Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (7 page)

At the Freedom School, Charles became particularly enamored of the work of two laissez-faire economists, the Austrian theorist Ludwig von Mises and his star pupil, Friedrich Hayek, an Austrian exile, who visited the Freedom School. Hayek’s book
The Road to Serfdom
had become an improbable best seller in 1944, after
Reader’s Digest
published a condensed version. It offered a withering critique of “collectivism” and argued that centralized government planning, in which liberals were then engaged, would lead, inexorably, to dictatorship. In many respects, Hayek was a throwback, romanticizing a lost golden age of idealized unfettered capitalism that arguably never existed for much of the population. But Hayek’s views were more nuanced than many American adherents understood.
As Angus Burgin describes in
The Great Persuasion
, many reactionary Americans knew only the distorted translation of Hayek’s work that had appeared in
Reader’s Digest
. The conservative publication omitted Hayek’s politically inconvenient support for a minimum standard of living for the poor, environmental and workplace safety regulations, and price controls to prevent monopolies from taking undue profits.

Hayek’s ideas arrived in America during the post-Depression years, when conservative businessmen were scrambling to salvage the credibility of the laissez-faire ideology that had been popular before the 1929 market crash. Since then, Keynesian economics had taken its place. Hayek’s genius was to recast the discredited ideology in an appealing new way. As Kim Phillips-Fein writes in her book
Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan
, rather than describing the free market as just an economic model,
Hayek touted it as the key to all human freedom. He vilified government as coercive, and glorified capitalists as standard-bearers for liberty. Naturally, his ideas appealed to American businessmen like Charles Koch and the other backers of the Freedom School, whose self-interest Hayek now cast as beneficial to all of society.

Charles’s funding of the Freedom School was his first step toward what would become a lifelong, tax-deductible sponsorship of libertarianism in America. His hope was to use his wealth to inject his fringe views into the mainstream by turning the Freedom School into an accredited graduate school and then a four-year undergraduate program specializing in libertarian philosophy, to be called Rampart College. A 1966 brochure features a photograph of LeFevre with Charles, shovel in hand, breaking ground for the new institution. Martin was hired to head Rampart’s history department. But, as Ames recounts, the venture soon fell victim to mismanagement, leaving a trail of disgruntled backers. Eventually, the school moved to the South, where for a number of years it was sustained by the anti-union textile tycoon Roger Milliken.
By the time LeFevre died in 1986, the Kochs had largely distanced themselves from him, perhaps sensing that he was a political liability. But Charles wrote a warm letter to LeFevre in 1973. He also gave a speech in the 1990s crediting the Freedom School with profoundly influencing him. It was, he said, “where I began developing a passionate commitment to liberty as the form of social organization most in harmony with reality and man’s nature, because it’s where I was first exposed in-depth to thinkers such as Mises and Hayek.” He added, “In short, market principles have changed my life and guide everything I do.”

A
s Charles grew increasingly ideologically driven, his brothers David and Bill, as he had, earned engineering degrees at their father’s alma mater, MIT. In contrast, Frederick, who no longer went by the name Freddie, attended Harvard and later, after serving in the U.S. Navy, studied playwriting at the Yale School of Drama. He evinced no interest in joining the family company, preferring to write and produce plays and to collect art, antiques, antiquarian books, and spectacularly lavish historic houses.

The private life of the younger Frederick, who remained single, became the focus of a vicious blackmail attempt by the other brothers, according to a sworn deposition given by Bill Koch in 1982. In his deposition, Bill described an emotionally wrenching confrontation in the mid-1960s in which he, Charles, and David tried to force their older brother Frederick, who they believed was gay, to relinquish his claim to a share of the family company, or else they threatened to expose his private life to their father.

