Keeping up With the Sarofim Family: Divorce, Drugs, and Lawsuits (Part II)

I covered Fayez Sarofim as an billionaire investor in this prior post. Fayez first married Luisa in 1962 (only 4 years after he started his company). However Louisa and Fayez were divorced on June 25, 1990. The cost of the divorce was $250 million the largest in Texas at the time. With this wife Fayez had a son named Christopher (who now works at the firm and had his own troubles).  Daughter Allison was born in 1968. She recently was sued by someone who was bit by her dog.

By 1979 Fayez who was then 50 met a 26 year old woman named Linda Hicks. Together they had a son named Andrew who was born in 1984 (here is a picture of him with an attractive blond). Their second son Phillip was born in 1986. Linda then had another son who was not Fayez’s (this gets confusing as the even the people who get cheated are getting cheated on themselves). Finally on September 30, 1990 Fayez and Linda Hicks were married.

Linda Hicks graduated from the University of Alabama Linda herself left her husband and moved with her young son (Sean who ended up going to TCU) to Houston and worked as an entry level clerk at Sarofim’s office for between $25,000 and $50,000. Sarofirm actually got to know Linda because he needed a babysitter and offered to pay anyone at the firm $25 per hour (which back in the early 1980’s was very good money). Fayez who was already married at the time began to meet Linda for some loving at a Houston hotel. Sarofim even asked Linda to come into his meetings to “size people up”. Fayez then bought a house for her in River Oaks. Fayez was generous and offered Linda $390,000 per year (tax-free) to be his mistress.  With a new house in River Oaks Linda seemed to like nice things and used Fayez’s money to buy a Jaguar, have frequent visits to Neiman Marcus, and almost purchased every dress on sale at a trunk show. Friends would say she would drop $100,000 per day at Neiman’s.

Despite all this money Linda didn’t seem happy. By 1995 she was an alcoholic and also a pill addict looking for Valium pills. She was taking 15 milligrams of Valium every 2 hours according to this story.  The house staff (nannies, maids, and security guards) took care of the kids while Linda would go on her drinking binges and then come home and yell at the kids for no reason. Fayez would come home and remain in his suit from work and at 6:30 P.M. to watch Wheel of Fortune with the kids. Also in 1995 while in Italy Linda had one too many drinks and told Fayez to get on his Falcon 900 private jet and go back to Houston (he took her up on that offer). Another divorce was looming. Linda wanted the same $250 million that Fayez’s first wife Louisa got. However it wasn’t cheap. Linda used lawyers Bob Piro and Earle Lilly which charged a non-refundable retainer of $50,000, in addition to $450 per hour (to work on custody for kids), and then the icing on the cake was a 20% of anything above and beyond the pre-nuptial agreement they had.  This story gets ever crazier as Earle Lilly was trying to have a relationship with Linda. Linda would buy him gifts like a $4,300 Hermes briefcase. She also made Lily the trustee of her estate (which in estate planning is a big no-no). Lilly could basically use her estate to pay himself whatever he felt was reasonable. 

By November of 1996 Fayez agreed to give Linda $12 million and she could keep the River Oaks house (of course she would have to pay the property taxes on it), along with $960,000 tax free forever. However the Piro and Lilly got $6.5 million total in fees. After the case was over Lilly suggested Linda buy him a $130,000 Mercedes for his great work. By this time Linda was crashing with her alcoholism. On February 19, 1997 she was taken to a hospital for drinking too much. It was in the hospital where Linda was admitted into rehab and met Mason Lowe (high school drop-out). Mason also had a criminal record stealing equipment from Compaq computer while working as a security guard in addition to public intoxication. Linda apparently saw something in Mason though as they bought a $4 million property in Hawaii and $2 million condo in Toronto. Apparently just like Fayez took care of Linda, Linda took care of Mason buying him a Bentley, took him to art galleries, and bought him nice suits form Neiman’s. Linda’s personal problems however got worse. In 1998 Linda had been drinking for 3 days and Mason had to call an ambulance. Fayez and Linda were still friendly and Fayez even invited both of them over for dinner. Lawyers Piro and Lilly found 153 phone messages (2 hours worth) that were threatening from Linda.

In May of 2000 while climbing Mount Kilimanjaro Linda who was having trouble breathing because she smoked for so many years passed away as she try to make it up the mountain.  Linda and Mason were asked before the trip if they wanted a satellite phone however they declined. One issue Linda had was that she had two wills. The last will usually invalidate previous wills. One will named Lilly has the executor and the other will had Mason as the trustee and executor which is somewhat scary given that Mason has a criminal record for stealing things. We shouldn’t feel too bad for Mason he currently lives in an $840,000 4,700 square foot condo in Houston according to property records.

