The
battle between the Koch brothers actually began in 1983 however took many years
to actually settle. William Koch, Freddy, and some distant cousins sold their
stock for around $1.3 billion. With the sale of stock in 1983 William got $470
million and Freddy got $345 million. In addition to William and Freddy other
distant relatives got money as well. William, Freddy, and the distant cousins claimed
they were shortchanged $340 million. By this time the company had annual
revenue of $17 billion and profit of $300 million, and 7,000 employees. However,
after Koch paid for their stock fairly quickly William began to question if the
company really had more money than they let on to believe.
Ann
Alspaugh and Holly Farabee inherited tens of millions of dollars in Koch
Industries stock. Alspaugh’s grandfather L.V. Simmons sold his refinery to Fred
Koch after World World II. The stock passed through the family via a family
corporation and trusts that owned oil interests. The Simmon’s family owned
13.7% of Koch Industries and as a result of the 1983 buyout got $300 million.
The stock paid out a low dividend and could only be sold to the company for
what Alspaugh and Farabee felt was a low price. The stock also had estate tax
consequences. If someone died with Koch Industries stock in their estate and if
Koch valued its own stock at a low price the IRS could later come in and say
that the stock price was actually higher then what Koch claims it is (this is
not untypical for the IRS to do either). This happens because Koch Industries is privately owned and not traded on the market. The beneficiaries or inheritors of an
estate would be left with a large estate tax if this occurred.
In
1992 William Koch was busy working on competing in the American Cup for
sailing. He spent $60 million and as a result won. In addition to this he set
up the America Foundation which was a nonprofit corporation that would extend
even after the race. As of 1992, the non-profit had raised $11 million in
contributions. During this time before the trial started William hired Lane
Marketing to help purchase commercials that aired in Wichita, Cape Cod, and
Palm Beach. Charles Koch decided to go with the local firm of Sullivan, Higdon,
and Sink to try to make the company look better.
William
who earned a PhD in chemical engineering at MIT and went to work at Koch
Industries rising from a chemical salesman to vice president of corporate
development. Charles during this time period was chief executive officer. William
however had problems at work. As he moved up he wanted more money and more
power which is ironic because in the trial he was claiming that Charles was
doing the exact same thing. In addition
to this, according to Sterling Varner who was at Koch Industries for 40 years and
worked for Charles Koch claimed that William wasn’t happy running Koch Carbon
(even though he founded it). Varner also believed that no one could trust
William. When Varner was cross examined they asked him if it was true he got
$30 million to $50 million in stock. Varner correctly points out “Excuse me.
Stock I bought”.
William
was not making bad money either. William made more than $1,167,000 in 1978
($747,000 of that in dividends). By 1979 this figure increased 148% to $2.9
million (including $1.9 million in dividends). Then by 1980 William was making
$3.7 million in just dividends and still asking for dividends to be double of what
they were. Part of this money was going to fuel William’s art appetite. Some
years he would purchase 10 to 20 paintings of museum quality art. He stashed 60
pieces in a rented La Jolla, California home. He was also paying to exhibit art
work and paying for the security and transportation which ran between $100,000
and $200,000.
By
1980 Freddy was making $2.4 million a year from Koch stock and he didn’t even
show up to work! Koch Industries in 1980 celebrated $276 million in profits
(their best year thus far). In addition to higher pay, bigger title names, he
wanted $25 million to invest in a computer company or to do whatever else he
wanted. This plan to invest $25 million was rejected in March of 1980 by the
board of directors. William also had some legitimate concerns about the
liquidity of Koch stock and estate planning since the stock was privately owned
and couldn’t be sold in the open market like publicly traded securities. In the fall of
1979 Don Cordes who was an executive for Koch Industries and also legal counsel
for the company met with William, Freddy, along with Marjorie Simmons Gray
(distant relative also suing) to talk about the estate planning concerns they
had about the stock. William had wanted
to make it easier for Koch stockholders to sell their shares however according
to Charles, Koch was already working on doing that and wanted to wait for the
lawyers and investment bankers to work out the details first.
On
July 9, 1980 in a board meeting that lasted four hours Bill sent an 11 page
single space letter to Charles detailing his complaints. By this time William
was one of the seven directors for Koch and was president of Koch Carbon. Then on
November 28, 1980 (one day after Thanksgiving) David received notice by mail
saying that a special meeting would be needed to elect a new board of directors
(essentially William was trying to take over the company). David having spent that Thanksgiving in 1980
with William and Freddy felt betrayed. The family during these couple of tough
years did not always have a good holiday season. In 1979, William Koch verbally
assaulted his mother Mary in a Christmas celebration. William was sitting next
to Mary and just went into attack mode accusing her of being a bad mother and
his problems were because of her. Of course Mary was in tears over this as any
parent would be. As Charles told this story his voice cracked somewhat with
emotion. William also was trying to make
sure he was going to get property and art equal to all of his brothers. Charles
told his brother said he was not going to fight his brother over the property and
that he should leave Mary Koch alone. Charles didn’t even feel comfortable
discussing what to do with her estate because he didn’t feel it was appropriate
for the discussion. Freddy in a letter to Mary Koch felt his trust fund should
be increased but Mary told him that he was already getting adequate amounts. Then
in the 1980 Christmas year after a traumatic year William had sent gifts to
Charles his wife Liz and their children. Charles didn’t believe the family
should accept the gifts so decided to send them back.
