Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (25 page)

Morale at the company plummeted. Employees worried about the fate of Koch Industries, and Charles had done little to assuage those fears. What his employees needed was a pep talk, some reassurance that Koch would navigate this traumatic period, but Charles remained closemouthed about the assorted legal threats facing the company. In 1999, as tensions within the company mounted, Tony Woodlief, the Koch management consultant, poked his head into Charles’s third-floor office. Its built-in bookshelves were lined with the twenty-volume
Oxford English Dictionary
and books by his favorite economic and political thinkers, including Thomas Sowell, Friedrich Hayek, Ludwig von Mises, and Joseph Schumpeter.

When Woodlief first met Charles in 1997, he had been completing his doctorate in political science at the University of Michigan. They were introduced at a conference sponsored by the Institute for Humane Studies, a libertarian organization where Charles had served on the board since the 1960s. The businessman had given a presentation on his management philosophy, which was steeped in libertarian concepts; his goal was to replicate a free-market society within his firm. To Woodlief, then a thirty-year-old academic, Charles’s management system sounded good in theory, but he was skeptical that it could work. Charles liked being challenged on his
views, and he enjoyed debate, so he invited Woodlief to Wichita for a firsthand look at his operation. Woodlief took him up on his offer and left with a job.

With many Koch employees on edge, Woodlief asked his distracted boss for a word. They repaired to the company’s large cafeteria, where Charles usually ate lunch, and sat down with their trays. “I think you ought to have an all-company meeting and just talk to them about the struggles we’re facing and reassure them,” Woodlief said. “People respect you and right now they want to hear from you. They don’t expect you to have all the answers. They just want to know that you know they’re worried about the future of the company. They just want to hear from you.”

Charles thanked Woodlief for his advice, but said he wasn’t going to follow it. There were too many unknowns and open questions. If the company didn’t fully understand the regulatory onslaught it faced, how could he tell his employees that everything was going to be okay?

Charles later realized his mistake. Months later, after some of Koch’s regulatory troubles had begun to clear up, he left an apologetic voice mail for Woodlief: “You were right. I should have talked to them.”

As 1999 drew to a close, Koch Industries faced the prospect of still another headline-grabbing trial. In the space of less than two years, it had been dragged into court three times—first by Bill, Frederick, and the Simmons family, alleging the company duped them on the sale of their Koch Industries holdings; then by the grieving father of Danielle Smalley; and then yet again by Bill Koch, billionaire whistleblower. Now, after more than four years, the Clean Water Act case that Angela O’Connell and her Justice Department colleagues had pursued was poised to go before a jury. The case hinged on the accusation that Koch Industries had fouled the environment by leaking millions of gallons of oil from
its pipelines and storage tanks, and that the company frequently sought to cover up these accidents by masking or minimizing its spills. During the fall of 1999, the case came so close to going to trial that Justice Department attorneys began looking for hotel accommodations. At the last minute, the company entered into a series of tense negotiating sessions with federal prosecutors and lawyers at the Texas Attorney General’s Office, also party to the case.

Shortly after the New Year, the Justice Department and EPA announced that Koch had agreed to pay a $35 million fine, the largest ever levied under the Clean Water Act up to that point. Accusing Koch of “egregious violations,” EPA Administrator Carol Browner said that the landmark fine “sends a strong message that those who try to profit from polluting our environment will pay the price.” Despite the record fine, some of the lawyers working on the case felt Koch Industries got off lightly, especially given what former Texas Deputy Attorney General Linda Eads described as the “willfulness” of its behavior. “I didn’t feel like it was a win. I didn’t,” she said. “I felt like it was a draw. I wasn’t sitting there giving high fives to everybody.”

Koch Industries, with ample help from Bill along the way, had by now developed a reputation as a corporate outlaw—a company that placed profits over safety, stole from oil producers, and flouted government regulations.

In many ways, the company was an extension of Charles, a reflection of his values, beliefs, and persona. His humble, taciturn style was its humble, taciturn style. His rigid free-market philosophy was its rigid free-market philosophy. If the company had taken an antagonistic view toward government regulation, it had flowed from him.