These days it seems as if the kids of the Sarofim family are also causing trouble. In 1999 Christopher (son of Fayez) married Valerie Sarofim however in the late 1990’s filed for divorce and had court hearings to fight over their daughter Gillian Sarofim. The Sarofim nanny in an affidavit said that Valerie Sarofim would just vanish and party ignoring her kids. The nanny also claims that there was drug use by Valerie. However, Christopher Sarofim admitted in court papers that he and his wife Valerie both used cocaine and marijuana in 1996. Christopher also seems to like the ladies as he seemed to be interested in Courtney Lanier (adopted daughter of ex-Houston mayor Bob Lanier).  Here is a picture of both of them (Courtney is in the middle and Christopher is on the right).

Despite all of this Fayez Sarofim has been very generous with his wealth. He has donated to many different charities including giving $25 million to University of Texas-Houston for a research building. In 2008, he gave $15 million to Southwestern University according to this article. Also he has contributed to the Houston Ballet, Museum of Fine Arts, provide financial support to Sloan-Kettering Cancer Center, Texas Children’s Hospital, Houston Grand Opera, the Houston Symphony, and given over $1 million to Hobby Center of Performing Arts.  Wherever there is a named building there is usually a capitalist behind it. Truly the Sarofim family is interesting from Fayez Sarofim as an investor, to the history of scandal, and to whatever the future holds. The Sarofim family does make the Kardashians look rather boring though.

Fayez Sarofim: Houston’s Billionaire Wizard Investor (Part I)

One day when I was in the medical center in Houston and I looked outside and noticed a building that was called the Fayez Sarofim Research Building. I thought there must be some capitalist behind it. I did some research and found it was donated by billionaire investor Fayez Sarofirm. What interest me was that Fayez made a name for himself buying high quality stocks and has been investing since 1958 which is pretty long term in the investment world. Sarofim’s motto is to never sell. However, as I did more digging I found a very different side of the Sarofim family such as $250 million divorces, having children with between different people, an ex-wife who climbed a mountain and then died, estate battles, and even drug use. Sometimes the truth is stranger than fiction.

Fayez actually came from a wealthy Egyptian family and came to the United States in the 1940’s and earned his degree from University of California at Berkeley and an MBA from Harvard. His firm was founded August 1958.

What is interesting is the number of clients that Fayez seems to have lost over the years. According to data from his website. According to this performance posted on the website it seems as if the number of portfolios decreased from 270 in 1998 to just 95 as of 2012. The assets have also decreased from $57 billion in 1998 to just $22 billion as of 2012. The firm use to (not sure if they still do) manage the pension funds of companies like General Electric and Ford along with the endowments of Rice University and the University of Houston).  There was this story last year from the Houston Chronicle that the firm might lay off people. This ADV form discloses biographical information of many of the employees who work at Fayez Sarofim (educational background, prior work experience, etc).  Many of the employees have been with the firm for many decades which is rare these days. What is also interesting is the company has many entities like Sarofim Trust, Sarofim International Management Company, Sarofim Advisors Group, Sarofim Realty Advisors, and The Sarofim Group.  The company according to this Morgan Stanley statement has 21 employees.  According to the same document Sarofirm after fees over the past 10 years has under performed the market 4.67% (versus 8.01% in S&P 500). This Fortune magazine story from 1992 discusses how “Successful investing is the result of judgment and discipline”.  During the early 1990’s he had outperformed the market.  In 1993 he was worth $300 million according to this article.  From 1983-1992 Sarofim outperformed 94% of all money fund managers.  In 1993 however he moved into the bottom 20% because of Phillip Morris. Sarofim got a personal phone call from the treasurer of Phillip Morris to say everything was okay and the company could still pay out its dividend. Fayez likes stocks with low price to earnings ratio, high return on equity, and decent dividend yields. NASDAQ actually has a website that discloses all of the firm’s holdings here.  The biggest holdings are in Phillip Morris, ExxonMobil, and Coca Cola. Fayez even helped an artist invest according to this 1999 story from the New York Times.

