The chants wafted up from the street below.
Charles and David Koch:
Your corporate greed is making us broke!
Charles and David Koch:
Your corporate greed is making us broke!
It was January 30, 2011, the kickoff of Charles and David’s next donor conclave, this one held in the Southern California resort city of Rancho Mirage, just outside Palm Springs. Among the conservative megadonors who jetted in to attend were Home Depot cofounder Ken Langone, Amway billionaire Richard DeVos, and Wisconsin building products mogul Diane Hendricks. The featured speakers were Eric Cantor and Paul Ryan, the incoming House majority leader and budget committee chairman, respectively.
For the first time in the eight years the Koch brothers had convened these strictly confidential gatherings, a copy of the invitation had leaked, giving away the location and allowing a collection of liberal advocacy groups and unions to mobilize. Watching from an upper balcony at the Rancho Las Palmas Resort and Spa, David and his wife, Julia, her head resting heavily in her left hand, grimaced at the clamorous scene below.
Hundreds of shouting, sign-waving protestors swarmed in front of the resort. Activists held up a yellow banner with biohazard symbols reading, QUARANTINE THE KOCHS. Another sign declared: KOCH KILLS. One protestor carried a cardboard placard splashed with fake blood and the slogan NEUTER FERAL FATCATS—the “s” doubling as a swastika.
It was the liberal analogue of a Tea Party. Instead of irate activists demanding the government keep its hands off their health care, these protestors were calling on the Kochs and their wealthy friends to keep their money out of the political system.
A line of police in riot gear guarded the driveway to the locked-down resort, while a contingent of Koch security guards, wearing gold “K” lapel pins, patrolled the grounds within the complex. Discovering Politico reporter Ken Vogel sleuthing on the premises, Koch’s surly guards ejected the journalist under threat of a “night in the Riverside County jail.”
Security wasn’t just tight on the ground. The Federal Aviation Administration had taken the cautionary step of curbing access to the airspace above the resort. A couple of days earlier, Greenpeace had launched its 135-foot airship above Rancho Mirage. As guests began to arrive at the resort, they were greeted with the spectacle of the lime green, blimp-like craft circling overhead and displaying large banners with Charles and David’s caricatures; sandwiched between their faces was the slogan KOCH BROTHERS: DIRTY MONEY.
The brothers were under the radar no more, their pictures used for left-wing propaganda and their family name a code word for corporate villainy. Experiencing the contempt firsthand was unnerving. And it materialized in some of the least expected places. A few weeks earlier, audience members had booed David at the opening of the Nutcracker at the Brooklyn Academy of Music, a holiday performance he had chipped in $2.5 million to sponsor. “He’s an evil man,” a voice in the audience whispered when he took the stage to say a few words about his contribution. It was an uncomfortable convergence of his life as a New York City philanthropist and his life as a billionaire bankroller of conservative causes.
Charles viewed the intensity of the onslaught as an omen of progress. “I believed that when we were considered effective we would be attacked,” he told The Weekly Standard. Charles’s father had made a nearly identical statement almost a half-century earlier, at the height of his infamy as a leader of the John Birch Society. “There are many who are attempting and will undoubtedly continue to smear us,” Fred Koch griped to a reporter in 1960. “We’ve been called just about everything in the book but we consider that a sign of our effectiveness.”
There was a big difference between Fred Koch’s era and the present one, however. The Kochs were no longer fringe players on the political scene. The brothers had begun their political careers as idealists, third-party outsiders. Now the same establishmentarians that had kept Fred Koch’s John Birch Society at bay and laughed off the Libertarian Party had started to embrace them. Even National Review, the arbiter of American conservatism that crusaded against both Birchism and Libertarianism, was defending the brothers from their liberal antagonists.
In the coming presidential election cycle, the Kochs would do battle on several fronts. On the surface, their objective was installing a Republican in the Oval Office and packing Congress with conservatives, but this fight was also about reshaping the Republican Party and crashing the gates of political power to claim a seat at the table. During the war ahead, the Kochs waged some of their most brutal combat not with ideological enemies, but with onetime allies from their early days in the political arena.
During breaks in the conference, curious attendees peeked outside to watch the protest, where police ultimately arrested twenty-five activists. If anything, the demonstration galvanized members of the Kochs’ donor network. “It generated a lot of enthusiasm for what we are trying to do,” a Koch official said at the time. Hanging out with the big, bad Koch brothers, the scourge of the Obama administration, had become a conservative status symbol.
