossly distorts the publicly available French court’s rulings. The result misrepresents and maligns an entrepreneurial company that has a strong environmental and safety record, and which has prohibited all trading with Iran, a policy that is stricter than US law.

Here are the facts on the issues raised by Bloomberg, much of which we provided to them but they chose to disregard:

Information from Dishonest Sources

Bloomberg ignored our warnings and relied on flawed information from dishonest sources in researching and reporting its article.

Ludmilla Egorova-Farines and France issues

Bloomberg relies heavily on Ms. Egorova-Farines’ account regarding what she allegedly discovered and what allegedly happened to her. We told Bloomberg Ms. Egorova-Farines was an unreliable witness given her bias against the company. Currently, she is appealing a decision of a French employment tribunal that rejected her claim of wrongful termination and ordered her to pay costs.

The crux of Ms. Egorova-Farines’ story to Bloomberg involves the actions of Leon Mausen, the former General Manager of Koch-Glitsch France, who was discharged by Koch-Glitsch France for his misconduct associated with questionable payments to third parties. When Mr. Mausen was separated from employment for his serious misconduct, he denied any inappropriate conduct on his part, and challenged the company’s termination of his employment before the Employment Tribunal of Arles, France. The Tribunal agreed with the company that Mr. Mausen was terminated for real and serious cause given his participation in, and knowledge of, the underlying non-compliant conduct.

Contrary to what Bloomberg implies, the letter in the Mausen French court proceeding to which Bloomberg refers in its article dealt with Mr. Mausen’s potential personal liability under French law, and did not reference or implicate any other law, including any US law.

A French appellate court reversed the Employment Tribunal’s decision based on a technicality of French law that requires a company to terminate an employee within 60 days of receiving the information upon which the termination decision is made. This context is important because it was Ms. Egorova-Farines’ handling of the matter that potentially compromised the underlying investigation by the company, and also served as the reason the French appellate court reversed its decision on a technicality.

Ms. Egorova-Farines, a former KCTG European compliance employee, had learned of the information concerning Mr. Mausen’s misconduct in May 2008 but, contrary to her obligations, failed to disclose what she knew to others in the company until September 2008 (thus the reason the company did not terminate within 60 days – Ms. Egorova-Farines had not shared the underlying information). Further, during that time period where she concealed information from the company, Ms. Egorova-Farines shared confidential information about the investigation with Mr. Mausen, the individual behind the improper activity being investigated, which was, among other things, a serious breach of duty on Ms. Egorova-Farines’ part. As explained by the French court, Ms. Egorova-Farines ultimately went on a medical leave of absence for physical and mental issues, never returning to work, and then filed a wrongful discharge action against the company, which she lost. In its decision, the French court was very clear about her performance deficiencies during the investigation and otherwise, as well as the company’s justified actions in terminating her employment. The Employment Tribunal of Paris, France noted that the company had treated Ms. Egorova-Farines fairly and provided her chances to perform her job adequately, and ordered her to pay the costs of the matter.

Contrary to what Bloomberg is reporting, the French court was aware of the improper payment issue involving Mr. Mausen and others. The French Court decision describes in great detail that when Ms. Egorova-Farines informed management in the US about alleged improper payments, the US management “sent right away an investigation team on-site.” A copy of an English translation of the French court’s decision, as well as several company affidavits filed in support of its position, can be found HERE and HERE.

The court also noted that the underlying investigation into the French payment issues was directed by lawyers and that Ms. Egorova-Farines was to operate as part of the team. The court found however that Ms. Egorova-Farines “brushed aside” the lawyers and “conducted a parallel investigation” without informing management or the rest of the team. Indeed, the French court found that Ms. Egorova-Farines had secret discussions with Mr. Mausen, which was a breach of her obligations to the company. While we shared this information with Bloomberg, and Bloomberg claims to have the underlying information from both the Mausen and Egorova-Farines employment claims, Bloomberg chose to ignore the factual record and our stated concerns regarding the credibility of these individuals, and instead proceeded to publish its slanted and distorted article.