According to Bill’s account, the brothers’ blackmail scheme began after Charles and a friend talked the manager of the Greenwich Village building in which Frederick lived into letting them into his apartment without his permission when he was not home. Evidently, once inside, they snooped around and discovered personal information that they regarded as compromising. Frederick returned to find the uninvited twosome in his apartment. Soon after, according to Bill’s deposition, Charles called his younger brothers to discuss whether Frederick should be allowed to continue as an officer of the family company. Bill admitted in cross-examination that he, along with his brothers, had regarded the situation as potentially embarrassing to the family enterprise, and so they had entrusted Charles to work out a plan to confront Frederick. According to the deposition, Charles then arranged a meeting in Boston of the directors of Koch Engineering, the part of the enterprise that the four boys had inherited together by this point and whose board they formed. In reality, as Bill described it, the meeting was a trap. Instead of addressing corporate business, it was a kangaroo court aimed at putting Frederick’s personal life on trial. Chairs were arranged so that Frederick was on one side, facing his three brothers. According to the deposition, Charles then led an inquisition in which he accused Frederick of being gay and argued that his behavior was inappropriate for the family company. If Frederick refused to turn over his shares to his brothers, he was told, they would expose him to their father. If their father learned, they warned, it would likely impair his fragile health and also result in Frederick’s disinheritance.

The subject of Frederick’s private life had never been openly discussed in the family. Mary Koch referred to her eldest son, with whom she was close, as “artistic,” and the senior Fred Koch evidently avoided the subject. One family member says homosexuality was so taboo in the family during those years, “it would have meant excommunication.”

According to Bill’s deposition, Frederick tried to defend himself in the face of his brothers’ accusations, arguing that he had a right to speak. But Charles cut him off, telling him to “shut up,” insisting that he had no say in the matter. At that point, Frederick stood up, said he wanted no more of the discussion, and walked out. Bill swore that he had tried to intercede on Frederick’s behalf in the end, feeling bad for him. Because of this, he claimed, Charles had angrily reprimanded him after Frederick left, saying the three brothers had to stand together. Under cross-examination Bill recounted that afterward he had apologized to Frederick, who had thanked him for trying to defend him, however belatedly. The subject, though, remained almost too painful to talk about.

The full story of this confrontation never surfaced because Bill’s deposition is sealed. But in 1997
Fortune
carried a fleeting reference to “a
homosexual blackmail attempt by Charles against Freddie to get his stock at a cheap price.” The magazine noted that Charles “vigorously denied” it. Years later, Frederick also briefly alluded to it, telling the biographer Daniel Schulman that
“Charles’ ‘homosexual blackmail’ to get control of my shares did not succeed for the simple reason that I am not homosexual.” For reasons that remain disputed, Frederick’s inheritance was nonetheless handled differently than that of the other boys. He took more money up front, and was left out of a final distribution.

In the midst of this filial rancor, in 1967, Fred Koch died of a heart attack. Charles, then thirty-two years old, became chairman and CEO of the family business, which the sons renamed Koch Industries, in honor of their father. At the time, the company’s principal business was refining oil, operating pipelines, and cattle ranching. Its annual revenues were estimated at $177 million, making it a substantial company but slight in comparison with the behemoth it would become.

Fred Koch’s fears of confiscatory taxes turned out to be overblown. When he died, he was described as the
wealthiest man in Kansas, and his will made his sons extraordinarily rich. Charles Koch has often lauded the virtuous habits it takes to succeed, publishing a book on the subject in 2007 called
The Science of Success
. He has been less forthcoming about his inheritance. His brother David, in contrast, has made less pretense of being self-made. He joked about his good fortune in a 2003 speech to alumni at Deerfield Academy, the Massachusetts prep school from which he graduated and where, after pledging $25 million, he was made the school’s sole “lifetime trustee.” He said, “You might ask: How does David Koch happen to have the wealth to be so generous? Well, let me tell you a story. It all started when I was a little boy. One day, my father gave me an apple. I soon sold it for five dollars and bought two apples and sold them for ten. Then I bought four apples and sold them for twenty. Well, this went on day after day, week after week, month after month, year after year, until my father died and left me three hundred million dollars!”

Fred Koch also left his sons the building blocks with which they could construct one of the most lucrative corporate empires in the world. The crown jewel, according to one former Koch Industries insider, was the Pine Bend Refinery, then called the Great Northern Oil Company, in Rosemount, Minnesota, not far from Minneapolis. In 1959, Fred Koch bought a one-third interest in the concern.