Sarofim owns multiple properties in Houston. According to property records he owns a 14,700 square foot home in River Oaks worth around $11.4 million. Also he owns a 8,700 square foot house in Houston that is worth $5.4 million. However, it seems like all this wealth comes at a price. (Part II Keeping up With theSarofims: Divorce, Drugs, and Lawsuits) 

Koch and Empire Grew Together (1994 Wichita Eagle Article)

Source: Wichita Eagle 

This past week I stumbled upon a really good article from June 26-27, 1994 about Charles Koch and Koch Industries. The article has some articles I referenced in my three part series (part 1, part 2, part 3) on the Koch brothers. However, the first article was more of a profile of Charles Koch. Bob Cox did a profile of Charles and his family in 1998 for the Wichita Eagle did a profile. The Wichita Eagle recently did a profile in 2012 by Roy Wenzl .

One thing I learned from the 1994 article was how much Charles Koch loves to read. According to the article at least in the 1990’s he spent at least 2 hours every day reading. He reads scholarly books on economics, history, philosophy, and psychology. He even read the Old Testament of the Bible just because he was curious. This is interesting because when Charles was younger he was more interested in parties and playing rugby and actually was expelled in high school for drinking. Koch thought about being a mathematician  scientist, or economist (thank goodness he didn't pick those). An interesting fact is he graduated M.I.T with 2 graduate degrees (chemical engineering and nuclear engineering) by the time he was 24. After all this he considered going to Harvard Business School. William Koch did take some business courses at MIT according to this.

Once Charles started working at Koch Industries he was working 7 days a week. He tended to look at problems as an engineer instead of understanding the importance of people. Everything I have read indicates that he is a workaholic which actually isn't bad as a side effect is becoming a billionaire. Charles didn't seem to understand that people had a life outside work, however Charles' life was work. One meeting in August of 1968 started at 4 P.M. and lasted until midnight. Executives were expected to work on Saturday.

Koch has an interesting management style. Up until this point I have never read anything about how he managed people. Even Charles Koch himself acknowledges that he doesn't try to be a tough boss however he may be insensitive from time to time.People say that while Koch is demanding he is also very fair and doesn't like people who lie. He has a great analytical mind (makes sense he is an engineer), sharp, and seems to know what questions to ask. Koch will actually let employees make the decision at the end of the day (this is part of market based management). One interesting quote from Koch about work is that "True self-respect only comes from real accomplishment, because you can't kid yourself for very long". Another good quote Koch has that could be applied to management is "If you have a proposition or thesis or theory, you're obligated to search just as hard for facts that disprove it as you do for facts that support it".

The relationship between Charles and Liz Koch is interesting too. Apparently the folk tale is that Charles was so busy he had to propose to Liz over the phone. Apparently when they first met Charles was not with the times as he was reading books in economics, philosophy, psychology, and history. There was a charm about Charles that was attractive to Liz however. After 5 years of dating Charles and Liz were married in 1972. What is interesting is that in the 1990's when this story was done the family had no servants or help despite being worth $1-$2 billion (according to my Koch historical net worth page)

Koch also doesn’t like to waste any time. He really uses every minute to add value or learn something. He only lives 15 minutes away from work and listens to books on tape (Dr. Walter E. Williams of George Mason University also does this listening to tapes from Academic Plant). In a 3 week trip to Orient that Koch had planned he didn't spend one minute relaxing. When the Koch family went on a trip to the Summer Olympics in Spain Charles wanted to see 4-5 events a day which wore every one out (kids swore it would be the last trip they would go on). Even on a Sunday afternoon Koch will be watching football games with his work papers out doing both things at the same time.

Charles isn't much of a partier (nor does he need to be running a multi-billion dollar company). David is more outgoing like mother Mary Koch use to hold (don't know if he still does) a New Year's Eve party that held 800 people as of 1993 in Aspen, CO. Even Newsweek said it was a great party to crash. Charles doesn't like to party but he does enjoy good wine.

What is really interesting is how in 1966 Koch Industries had $177 million revenue and in 2012 the company had $110 billion in revenue. This is an annual growth rate in revenue of 15% which is pretty amazing. One reason might be of Market Based Management. Personally I don’t think Charles Koch works for money as so many of the left claim. His house seems quite modest for his net worth. He does have homes in California and Aspen however even though they are only worth a few million dollars each it is very small compared to his net worth of around $31 billion. They didn’t even have servants in the 1990’s despite being worth in the billions. The Koch family does have expensive cars and charter company planes for trips however they are not socialites who party all the time and have fun. They say he is greedy and trying to control democracy by buying politicians. To me Charles Koch preaches about free markets and liberty. Liberals forget that means personal liberty which is for social liberty (legalize drugs, same-sex marriage, etc). People forget this and just label Charles and David Koch as Republicans but they really do have certain libertarian ideas.

