Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (16 page)

By 1982, with negotiations faltering, Bill hired a New York lawyer named Arthur Liman, a high-profile litigator who had served as the chief counsel on the Senate’s Iran-Contra investigation. Bill
realized that the threat of litigation might goose Koch to raise its offer, and Liman’s hiring alone sent a clear signal. Another pressure point was publicity, a powerful motivator for a company that played it very close to the vest. Charles, Bill observed, “was very sensitive to publicity at that time.”

Both sides had agreed to keep the delicate negotiations confidential, and the company had so far managed to keep news of the boardroom acrimony out of the media. Koch Industries did not want to spook its already worried employees or allow its competitors and business partners to smell weakness. But in July 1982, the corporate discord spilled into the press when
Fortune
magazine ran a feature story titled “Family Feud at a Corporate Colossus.” Charles and David had given interviews for the story without mentioning the tense talks under way, but Bill and his allies had violated the family’s vow of
omerta
, anonymously disclosing information about the rift among Koch’s owners.

“Keeping a company with estimated annual revenues of more than $14 billion out of the public eye is a task that one of its principal owners describes as ‘sort of like trying to hide an elephant behind a telephone pole,’ ” the article began. “… But these days the shy elephant is stomping around in a traumatic fit. A family feud has erupted among the four Koch brothers, who own 75% of the company, dividing them into two rival camps. Blood and money, that most volatile of mixtures, makes their fight over the corporation’s future especially bitter.”

Charles, predictably, was horrified by the story, which quoted an anonymous member of the dissident faction—who later turned out to be Bill—saying: “It’s a classic dispute between stockholders who want yield and liquidity and a management that wants power and authority.”

That October, when negotiations had still failed to progress, Bill finally unleashed a suit against Koch Industries and his brothers. He alleged a laundry list of mismanagement, including Charles’s
lavishing of company funds on libertarian causes. Frederick, under intense pressure from their mother to do his part to deescalate the family hostilities, declined to join the lawsuit.

Charles and David retaliated with a $400 million countersuit, claiming that Bill and his supporters had used
Fortune
to defame Charles by portraying him as “no less maliciously creative than the willful J. R. Ewing of the television show ‘Dallas’ in devising ways to control his brothers and the family fortune.”

Through the end of 1982 and into early 1983, the two sides remained far apart on a buyout. In November, Koch had offered $160 (the valuation suggested by Morgan Stanley and Lehman); Bill’s team countered with $240. But as discovery in the lawsuit began to heat up, so, too, did the pace of negotiations.

On May 25, 1983, the dissident shareholders, accompanied by a phalanx of lawyers and investment bankers, convened at the Marriott Hotel near New York’s LaGuardia Airport. Desperate to rid itself of the suit and the problem shareholders, Koch had substantially raised its bid to $200 a share, plus an interest in an oil concession off the coast of Santa Barbara, California.

Bill thought he could still squeeze more out of his brothers. Nevertheless, as he opened the meeting, he stressed that it was “very important for our group to stick together. We came into this fight together, we should go out together.”

Lawyer Arthur Liman, Bill recalled, told the shareholders that Koch Industries “was our heritage and we had to decide whether we wanted to keep our heritage or get away from it and pursue our own endeavors in life and he viewed that as the essence of the decision.… He said this was a good opportunity to get away from Charles, who in his opinion was going to run the company in his own way for his benefit without regard for anybody else.”

A consensus emerged, as the rest of the advisors chimed in:
Take the offer.
The shareholders asked the gaggle of lawyers and bankers to clear the room so they could deliberate. Hopeful of restoring
family peace, Marjorie Simmons Gray, whose close relationship with Mary Koch had suffered because the Koch matriarch blamed her for siding against Charles, urged that they settle. Frederick agreed, telling the group he had better things to do in life than get dragged into a long and nasty lawsuit. When the shareholders took a vote, Bill was the lone holdout.

“I advocated going back at a higher number and then horse trading to around $220,” Bill recalled. “That was the number I was shooting for.” But keeping their coalition together had been a struggle as it was. He likened his role to Dwight Eisenhower’s during World War II: The general had spent most of his time simply holding the Allies together. In the interest of maintaining a united front, Bill reluctantly agreed to accept the deal.

But he wanted it to happen quickly, before Koch could pull the offer or attempt to chisel on the price. The company was equally eager to settle the matter. By the following day, May 26, the company had sent a draft agreement to Liman. “Bullshit,” Bill told his lawyer, “I’m not going to go with their draft.” Bill so thoroughly distrusted Charles by this point that he insisted Liman’s firm draft the agreement. Koch tried to “slip things by the other side” in contracts, Bill told his lawyer.