That enthusiasm had been a long time in coming.
Since the 1970s, when Charles was the libertarian movement’s primary benefactor, he had been intent on cultivating a group of like-minded business leaders to support the causes he held dear. “He wanted more guys like him who would put money into Cato and these different organizations,” said Richard Wilcke, who ran the Koch-funded Council for a Competitive Economy. He was trying to “identify other Charles Kochs” and seeking to drum up “movement-type organizational support.” A number of lonely years had passed before Charles began to find willing investors who shared his vision.
Through the biannual seminars, Charles hoped to build a deep network of business leaders and philanthropists that would grow and sustain a coterie of favored free-market think tanks, advocacy groups, and educational programs. The inaugural conference, held in Chicago in 2003, attracted just seventeen participants, many of them drawn from Charles’s circle of friends. Back then, these invitation-only confabs, where presenters bored attendees senseless with marathon economics lectures, held little mystique. It was hard to read the long-winded name of these events—“Understanding and Addressing Threats to American Free Enterprise and Prosperity”—without stifling a yawn. The brothers didn’t need a heavy security presence to keep people out—the problem was getting them in the door to start with.
“Their first few seminars were disasters. No one even came,” said a Republican operative who has attended the donor summits.
Eventually Richard Fink and his staff began to spice up the tedious conferences with conservative celebrities and high-profile Republican lawmakers. The events gradually drew a hundred, then two hundred attendees. Soon guests rubbed elbows with Rush Limbaugh, Charles Krauthammer, Senator Jim DeMint, Mississippi Governor Haley Barbour—even Supreme Court justices Antonin Scalia and Clarence Thomas. The more donors the events attracted, the more these gatherings became a magnet for politicians prowling for campaign contributions. “It became a libertarian Woodstock that you had to go to,” a conservative strategist said.
By the 2008 election cycle, the Kochs’ donor retreats began attracting the type of heavy hitters who wrote seven-figure checks without flinching. Kevin Gentry, Koch Industries’ vice president for special projects and the brothers’ chief fund-raiser, played an important role in transforming the donor summits into a well-oiled machine. An acolyte of conservative activist Morton Blackwell, Gentry served as a vice chairman of Virginia’s Republican Party and he was an old pal of Tim Phillips, Americans for Prosperity’s president; he had been a director of the Faith and Family Alliance, the Jack Abramoff–linked group that Phillips had helped to set up.
Gentry’s entrée to the Koch universe came through George Mason University, where he was a fund-raiser for both the Mercatus Center and the Institute for Humane Studies. He was hired in 2003 by Charles’s foundation and later went to work for Koch Industries directly, serving as a liaison between the Kochs and the organizations they funded.
Gentry employed a simple yet brutally effective fund-raising strategy at the donor retreats, which he organized and emceed. During lunch on the second day of the conference, after attendees had heard from a variety of speakers and been briefed on the Kochs’ political strategy, Gentry often presided over a lively pledge-a-thon during which some of America’s wealthiest men rose to their feet to one-up each other as they promised six- and seven-figure contributions to advance the cause of economic freedom.
“Literally, Kevin’s at the front of the room with a microphone: ‘Foster, what do you think you can pledge?’ ” said a political strategist who has attended these sessions. “They would get in this room and just feed off each other.” Between ultracompetitive billionaires and business moguls, it almost became a contest over who could cut the bigger check. “Everybody gets so excited, and it’s this human nature of ‘my dick’s longer than your dick.’ They’re tapping into basic human nature and they’re raising tens of millions of dollars in the span of an hour.”
Minnesota broadcasting billionaire Stanley Hubbard, a regular attendee of the Kochs’ donor summits, said: “When people stand up and say, ‘I’ll give,’ another guy will say, ‘I’ll give the same thing,’ and another, ‘I’ll do the same thing.’ And they raise a lot of money in a big hurry at lunch.”
By the time the Rancho Mirage conference disbanded on Tuesday, February 1, Charles and David’s political operation had banked $49 million toward the goal of completing the Republican takeover they had helped to set in motion in the midterms.
Several weeks later, at about 2:00 p.m. central time on February 22, Scott Walker, the newly elected Republican governor of Wisconsin, picked up the phone in his office. David Koch, he’d been told, wanted to speak with him. Koch Industries’ political action committee had contributed $43,000 to Walker’s campaign, making the company one of the governor’s biggest financial backers. Koch’s PAC had also directed more than $1 million to the Republican Governors Association, a political outfit focused on electing GOP chief executives across the nation; David had personally donated $1 million to the association, which had in turn sunk more than $3.4 million into Walker’s race.