Personally I am glad I found this classic article from 1994. It revealed to me that Charles Koch doesn't like wasting time, challenges himself on a daily basis, works his tail off, and really seems like a decent human being. Now if we can just get others to realize his enormous accomplishments we all might be better off. I personally do hope all the Koch brothers publish their own autobiographies so they can tell their own stories in stead of having other people tell it for them. 

Koch Will, Growth, and $1.3 Billion Lawsuit Sources

Here is part 1, part 2, and part 3 of my coverage of the Koch family in the 1990's.

I primarily used the Newsbank database website for finding articles which is offered through a university I attended (I am sure local libraries have access to this same database). When I copied and pasted the articles in a Word document it was close to 80 pages.  I am very grateful to The Wichita Eagle for their great reporting throughout the 1990's. In particular Bob Cox did a fantastic job covering the Koch trial which led to easy to read and interesting articles.

“Koch Begins $33 Million Project 8 Story Office Building Will be Largest in State”, Wichita Eagle. June 5, 1990 by: Guy Boulton

“Koch Family Feud Takes a New Twist William Koch Offers to Drop Probate”, Wichita Eagle. November 26, 1991 by: Frank Garofalo and Guy Boulton

“Experts Say Koch’s Mind Affected”, Wichita Eagle, December 5, 1991 by Nickie Flynn

“Camps in Koch Battle Turn to PR fight appears to be for Wichita’s heart”, Wichita Eagle. April 12, 1992 by Jim Cross

“Koch buys pipeline company acquisition cost put at $400 million”, Wichita Eagle. November 10, 1992 by Guy Boulton

“Learn, Patient, Ready to Pounce More Growth Likely As Company Moves Into New Businesses, Expands Old Ones”, Wichita Eagle. June 27, 1994 by Guy Boulton

“Koch Employees Put Money on Tiahrt Incumbent’s Free-Market Stance Appeals To A Cadre Of Company’s Managers Executives”, Wichita Eagle. July 28, 1996 by Jim Cross

“Koch’s Hidden Message Houston Expansion Is About More Than Business. It’s A Strong Signal To State Officials To Stop Courting Bill Koch”, Wichita Eagle. March 23, 1997 by Bob Cox

“Judge Rejects Much Of Suit Against Koch Both Brothers Claim Victory As Key Parts of Suit By Bill Koch Still Remain Against Charles Koch, Company”, Wichita Eagle, July 17, 1997 by  Sarah Lunday   

“Judge Issues Gag Order In Upcoming Koch Trial N Ruling Prohibits Both Sides From Pretrial Polling, Talking To The Media Or Running Ads”, Wichita Eagle. March 25, 1998 by Molly McMillin

“Testimony Recounts Events Leading To Bill Koch’s Firing N Charles Koch Testifies That His Brother’s Actions Threatened The Company”, Wichita Eagle. March 30, 1998 by Bob Cox

“Koch vs. Koch: It’s an oil family feud- Escalating legal battles involving Koch Industries have bitterly divided the four Koch brothers”. Star Tribune: Newspaper of the Twin Cities. April 1, 1998 by Greg Gordon

“Koch lawyers fire opening shots in trail during opening statements, Bill Koch faction is characterized as greedy, and Charles Koch is described as unscrupulous”. Wichita Eagle. April 9, 1998 by Bob Cox

“David Koch testifies in lawsuit he is the first Koch brother to testify in the suit brought against Koch Industries by his twin brother, Bill”. Wichita Eagle. April 15, 1998 by Box Cox

“Koch brother gives emotional testimony David Koch breaks down on the witness stand while talking about his relationship with his twin brother bill”. Wichita Eagle. April 16, 1998 by Bob Cox

“Brother Disparaged in Koch Trial”. Associated Press. April 18, 1998

“Layoffs follow Koch setbacks hard hit by economic downturns in its bedrock businesses Koch Industries Inc dismisses hundreds of employees, contractors”. Wichita Eagle. April 11, 1999 by Box Cox

“Bill Koch discusses takeover attempt, He would have ended his bid to take control of Koch Industries in 1980 for access to $25 million and more power over company decisions”. Wichita Eagle. April 23, 1998

“Bill Koch was willing to chop up company, After takeover bid, he was prepared to sell stake to corporate raiders”. Wichita Eagle, April 24, 1998

Frederick Koch takes stand n ally of Bill Koch upholds his brother’s version of dispute”. Wichita Eagle. May 1, 1998 by Box Cox.

