One of the first major deals that Charles Koch performed that grew Koch Industries dramatically was the acquisition of Great Northern Oil Company. Great Northern Oil Company owned a 36,000 barrel per day refinery known as Pine Bend Refinery that is located near Minnesota. Fred Koch in 1959 purchased a 35% interest for $5 million from Sinclair Oil. In order to purchase the refinery Koch Industries owned 35% and 15% was owned by J Howard Marshall (the one who married Anna Nicole Smith). This 50% interest was placed into a holding company that would later exchange J. Howard's interest for Koch Industries stock. Charles Koch set up the deal this way because if he offered J Howard Marshall Koch Industries stock the transaction would have been taxable to J Howard Marshall. With this combination Koch and Marshall were able to buyout the remainder interest owned by Union Oil for $25 million in 1969. J Howard Marshall would later write in his autobiography "Done in Oil" it would be the best deal he ever did. Also being a Koch Industries shareholder would make J Howard Marshall incredibly wealthy which I blogged about here.
When the Pine Bend refinery started in the 1950's it only had a capacity to refine 25,000 barrels of oil per day. Recently in 2016, the plant had the capacity to process 339,000 barrels of oil per day. The plant has grown in capacity due to serious investments from Koch Industries over the years (Koch Industries routinely invests 90% of their earnings back into the company). Recently in February 2016 it was announced that Koch would invest $750 million to upgrade major equipment and add advanced emission controls into the Pine Bend Refinery Plant.
As part of the Koch vs. Koch lawsuit it was alleged that Koch Industries deceived Bill and Fred Koch as well as other shareholders and cheated them out of more money. There were a total of 25 different claims brought forth. The claims included Koch Industries engaged in racketeering, undervaluing a real estate asset deal, keeping hidden Swiss bank accounts, hiding information about a proposed refinery expansion of Pine Bend Refinery, and accounting practices. 23 of the 25 claims were dismissed. The only claims that went to trial were the Pine Bend Refinery expansion and the accounting practices.
As part of the Koch vs. Koch lawsuit it was alleged that Koch Industries deceived Bill and Fred Koch as well as other shareholders and cheated them out of more money. There were a total of 25 different claims brought forth. The claims included Koch Industries engaged in racketeering, undervaluing a real estate asset deal, keeping hidden Swiss bank accounts, hiding information about a proposed refinery expansion of Pine Bend Refinery, and accounting practices. 23 of the 25 claims were dismissed. The only claims that went to trial were the Pine Bend Refinery expansion and the accounting practices.
One of the allegations was the withholding of information regarding the Pine Bend Refinery expansion plans. Typically refineries are measured by their capacity in barrels of oil per day. Koch Industries took a 100% interest in Pine Bend in 1970. Around this time the Oil and Gas Journal reported that Pine Bend had a capacity of close to 80,000 barrels per day of stream capacity. In 1976 the refinery was able to run a certified capacity of 127,000 barrels per day. In 1977, Bernard Paulson who was president of Koch Refining believed that the refinery could increase the refinery from 127,300 barrels to day to 160,000 barrels per day by making improvements. Bernard in November 1977 proposed to increase the capacity of the plant to 200,000 barrels per day (proposed cost would be $270 million). The board of directors ended up not accepting the proposal since the board felt the plans were too much expansion and grandiose. Nearly every Koch board meeting in the 1970's involved expanding Pine Bend Refinery. William Koch was present at the board of directors meetings and often took copious notes. During the trial when David Koch was testifying he said that the 200,000 barrel goal had been a long term objective that had been talked about for years.
In the early 1980's the Pine Bend refinery would process heavy, high sulfur crude from Canada, Mexico, and other countries. By the fourth quarter of 1978 the plant ran an average of 128,000 barrels per day. In 1979 production of the plant fell to 126,000 barrels Average crude of Pine Bend then decreased in 1980 and 1981. By 1982, the number of barrels increased to 133,000 barrels per day. The next year (1983) production fell to 131,000. By 1984 the average barrels of day increased to 158,000 and then by 1985 they decreased to roughly 152,000. Koch used a computer program that would take the inputs of feed stock prices, expected product, and capacity and calculate which crudes were the most profitable. The historical evidence shows that the capacity of the Pine Bend refinery although increased over time there were some years were production did actually decrease which casts some doubts in terms of Bill Koch and other shareholders not being aware of expansion plans for the Pine Bend refinery.