Over two days in early June, lawyers for both sides completed a marathon of contract negotiations in the midtown Manhattan offices of Liman’s firm, Paul, Weiss, Rifkind, Wharton & Garrison. Near midnight on June 4, 1983, the finalized agreement sat before Charles in the law firm’s large conference room, where Bill was also seated. (David and Frederick were not present.) Under the terms of the deal, Koch would buy out the dissident shareholders for $1.1 billion, of which Bill would receive $470 million and Frederick $330 million. Such was the price of peace at Koch Industries. Charles signed. So did Bill.

The deal completed, Bill stood up from the conference table and smiled. “We’ve got our business affairs separated, and the war
is over,” he told his brother. They were after all relatively young men—Bill was forty-three and Charles forty-seven—with many years ahead of them. “We’re still brothers, and I care about you.” Bill extended his hand. Charles ignored the gesture. He turned and strode briskly out of the conference room, trailed by his lawyers. After he left, Bill crumpled heavily into his chair and buried his face in his hands. Tears were in his eyes.

Closing this acrimonious chapter brought a wave of relief to Koch employees, who had experienced several years of uncertainty about the company’s future. At the 1984 annual stockholders meeting, fifty-six of Koch’s top managers signed onto a symbolic resolution celebrating Charles for navigating the company through the recent tumult. Noting that “1983 saw the conclusion of one of the most traumatic periods in the Company’s history,” it lauded Charles “for the leadership abilities, high principles and strength of character which he displayed not only in leading the Company to its outstanding success over the years but in leading the company through its recent crisis without sacrificing the principles for which he and the Company have stood.”

But the testing of Charles’s mettle had just begun. The long war between the Koch brothers was only starting.

Since the feuding between Mary Koch’s sons had begun, the anniversary of Fred’s death, on November 17, had arrived each year freighted with additional melancholy. She felt his absence most acutely because the battle among their boys, in all likelihood, never would have erupted had he not died young.

Fred would have snuffed out any hint of family unrest; on his watch, a brother-versus-brother legal skirmish was unthinkable. But without his firm hand to keep them in check, his sons ignored their father’s beyond-the-grave admonition to “be kind and generous to one another.”

The feud that had engulfed the clan—making family gatherings impossible and maintaining good relations with each of her four sons an act of emotional contortionism—had wounded Mary deeply. “She was the meat in the middle of the sandwich, and she was getting pounded on both sides,” says one of her closest confidantes during this period.

Alone in the dark, sprawling stone mansion off 13th Street, she lay awake nights trying to figure out how to heal the divisions that were tearing her family apart. Mary saw much of her late husband in Bill and Charles—especially in their bullheadedness; like Fred, they were “made of stubborn Dutch stock that won’t give in.”

The negative publicity (and whispers in Wichita society) that the dispute generated added to Mary’s distress. The 1982
Fortune
article that first lifted the curtain on the Kochs’ private melodrama dealt a particularly heavy blow. It upset her all the more because she had read the story directly after returning to Wichita from a trip to see Bill and his girlfriend Joan in Massachusetts. During her visit, Bill had wined and dined Mary and her friends in Boston, where some of his art collection was on display at the Museum of Fine Arts. And he had even hired a mariachi band to serenade them during a luncheon at his Dover manse. Flipping anxiously through the pages of
Fortune
, Mary saw the family rift become a chasm before her eyes. She blamed Bill for the “distasteful” article, which she considered a sickening act of “character assassination” against Charles.

Mary loved her sons equally—or tried to. Bill was generous, and he could be utterly charming when he chose to be. David was sensible and easygoing, the kind of son a mother didn’t need to worry about, though she did wish he’d give up his bachelor ways and settle down. She was deeply proud of Charles for shouldering the responsibility for his father’s company at such a young age, and for the incredible wealth he had brought to the family. And Frederick—he was an artistic soul just like she was.

Mary had tried to adopt an air of neutrality, but her true allegiance seemed clear enough—it was to Charles and the company he’d built from the patchwork of his father’s holdings. Instead of rebelling, she felt the dissident shareholders should bow down to Charles for what he’d accomplished. Knowing Bill’s temperamental streak and the grudge he had nursed against Charles since boyhood, Mary had a difficult time seeing the strife—at least Bill’s part in it—as anything other than the unsettling continuation of a childhood vendetta. “You have judged Charles in a cruel & jealous manner instead of appreciating the way he has worked to make the company grow & give all of the stockholders more dividends,” she wrote Bill in October 1982. Had he been “more rational” and “less emotional,” Mary continued, Bill “could have accomplished
a great deal” at Koch Industries. She called her son’s decision to file suit against his brothers “unforgivable” and she feared her family would never spend another Christmas together, because “instead of joy & love there would be bitterness & hatred.”