David was precisely the type of megadonor an ambitious politician like Walker wanted in his Rolodex. And if he called, you answered the phone.
“Scott! David Koch. How are you?”
“Hey, David! I’m good. And yourself?”
“I’m very well. I’m a little disheartened by the situation there, but, uh, what’s the latest?”
The situation was that thousands of people were protesting in the streets outside Walker’s office in the state capitol in Madison. An angry throng of activists had made camp inside the building’s three-story rotunda. Walker, the forty-four-year-old son of a Baptist minister, had stirred the outrage of tens of thousands of Wisconsinites when, less than a month into his new job, he “dropped the bomb,” as he put it, on the public sector workers and unions of his state.
He had unveiled a piece of legislation intended to plug a $137 million hole in the state budget by, in part, slashing collective bargaining rights for public workers and forcing them to pay more for their health care and retirement benefits. The bill required an annual vote to keep a union functioning and, going a step further to weaken labor’s power, curbed the ability of unions to collect money for political spending. Democratic members of the state Senate had fled Wisconsin to deny their Republican colleagues a quorum to vote on Walker’s bill. The state was in turmoil.
Walker was not alone in his efforts to neuter organized labor at the state level. Other conservative governors, swept into power by riding the Tea Party wave of 2010, put forward their own bills targeting unions. Legislation similar to Walker’s popped up in Iowa, Idaho, Alaska, and Ohio, sparking smaller protests in those states as well. The early months of 2011 saw a sustained assault on organized labor, of the kind that hadn’t been seen since the right-to-work movement of the 1940s and 1950s, when Fred Koch and his right-wing ally Bob Love had successfully led the charge to make Kansas a right-to-work state.
As Walker came under fire, the Koch brothers’ Americans for Prosperity rallied to his aid. Wisconsin was home to one of the group’s largest and most active state chapters, and in the past Walker had been a frequent speaker at Americans for Prosperity events. (Koch Industries also had a sizable presence in the state, where it employed some 3,000 employees, including at two Georgia-Pacific paper mills in the Green Bay area.) In an interview with The New York Times, Tim Phillips suggested that AFP leaders had encouraged Walker to battle the unions (though Phillips later denied saying this). And his group mobilized quickly to defend Walker from the pro-labor onslaught. It flooded the airwaves with issue ads urging citizens to “Stand with Walker,” organized counterrallies, and launched a statewide bus tour in support of Walker’s budget plan. (The advocacy group would later be pivotal in helping Walker keep his job, after his antiunion tactics culminated in a recall election.)
On the phone, Walker provided an insider’s account of what was transpiring in Wisconsin and a preview of his plans. “The state Senate still has the 14 members missing,” Walker said, “but what they’re doing today is bringing up all sorts of other non-fiscal items, many of which are things that members in the Democratic side care about. And each day we’re going to ratchet it up a little bit.”
When the caller brought up the idea of “planting some troublemakers” among the crowd of protestors, Walker acknowledged that “we thought about that.” And when he suggested the governor “bring a baseball bat” to a potential meeting with the fourteen Democratic senators who had left Wisconsin to bring the legislative session to a standstill, Walker responded, “I have one in my office; you’d be happy with that. I got a Slugger with my name on it.”
“Well, I tell you what, Scott,” the caller said as their conversation wound down, “once you crush these bastards I’ll fly you out to Cali and really show you a good time.” “All right, that would be outstanding,” Walker replied. “Thanks for all the support in helping us to move the cause forward.”
Walker rang off with three words that his critics would never let him forget: “Thanks a million.”
David’s secretary delivered the news that a gonzo journalist for a Buffalo alt-weekly had posed as him, holding a lengthy conversation with Wisconsin’s embattled governor. And the cringe-inducing recording of the call was circulating online. The real David Koch’s face flushed with anger. Protested, heckled, maligned—now someone had appropriated his identity.
The events in Wisconsin catapulted Walker onto the national stage. The battle also cemented the Koch brothers’ image as the right-wing puppet masters orchestrating a national stealth campaign of self-interested conservative reforms.
The prank call doused gasoline on the Madison uprising. Walker’s comments to the David Koch imposter fed into the tyrannical figure conjured up by the governor’s enemies—the politician who refused to negotiate with Democrats and hadn’t mentioned a word about his drastic budget proposal on the campaign trail, but who happily spent twenty minutes detailing his plans to a billionaire supporter. The call also reinforced the link between the governor and the Koch brothers in the minds of protestors, even though, as the recording confirmed, the men had never met nor spoken.
