J Howard Marshall, Anna Nicole Smith, and Koch Industries: The Estate Planning Nightmare

A while back a reporter that talked about a woman who owned the rest of Koch Industries. Right now Charles Koch and David Koch own 84% between them of Koch Industries. I always thought the rest of the ownership was owned by Koch Industries employees (board of directors/employees). However, it looks like Elaine Marshall owns around 15% of Koch Industries which puts her net worth at close to $13 billion as Koch Industries generates roughly $115 billion in revenue (according to Forbes).

Elaine Marshall was married to E. Pierce Marshall who was the son of J.Howard Marshall II (the one married to Anna Nicole Smith). J.Howard Marshall had been a shareholder for 20 years of Koch Industries. According to J. Howard Marshall’s autobiography “Done in Oil” Marshall and Fred Koch (father of Charles and David Koch) had an interest in Great Northern Oil Company which was created in 1954. Fred had founded Wood River Oil and Refining Company in 1940 which was a mid-continent oil company. In 1959 Fred Koch purchased a 35% interest in Great Northern for $5 million. According to Marshall, Fred Koch didn’t have the cash and called up First Chicago bank and Koch asked for a note in order to pay it. Koch must have had a great financial reputation to pull that off in the 1950’s.

Marshall had a 12% interest in Great Northern.  In 1959 Wood River changed its name to Rock Island (which later became Koch Industries after Charles Koch took over). Fred Koch passed away in 1966. Charles Koch had worked at Great Northern in his 20’s and knew the refinery business very well. In 1969 Koch Industries purchased a controlling interest in Great Northern Oil Company. Charles was going to purchase a 40% interest in Great Northern Oil Company but they are asking too much for it. Charles then got the idea to pool his interest along with the interest of Marshall into the holding company of Koch Financial. Charles Koch promised J. Howard Marshall a 30% interest in Koch Financial for Koch Industries. They then purchased Union Oil’s Great Northern Oil Company.

In 1974 Marshall II gave his two sons 4% of Koch Industries stock J.Howard Marshall for estate planning purposes.  He gave his sons the Koch Industries stock claiming they "are the crown jewels, take care of them". By 1980 there was a board room coup for control at Koch Industries. Bill Koch and Fredrick  (brothers of Charles and David Koch) wanted to take the company public. At the time Bill and Fredrick had a 48% ownership in the company and needed more than 50% for control. Freddie and Bill tried to purchase a 4% interest from Pierce Marshall to gain more than a 50% interest. Bill and Fredrick then approached J. Howard Marshall III to purchase his shares.

J. Howard Marshall II sided with Charles and David Koch while Marshall III was aligned with Bill and Freddy Koch. To fight off a corporate takeover by Bill Koch Charles Koch flew to California to convince J. Howard Marshall II to purchase Marshall III’s interest. Marshall II bought his son’s share for $8 million- $208/share (the shares had been gifted to Marshall III over the years). This was a large premium for Koch Industries stock considering the highest previous transaction was $80 per share. Charles Koch had urged the buyout of remaining shareholders. The buyout then lead to a lawsuit from Bill, Fred, and the other shareholders who were bought out.

In 1982 to reduce the cost of probate Marshall put all of his interests in Marshall Associates (a family partnership that held Koch Industries of which he owned 862,535 shares of Koch Industries stock). Marshall liked to use leverage though as he used 505,885 shares of Koch Industries stock as collateral. At the time Koch Industries had 5,850,908 total shares outstanding (Marshall had about a 15% interest in Koch Industries. Marshall was using the dividend income from Koch Industries stock to pay off debt and mostly to finance his lifestyle of giving generously to the ladies in his life. In 1994 Marshall earned about $8 million in dividends from his 15% interest in Koch Industries stock (1995 was a little bit less at only $7 million). This would say that Koch Industries was only paying out a little more than $53 million total in dividends in the mid 1990's when looking at ownership interests which was probably a small payout ratio as Charles Koch directed roughly 90% of the earnings back into the company for expansion.