Mary had exerted every ounce of her maternal influence to hasten a settlement, even calling Koch Industries’ general counsel Don Cordes to implore him to speed things along. She wrote Frederick to plead with him to “help me to mend bridges not destroy them.” (Her persistent guilt tripping had kept Frederick from joining Bill’s 1982 lawsuit.) Unable to get through to Bill by other means, she resorted to emotional blackmail. “This conflict is tearing me down & affecting my health,” she wrote him as the feud escalated. “I am a nervous wreck & dissolve in tears when I think or talk about this terrible war going on between my sons.”

“The only thing I want before I die is reconciliation,” she wrote in another letter, signing off: “Please listen to me before I die!”

After the settlement, Mary allowed herself a flicker of hope that family harmony might finally be within reach. “I never was so relieved in my life & I am sure you must be too,” she wrote Frederick shortly after the deal had closed.

To Bill, who Mary learned had continued to stew after the two sides had untangled their business affairs, she wrote: “I trust & pray that you can find some business that will interest you enough to get your teeth in it & get over your brooding & bitterness.” Mary’s siding with Charles and David confirmed what Bill had always felt—that she favored his brothers. Their relationship deteriorated rapidly after Bill filed suit, until mother and son barely communicated.

Bill felt remorse for the toll the rift had taken on his mother. He found her pleas “emotionally wrenching,” he told an interviewer, but he ignored them in his single-minded quest to squeeze every last penny out of his brothers. In June 1983, as lawyers finalized
the stock purchase agreement at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, Bill had beckoned over Bob Howard, a Wichita attorney who represented Koch Industries and the Koch family. “Howard, I want you to do something for me. When you get home please tell Mama I still love her.” Howard dutifully conveyed the message. The gesture “touched” Mary, but there were still raw feelings. “My heart aches over all the past trouble,” she told Bill in a July 1983 letter. But she hoped “in time there can be peace in our family.”

Peace among her sons proved elusive, but there was a brief period of détente. Newly flush with cash, Bill and Frederick busied themselves spending some of their enormous wealth.

Frederick became a voracious collector, hoovering up rare manuscripts, musical scores, and paintings. Though he often deployed third-party agents to keep his role in the purchases anonymous, the frenetic pace of his buying turned heads on the international auction scene. “Almost every day, in London, New York, Paris or Monte Carlo a picture is bought by Mr. Koch or by dealers acting on his behalf,” London’s
Daily Telegraph
reported in the 1980s, noting that he was said to be shelling out £18 million annually on art purchases. “The buying goes on relentlessly. Koch is said by an associate to be ‘unimpressed by cost.’ There’s been nothing quite like it since Pierpont Morgan.”

Frederick’s buying habits mystified the art world not only because of the scale of his spending and the secrecy surrounding his purchases, but because his ravenous collecting seemed to lack a through-line. “As befits a man who has used his wealth to buy himself complete privacy,” the
Telegraph
noted, “the nature of Mr. Koch’s taste remains something of a secret. It is certainly eclectic. He likes Symbolism, the aesthetic movement, the ancient Greek and Roman painters between 1860 and 1910, the ornate and baroque, the male subject.”

One former Sotheby’s employee recalled that Frederick “was known as kind of the vacuum cleaner of Madison Avenue”—where the auction house was then situated. “He bought everything and anything, some of which was really terrific, some of which not so much. He was very interested in Pre-Raphaelite thought, and everything that went along with it, music, poetry, paintings, drawings, sculpture, and so acquired a lot of things from that era. I think pretty much anything that came his way, he bought.”

Frederick also splurged on historic abodes, which he then lovingly restored, often with the help of his architect, Charles Young, who had worked with I. M. Pei. On the French Riviera near Monaco, he scooped up Villa Torre Clementina, its lavish gardens designed to guide visitors, as if passing through the rooms of a home, to the shore of the Mediterranean. Near Salzburg, Frederick acquired Schloss Blühnbach, the palatial hunting lodge of Archduke Franz Ferdinand. To house his massive nineteenth-century art collection, he selected Sutton Place, a sixteenth-century Tudor masterpiece outside London, which had once been owned by John Paul Getty and was infamous as the illicit trysting spot of Henry VIII and Anne Boleyn. In the United States, he purchased Elm Court, a Gothic mansion in western Pennsylvania with a loggia that evoked the architecture of the Ivy League; and just off Manhattan’s Fifth Avenue on East 80th Street, he acquired an ornate, six-floor French Regency–style town house, which had once belonged to one of the daughters of dime store magnate Frank Winfield Woolworth.