Handling of France issues

Koch Industries and its affiliated companies are committed to compliance and Koch companies strive to live by their Guiding Principles, including most importantly Principles 1 and 2, which require that all business dealings are conducted lawfully, with integrity, and in compliance with all laws. When a Koch company discovers that it has fallen short of these principles, it fully investigates and addresses the issues to ensure compliance with all laws.

Consistent with this commitment to compliance, in 2008, Koch-Glitsch France, a foreign subsidiary of Koch Chemical Technology Group, conducted a privileged and confidential internal investigation regarding practices of certain of its internal sales force, as well as its third party sales representatives. During that internal investigation, Koch-Glitsch France learned of conduct which it viewed as inconsistent with the company’s Guiding Principles. The company acted firmly and decisively in response to what it learned. As a result, multiple individuals were separated or resigned from employment, third party sales representatives were terminated, and internal controls were reviewed and enhanced to ensure that all company personnel fully complied with Koch’s Guiding Principles.

George Bentu and Germany and Iran Issues

Mr. Bentu is a disgruntled former employee whom Bloomberg refused to identify despite our requests after Bloomberg asked us to respond to allegations raised by an anonymous individual. Mr. Bentu apparently was a source of information for the German Federal Cartel Office (“FCO”). The conduct investigated by the German Federal Cartel Office (“FCO”) was reported to the authorities by former employees of Koch-Glitsch Gmbh who went to work for Montz, a competitor of Koch-Glitsch. Once at Montz, these employees raised these issues for the first time, having not, to our knowledge, raised them before when they worked for Koch-Glitsch. The FCO’s decision addressed certain exchanges of confidential information primarily involving the employees who went to Montz and information they had exchanged with Montz employees. The decision did not find that Koch-Glitsch Gmbh engaged in price fixing. The FCO advised us that this was an unprecedented situation where the employees of the firm who engaged in the exchange of confidential information went to the competitor to whom they exchanged the information and, subsequent to their departure, the FCO investigated the firm, even though all the individuals involved in the underlying conduct now worked for the competitor. Even Bloomberg acknowledged in its article that the FCO found the underlying conduct to constitute a minor infraction.

Mr. Bentu made allegations to Bloomberg that he never brought up while he was employed by Koch. In fact, Mr. Bentu made representations to Koch and to the FCO that are completely inconsistent with what he is now telling Bloomberg.

For example, on March 20, 2007, Bentu wrote a letter to Charles Koch and stated that it was a “privilege” to be a Koch-Glitsch employee. He also wrote that it was “a pleasure to work for a company which sets (a) very high standard and at the same time expects all its employees to act according to the core values and MBM Guiding Principles.” He also indicated that Christoph Ender, then the President of Koch-Glitsch Europe, instructed, “that at no time and for no reason must the application of these Principles compromise our commitment to Principle 1 (Integrity) and Principle 2 (Compliance). . . . Koch employees are expected to report any unethical or illegal activities.” A copy of that letter can be found here.

It is interesting to note that the company, consistent with its Guiding Principles, followed up on the issues raised by Mr. Bentu, which concerned his complaints about his treatment by local management. The person who followed up with Mr. Bentu was none other than Ms. Egorova-Farines, who is discussed above. Ms. Egorova-Farines looked into Mr. Bentu’s concerns that he raised in his letter and found his complaints were “contradictory” and had “insufficient or no substantiation.”  A copy of Ms. Egorova’s report from her investigation into Mr. Bentu’s concerns can be found here.

Further, in sworn testimony before the German FCO, Mr. Bentu said that in his opinion, except for the KG Germany office, where he had worked, that the Koch code of conduct was followed and that “the parent company placed great emphasis on compliance.” At no time, either in his letter to senior management or in his sworn testimony to the FCO, or otherwise, did Mr. Bentu raise the concerns he expressed to Bloomberg, and his sworn statement to the FCO as well as his letter to management contradict what he told Bloomberg. As Ms. Egorova-Farines previously found with respect to his letter to senior management, Mr. Bentu’s statements to Bloomberg are “contradictory” with his prior statements, including one statement made under oath to German authorities. Had Bloomberg advised us that Mr. Bentu was their source for the information, we could have provided them with the above information which may have made their article more balanced. However, Bloomberg obviously was not concerned with providing balance to the article.