Marshall had met Lady Walker in 1982 who worked at a strip club. J Howard Marshall would shower Lady Walker with gifts and purchased $1 million of jewels from Harry Winston and Nieman Marcus. He ended up spending $2 million a year on Lady Walker (he would spend $2 million a year on Anna Nicole Smith 10 years later). He tried to pay Lady Walker $1 million a year to handle his public relations (he tried to write this off as a business expense and the IRS said no). To impress her with his wealth J Howard Marshall showed Lady Walker a prospectus of Koch Industries with the front page reading "For Lady/The Crown Jewels". Since Marshall had purchased all these gifts for Lady Walker they are subject to what is known as gift tax (tax Form 709 has to be filed every year with this if the gift is over a certain amount). Marshall had given Lady Walker $12-$14 million in gifts without paying any gift tax on it (Marshall fired his accountant for not being aggressive enough with the IRS).  Failure to file gift tax would cost millions in penalties and fees. Marshall tried to disregard the tax code at all cost (even though he was a Yale trained lawyer).

Marshall had cut out his son Marshall III as a potential beneficiary. The stock was held in a revocable living trust (basically this type of trust avoids probate costs and also is not made public). In 1989, Marshall's first wife Eleanor decided she wanted to increase her charitable giving so she set up a charitable remainder trust. Typically this works by giving a human beneficiary income with the remainder of what is left over going to a charity.

 J. Howard Marshall retained the right to income of the living trust. In October 1991 J. Howard Marshall (who was in his 80’s at the time) met a 24 year old blond haired single divorced mother named Vickie Lynn Smith (Anna Nichole Smith). Anna Nicole Smith who was only 24 (she was a dancer at Gigi's strip club in Houston). What is interesting is because of J Howard Marshall's age he would often go to the strip club during the day and he met Anna Nicole Smith when was working the day shift. Anna Nicole talked about her job so Marshall gave her an envelope with $1,000 cash and told her she didn't need to work. Marshall would then give Anna Nicole Smith $4,000 a month for "consulting fees". Over time he increased these checks to $5,500 per month.  Of course Marshall was contemplating marriage and on Christmas Eve of 1993 a Neiman Marcus employee showed up to the home of Anna Nicole Smith to review jewelry. Over time Marshall purchased a ranch, a home, places in New York, Los Angeles, a Mercedes Benz, and jewelry for Anna Nicole Smith. Not only would these gifts be subject to gift tax but generation skipping tax (GST) due to the age difference (generally if there is more than a 37.5 year age difference in the parties and they are not related then they are subject to generational skipping tax). J Howard Marshall had a creative idea to try to adopt Anna Nicole Smith but his lawyer said that the state of Texas might frown upon that. Marshall and Anna Nicole Smith married on June 27, 1994 (son Pierce Marshall didn't know about the meeting until the day after). At the time of the marriage Marshall was estimated to be worth $500 million. What is interesting is Marshall knew that Anna Nicole had limited intelligence and called her "unteachable". Marshall created a pre-nuptial agreement giving Anna Nicole Smith $100,000 per month for each month married and $5 million if they had a child together (the agreement was 58 pages and Marshall believed that legal documents should be no more than 1 to 2 page). To his credit Marshall never planned on giving Anna Nicole Smith Koch Industries stock. I am sure Charles and David Koch were happy about this. Could you really see a former Playmate being a shareholder of Koch Industries and at board of directors meetings? Although, Marshall didn't want to give Anna Nicole Smith the "crown jewels" he did want to make sure she was financially secure which explains why he would give her monthly payments of $5,500.

Even Charles Koch noticed that Marshall showed strange tendencies during this time period. According to Koch in a 1997 deposition Marshall "tended to get drunk a lot, passed out at one of the shareholder meetings". Charles went on to say that when Marshall got drunk he tended to be pretty foolish.