Post–prank call, the Kochs found their names plastered everywhere in Madison, and they became the targets of more public venom than they’d ever experienced in their lives. One popular theme declared Walker a KOCH WHORE. Another sign read, MR. WALKER, YOUR KOCH DEALER IS ON LINE 2… A third: SCOTT WALKER IS A KOCHLEAR IMPLANT. Meanwhile, boycott lists of Koch products were taped to the marble walls of the capitol. Brawny paper towels, Dixie cups, Quilted Northern toilet paper, Lycra, anything made by Georgia-Pacific: All of it was verboten.
Activists began to see nefarious signs of a Koch-Walker nexus everywhere. They pointed breathlessly to the fact that Koch Industries had recently opened a lobbying office in Madison, across the street from the state capitol. A provision in Walker’s bill allowing Wisconsin to offload state-owned power plants in no-bid transactions spiraled into rumors that Walker planned to give Koch Industries a sweetheart deal. Within Koch Industries’ public sector group—its public affairs, legal, and lobbying division—there was a debate about whether the company should respond to this conspiracy theory. Was the company really going to start issuing statements about deals it wasn’t interested in, and would the tinfoil-hat-wearing activists spreading this rumor even believe the company? The company ultimately put out a statement denying any interest in the plants, which are “obsolete and do not in any way fit the Koch companies’ current operations or their business plans moving forward.” Sure enough, it seemed to do little good. “Are you reassured?” The New York Times’s Paul Krugman asked in a column.
After the company issued the denial, Mark Holden, Koch’s lanky general counsel, left an angry voice mail for communications director Melissa Cohlmia. A former Akin Gump lawyer who hailed from Worcester, Massachusetts, Holden didn’t blame Cohlmia per se. He was just furious at the situation. Why did the company need to dignify this garbage with a response? Screw you, Paul Krugman!
The brothers’ opponents seemed to miss the forest for the trees as they strained to find evidence of the Kochs’ hidden hand at work, a smoking gun that proved the governor of Wisconsin’s marching orders came straight out of Wichita. The Kochs had indeed helped to influence the events playing out in Wisconsin and elsewhere in the country, where Republicans were trying to ram through proposals that curbed the clout of unions—but not as the Kochs’ critics imagined. George Pearson, Charles’s first political advisor, had once said that his boss “did not see politicians as setting the prevalent ideology but as reflecting it.”
This explained the Kochs’ political modus operandi. They had spent decades bankrolling the idea factories that had generated the policy recommendations and research underlying some of the same budget-cutting reforms that conservative governors like Scott Walker were now trying to implement. They had helped to elect politicians like Walker, who were inclined to enact these policies, and utilized groups like Americans for Prosperity to hold lawmakers’ feet to the fire or mobilize reinforcements if they came under attack. Politicians were merely chess pieces advancing the agenda they’d been armed with.
Death threats (“The Koch brothers will DIE!!!!!”) poured into Koch Industries in the months to come and hackers affiliated with the group Anonymous attempted to attack and infiltrate the company’s computer networks. A vandal defaced Deerfield’s Koch Center, the $68 million math and science building David had financed at his old boarding school, with statements including “money does not equal power.” Activists projected a caricature of the industrialist on the side of the David H. Koch Theater at Lincoln Center with a thought bubble above it reading, “I bought this theater so I could hide my evil deeds.”
Owing to security concerns, David and Julia began sending their children to school in a bulletproof car and his family received round-the-clock protection from ex–Navy SEALs. David told his three kids to think of the bodyguards as nannies. A security team protected Charles and Liz as well; Charles had hired the guards without bothering to inform his wife, who was livid. Cameras camouflaged in the trees of their Wichita compound, located at a busy intersection of chain restaurants and shopping plazas and ringed by a six-foot concrete wall, scanned the grounds for intruders. Even with these security measures in place, people close to the Kochs worried about “the Lee Harvey Oswalds of the world,” as one family friend put it.
Jeff Jacobs, the CEO of the Boys & Girls Clubs of South Central Kansas, recalled seeing helicopters hovering above the company’s headquarters and assault-rifle-carrying guards posted on its roof following one bomb threat. One day, with the backlash against the company in full swing, Jacobs visited Charles in his office. The men had never met but Jacobs had requested an introduction, just to thank the CEO for the good works he and his employees had done in the community, especially their support of the local Boys & Girls Club. Jacobs had expected a brief meeting, but the men talked for more than a half hour.