“Cousins sided with Bill Koch to get more money for their stocks”. Wichita Eagle. May 2, 1998 by Box Cox

“Koch tried to placate dissents, exec says, chief counsel for Koch Industries says Charles Koch tried to make peace with his brother Bill”. Wichita Eagle. May 21, 1998 by Bob Cox

“Charles Koch takes the stand chief executive’s long-awaited testimony comes as the trail enters its eighth week in Topeka”. Wichita Eagle. May 27, 1998 by Bob Cox

“Charles Koch: Brother’s accusations ruined bond He says Bill Koch’s attacks follows a business-plan rejection”. The Kansas City Star. May 28, 1998 by Grace Hobson

“Testimony recounts events leading to Bill Koch’s firing N Charles Koch testifies that his brother’s actions threatened the company”. Wichita Eagle. May 30, 1998 by Bob Cox

“Brother: Bill Koch bullied mother”. Tulsa World. May 30, 1998

“Charles Koch faces hostile questioning”. Tulsa World. June 2, 1998 by Associated Press

“Long day on stand for Charles Koch and he is cross-examined for a third day as the Koch lawsuit enters its ninth week”. Wichita Eagle. June 2, 1998. Bob Cox

“Charles Koch praised by longtime top Koch exec, Sterling Varner, the retired president of Koch Industries, says he made the motion to fire Bill Koch from the company’s board of directors”. Wichita Eagle. June 11, 1998 by Bob Cox

“Kochs’ friends prepare for more legal action and Koch Industries workers and supporters celebrate victory for Charles and David Koch, while Bill Koch’s backers look forward to his appeal”. Wichita Eagle. June 20, 1998 by Stan Finger

“Koch Inc. prevails company executives Charles and David Koch win jury verdict, but brother Bill vows to appeal”. June 20, 1998. Wichita Eagle by Bob Cox.

“Charles Koch confident about company’s future battles”. Tulsa World. July 3, 1998 by Knight Ridder/Tribune Service

“From trial’s ordeal, a stronger Koch chief executive Charles Koch feels vindicated and is ready to tell the world more about Koch Industries.” Wichita Eagle. June 28, 1998 by Bob Cox

“Charles Koch to undergo treatment for prostate cancer disease in early stages for Wichita-Based Koch Industries Chairman”. Wichita Eagle. September 4, 1999 by Lillian Zier Martell

“Bill says he wants to reconcile with Charles through spokesman, Charles urges brother to live his own life”. Wichita Eagle. September 26, 1999 by Dion Lefler.

“Supreme Court refuses appeal”. Associated Press. October 14, 2000 by Knight Ridder/Tribune Service

Koch vs. Koch Battle of the 1990's: Part 3, The $1.3 Billion Lawsuit

Part 1 can be found here and Part 2 can be found here

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

Koch vs. Koch Battle of the 1990s: Part 2, Growing Koch Industries

Continued from Part 1 here…

I am indebted to the Wichita Eagle for covering this story on June 27, 1994 in an article called “Lean, Patient, Ready to Pounce More Growth Likely As Company Moves into New Businesses, Expands Old Ones” by Guy Boulton

During this same time of Mary’s will Koch Industries was growing by leaps and bounds providing customers with products they wanted at reasonable prices. In June 4, 1990 Koch Industries began construction on a $33 million building since they were clearly in a growth mode. The building was eight stories high with 500,000 square feet of space and at the time was the largest office building in Kansas. Koch Industries was able to get a 10 year tax abatement for the building. Also during this time period on November 9, 1992 Koch purchased United Gas Pipeline for $400 million. United Gas at the time had sales of $370 million and 9,600 miles of natural gas pipeline compared to Koch who owned 27,000 miles of pipelines. This is a long way from where the company started in 1967 having sales of $200 million, 600 employees and profits of $6 million.

From 1985-1994 Koch Industries doubled from 6,500 people to 13,000 people. Revenues in 1966 were $177 million and by 1993 they were $24 billion. By 1997 revenues increased to $30 billion. In December of 1993 Forbes had estimated that the company was earning $2.8 billion before interests, expenses, and taxes. The company was also putting profits back into the company. From 1987-1994 the company invested nearly $2 billion in refineries. The company at one point owned retail outlets and sold a chain of their 300 convenience stores and gas stations in the 1980’s.

Koch has a unique management style that did away with annual budgets in the early 1990’s and gives more power to employees to make decisions. The company reinvests 90% of its profits and doesn’t like debt. When the company does borrow money it uses a mix of bank loans and notes that are sold to private intuitions. The company likes hard workers who want to stay with the company a long time and often recruit from Kansas schools. The interview process is extensive and employees are often people with engineering backgrounds who have business experience.

