Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (3 page)

Stephen Schwarzman, who was in general less of a political activist than Singer, might have first become involved in the Kochs’ political enterprise out of happenstance. In 2000, he paid $37 million for the palatial triplex that had previously belonged to John D. Rockefeller Jr. at 740 Park Avenue, the same Manhattan co-op building in which David Koch bought an apartment three years later. By the time Obama was elected, Schwarzman had become something of a poster boy for Wall Street excess. As Chrystia Freeland writes in her book
Plutocrats
, the June 21, 2007, initial public offering of stock in Blackstone, his phenomenally successful private equity company, “marked the date when America’s plutocracy had its coming-out party.” By the end of the day, Schwarzman had made $677 million from selling shares, and he retained additional shares then valued at $7.8 billion.

Schwarzman’s stunning payday made a huge and not entirely favorable impression in Washington. Soon after, Democrats began criticizing the carried-interest tax loophole and other accounting gimmicks that helped financiers amass so much wealth.
In the wake of the 2008 market crash, as Obama and the Democrats began talking increasingly about Wall Street reforms, financiers like Schwarzman, Cohen, and Singer who flocked to the Koch seminars had much to lose.

The hedge fund run by another of the Kochs’ major investors, Robert Mercer, an eccentric computer scientist who made a fortune using sophisticated mathematical algorithms to trade stocks, also seemed a possible government target. Democrats in Congress were considering imposing a tax on stock trading, which the firm he co-chaired, Renaissance Technologies, did in massive quantities at computer-driven high frequency. Although those familiar with his thinking maintained that his political activism was separate from his pecuniary interests, Mercer had additional business reasons to be antigovernment. The IRS was investigating whether his firm improperly avoided paying billions of dollars in taxes, a charge the firm denied. Employment laws, too, would prove an embarrassing headache to him;
three domestic servants soon sued him for refusing to pay overtime and maintained that he had docked their wages unfairly for infractions such as failing to replace shampoo bottles from his bathrooms when they were less than one-third full. The tabloid news stories about the case invariably mentioned that Mercer had previously brought a suit of his own, suing a toy-train manufacturer for overbilling him by $2 million for an elaborate electric train set he had installed in his Long Island, New York, mansion. With a pay package of $125 million in 2011, Mercer was ranked by
Forbes
as the sixteenth-highest-paid hedge fund manager that year.

Other financiers active in the Koch group had additional legal problems. Ken Langone, the billionaire co-founder of Home Depot, was enmeshed in a prolonged legal fight over his decision as chairman of the compensation committee of the New York Stock Exchange to pay his friend Dick Grasso, the head of the exchange, $139.5 million.
The sum was so scandalously large that it forced Grasso to resign. Angry at his critics, Langone reportedly felt that “
if it wasn’t for us fat cats and the endowments we fund, every university in the country would be fucked.”

Another Koch seminar goer from the financial sector, Richard Strong, founder of the mutual fund Strong Capital Management, was banned from the financial industry for life in a settlement following an investigation by the former New York attorney general Eliot Spitzer into his improperly timing trades to benefit his friends and family. Strong paid a $60 million fine and publicly apologized. His company paid an additional $115 million in related penalties. But after Strong sold his company’s assets to Wells Fargo, the Associated Press reported that he would be “
an even wealthier man.”

Many participants in the Koch summits were brilliant leaders not only in business but also in tax avoidance. For instance, the Colorado oil and entertainment billionaire Philip Anschutz, a founder of Qwest Communications, whom
Fortune
magazine dubbed America’s “greediest executive” in 2002, was fighting an uphill battle on a tax matter that practically required an accounting degree to explain. Anschutz, a conservative Christian who bankrolled movies with biblical themes, had attempted to avoid paying capital gains taxes in a 2000–2001 transaction by using what are called prepaid variable forward contracts. These contracts allow wealthy shareholders such as Anschutz, whose fortune
Forbes
estimated at $11.8 billion as of 2015, to promise to give shares to investment firms at a later date, in exchange for cash up front. Because the stock does not immediately change hands, capital gains taxes are not paid. According to
The New York Times
, Anschutz raised $375 million in 2000–2001 by promising shares in his oil and natural gas companies through the firm Donaldson, Lufkin & Jenrette.