Marshall however passed on August 4, 1995 at the age of 90. From 1994 to 1995 Koch shares appreciated from $664 million to $780 million. J. Howard Marshall in 1994 transferred $6 million of gifts (including ranch, several houses, cars, jewelry, and a substantial amount of cash) to Anna Nichole Smith. While Marshall and Anna Nicole Smith were dating he would pay her a $4,000-$5,500 per month consulting fee. Because they were not married this amount would be subject to gift tax (if you are married you can give an infinite amount under the marital deduction). When Marshall and Anna Nicole Smith were getting close son Pierce Marshall attempted to shift ownership of Koch Industries around from. This 1999 New York Times article speculated that Anna Nicole Smith (who was only 31 who was a high school drop out) "could become one of the richest women in America". At the time the Marshall family owned 8% of the voting stock for Koch Industries and 16% of the non voting stock. Anna Nichole Smith had issues handling money as in 1996 she filed for bankruptcy (she listed the inheritance from Marshall-who died in the year prior as an asset). Smith had claimed that Marshall promised her half of his $1.6 billion estate. In 1999, a California court awarded Anna Nicole Smith $400 million but then in 2002 a federal court reversed that award. Daniel Fisher of Forbes wrote a good article and timeline of the court cases here. In 2014, a court rule that one of Anna Nicole's children Dannielynn would not inherit the $49 million of the Marshall estate. In essence Koch Industries will not transfer to any new beneficiaries.

The whole J Howard Marshall estate is a very good case study for estate planning. The Marshall family is still one of 9 shareholders of Koch Industries stock. Elaine Marshall and her family still owns about 15% of Koch Industries stock. Bloomberg uncovered Marshall as a billionaire. Bloomberg pegged Marshall's net worth at $13 billion however according to this article a spokesperson said the valuation is inflated. They actually do have a point since Koch Industries is privately owned the valuation is the same as valuing a public company such as Google or Microsoft. Elaine Marshall is 73 years old (younger than Charles Koch). She has two sons one named Preston Marshall (grandsons of J Howard Marshall) who is an oil executive for MarOpCo in Houston. It is said that Preston Marshall is the largest shareholder of Koch Industries outside of Charles and David Koch. Why isn't he on the billionaire list? The other son is E. Pierce Marshall Jr. who works as a Vice President for MarOpCo with his brother and also runs a family office called Elevage Capital Management in Dallas. J. Howard Marshall would be proud as E. Pierce Marshall Jr graduated from Yale Law School in 1995 and received a business degree from Tulane (where he sits on the board)

What is quite interesting is that J. Howard Marshall and Anna Nicole Smith were only married for 14 months and the battle for his estate extended for a mere 20 years. 

20 Things You Didn't Know About The Koch Brothers or Koch Industries

1. Koch Industries has grown from $225 million to $115 billion (2013)
2. Charles Koch does yoga (he works an hour and half every day)
3. David Koch still works 10 hour days (despite being 73 years old)
4. David Koch in his playboy days was dating multiple women at a time and had three dates per day
4. All four Koch brothers have had prostate cancer
5. David Koch once owned a Ferrari
6. Bill Koch checked himself into rehab (1994 Vanity Fair article)
7. David Koch use to have a New Years's Eve party that Newsweek said was one of the best parties to crash
8. Charles Koch often reads books on tape when traveling to work
9. Bill Koch was married while also having misstresses
10. There are actually four Koch Brothers
11. The Koch brothers have a total of 7 degrees from M.I.T (Bill 3 including a PhD in chemical engineering, David 2, Charles 2)
12. David Koch has given $435 million away to the arts, sciences, and theater
13. 30% of Koch Industry workers are unionized
14. Even when Charles Koch was worth $1 billion he didn't have servants at his home 
15. Charles Koch gets haircuts from his wife
16. Charles Koch didn't get married until he was 37
17. The Koch brothers as part of their trusts were required to give away a large part to charity for 20 years
18. J. Howard Marshall II (married Anna Nicole Smith) was a shareholder of Koch Industries
19. Charles Koch still wakes up at 6:30 A.M.
20. Once Charles Koch had a meeting in 1968 that started at 4 P.M. on a Sunday afternoon and didn't end until midnight

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. 