When the company started employees worked on Saturdays. Charles Koch essentially worked all the time. Eventually this changed to half a day on Saturdays. Then employees had Saturday off but it was expected they would show up. Many employees work on Saturday and sometimes on Sunday as well.  Employees also showed up early as cars can be seen in the parking lot as early as 6 a.m. Even the lunches are short. In late 1993 lunch was limited to 30 minutes but then extended to 45 minutes. Employees can pick from a variety of foods such as pizza, sandwiches, entrees, a salad bar or even Chinese food. Employees from the bottom to the top all eat in the same lunch room (even Charles Koch).   Executives at the company wear white shirts with ties (however no jackets).  

In the 1993 selling a barrel of oil would add $16 to revenue. However, the profit margin on this deal was very small. The company stands cycles by purchasing assets when the market takes a downturn. The company prefers to buy assets instead of whole companies. The company rewards those who work hard. Company executives in the early 1990’s were making between $300,000 and $500,000. As we will find out later members at the very top did extremely well when considering salary, bonuses, and stock dividends.

Cy Nobles joined Koch Industries in 1979. Nobles oversaw the refining and petrochemical business and in November 1981 after being up all night working on negotiations to purchase a refinery and petrochemical plant from Sun Oil in Corpus Christi, Texas. Charles Koch called Nobles into his office and said he wanted to name Nobles to the head of the Sun Oil. Nobles however said, “No sir you are not. You’ve just spent $265 million, and it deserves someone better than me to administer the investment" (Nobles was running on very little sleep). Nobles claimed that when other companies are buying they are selling. Cy eventually ended up being president of Koch Chemical.

This little taste of the corporate culture of Koch Industries makes it pretty clear why the company is so successful. Employees are constantly working trying to create value and show up sometimes six days per week. Working long hours and taking short breaks will not make anyone poor. Also the idea of accomplishing is very satisfying. The company does not have a lot of bureaucracies and Charles Koch himself doesn't dictate everything that goes on in the company. The company today follows Market Based Management which I discussed in this post. 

Sources

Koch vs. Koch Battle of the 1990s: Part 1, The Will

I want to thank Bob Cox for inspiring me to write these posts. Cox was a journal reporter for the Wichita Eagle in the 1990's who covered the Koch vs. Koch trial. Without his excellent journalism these posts would not be possible. Sources are down at the bottom.

As you may know by now I am pretty interested in the Koch brothers. I talked about their historical net worth here and a family history here.  I personally think that the Koch family  is one of the most interesting families of all time given their wealth and family feuds.  When I was doing research I learned of the court case Koch vs. Koch and think it would be pretty interesting if someone published all the transcripts of the case since it went on for so long. However, I looked up the cost for transcripts and they start at $3 per page.

In doing some research through Newsbank I found some interesting articles about the Koch brothers from the 1990’s. The 90’s got off to a rough start when William Koch challenged his mother’s will. Mary Koch (mother of Charles, David, William, and Freddy) had an estate of $10 million when she died on December 21, 1990 from a stroke she had the day before. Keep in mind that during this same time Charles and David were each worth $1.8 billion. Mary had suffered a stroke a year before and entered Wesley Medical Center for a checkup.  The will Mary left $150,000 each to the Wichita Center for Arts, and Wellesley College in Massachusetts. In addition to this she left $100,000 each to Wichita Collegiate School and Pembroke Hill in Kansas City, Missouri. Mary attended Wellesley College and majored in English and French. Mary met her husband Fred at a polo match after Fred had come back from Moscow on business.  They got married one month after they met. On their seven month honeymoon to South America Mary could only bring one piece of luggage on a train. She had a trousseau (bride out fit) in the luggage and was worried about it. Fred Koch promised Mary that she should would not have to worry because he would buy her ten trousseaus. Once they took off on the train and there was a little charter plane following them. Fred told Mary that it was the plane that was carrying Mary’s trousseau. She thought he was a keeper. 

In the last years of her life David Koch would frequently visit his mother in east Wichita since he worked in New York. She was always looking out for her boys as in one visit in 1989 David brought a girlfriend over and his mother really seemed to like her and she asked why David didn’t marry her. David as I have mentioned in this post was known for his playboy bachelor days in the 1980’s where often had three dates per day.

Mary’s will had stated that she would disinherit the sons if they have a pending lawsuit against their brothers (disinheritance clause). David said that he believed it was an ingenious idea since Mary knew money would make more of an impression on William and Freddy. William and his older brother Freddy tried to contest this. Mary’s will went through what is known as the probate process. In the probate process the will is open and can be seen as a public document by anyone.