Eventually, the court sided against Anschutz on something of a technicality. The former
Times
reporter David Cay Johnston wrote that in essence the court had ruled that “
prepaids done slightly differently than the Anschutz transactions will survive. But why should they?” he asked. “Why should anyone get to enjoy cash from gains now without paying taxes?” Johnston concluded, “The awful truth is that America has two income tax systems, separate and unequal. One system is for the superrich, like Anschutz and his wife, Nancy, who are allowed to delay and avoid taxes on investment gains, among other tax tricks. The other system is for the less than fabulously wealthy.”

Some donor families had clearly committed tax crimes. Richard DeVos, co-founder of Amway, the Michigan-based worldwide multilevel marketing empire, had pleaded guilty to a criminal scheme in which he had defrauded the Canadian government of $22 million in customs duties in 1982. DeVos later claimed it had been a misunderstanding, but the record showed the company had engaged in an elaborate, deliberate hoax in an effort to hoodwink Canadian authorities. He and his co-founder, Jay Van Andel, were forced to pay a $20 million fine. The fine didn’t make much of a dent in DeVos’s fortune, which
Forbes
estimated at $5.7 billion.
By 2009, DeVos’s son Dick and daughter-in-law Betsy were major donors on the Koch list and facing a record $5.2 million civil fine of their own for violating Ohio’s campaign-finance laws.

Energy magnates were also heavily represented in the Koch network. Many of this group too had significant government regulatory and environmental issues. The “extractive” industries, oil, gas, and mining, tend to be run by some of the most outspoken opponents of government regulation in the country, yet all rely considerably on government permits, regulations, and tax laws to aid their profits and frequently to give them access to public lands. Executives from at least twelve oil and gas companies, in addition to the Kochs, were participants in the group. Collectively, they had a huge interest in staving off any government action on climate change and weakening environmental safeguards. One prominent member of this group was Corbin Robertson Jr., whose family had built a billion-dollar oil company, Quintana Resources Capital. Robertson had bet big on coal—so big he reportedly owned what
Forbes
called the “
largest private hoard in the nation—21 billion tons of reserves.” Investigative reports linked Robertson to several political front groups fighting efforts by the Environmental Protection Agency (EPA) to control pollution emitted by coal-burning utilities. Almost comically, one such front group was called Plants Need CO
₂
.

Another coal magnate active in the Kochs’ donor network was Richard Gilliam, head of the Virginia mining concern Cumberland Resources. The dire stakes surrounding the sinking coal industry’s regulatory fights were evident in the 2010 sale of Cumberland for nearly $1 billion to Massey Energy, just weeks before a tragic explosion in Massey’s Upper Big Branch mine killed twenty-nine miners, becoming the worst coal mine disaster in forty years. A government investigation into Massey found it negligent on multiple safety fronts, and a federal grand jury indicted its CEO, Don Blankenship, for conspiring to violate and impede federal mine safety standards, making him the first coal baron to face criminal charges.
Later, Massey was bought for $7.1 billion by Alpha Natural Resources, whose CEO, Kevin Crutchfield, was yet another member of the Koch network.

Several spectacularly successful leaders of hydraulic fracturing, who had their own set of government grievances, were also on the Kochs’ list. The revolutionary method of extracting gas from shale revived the American energy business but alarmed environmentalists. Among the “frackers” in the group were J. Larry Nichols, co-founder of the huge Oklahoma-based concern Devon Energy, and
Harold Hamm, whose company, Continental Resources, was the biggest operator in North Dakota’s booming Bakken Shale. As Hamm, a sharecropper’s son, took his place as the thirty-seventh-richest person in America with a fortune that
Forbes
estimated at $8.2 billion as of 2015, and campaigned to preserve tax loopholes for oil producers, his company gained notoriety for a growing record of environmental and workplace safety violations.

One shared characteristic of many of the donors in the Kochs’ network was private ownership of their businesses, placing them in a low-profile category that
Fortune
once dubbed “the invisible rich.” Private ownership gave these magnates far more managerial latitude and limited public disclosures, shielding them from stockholder scrutiny. Many of the donors had nonetheless attracted unwanted legal scrutiny by the government.

It was, in fact, striking how many members of the Koch network had serious past or ongoing legal problems. Sheldon Adelson, founding chairman and chief executive of the Las Vegas Sands Corporation, the world’s largest gambling company, whose fortune
Forbes
estimated at $31.4 billion, was facing a bribery investigation by the Justice Department into whether his company had violated the Foreign Corrupt Practices Act in securing licenses to operate casinos in Macao.