It also appears that Mr. Bentu is Bloomberg’s source regarding Iran. Once again, to our knowledge, Mr. Bentu never raised any such issue while he worked for Koch-Glitsch. In any event,during the relevant timeframe covered in the article, U.S. law allowed foreign subsidiaries of U.S. multinational companies to engage in trade involving countries subject to U.S. trade sanctions, including Iran, under certain conditions. With regard to the questions raised by Bloomberg about certain projects involving sales to Iran by Koch-Glitsch, those sales were conducted at the foreign subsidiary level of Koch-Glitsch. Koch-Glitsch had protocols in place that were consistent with applicable U.S. laws allowing such sales at the foreign subsidiary level. This practice was similar to that engaged in by other U.S. multinational corporations which were involved in sales to Iran at the foreign subsidiary level.

Years ago, Koch adopted an approach more restrictive than that required by U.S. law and decided that none of its subsidiaries would engage in trade involving Iran, even where such trade is permissible under U.S. law. That policy continues to exist today.

Here is a recent Bloomberg Business Week article that supports what Koch had communicated to Bloomberg Markets Magazine before they published their reckless article – that U.S. law does not preclude transactions with Iran through foreign subsidiaries.  Thus, Bloomberg Business Week refutes Bloomberg’s Markets and Mr. Bentu’s false assertions that any U.S. laws were broken by Koch.

Sally Barnes-Soliz and Corpus Christi Issues

In November 1995, Koch Petroleum Group made a voluntary disclosure to the government related to its reporting of wastewater monitoring tests. After making this voluntary disclosure, Koch Industries, Koch Petroleum Group and four individuals were prosecuted by EPA and the Department of Justice for alleged violations of Clean Air Act provisions related to benzene. The 97-count complaint was resolved almost six years later with Koch Petroleum Group pleading guilty in April 2001 to a single count related to the wastewater reporting it had voluntarily disclosed in November 1995.

During the five-plus year investigation, KPG discovered that a document the Department of Justice presented to the Grand Jury did not contain critical exculpatory evidence. During a November 27, 1995 meeting with State regulators, KPG told the State regulators that the company was out of compliance and would follow up. This self disclosure of non-compliance is clearly stated in the summary of the meeting that KPG obtained from the State through a Freedom of Information Act request. The last sentence of the meeting summary states: “They will investigate further and return with a follow-up in early February with the (sic) how far and how long they have been out of compliance.” However, in the version of the meeting summary that the Department of Justice presented to the Grand Jury as a basis to bring charges against the company, this critical exculpatory language is clearly absent – the language only says “They will investigate further and return with a follow-up in early February.”

Sally Barnes-Soliz, a so-called whistleblower upon whom the government relied, admitted under oath that prior to approaching the state regulator in April 1996, she was concerned about being fired, had consulted with multiple plaintiff’s lawyers about suing KPG, and had a plan in place to sue the company. After she reported Koch to the state in April 1996 (several months after Koch already self-disclosed the issue to the state), Ms. Barnes-Soliz told a co-worker she did so to “f_k” Koch before Koch could “f__k” her. In addition, she admitted to lying to the Texas Employment Commission in order to receive unemployment benefits after leaving KPG. Excerpts from the deposition and exhibits can be found here.