William I. Koch vs. Koch Industries The Family Lawsuit

I found an interesting find in the William I. Koch vs. Koch Industries trial that I covered in a previous three part series (part1, part2, part3). The document I found was 112 pages (much of it talks about historical court cases). What is even more interesting that the court case had 10,000 pages of exhibits (which would be twelve feet in a library).

William and Fred Koch along with other plaintiff dissents) owned 47.8% of Koch Industries stock. Fred Koch (father of all Koch brothers) set up trusts in 1966 and 1967 which gave all of his shares to his sons except for Frederick (some speculate it was because Frederick stole petty cash from the family). The trusts were actually interesting because the income of the trusts was paid to charity for 20 years and t he principal would be paid either to the Koch brothers or to some beneficiaries. Today, these are known as Charitable Remainder Annuity Trusts (CRAT trust) which is creative today and must have been innovative back then. According to the court case Charles began working at Koch in 1961 and became an officer one year later and was elected president in 1966. David came on board in 1970 with William joining in 1974 (three years after he completed his PhD from M.I.T.) William rose to become head of Koch Carbon in 1976 and was elected vice president of corporate development for Koch Industries in 1979.

In March 1980 William wanted more liquidity and cash flow for Koch Industries. Charles came up with an estate planning and liquidity program while Don Cordes and Tom Carey of Koch Industries talked to the plaintiffs to help them with any issues or concerns they had.  In the mean time William Koch didn’t like how Charles was running the company and talked to the plaintiffs. William talked to the plaintiffs to try to change the board of directors to do what they wanted.  The deal breaker would be J. Howard Marshall III who would help William, Frederick, and the other plaintiffs to gain a majority interest (over 50%).  Marshall III owned 4%. William however knew he had a problem because he didn’t have the number of shares he needed to elect a new board of directors. To fix this William called the First National Bank of Wichita and wanted to add two new directors. Charles hopped on a plane to see Marshall II to see if anything could be done. According to J. Howard Marshall II autobiography “Done In Oil” Charles went to visit Marshall II and Charles asked “What do we do now?” J. Howard Marshall II who himself was a business man after spending many years in government agencies suggested that he would offer his son $8 million $203 per share for the Koch stock that would change the board. Marshall tried to make it more of an emotional offer and his son took it. William got wind of this and increased the offer price to J. Howard III.

At a December 5, 1980 meeting Stuart Varner who was a board member of Koch Industries suggested that William Koch be asked to resign. William didn’t want to however the board thought it was time for him to go. In 1981 William hired Davis, Polk, and Wardwell to represent him and Morgan Stanley and Lehman Brothers were also brought on to determine what if Koch Industries should be publicly traded to fix the problem of liquidity and cash flow that William had been complaining about.  In a May 18, 1981 meeting the estimates from Morgan Stanley and Lehman said Koch Industries could sell between $140-$170 per share. Charles thought some of these figures were high because they did not take into account working capital. Both Morgan Stanley and Lehman said Koch Industries should not go public unless it needed to.

In 1982 Goldman Sachs was brought in and examined 100 pages of evidence from Koch Industries analyzing historical earnings balance sheets from 1977-1982. Goldman came up with a value of $1.6-$2.2 billion and valued the stock between $110 and $140 per share. William did not like this number and questioned Goldman Sachs about whether they were doing analyzing their discounted cash flows models correctly (used to figure out value). William then brought in Bain & Co. (keep bringing in advisors until you get the number you want right?).  Lehman revalued the shares in July 1982 and came up with an average of $175 per share.  On July 26, 1982 this profile came out in Fortune that discussed part of the battle that had been going on at Koch Industries. By October 1982 the case was even affecting mother Mary Koch who called Don Cordes and was upset that the Koch brothers were not able to solve their issues in court. By November  of 1982 Bain had come up with $187 per share while William and Bain wanted to make a counter-offer of $240 per share or a 28% premium. The plaintiffs all got together and met with Goldman Sachs and Bain & Co and agreed on the $240 per share counter offer. Koch Industries however did not think $240 per share made any sense after Lehman said it was really worth $140 per share. Koch countered with $167 per share ($95 in cash and $72 over a 15 year period at 10% interest). The plaintiffs did not want this because when you calculate a present value it was very low compared to what they thought they could get. William thought the stock was worth $212-$245 per share. In May 1983 William gathered up the plaintiffs to discuss what they all thought a fair price was. William of course wanted more than everyone else and the group also had to determine the cost of waiting out the ligation.