The Kochs had looming worries about the Foreign Corrupt Practices Act, too. As Bloomberg News later revealed, the company’s record of illicit payments in Algeria, Egypt, India, Morocco, Nigeria, and Saudi Arabia was spilling out in a French court.
Further, in the summer of 2008, just a few months before Obama was elected, federal officials had questioned the company about sales to Iran, in violation of the U.S. trade ban against the state for sponsoring terrorism.

Meanwhile, another donor, Oliver Grace Jr., a relation of the family that founded the William R. Grace Company, was at the center of a stock-backdating scandal that resulted in his being ousted from the board of Take-Two, the company behind the ultraviolent
Grand Theft Auto
video games.

The legal problems of Richard Farmer, the chairman of the Cincinnati-based Cintas Corporation, the nation’s largest uniform supply company, included an employee’s gruesome death. Just before the new and presumably less business-friendly Obama administration took office, Cintas reached a record $2.76 million settlement with the Occupational Safety and Health Administration (OSHA) in six safety citations including one involving a worker who had burned to death in an industrial dryer. The employee, a Hispanic immigrant, had become caught on a conveyor belt leading into the heat source. Prior to the fatal accident, OSHA had cited Cintas for over 170 safety violations since 2003, including 70 that regulators warned could cause “death or serious physical harm.” As Obama took office, the company was still fighting against paying a damage claim to the employee’s widow and arguing that his death had been his own fault. Farmer, too, ranked among the Koch group’s billionaire donors, with a fortune that
Forbes
estimated at $2 billion.

Given the participants’ unanimous espousal of antigovernment, free-market self-reliance, the network also included a surprising number of major government contractors, such as Stephen Bechtel Jr., whose personal fortune
Forbes
estimated at $2.8 billion. Bechtel was a director and retired chairman of the huge and internationally powerful engineering firm Bechtel Corporation, founded by his grandfather, run by his father, and, after he retired, by his son and grandson.
Paternalistic and family-owned, Bechtel was the sixth-largest private company in the country, and it owed almost its entire existence to government patronage. It had built the Hoover Dam, among other spectacular public projects, and had storied access to the innermost national security circles. Between 2000 and 2009 alone, it had received $39.2 billion in U.S. government contracts. This included $680 million to rebuild Iraq following the U.S. invasion.

Like so many of the other companies owned by the Koch donors, Bechtel had government legal problems. In 2007, a report by the special inspector general for Iraq reconstruction accused Bechtel of shoddy work. And in 2008, the company paid a $352 million fine to settle unrelated charges of substandard work in Boston’s notorious “Big Dig” tunnel project. The company was facing congressional reproach too for cost overruns in the multibillion-dollar cleanup of the Hanford nuclear facility in Washington State.

Antagonism toward the government ran so high within the Koch network that one donor angrily objected to federal interference not just in his business but on behalf of his own safety as well. Thomas Stewart, who built his father’s Seattle-based food business into the behemoth Services Group of America, reportedly loved flying in his helicopter and corporate jet.
But when a former company pilot refused to take his aeronautic advice because it violated Federal Aviation Administration regulations, according to an interview with the pilot in the
Seattle Post-Intelligencer
, Stewart “rose out of his chair, and screamed, ‘I can do any fucking thing I want!’ ”

T
he highlight of the Koch summit in 2009 was an uninhibited debate about what conservatives should do next in the face of their electoral defeat. As the donors and other guests dined in the hotel’s banquet room, like Roman senators attending a gladiator duel in the Forum, they watched a passionate argument unfold that encapsulated the stark choice ahead. Sitting on one side of a stage, facing the participants, was the Texas senator John Cornyn, the head of the National Republican Senatorial Committee and a former justice on the Texas Supreme Court. Tall, with a high pink forehead, puffy cotton-white hair, and a taste for dark pin-striped suits, his image conveyed his role as a pillar of the establishment wing of the Republican Party. Cornyn was rated as the second most conservative Republican in the Senate, according to the nonpartisan
National Journal
. But he also was, as one former aide put it, “very much a constitutionalist” who believed it was occasionally necessary in politics to compromise.