The odd thing about his obsession with historic houses is that he rarely stayed in them, even when he visited. He kept an apartment in Monte Carlo, near Villa Torre Clementina. When he visited Elm Court, according to one of his guests, he slept not in the main house but in a smaller residence on the property. He never spent a night at Sutton Place (and under tax rules he technically couldn’t, because he purchased it through a charitable foundation). And
when in New York, he lived in a two-bedroom apartment on Fifth Avenue, a fifteen-minute walk from the large, spectacular town house that he almost never slept in. It was as if he viewed his collection of homes as objects of art, to be appreciated but not sullied by human contact.

Frederick’s life had a hermetic quality to it, but the same could not be said of Bill’s. Feeling “like a kid let out of reform school,” he indulged in his own flamboyant way. Advised by the executive director of the Getty Museum, he binged on expensive art. He rapidly accumulated a series of multimillion-dollar properties, including a Fifth Avenue duplex, and two Cape Cod compounds. In a cavernous, climate-controlled cellar beneath Homeport, one of his Cape estates, he amassed a 30,000-plus-bottle wine collection, including an incredibly rare 150-year vertical of Château Lafite, which
Wine Spectator
would (in 1996) dub the finest in America. Bill took up sailing, a sport that appealed to his analytical mind and love of nature. When a local yacht club rejected his application—Bill had offended the delicate sensibilities of Cape Cod’s blue bloods by noisily choppering to and from the peninsula, among other lapses in decorum—he built his own marina. Though he enjoyed throwing around millions like they were sawbucks, Bill quickly tired of his life of leisure. He’d become the quintessential “country club bum” Fred Koch so despised. “After eating so many gourmet meals and drinking so much good wine, I knew I needed to do something,” he said.

So in late 1983, Bill formed an energy company called Oxbow, the term for a sharp, U-shaped bend in a river. It was a poetic nod to Bill’s own new direction. At Koch Industries, he led the company’s move into coal mining and petroleum coke—a valuable refining by-product. Now he steered Oxbow into the same sector, making him a competitor (albeit a minor one) of his brothers’ company. But he also branched out into geothermal power, real estate, and even bought a stake in
CFO
magazine. The publication, he
liked to point out, was started by Neil Goldhirsh, who had been in business with his brother Bernard, the founder of
Inc
. magazine. Neil had parted ways with Bernard over brotherly disagreements, a scenario Bill could relate to.

Bill was very much his father’s son, a shrewd and innovative businessman, and over the years Oxbow grew into a multimillion-(and later, multibillion-) dollar business. Bill had something to prove—and he was proving it. “The best thing that ever could have happened to me was leaving the company,” he said in the late 1980s. “I didn’t have big mother to protect me. The whole process was very painful, but a lot of good comes out of a lot of bad. When I was working there, my whole image, everything I was doing was all wrapped up in the company.”

But as he tried to move on with his life, Bill remained anchored to the past. Less than a year after the brothers had sealed their drawn-out corporate divorce, Bill commenced an investigation into whether Charles and his allies had cheated the dissident shareholders into selling their shares cheaply. Koch Industries had borrowed more than $800 million to finance the buyout. Bill and his bankers calculated that it would take years for the company to free itself of the debt, but somehow it did so in just two. “How could they have so much cash?” Bill wondered. The buyout should have hobbled the company, but Koch Industries was growing faster than ever.

In June 1985, Bill again filed suit against his brothers and Koch Industries; the Simmons clan joined him. They alleged that Charles and his allies had hidden or misrepresented lucrative assets, including oil and gas concessions in Qatar and a pair of wells in Utah, and had intentionally downplayed the financial prospects of the company’s Minnesota-based refinery, Pine Bend. The plaintiffs soon augmented the complaint to tack on allegations of fraud and racketeering. After remaining on the sidelines of the legal dispute, Frederick, to his mother’s tearful dismay, signed on to the case as well, convinced by his attorney to do so.

The suit alleged that Charles “had mislead [sic] plaintiffs as to the profitability, worth, and future prospects of KII”—Koch Industries Inc.—“by a course of action which included distributing misinformation” and contended Bill, Frederick, and the other dissidents were deceived by “Charles Koch’s actions which suggested that he was irresponsible and that his lack of judgment had and would continue to adversely affect the value, profitability and prospects of KII. Representative of his irresponsible conduct was his fettish [
sic
] with Libertarian causes, which included wasting in excess of $5 million of KII funds on such causes” and “his exposure of KII to potentially large money judgments on account of his disregard of government regulations and laws.” They charged that this had been part of a pattern of fraudulent behavior intended to “encourage plaintiffs and others not supportive of Charles Koch to give up their stock ownership interests in KII and to do so for less than fair value.” (The company denied the allegations. “I don’t think the lawsuit has anything to do with money,” Don Cordes, Koch’s top lawyer, retorted at the time.)