William
in his quest for a corporate takeover of Koch Industries was planning on
selling the company to T. Boone Pickens or Carl Icahn who at that time period where
corporate raiders (took over companies). In the trial William had said it would
be foolish if someone if someone came along and offered you twice as much for
your company and you didn’t take it. The value of Koch Industries ranged from
$140 per share to $160 per share according to estimates from Morgan Stanley and
Lehman Brothers. William got the idea of selling since he claims Charles Koch
and Don Cordes were making offers to buy existing Koch stock at high prices. An
offer was made of $140 a share with half being paid in cash and the other half
being paid over a ten year period. When doing a net present value calculation
William felt that the deal really wasn’t that great. William owned 20.7% of
Koch Industries or 2,300,000 shares of common stock. Brothers Charles and David
also owned similar amounts and Freddy owned only 13.7%. Koch was also owned by
the employees, some shareholders, and relatives of shareholders. In June 1983
Charles tried to buy out William and Freddy by offering $200 per share in
addition to an offshore California oil field. William still thought he could
get higher prices from Arab or Japanese investor who owned Koch stock. Freddy
really didn’t get into the finances as he was a screenwriter, producer, and
busy living in New York, Monaco, and Austria. During his testimony Freddy spoke
with a British accent even though he was raised in Wichita, Kansas. He never
worked a day of his life at Koch Industries even after he attended Harvard and
Yale and did some military service in the Navy. When asked about what he did
Freddy said he was involved with charitable activities and worked on the Metropolitan
Opera and Royal Shakespearian Co in New York.
Freddy rejected a $120 a share offer in 1967 from Charles to purchase
his 14.2%. share of the company because his counsel believed the stock was
worth between $360-$480 per share.
By
June 19, 1998 a verdict from the six men and six women jurors had been reached
after spending 11 weeks in court and nearly over 13 years in litigation. The
case was overseen by Judge Sam Crow (who is still serving today). The U.S.
District Court of Topeka jury found that Charles and David Koch did not cheat
William and Freddy out of the $1.3 billion stock sale. The two questions the
jury had to answer were did Koch Industries hide plans to increase production
from one of its refineries, and did the company misrepresent their profitably
by failing to write down certain assets on their financial statements. The jury said there were some omissions
however they were not material enough to affect the price of Koch stock in the
sale. After the verdict Charles called David who was in his office in New York
and told him the good news. Freddy was traveling in Europe and couldn’t be
reached for comment. William wanted to appeal claiming the judge made mistakes.
William Koch who was represented by Fred Barlitt declined to comment as he
claimed he never talks about a case. Koch Industries was represented by
Foulston and Siefkin. Charles and David both wept with tears of joy. David Koch claimed at that moment “To have our
life’s work vindicated…I feel like the happiest guy on earth right now”. The
trial for Charles was not only physically draining but emotionally draining as
well. In his first interview after the trial Charles claimed “What doesn’t kill
me makes me stronger”. While Charles was gone the company he had help build Koch Industries was still able to
operate because Charles had structured the organization to run even if he was not there which goes against William’s claim about his brother “Prince Charles”
being controlling and wanting to make decisions on everything. Charles’s wife
Liz said she woke up every morning feeling queasy and the whole process being
very painful during the trial. What is ironic is that William referred to his brother Charles as
being a dictator and greedy when William was doing the exact same thing.
Shortly
after the summer of 1998 in September of 1999 Charles was diagnosed with prostate
cancer. I am not a physician but perhaps the trial was so draining to Charles
that it might have contributed to this. Charles starting in September 1999
spent two weeks undergoing treatment. Doctors caught the disease in its early
stages. Charles had been tested every 6 months for the disease (brother David
was diagnosed in 1995 with prostate cancer). All the Koch brothers have been
diagnosed with prostate cancer. Luckily prostate cancer is highly curable.
Charles also did not take a leave of absence from work after being diagnosed.
After William heard the news he wanted to make-up with Charles for all the traumatic
years of pain he had caused. William offered to take Charles on a sail and
share several nice bottles of wine in addition to Charles meeting William’s
family of wife and six kids. A spokesperson essentially said that this peace
offer was too little too late.
Sources
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