“We should
not
cave in the moment a regulator sets foot on our doorstep,” he once thundered in a call to arms to the business community, penned in 1978 at the height of his libertarian fervor. “Do
not cooperate voluntarily; instead, resist wherever and to whatever extent you legally can. And do so in the name of
justice.
”

But during the recent legal onslaught, Charles had received a wake-up call. The world he lived in was not the libertarian paradise he wanted it to be. “It was a seminal moment in his life, because he finally began to understand the costs of what they now call public sector,” said one Koch veteran. “There’s a cost—a high cost—for not being a world-class company.

“These were learning points that turned the culture around,” he added. “They went on a multi-year crash course to overhaul the company. It was probably one of the most grandiose turnarounds ever.”

In a reversal of the defiant message Charles had once sent to business leaders, his corporate mantra became “10,000% compliance with all laws and regulations.” This meant that he expected 100 percent compliance from 100 percent of his employees. “While business was becoming increasingly regulated, we kept thinking and acting as if we lived in a pure market economy,” Charles acknowledged. “The reality was far different. The laws of economics seemed less and less relevant in a world where the uncertainty of politics had replaced the uncertainty of the marketplace.”

During this period, as the company tried to navigate its thorny relationship with the federal government, especially on environmental matters, it lured away the EPA’s assistant administrator Donald Clay. It also hired Alex Beehler, a top trial attorney in the Justice Department’s Environment and Natural Resources Division—the same section that had aggressively prosecuted the company. Meanwhile, Richard Fink, a Rutgers- and New York University–trained economist who had risen to become one of Charles’s most trusted deputies, led a dramatic reshuffling and integration of the company’s public affairs, government relations, and legal departments into a “public sector” division.

The company also began offloading large swaths of its troublesome pipeline system, eventually downsizing its network from
some 40,000 miles to 4,000. Koch pivoted from some of its core businesses to focus on the far-less-regulated energy and commodities trading markets, competing with the likes of Enron.

“We’ve learned from the nineties we have to be on top of our game and that one of our biggest customers is in fact the government,” said Mark Holden, Koch’s general counsel. “We deal with them every day, so if that’s one of your customers in that sense you need to build relationships with them like you would a commercial enterprise or entity.” He added, “We learned a lot in the nineties, and if we hadn’t, I don’t know what would have happened because the road we were on wasn’t going to be productive.”

By the spring of 2001, a new era was dawning for Koch Industries. It had emerged from the hellfire of scandal and litigation as a more modern and less politically tone deaf company, though with an institutional bunker mentality forged by years of bitter legal warfare. At the same time, there was also a budding armistice in the 20-year feud between the Koch brothers. Despite his courtroom triumph, 2000 had been a tumultuous year for Bill.

Around 11:00 p.m. on July 17, 2000, a Barnstable police car pulled down the driveway at 177 Seapuit River Road and stopped in front of Homeport, Bill’s nine-bedroom Cape Cod colonial-style mansion. White with hunter green shutters, the 8,600-square-foot waterfront home was located on the private island of Oyster Harbors, one of the Cape’s most exclusive communities. It was situated on 1.5 acres and featured a deepwater dock and a gunite pool. On the front lawn sat a handful of curvaceous Botero sculptures, and Bill’s art collection crammed the interior of the home.

Bill had remarried in November 1996. His new wife, the former Angela Gauntt, was nineteen years younger. She hailed from Montgomery, Alabama, though when they met, via a mutual friend, she lived in New Orleans and worked as a fund-raiser for
Tulane University. The couple had been out on only a handful of dates when Bill popped the question. Given the state of his personal life at the time they met, it was hard to imagine that Bill was in the market for marriage. He had just battled to evict his former mistress Catherine de Castelbajac—she of the not-safe-for-work faxes—and he was also expecting a child with Marie Beard, whom Bill had met when she tried out for his all-female America’s Cup team.