The government’s case ultimately collapsed after the company finally had an opportunity to challenge the government’s key expert witness in a hearing before the federal judge less than a month before the trial’s start. The government’s expert witness testified that sampling evidence used to prove criminal or civil violations of the BZ NESHAPS regulation, which was at issue in the case, must be collected and analyzed according to strict scientific protocols set forth in EPA’s regulations. However, on cross-examination by a company lawyer (the first time the company and the other defendants had a chance to examine any government witness), the government’s expert witness admitted that the samples he and the government relied upon for the basis of their prosecution of Koch and the other defendants were not taken in a way that was consistent with EPA’s or the BZ NESHAPS regulations’ requirements. The witness admitted that he never visited the Koch facility at issue, that he had no first-hand knowledge how the samples were taken, that the samples Ms. Barnes-Soliz took admittedly did not follow EPA requirements and she did not understand what the regulations required, that the government did not conduct any independent verification of the samples, and that the witness had never before tried to use in court samples similar to the unreliable samples the government was relying upon in its prosecution of Koch and the individual defendants.

The government’s case toppled quickly after that, with the dropping of all the counts against Koch Petroleum Group, Koch Industries, and the four individual defendants. As part of the settlement, the government required the four individuals to agree not to sue the government for malicious prosecution. David Uhlmann, who is quoted by Bloomberg, was ultimately responsible for the government’s overreaching that led to all of these charges being dismissed.

Other Issues Raised in the Article

Minnesota issues

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. In March 1999, Koch Petroleum Group took full responsibility for past underlying discharges and, as part of the settlements, pled guilty to two negligence misdemeanors. These charges involved the discovery and response to an aviation fuel tank leak, part of which later appeared in a wetland adjacent to the Mississippi River, although no fuel reached the river itself.

Conoco civil case

This CERCLA environmental litigation concerned Koch’s long-ago ownership of a portion of the Duncan, Oklahoma refinery from September 1946 until September 1953. Koch sold its interest to what is now Sunoco in September 1953. In 1997, 44 years after Koch owned the refinery, Tosco (now part of ConocoPhillips) sued Koch and four other companies regarding a dispute over what share of the remediation clean-up would be attributable to each of the companies. Koch was found responsible for 15 percent of any such remediation. This matter settled on January 19, 2009. We understand that appropriate remediation is occurring and Koch has met all of its obligations with respect to this matter.

Pipeline explosion in Lively, Texas

In August 1996, there was a pipeline explosion that claimed the lives of two people. Koch Pipeline Company immediately accepted responsibility for the incident, which is the only event of its kind in the company’s 60- plus year history. The thorough review conducted of this pipeline the year before the accident did not uncover any issues that posed a foreseeable threat to public safety. The bacteria-induced corrosion that caused the accident acted more quickly to damage this pipeline than had ever been documented by any industry expert.

Koch’s cooperative efforts to identify the source and cause of this problem so that this knowledge could be shared throughout industry were praised by the National Transportation Safety Board, which conducted a two-year investigation into the incident. Koch Pipeline Company has used the lessons learned from this incident to modify its operating procedures to help avoid any repeat of a similar accident.

KoSa antitrust

Arteva Specialties, a Luxembourg subsidiary of KoSa, unknowingly bought into an ongoing antitrust conspiracy concerning polyester staple when it acquired certain assets from another company. Once Arteva learned of the conspiracy’s existence, it stopped the conduct at issue and cooperated fully with the DOJ. The matter was resolved in October 2002.

Oklahoma oil measurement case

This case, originally filed in 1989 by an individual who had sued the company repeatedly and unsuccessfully in the 1980s, involved oil measurement practices by Koch during the 1970s and 1980s on Federal and Indian lands. Given the imprecision involved with field conditions and hand gauging to measure oil during this time period, we believe that our practices were consistent with industry practice. In fact, the customers, including the producers, pumpers, and royalty owners, who testified at the 1999 trial, said if they ever had any issues with Koch’s measurements, they raised questions and any issues were resolved amicably by agreement. Further, no evidence was introduced that Koch intentionally mismeasured oil on Federal and Indian lands. The Court instructed the jury that in considering the facts, Koch’s customers could not bind the government and it was therefore irrelevant whether Koch’s customers approved of the measurements at the time they were made. After more than a week of deliberations, the jury returned a verdict against Koch. The case settled in 2001.

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