In 1969, two years after Charles Koch took the company’s helm,
Koch Industries acquired the majority share in the refinery. Charles later described the purchase as “one of the most significant events in the evolution of our company.”

Pine Bend was a gold mine because it was uniquely well situated geographically to buy inexpensive, heavy, “garbage” crude oil from Canada. After refining the cheap muck, the company could sell it at the same price as other gasoline. Because the heavy crude oil was so cheap, Pine Bend’s profit margin was superior to that of most other refineries. And because of a host of environmental regulations, it became increasingly difficult for rivals to build new refineries in the area to compete.

By 2015, Pine Bend was processing some 350,000 barrels of Canadian crude a day, and according to David Sassoon of the Reuters-affiliated
InsideClimate News
, Koch Industries was the world’s largest exporter of oil out of Canada. In 2012, he wrote, “
This single Koch refinery is now responsible for an estimated 25 percent of the 1.2 million barrels of oil the U.S. imports each day from Canada’s tar sands territories.” The Kochs’ good fortune, however, was the globe’s misfortune, because crude oil derived from Canada’s dirty tar sands requires far greater amounts of energy to produce and so is especially harmful to the environment.

In 1970, a year after Koch Industries completed the Pine Bend deal, the twins joined their elder brother at Koch Industries, with David working out of New York and Bill near Boston. Charles characteristically assumed control, and it was not long before the long-standing sibling rivalries flared anew. Bill, according to court records, felt slighted and resented Charles’s insistence on plowing almost all of the earnings back into the company, skimping on pay for his brothers. “
Here I am one of the wealthiest men in America and I had to borrow money to buy a house,” he complained. A political independent, Bill also complained that “Charles was giving as much to the Libertarians as he was paying out in dividends. Pretty soon we would get the reputation that the company and the Kochs were crazy.”

In 1980, Bill, with assistance from Fred, attempted to wrest control of the company from Charles, who ran it with “
an iron hand,” according to Bruce Bartlett, a former associate. The attempted coup fizzled when Charles and David caught on and swung the board their way and, in retaliation, fired Bill.

Lawsuits were filed, with Bill and Frederick on one side and Charles and David on the other, re-creating the sibling rivalries of their childhood.
In 1983, Charles and David bought out their brothers’ shares in the company for about $1.1 billion. The settlement reportedly left Charles and David owning over 80 percent of Koch Industries’ stock, evenly split between the two of them. But the fraternal litigation continued for seventeen more years. Among other accusations, Bill and Frederick alleged that Charles and David had cheated them by undervaluing the company. The Pine Bend Refinery in particular became the focus of contention, with Bill and Frederick arguing that Charles and David had hidden its true worth from them—an accusation Charles and David denied. As the acrimony built, the brothers hired rival legal teams and rival private investigators, who reportedly literally rummaged through the family garbage of the opposing brothers.

In 1990, the brothers walked past one another with stony expressions at their mother’s funeral. Frederick, however, was absent. A confidant claimed later that Charles, who lived in Wichita, where their mother had died, hadn’t given him early enough notice about the funeral arrangements for him to be able to attend. There had been an ice storm in Chicago, which complicated his travel arrangements. In the end, Frederick was only able to arrive in Kansas in time to attend a reception after the service. “He was heartbroken,” the confidant said.

Bill, too, nearly missed the funeral. He was given such short notice he had to charter a private plane to make it in time and then was seated not with the immediate family but with cousins. In addition, both he and Frederick believed they were excluded from a private memorial at their father’s ranch, arranged and attended by Charles and David.

Then, when Mary Koch’s will was opened, it included a provision denying any inheritance from her $10 million estate to any son who was engaged in litigation against any other within six weeks of her death. Frederick and Bill, who were in the midst of suing their other two brothers, suspected their mother, who had suffered from dementia, had been unduly influenced during her fading days into adding this provision to her will. Again they sued, but lost, appealed, and lost again.