Finally at midnight on June 4, 1983 the final draft had been approved by both sides with the deal closed only six days later.  The plaintiffs were paid $200 per share on June 10, 1983 (the legal cost for “experts” was over $1.5 million). Charles, David, and William at the time each around 20% of the common stock (Fredrick owned 14%). The Simmons family (Mariorie Simmons Gray, Ann Alspaugh, and others) owned 13% and J. Howard Marshall II owned 8% (the one who married Anna-Nicole Smith). Koch employees and other people owned just 4%.  

Not only did the plaintiffs get a $200 share price but they got part of an offshore exploration property. This was however short lived as Bill Koch believed that brothers Charles and David Koch had cheated them out of money.  On December 31, 1982 the book value of Koch Industries was $1.54 billion (meaning what the worth of just its assets). The company in 1982 earned after tax earned $309 million. The company had a book value of just $133 per share.

This whole share price war reminds me of the classic book “Barbarians at the Gate” which discusses the merger between Nabisco and R.J. Reynolds with investment bankers coming up with higher and higher offers but made crazy assumptions. The Koch trial seems to be similar. Koch Industries told William Koch what the company was worth but William wanted a higher price. He kept hiring advisors to tell him his higher number was right. However, in the end I think William Koch made out pretty well.  When the whole thing was said and done Bill walked away with a $500 million check. William is now worth $4 billion. Not too shabby if you ask me. 

Charles Koch Relentless Goals: Being a Billionaire, Death Threats, and Giving Back

Source: Wichita Eagle

Apparently, the Wichita Eagle gave me an early Christmas present with this recent profile of Charles Koch. In 1998, Bob Cox of the Wichita Eagle did an in depth profile similar to this one.  The Koch family seems like one interesting family with David, Charles, and Bill. This profile shed light on who Charles Koch really is.

In the article it discusses how Charles Koch gets his hair cut from his wife (even though he is worth $31 billion and historical net worth 1984-2012 here) because he doesn't have time to go to the barber. Koch also use to be an avid skier until his knees gave out and has had both knees replaced and his right shoulder. This was after years of playing tennis, squash, golf, and polo.  These days he works out for an hour and a half doing weighting lifting, Pilates, and aerobics and follows a strict diet. He was diagnosed with prostate cancer in 1999. Koch is very competitive. When he played tennis with his friends and wife he hit the ball so hard that it hit the woman in the lip causing his wife Liz to curse him out.

His wife Liz has been at his side for their 44 years of marriage (which seems rare these days). She claims she is only one in the relationship that let her hair grow out.What is funny though is that when Liz first met Charles he wore a strip shirt and madras (picnic shorts). Liz also put up with Charles having books all over their apartment when they were first married when Charles was teaching himself about different subjects (economics, psychology, history) in the 1960's that Liz didn't even have a closet for her clothes. Even brother David Koch admits Charles reads "like a demon".

Charles was also competitive in the business world as well. Right before he joined his father’s company it had $70 million in annual revenue in 1960. In 2012, this number increased to $116 billion. Koch is a hard working man who is always working. His father Fred yelled at him when he was trying to save money for estate taxes (estate taxes have to be paid 9 months after death which makes it hard if your assets are all tied up in company stock). Charles bought two trucker companies (instead of one) and his father was furious with him. I personally think Koch is a workaholic however I think one of the side effects is becoming a billionaire. He also doesn’t like wasting time as he listens to audio books in his car because why waste 10 minutes of time. He doesn’t seem to work for money.  Charles Koch wakes up every morning to do what he loves doing: running a business. He doesn’t plan to retire and probably will work until he dies.