After their marriage, Angela added two more children, William Jr. and Robin, to his brood, which now numbered four. But soon their relationship began to unravel, particularly after Bill lost his lawsuit against his brothers over the sale of his Koch Industries stock. “It was something he could not get over—it just ate him up,” Angela said. “After that, everything just took a turn for the worse. He was depressed and despondent.” Bill already had a reputation for swilling copious amounts of pricey French wine—after contracting hepatitis in grad school, he could no longer stomach beer or hard alcohol—and Angela claimed he had developed a drinking problem. “He was not fun to be around when he drank too much,” she said.

Late on the evening of July 17, Angela frantically summoned the Barnstable police, accusing her husband of domestic violence. Wyatt, Bill’s red-haired fourteen-year-old son, was staying with them, and Angela alleged that her enraged husband had threatened “to beat his whole family to death with his belt.” She claimed Bill had also punched her in the stomach. Based on her allegations, which Bill strenuously denied, the police arrested him and charged him with domestic assault and threatening to commit murder.

Angela was granted a restraining order, forcing Bill to live in the guest quarters of their Cape compound and stipulating that he had to refrain from drinking 24 hours before visiting their children. It also included an eyebrow-raising proviso allowing Bill to be in Angela’s proximity only if the couple was entertaining.

After the incident, they attended counseling and tried to reconcile. Then Angela learned that Bill had hired a private investigator to follow her. “It was frightening, and embarrassing,” she said at the time. “At that point, I knew there was no hope of reconciling. I had become the enemy.” She filed for divorce that September. Bill approached the dissolution of their marriage in his customarily pugilistic style. According to Angela’s lawyer, he told his wife, “I’ll litigate you into the ground.” But Angela could play hard ball, too: The pace of their negotiations heated up after she attempted to have court records unsealed in Bill’s divorce from his first wife, Joan Granlund. By November, she dropped a civil suit against Bill and recanted her accusation that he had threatened to kill her and his son Wyatt, though she maintained that an assault had taken place. (Several witnesses, including Wyatt, backed Bill’s account that no physical altercation occurred.) Soon thereafter they entered into a $16 million divorce settlement.

For a time, their acrimonious split made it difficult for Bill to gaze on one of his favorite paintings, Amedeo Modigliani’s sensuous
Reclining Nude
, which hung in his Palm Beach living room nearby a Matisse and a Picasso. “I liked looking at it when I was happily married, right before I would go to bed with my wife,” he told a reporter wistfully a couple weeks after the divorce was finalized. “You can’t tell what she’s feeling. Is she pensive? Is she happy? Bored? Is she looking to get out of there? In a way, this painting combines the sensuality of women and the elegance of their bodies with the mystery of their souls.”

Bill had begun to do some soul-searching of his own. The Koch brothers had entered their sixties. In the time that Bill had spent battling his brothers, Charles’s children had grown up and graduated from college. David had gotten married and started a family of his own. Bill didn’t know their children; they didn’t know his. The brothers had spent a third of their lives—more if you count the explosive fights during their childhood—at one another’s throats.

In October 2000, in the midst of Bill’s messy divorce, the long-running lawsuit among the four Koch brothers reached the end of the road when the Supreme Court declined to hear Bill and Frederick’s last-ditch appeal. A few months earlier, the federal judge who heard Koch Industries’ oil theft case in Tulsa had denied the company’s motion requesting that he overturn the jury verdict. The company eventually settled for $25 million, of which $7.4 million went to Bill and the rest to the federal government. (Koch Industries also paid Bill’s formidable legal bills, estimated at $25 million.)

During the summer of 2000, as their legal travails wound down, Bill initiated a cautious rapprochement with his brothers—conveying, through his lawyers, that he was ready to begin the process of deescalating their feud. The fight between the Koch brothers—at least as far as Bill, David, and Charles were concerned—had always had to do with much more than money.

As negotiations quietly commenced, the most contentious talks had nothing to do with dollar figures, but how the brothers would divide their father’s possessions. “During the settlement discussions,” Bill recalled, “we were dealing with large sums of money but the biggest thing we argued about was who was going to get what painting out of my father’s collection. The most valuable painting he had in there was worth peanuts compared to what we were talking about. It wasn’t the money, it was the emotional stake.” He said at another point, “We ended up in a heated argument, almost fisticuffs, over my father’s art collection.”