Mary in her older age suffered from Alzheimer’s and Mary told psychologist Charles Schalon in October 1989 that she had a hard time remembering things. Mary Koch was 82 when this occurred. Despite all this Mary was able to understand her will (she had her will redone in January 1989). Mary had hoped that the will would prevent her sons from fighting however this was not the case. The fighting between the brothers got so bad that in 1982 she suggested that she didn’t want to host Christmas parties with all four sons at one time. Instead she suggested the Fred and Bill visit for Thanksgiving while Charles and David visit for Christmas. William even filled a lawsuit against his own mother claiming that he, Mary, Charles, and David all had an oral agreement to direct how part of $300,000 in annual contributions from Mary’s trust would be disbursed. 

On April 2, 1993 a Kansas Court of Appeals in Sedgwick County under Judge Hal Malone ruled that this disinheritance clause was valid. William and Freddy were disinherited from Mary’s estate as a result.  Mary Koch really did care about her boys and tried to bring peace to the family, however other family members had different ideas. 

Sources

Statement from David Koch about Federal Debt

Below is a statement from David Koch of Koch Industries

"It is my hope that Democrats, not just Republicans, will become part of the effort to reduce the federal debt by right sizing government and restructuring unsustainable entitlement programs. For that to happen corporate subsidies and tax preferences not applied equally should be eliminated or simplified in a revenue-neutral way, which I alluded to last week ("The Republicans' new Koch," editorial, Sept. 3). Broad-based tax increases make no sense; they would only slow an economy in tremendous need of growth. The Democratic Party has a perfect opportunity at its convention to join Republicans in pledging to stabilize America's finances. They should seize it."

David Koch Team Builder and Generous Guy

I am across this interesting article a while ago published in the Summer 2012 Philanthropy Magazine about David Koch. Koch started at MIT when he was 19 years old in 1958 and was team captain of the MIT basketball team leading the team to a 17-4 record his senior year. What is interesting is that his final game was played against the University of Chicago (home of Milton Friedman) which is known for free-markets. David was the second highest in scoring average and had 545 rebounds. Not bad for a future billionaire and philanthropist.

The article talks about how even before Koch Industries became large David was still philanthropic. In the mid-1980’s he joined the New York University-Presbyterian board. He became more interested in medical boards in the 1990’s when he was diagnosed with prostate cancer. Koch first went through radiation therapy, then had his prostate removed, then the cancer came back again and he had hormone therapy. That didn’t work so now Koch is using Zytiga for his cancer. In addition to this not too long ago Koch suffered from diverticulitis. To treat this Koch received intravenously antibiotics which if they were not available would have torn up his colon and might have killed him.  I am not sure if the media truly understand the battle David Koch has already fought. This has caused him to pore millions into cancer research ($25 million to M.D. Anderson where he is treated), $30 million for Memorial Sloan-Kettering, and $20 million for John Hopkins. He has also had 10 special surgeries at Hospital for Special Surgery in New York. Koch has donated since 1998 close to $400 million to medical research. His donations have even created jobs to help fight research. His gift to MIT to create a cancer institute has 650 researchers after his $100 million gift. Koch believes that in the next decade or so we will see breakthrough discoveries and treatments. As long as the FDA can limit their involvement everyone will be better off.

 Much of the money David Koch makes comes through his dividends. As I pointed out in this post in the 1980’s William Koch was getting what would be today equal to an $11 million dividend and that was when Koch Industries was much smaller than it is today. I have no way of knowing but if the company still does pay 7% dividend and you take a modest return (7%) on $110 billion in revenue and factor in 42% ownership from David Koch I would estimate maybe $200-$250 million in dividends per year (again back of the envelope calculation ). This is also in line with the analysis I did of the Koch net worth from 1984-2012 here. Koch does plow back 90% of their earnings into the company so 7% may be reasonable for a dividend. Also David Koch has around $25 billion in net worth in addition to his dividends which makes him pretty flush with cash. If taxes for dividends increase then he will give less. Dividends on taxes next year will jump from 39.6% up from 15% if Congress fails to act.

I think sometimes people forget that people respond to incentives. People forget that John Rockefeller with a little less than 5% of his net worth created the University of Chicago. M.D. Anderson was named after a successful cotton trader who gave his estate to charity. Capitalists are needed in building future charities.

David Koch: Speaking Your Piece: A Civic Duty

The New York Post published an op-ed  here from David Koch who is the executive vice president of Koch Industries. David Koch needs to continue writing about how free-markets can help solve our problems. 

My favorite paragraph is this:

"Meanwhile, the eyes of the world will be on our national political gatherings, none more keenly than those of people suffering under oppressive regimes around the globe--if they are lucky enough to have access to a TV screen or the Internet."