Growing up in the Koch family wasn’t easy either. The tennis gene must of rubbed off on his son Chase Koch because he appeared in Sports Illustrated under “Faces in the Crowd” in 1996 for a stellar tennis record. Just three years earlier Chase hit and killed someone in an accident. People make mistakes no question and growing up with Charles Koch probably wasn't easy as at 13 years old Chase had to go out and do work on the cattle feedlot in western Kansas. Charles said he thought his son believed he would have a full time job and be able to go out with his friends as night in Kansas. Chase worked 12 to 13 hour days 7 days a week as well. Charles when he first started work at Koch worked 7 days a week too. Charles preached family values and economics to his kids. Every Sunday afternoon Charles would teach his kids about economics. Chase would go to sleep while daughter Elizabeth would act interested. Chase who is not 35 now Vice President of Koch Agronomics Services. Elizabeth graduated from Princeton in 1999 is 36 years old with a degree in English literature and an MFA from Syracuse in 2011 and now works at Black Balloon Publishing in New York. The Koch kids seem to be good people or done anything crazy that has got in the press.

What truly is crazy is that the Koch family gets hundreds of death threats from wackos all the time. Not only this but Koch Industries has received cyber threats, bomb threats, and employees have also been threatened to. The family has a result has to hire security guards around the clock to protect themselves (tax increase I would point out). This seems pretty crazy for guys that just want to spread the good word of liberty, limited government, and prosperity. Speaking of prosperity Charles points out that "even those who live in poverty, have more money and opportunity for jobs if they live in a free-market economy rather than one controlled by dictators".

I consider Charles Koch to be a great American. Greatly expanding a business his father started into a $115 billion per year is not easy. In addition to creating jobs, improving the economic condition of his own 60,000 employees he is trying to spread the message that free markets actually do improve the life of everyone (even  poor people). I personally don't think Charles Koch is motivated by money. He is motivated to do the right thing by explaining not only how he was successful but how other people can be successful. In addition to all of this, he and his brother David have given $46 million to local Kansas charities and $1 billion in the last 12 years to various causes. If after reading this you don't have any respect for Mr. Koch you probably don't have any decency. 

Kochs’ Quest To Save America

Source: Wichita Eagle

It seems as if more information came out about the Koch brothers over the weekend. The Wichita Eagle published this article on October 11, 2012. On the Wichita Eagle website (Kansas.com) it said that this was an exclusive and only part 1 of an extensive interview. I am hoping for more articles out of this of course. As you may know I have been interesting in the Koch family for quite some time and did a historical net worth of Charles and David here, a Koch family history, the $1.3 billion lawsuit between all the Koch brothers,  growth in the 1990’s,  as well as current growth, even David Koch dating.

There was not only the original article that came out but also some photo galleries that can be seen here and here. Some separate articles are quotes from Charles Koch, David Koch, and Dr. Richard Fink (executive Vice President of Koch Industries). Growing up the Koch family had a strict dinner policy. At 6:30 a big bell would ring and they had to come into the house and sit down with parents. David admits he was scared when he was diagnosed with prostate cancer in the 1990’s. He actually believed he wouldn't be around very long. His prostate cancer is under control and David has generously funded causes to help find a cure for prostate cancer as he donated $25 million to M.D. Anderson Cancer Center in Houston. As part of his legacy David wants people to know he tried his best to make the world a better place and improve the lives of others.