“This has got to be such a burden,” Jacobs said when he finally felt at ease enough with the billionaire to ask the question that had been on his mind. “I mean you could just run your business, make your money, go on vacation, and forget this policy stuff.” So why didn’t he?
“In America, we’ve kind of lost our way,” Charles explained. The American dream had smiled on the Koch clan. He felt an obligation to get the country back on track.
“What do you think, Mr. Koch, are you making any headway with any of this?” Jacobs asked. “I mean, you’re fighting a battle here.”
“Well, I’ll tell you, Preacher Man,” Charles responded, referring to Jacobs’s role as a local Catholic church deacon, “when you’re preaching to the choir, they get it, but there are some people who just don’t want to listen.”
Richard Fink, whose own Northern Virginia home was posted with guards, considered Wisconsin “an escalation” in “an orchestrated campaign” by the Obama administration and its Democratic allies to target Koch Industries and its owners. “With the Left trying to intimidate the Koch brothers to back off of their support for freedom and signaling to others that this is what happens if you oppose the administration and its allies, we have no choice but to continue to fight,” Fink said after the Walker prank call. “We will not step back at all.”
The Koch brothers and their strategist had spent much of their lives planting the seeds of change that had started to bloom around the country. “This is a big part of our life’s work,” Fink said. “We are not going to stop.”
In late June 2011, the Kochs assembled their network once again to plot an escalation of their own. The setting was Colorado’s lush Vail Valley, where the Kochs and nearly three hundred guests had the run of the Ritz-Carlton nestled at the base of the Beaver Creek ski mountain. The same weekend that Charles and David were cajoling their friends to hand over millions to dump into the upcoming elections, their brother Bill dropped seven figures of his own nearby in Denver. The only known photograph of Billy the Kid was up for auction; Bill plunked down $2.3 million for the rare picture after a round of bidding so intense that spectators jumped to their feet in applause once the auction ended.
The evening of Sunday, June 26, was warm and clear, with a light wind blowing in from the west. At the end of a long day of panel discussions and strategy talks, conference attendees gathered in an outdoor pavilion for the opening reception. Guests received the customary warning that what was said that weekend was strictly confidential. To prevent outsiders from eavesdropping, the pavilion was encircled with outward-facing speakers droning sound-masking noise.
Before dinner, catered by Wolfgang Puck’s Spago, Charles stepped to the microphone. “This is the mother of all wars we’ve got over the next 18 months, for the life or death of this country,” he said, likening Saddam Hussein’s description of the first Gulf War to the upcoming presidential election. “So, I’m not going to do this to put any pressure on anyone here, mind you. This is not pressure. But if this makes your heart feel glad and you want to be more forthcoming, then so be it. What I want to do is recognize not all of our great partners, but those partners who have given more than a billion—a mill…”
Laughter rippled through the crowd as Charles recovered from his flub. “Well, I was thinking of Obama and his billion-dollar campaign, so I thought we gotta do better than that.” The CEO then read off the names of the more than two dozen donors who had chipped in a million dollars or more over the past year. “If you want to kick in a billion, believe me, we’ll have a special seminar just for you.”
Among the donors he recognized were investment guru Charles Schwab; Amway cofounders Richard and Helen DeVos; Foster Friess; Cintas CEO Dick Farmer; the Marshall clan; Variety Wholesalers scion Art Pope; and billionaire hedge fund manager Paul Singer.
“Ten more will remain anonymous, including David and me,” Charles joked. “… The plan is the next seminar I’m going to read the names of the ten million.”
David spoke briefly later that evening, introducing the keynote speaker, New Jersey’s brash governor Chris Christie. Not yet two years into his term, Christie was already being floated as presidential timber. He was a hard-charging former U.S. Attorney, who, like Scott Walker, had entered into a fiscal showdown with his state’s most powerful unions. Earlier that year, Christie had called on David at his Madison Avenue office, and they had spent close to two hours talking. David came away so impressed with Christie that he had invited the governor to headline June’s donor conference.
In his introduction, David hailed Christie for his “courage and leadership,” citing the recent passage of a bill in New Jersey downscaling the pension and health benefits of public employees and the governor’s decision to pull out of a regional initiative to reduce greenhouse gas emissions. “We sincerely hope and trust that he will continue to be a strong voice for market-oriented policy,” David said. “Who knows? With his enormous success in reforming New Jersey, some day we might see him on a larger stage, where God knows, he is desperately needed.”