In the early 1980's the Pine Bend refinery would process heavy, high sulfur crude from Canada, Mexico, and other countries. By the fourth quarter of 1978 the plant ran an average of 128,000 barrels per day. In 1979 production of the plant fell to 126,000 barrels Average crude of Pine Bend then decreased in 1980 and 1981. By 1982, the number of barrels increased to 133,000 barrels per day. The next year (1983) production fell to 131,000. By 1984 the average barrels of day increased to 158,000 and then by 1985 they decreased to roughly 152,000. Koch used a computer program that would take the inputs of feed stock prices, expected product, and capacity and calculate which crudes were the most profitable. The historical evidence shows that the capacity of the Pine Bend refinery although increased over time there were some years were production did actually decrease which casts some doubts in terms of Bill Koch and other shareholders not being aware of expansion plans for the Pine Bend refinery.
The annual stockholders meeting in March 1983 would be the last that Bill Koch would attend before he sold his stock to brothers Charles and David Koch. It was proposed to the board that the budget for Pine Bend in 1983 be $75 million. The $75 million would be used to increased efficiency, save energy, and increase the amount of crude oil that could be handled by the refinery. Any deal at Koch Industries back in the 1980's that were over $1 million would have to be personally approved by Charles Koch. Around this same time in 1983 brothers Bill, Fredrick Koch, along with other shareholders wanted to cash out their Koch Industries stock because of differences in how Koch Industries should have been run. Koch Industries (Charles and David) bought out their brothers and other shareholders for roughly $1.3 billion. William Koch received $470 million and brother Frederick received $345 million (for their 5.5 million shares of Koch Industries) . However, even after the buyout William realized that Koch Industries was quick to pay off the stock that they purchased which lead to the lawsuit.
In the last statement that Bill Koch received Pine Bend showed a profit of $7 million profit (it was expected to earn only $5 million). During this time period Koch Industries was doing well also. Koch Industries in the first quarter of 1983 made $89 million. In 1982 Koch Industries earned $309 million (after-tax) which had been a record year for the company (in 1981 the company earned $273.5 million after-tax).Koch was also pouring plenty of money into maintaining and upgrading the plant. In 1982, the company spent $45 million on the Pine Bend refinery plant ($19 million for repairs and $26 million for capital improvements).
Finally on June 19, 1998 at 9:46 A.M. Judge Sam Crow read the verdict reached by the jury after spending the Koch brothers spent 10 weeks in court, with two days of deliberations (jurors only earned $50 per day (personally I would have done it for free-just to watch the trial), from a lawsuit that started in June 1985. The trial has over 10,000 pages of documents that were shown on overhead projectors and TV screens with 800 exhibits. The jury found Koch Industries not guilty of having a material misrepresentation of facts (including the output of the Pine Bend refinery) during the negotiations. Bill Koch during the trial had run up a legal bill of $200,000 per week (at a cost of about $5,000 per hour).
What is clear is that Pine Bend refinery was steadily increasing their output over the years (this was mostly due to Koch Industries putting tens of millions of dollars in capital back into the plant in addition to finding improvements). It should be pointed out that the output of the Pine Bend refinery fluctuated and in some years did actually decrease. Although, even with these facts people can sue for anything. In fact, as I write this Bill Koch himself is involved in another lawsuit with current company Oxbow Energy from shareholders who invested in his company.
In the last statement that Bill Koch received Pine Bend showed a profit of $7 million profit (it was expected to earn only $5 million). During this time period Koch Industries was doing well also. Koch Industries in the first quarter of 1983 made $89 million. In 1982 Koch Industries earned $309 million (after-tax) which had been a record year for the company (in 1981 the company earned $273.5 million after-tax).Koch was also pouring plenty of money into maintaining and upgrading the plant. In 1982, the company spent $45 million on the Pine Bend refinery plant ($19 million for repairs and $26 million for capital improvements).
Finally on June 19, 1998 at 9:46 A.M. Judge Sam Crow read the verdict reached by the jury after spending the Koch brothers spent 10 weeks in court, with two days of deliberations (jurors only earned $50 per day (personally I would have done it for free-just to watch the trial), from a lawsuit that started in June 1985. The trial has over 10,000 pages of documents that were shown on overhead projectors and TV screens with 800 exhibits. The jury found Koch Industries not guilty of having a material misrepresentation of facts (including the output of the Pine Bend refinery) during the negotiations. Bill Koch during the trial had run up a legal bill of $200,000 per week (at a cost of about $5,000 per hour).
What is clear is that Pine Bend refinery was steadily increasing their output over the years (this was mostly due to Koch Industries putting tens of millions of dollars in capital back into the plant in addition to finding improvements). It should be pointed out that the output of the Pine Bend refinery fluctuated and in some years did actually decrease. Although, even with these facts people can sue for anything. In fact, as I write this Bill Koch himself is involved in another lawsuit with current company Oxbow Energy from shareholders who invested in his company.