What we learn in all this recent news is how the Koch brothers have been personally targeted by the Obama administration for using their first amendment rights to speak out against the administration. Wichita Eagle mentioned the death threats in this article. Not only has Charles and David Koch (David said he got 100 creditable death threats) been getting death threats but employees as well. Of course these death threats are from deranged people who don’t actually have all the facts and watch MSNBC all day, read Media Matters online, and listen to fools like Ed Schultz on the radio. I haven’t even heard of President Obama getting death threats and you would think that would be likely with all these so called “racists” out there. At any rate, the death threats on the Koch family have caused them to hire more security for them and their family (tax increase of course).  The article mentions how Austan Goolsbee (Obama’s chief economic adviser claimed Koch Industries was not paying their taxes (which is actually a crime under federal law to disclose confidential tax information). Stephanie Cutter Obama’s chief campaign manager claimed she “was going to call their BS”. Apparently, Ms. Cutter has not seen a video where Koch Industries calls Cutter on her BS here. This video talks about the falsehoods associated in a Bloomberg article that discussed the dealing Koch had in Iran. In May 2012 David Axelrod called the Koch brothers “contract killers”.

Also it is learned that Dr. Richard Fink told the Koch brothers in January 2009 around the same time when President Barack Obama was sworn into office that there would be a price to pay for taking on the president. One of the risks might be to put Koch Industries at risk as well as the family legacy. The government does have the power to do much harm to Koch Industries as it can “randomly” audit the company, refuse permits, or treat them in a way that would not be business friendly. David Koch talks about how we will have inflation by buying bonds to finance debt.  This has forced interest rates to very low rates and as Charles points out really doesn't help the people who save money (Koch praised John Allison’s new book on the financial crisis which I am currently reading). Fink points out that the interest alone due to China by 2025 will be enough money to fund China’s military budget.

Another interesting point that people forget is that Charles and David Koch are more libertarians than anyone thinks. Charles even admits that if Democrats supported free markets and limited government they would donate to them (it just so happens that the people who endorse free markets are Republicans). They support people who want limited government, strong property rights, and people who want everyone to prosper. Both Republicans and Democrats have failed this test and Charles points out that even under Romney the country will just decline as a slower rate compared to Obama.  Although people claim that the Koch brothers want more deregulation to make more money this is a foolish statement. If markets are deregulated allowing more competitors into the same businesses as Koch how does that benefit them if they would face even greater competition? It is actually against their self interests to want more competitive markets. However, the Koch brothers rise to higher morals and want a system that makes the world a better place for everyone.

Dr. Richard Fink was looking to fund a free-market organization and went to Koch (after buying a $1,200 plane ticket to Wichita). Fink wore a polyester based suit and made a presentation to Charles in 1977 in search of seed funding of $150,000. Charles admits the fact that Fink wore a polyester suit helped (petroleum based which Koch has businesses in). Then there were the invitation only economic seminars which the first one in Chicago with only 17 people having nonstop lectures (people couldn't even taken bathroom breaks).

Clearly, the Koch brothers have benefited society through their charities (they donate to the arts, medical institutions, and schools). In addition creating a business that now has 60,000 employees they create products that people use every day (toilet paper, Dixie paper cups, along with blended gasoline). David Koch’s technology group is even making water cleaner to drink. I really admire them for their success in not only running a business but promoting an economic system that really would lift people out of poverty and increase the standard of living for everyone. To the Koch brothers I tip my hat to both of you. 

William Koch: Culver, MIT, and Other School Days

After making the comment that William Koch had learned nothing after 13 years and getting three degrees from MIT including a PhD in chemical engineering I did some research to learn more about his school days.  I found this profile from his high school Culver Military Academy where he graduated in 1958. It should be pointed out that Charles Koch also went to Culver Military Academy but was expelled after drinking on a train. Even though students go to places like Culver before college it has more of a college schedule with Wednesday being the busiest day with activities from 8:20 a.m. to 11 p.m. There is no surprise that 99% of the graduates matriculate into colleges.  It is interesting the classes are ranked by how much time it takes students on homework. So for example a Level A class will take less than 30 minutes in homework per class while a Level E class will take more than 90 minutes per class of homework.

