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Sons of Wichita

How The Koch Brothers Became America's Most Powerful Family

Daniel Schulman

Fred Koch had 4 sons - eldest, Frederick, became a patron of the arts, never married. Second son, Charles, was moulded from an early age as Fred's successor. Twins David and Bill - David became Charles local lieutenant; Bill soured of Charles management and became a collector of fine wines, a playboy with a history of tangled romantic messes, and as the winner of 1992 America's Cup.

Fred was a libertarian, a philosophy that advocates maximum personal and corporate freedom, and minimum government. Fred made his initial fortune helping Soviets rebuild their oil businesses between the wars. But he was horrified by the arbitrary use of power by its leaders, and the poverty of its people. He saw communist influences everywhere in America, and helped found the John Birch Society to counter this. Birchers opposed the UN and the Civil Rights Act, believing it was a communist plot to divide and conquer America. The group's extreme rhetoric and charges of treason directed against politicians, frightened not just liberals, but the Right as well. It's leader, Robert Welch, called President Eisenhower a "dedicated, conscious agent of the Communist conspiracy".

Charles was indoctrinated from birth in his father's hard-line conservative politics. By his late twenties he was evangelicising an extreme ideology of a government whose sole role was to rein in those who wanted to interfere with the laws of supply and demand.

Charles has spent decades remaking the political landscape of the US and mainstreaming his libertarian views. He and David founded academies, think tanks and political organizations. They helped provide the financing and leadership that allowed the Tea Party to blossom into a force within the GOP.

Early problem that libertarianism covered a range of ideas - a combustible mix of free thinkers, from sober academics to black-flag waving anarchists. from businessmen to survivalists.

Funded the 1977 foundation of Cato Institute think tank, but incorporated under Kansas law with shareholders, which allowed Charles to retain control. In 1981 he used that to boot out one of the founders, Murray Rothbard, who criticised Charles control of policy.

1978 essay Charles railed against hypocrisy of business wanting welfare for themselves while attacking welfare for the poor. "Our critics rightfully claim that we want socialism only for the rich." And he attacked those who preached "freedom in voluntary economic activities but simultaneously calling for the full force of the law against voluntary sexual or other personal activities."

Family fell out over money. Bill and Frederick objected to the fact that they were rich on paper but had no money, because Koch reinvested everything (apart from the money Charles put into his libertarian causes, which the brothers also objected to). After acrimonious attempted board coup d'etats and court cases, in 1983 Bill and Frederick and other dissident shareholders sold their shares to Koch Brothers. Bill got $470 million and Frederick $330 million.

It was only a temporary truce because Bill quickly decided that they had been conned into selling their shares too cheaply. The company repaid the billion dollar loan to finance the buyout in two years. Where did all that cash come from? It didn't tally with the cash flow claimed when the shares were being valued. So in 1985, Bill and Frederick and cousins sued Charles and David for fraud. In 1988 they sued for control over the charitable foundation their father had created. The first case eventually came to trial in 1998, with the charges being dismissed.

Frederick began spending on a gigantic scale, buying both works of art and old mansions, which were then expensively renovated. (But he rarely ever stayed in them).

Bill took up wine, amassing a 30,000 bottle collection including an incredibly rare 150-year 'vertical' of Chateau Lafite. Then in 1983, conscious that he was becoming the 'country club bum' his father believed he would, Bill formed an energy company called Oxbow. He grew it into a multi-billion dollar business.

During America's Cup campaign, Bill took industrial espionage to new heights, spending over $2 million on spy campaigns and counter-intelligence. They had speedboats, helicopters and divers tracking opposition yachts, and when his tactician quit, fed up with Bill's micro-management, he had private detectives following him for months to check whether he was spilling any secrets.