William “Billy” Koch: My Own Private Koch Colorado Town

In my previous profile of William Koch here I mentioned that in 2007 he began to purchase land in Beaver Creek Colorado. Koch purchase land near the Ragged Mountains. Now Koch is actually going to turn it into his own private wild west town complete with a saloon, jail, church, firehouse, livery, train station and his own 21,000 square foot house (a wing had to be removed so the house would not be “obtrusive”) as detailed in the Denver Post here.  Koch already owns four properties in Castle Creek Valley which include a 17,000 square foot home that he has turned into a house. This house along with three other properties were purchased for $51 million in 2007. Apparently, 1/3^rd of the mansion will be underground and be blocked by a hillside. I can only imagine the approval process Koch had to go through to get this approved. Koch is also trying to swap land in order to get more privacy. The trade would be the government would get properties near Blue Mesa and in addition to this a Dinosaur National Park while Koch would get a public swatch that would cut through his ranch.  The house will be situated on top of a hill so I guess Koch can oversee his creation. Forbes apparently now estimates William Koch’s net worth to be close to $4 billion (I guess I didn’t get the memo on the updated figure).  William is the Koch brother who enjoys collecting everything (art, memorabilia, houses, etc).  He plans on moving his Western Art to this new Western town.  Koch’s wife claims that he should be on hoarders since he does buy a lot of art work, wine, and use to have some boats. In 2011, Koch paid $2.3 million for a photo of Billy the Kid.  Koch’s city however will not be open to the public. If people buy something they should be able to decide how it is used. Although, this Wild West town would be pretty cool. What is even more interesting is that people seem to want to decide how to spend William Koch’s money yet have not done the work needed to earn that money to make the decisions he can make. 

Charles Koch: Why We Fight For Economic Freedom

I enjoy talking about Charles, David, William Koch, even a family history. Charles Koch recently wrote a letter that was published in Koch Industry’s July Discovery magazine here. The article talks about when Charles visited Russia in 1990 (formerly known as the Soviet Union) he quickly noticed how many shortages there were. I actually did a research project for one of my MBA courses where I shortages of products when the country was rationing products. Not only did the rationing lead had to study Russia and why a company should open business there (I ended up picking Wal-Mart). In my research I remember reading about to shortages if you could actually find food it was priced much higher than you could find elsewhere.

Also he points out that even though the country had “free” healthcare but the quality was very poor compared to standards of the United States. He then goes on to discuss how the Soviet Union is a prime example of why economic freedom is important. Also people who depend on government are not as free as they think because as Charles points out “Citizens who over-rely on their government to do everything not only become dependent on their government, they end up having to do whatever the government demands.  In the meantime, their initiative and self-respect are destroyed”. Charles Koch and understands the welfare system. As Thomas Sowell would say Democrats want to help the poor while they are poor, while Republicans want to help the poor from stop being poor.

Not only do people ask for handouts but companies and industries also ask for handouts. Companies don’t directly ask for handouts however they may get special treatment that other companies don’t get. For instance farmers enjoy subsidies (which represents only a handful of farmers) meanwhile they artificially increase the price of crops that go into many different products we use. If we got rid of these subsidies the prices of inputs like corn, cotton, sugar, and wheat would not only decrease but any end product that used these inputs would also decrease which would save Americans billions of dollars per year. The people who are truly hurt by these subsidies are the poor and even middle class families who see food prices increase because the government enjoys subsiding farmers. If a business cannot meet the needs of their customers they should be forced to go out of business. As Milton Friedman use to say business is a profit and loss system. The profits encourage wise behavior while the losses force people to realize reality is not optional.

Charles Koch also points out that disparity not only exists in America but even in other countries that have dictators. He is absolutely right. In these countries you have a small class of people who are really rich because the government can hand out favors or blocks certain people from entering (modern day Russia seems to be like this with various oligopolies) while the vast majority of people have a lower standard of living. The United States is much more transparent than most developed countries but still has issues from time to time with this.

I was a little sad to here that Mr. Koch is not seeking political office like his brother did in 1980 on the libertarian ticket with Ed Clark. What Mr. Koch seems to understand is that economic freedom does in fact create economic prosperity. I am not sure why this is so hard for many people to understand. When discussing his legacy Mr. Koch says “I want my legacy to be greater freedom, greater prosperity and a better way of life for my family, our employees and all Americans.  And I wish the same for every nation on earth.” Mr. Koch has done a great job of creating jobs, running a company, and helping spread the word of limited government with its main ingredient of liberty. I just wish now he would write an autobiography so we could learn more about this great individual!