William seemed pretty busy when he as at Culver. He was on cross country, basketball, track, football, baseball, boxing, volleyball, softball, and graduated cum laude. According to the June 1994 edition of Vanity Fair from an article called Wild Bill Koch’s Grand Desires by Bryan Burrough, William as a kid was “nerdy, awkward kid”. He also like to start mischief when he was six he swallowed a hog ring which lead to a hospital visit where they had to pump it out. He was also competitive and didn’t like to lose. The Koch family had a pool growing up and William got upset pretty easily and sometimes would go crazy. In one instance his twin brother David Koch was hit with a polo mallet and David fought back. In a very dangerous fight William got a butcher knife but finally put it down after he realized he could kill his own twin brother. During middle school at the age of 13 Bill almost failed out (interesting for someone who later got a PhD in chemical engineering) and says he was clinically depressed. William went to M.I.T. like his older brother Charles and all joined Beta Theta Phi, where William was the house “humorist”. William was also a pretty decent athlete making the basketball team at M.I.T. his freshman year. Twins David and Bill both got their master’s degrees in chemical engineering by 1963 however they both took different paths. David went to go out in the real work and work while William spent the next eight years at M.I.T. getting his PhD. David claims his twin brother William had a country club attitude when it came to school, and just “lazy years, full of days tinkering in university labs, playing rugby, and chasing women”. Perhaps spending a total of 13 years in school was a way for William to avoid having to work in the real world which makes his comment about never really learning anything even more interesting.

As people say it really isn’t where you start out in life it where you end up. William Koch seems like he has gone through many different things in his life time (depression, various lawsuits, and marriages). However, today he is waking up everyday going to work in charge of Oxbow Corporation and worth $4 billion. If you read he was on the verge of flunking out of middle school you might not have guessed he would have been a billionaire or ever got a PhD. 

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

Charles Koch: Corporate Cronyism Harms America

Today in the Wall Street Journal op-ed section was an article by Charles Koch about crony capitalism. As you may know I did an extensive three part series on the Kochs here, here, and here.

The main gist of the article is that Charles Koch opposes crony capitalism and doesn’t want the government to come help him out (too bad more business leaders are not like this). People on the left claim that Koch Industries takes subsidies from the government but their arguments are shaky at best. Let’s examine some of their claims. The first claim is that Fred Koch (father of Charles) helped construct refineries for Joesph Stalin. What they don’t explain is how free market the father became after realizing how communism didn’t work in the former Soviet Union. Also even though no one is fond of Stalin I am not sure how the U.S. government is subsidzing this. Another claim is that Koch is trying to lobby politicians by making campaign contributions and then in return the politicians will help out the business. Koch has been against subsidies like the NAT Gas Act, against ethanol subsidies (which actually increase the price of food), and alternative energy subsidies. You could take away all of these subsidies and Koch Industries would be just fine. Also sometimes the government forces companies into taking subsidies even when they don’t want them (giving banks money in 2008 that were financially stable). This is like when people claim that oil companies get subsidies. This of course is nonsense since oil companies get no unique tax credits or deductions. In fact in 2005 when oil company CEOs were called in front of Congress about “excessive profits” each executive said these so called subsidies wouldn’t make a difference in their bottom line because it doesn’t even apply to them.  

Charles and David Koch believe in free markets which is actually against their self interest which  so many people fail to point out. They want free markets not to make them rich but to make everyone else rich while enhancing the standard of living for everyone. Liberals often say the Koch brothers just want to pollute to make more money. My question would be do Charles and David Koch breath different air then everyone else? Also if these accusations of pollution were as true as so many claim why wouldn’t there would be criminal action against Koch Industries? Yes, the company has had incidents were sometimes bad things go wrong. However, when you are operating a company with over 60,000 employees dealing with chemicals that are not so friendly bad stuff can and will happen. The question is what trade off are people willing to accept. We could have so much regulation that gasoline would cost $6 at the tank in order to be safe, however how many people could be able to afford to go to work every day? I would argue the Koch brothers have done more to increase standard of living than politicians by giving people a place to go every day to earn a living, a place to help them pay bills, a place to give them purpose, and most importantly a place to create value. If you know if any welfare problems that have similar results without taxpayer money please let me know. 

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