Senate investigation 1998 found that Koch Industries had engaged in systematic theft by under-reporting oil pumped from wells on native American lands. They concluded that Koch had stolen at least $31 million worth in the last three years alone. But the government didn't take Koch to court. So Bill did, using the whistleblower False Claims Act which allowed a private citizen to sue a company on the government's behalf. Charged that Koch had taken at least $230 million in "overages' between 1980 and 1989.

Bill finally had a big win. Koch Ind was found guilty of 24,587 false claims during the late 1980s, resulting in $553,504 in underpayment of royalties owed to the government and tribes. That underpayment will automatically be doubled in some cases and tripled in others for a total of about $1.4 million in compensatory damages, said Bill Koch's spokesman. The judge is required by law to levy penalties of $2,000 to $10,000 for each false claim. The federal government will receive 75 percent to 80 percent of the overall award; the remainder will go to Bill Koch and his business partner, Bill Presley, who carried the suit on the government's behalf. The company also will have to pay Bill Koch's legal fees, his chief lawyer, Roy Bell said. Bell estimated the fees to be about $20 million to $25 million.

Massive leak from a butane gas pipeline - 2 teens drove into a pool of the clear gas which then exploded, incinerating them. Turned out that Koch Ind had reinstated an obsolete pipeline that they knew had corrosion problems, because they could make an extra $8 million a year. Investigators found that Charles had instituted a policy whereby each bit of a business had to show a profit each year, and each year that profit had to increase. So when someone wanted to do repairs on a hazard, they were told that money spent on that would be better spent on productive investments, and even if there was a lawsuit, they could pay it off and still come out ahead. In butane case lawsuit, lawyer asked the jury to send a message to Koch by awarding damages of $100 million. Instead they awarded $296 million.

Then in 1999, Koch was fined $35 million for hiding environmental damage from leaking pipelines.

Koch had now established a reputation as a corporate outlaw - a company that put profits over safety, stole from oil producers, and flouted government regulations.

It was a wake-up call for Charles, who now recognized that he wasn't doing business in the libertarian paradise he hoped for. Immediately began a crash campaign to rehabilitate company. Hired government officials from EPA and Justice Dept, and offloaded it's troublesome pipeline business.

"Charles is so tough a negotiator that in a 50-50 he keeps the hyphen."

2012 spent hundreds of millions to take down Obama and wrest control of the Senate from the Democrats. But all their donations came with control - "Nobody works with them; you work for them." The joke was that Obama's organization was operating in a freewheeling entrepreneurial way, with an agenda to increase the state. But Koch's outfits, claiming to want less government and more diversified power, were coming in with centralized power, command and control.

At the same time a crisis brewing at Cato. The Koch brothers wanted the Institute to do more to advance their political agenda in the election, and they wanted to get rid of Ed Crane, the long-time leader. They threatened to withhold their money if they didn't get their way. Most of the scholars who worked at Cato were big fans of the Koch brothers, but they were incensed at their attempt to take direct control. Already vilified by the Left, the Kochs hadn't expected to be attacked by the Right as well.

Then Obama launched their offensive. They were concerned that the Koch's huge ad spend would say the undecided. But testing showed that viewers disregarded the TV propaganda if they knew that the Americans For Prosperity group running the ads was financed by " secretive oil billionaires". They didn't need to refute the ads.

Nov 6 Obama won easily. The Dems increased numbers in the House, and kept control of the Senate. The Kochs had pulled out all stops to usher in a new conservative era, and they had nothing to show for it. They had taken a high-profile stand, accepting the scorn and hatred that came with it. But in the end they had paid the price without reaping any reward. They hadn't changed the country, they had just changed the way people looked at them and their company, and not for the better.

Conclusions: Bill has a saying - "Before you embark on a journey of revenge, dig two graves", yet he has spent most of last 30 years embroiled in lawsuits with his brothers and with people he believes have cheated him (mainly people who have sold him wine, and guys who've worked for him).

Charles has arguably done more than anyone else to promote free-market economics. By mainstreaming libertarianism, he has helped change the way people think. Without his money and vision, America would be a different place.

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