Known for his combative style and high-octane speeches, Christie gave a typically energetic performance. During a Q&A session afterward, he deflected questions about his White House ambitions. “You’re the first guy that I’ve seen who could beat Barack Obama,” gushed one donor, who also happened to be a close friend of presidential candidate Tim Pawlenty.
Christie clearly left an impression. Within a couple weeks of the Vail meeting, David and other members of the donor network (including Ken Langone, Charles Schwab, and Paul Singer) began strongly urging the New Jersey governor to jump in the presidential race. They had surveyed the field—Herman Cain, Jon Huntsman, Michele Bachmann, Mitt Romney, Newt Gingrich, Rick Santorum, and Tim Pawlenty—and saw no clear superstar with the charisma to oust Obama. Of these candidates, David Koch was the closest to Romney, the former Massachusetts governor, whose 2008 presidential bid he had supported. But David wanted to win. Christie had a certain type of straight-talking magnetism and the kind of pugilistic temperament it took to survive a bruising primary campaign and general election.
Ken Langone led the Draft Christie effort. “Ken was the person who really pushed it really hard,” remembered Christie’s chief political strategist Mike DuHaime. And David, he noted, “was one of the people that Ken Langone brought forward in the recruitment process.”
The month after the Vail seminar, Langone summoned Christie to the New York Health & Racquet Club in Manhattan. He wanted to show the governor precisely the kind of support he and his wealthy friends could deliver. Christie, joined by his wife and eldest son, Andrew, as well as DuHaime and another aide, had arrived expecting an intimate gathering. “I want you to come meet with me and a few friends,” is how Langone had pitched the meeting to the governor. Dozens of influential people packed the room. Among the attendees was Rudy Giuliani’s right-hand man Tony Carbonetti, hedge fund billionaire Stanley Druckenmiller, and even Henry Kissinger, the eighty-eight-year-old former secretary of state. At the front of the room was a row of chairs for Christie and his entourage, and nearby was a table with a speakerphone. Morgan Stanley’s John Mack was on the line. So was David, who was traveling. “He spoke up and voiced his opinion that he would be with the governor if he decided to run,” DuHaime recalled. “He said, ‘If you run, I’ll be with you.’ ”
To fund the Mother of All Wars, the Kochs and their advisors settled on a staggering budget of nearly $400 million. Arizona’s John McCain had not even raised that amount during his entire presidential campaign in 2008. The Vail conference alone netted more than $70 million’ worth of pledges. And Charles had vowed to his fellow donors to maximize the impact of their contributions. “I’ve pledged to all of you who’ve stepped forward and are partnering with us that we are absolutely going to do our utmost to invest this money wisely and get the best possible payoff for you in the future of the country,” he said.
Disenchanted with traditional Republican Party organs, members of the Kochs’ donor network had placed their faith in the Koch brothers. This was politics 2.0, a decentralization of party power caused by the gradual weakening of campaign finance laws and the rise of super-PACs and “dark money” nonprofits that allowed individuals and corporations to influence the political system as never before.
Characterizing donor sentiment, Charles’s friend Nestor Weigand, a regular attendee of the conferences, said: “What it amounts to is I’m not putting my money in a hole again. I have more confidence in this than I do in the Republican Senatorial Trust Committee” and similar GOP institutions.
“They bring real credibility,” said DuHaime, the Christie strategist and a former political director of the Republican National Committee. “I think other donors view them as smart donors. If the Kochs are behind something, then it has credibility. ‘We should get behind it too.’ ”
“They’re active, they’re engaged, they’re smart,” he continued. “It’s not just about television ads and things like that. They understand the evolution of data mining and all the different aspects that go into a long-term political operation. I’m hugely impressed with them.”
The Kochs commanded a sophisticated operation that had evolved over the years into a kind of shadow party, occupying its own center of gravity within the GOP universe. They controlled an extensive fund-raising network with the ability to drum up as much cash as the Republican National Committee itself. Through Americans for Prosperity, they had ground operations in all the competitive electoral states and a readymade corps of volunteers for get-out-the-vote efforts—what David called “a citizen’s army.” A web of other political and advocacy outfits, meanwhile, were under varying degrees of Koch control. The brothers had even spearheaded an effort to build a comprehensive database for voter microtargeting—an area where President Obama’s data-obsessed 2008 campaign had seriously outgunned the Republicans. Former Koch Industries executives ran the hush-hush operation, dubbed Themis after the Greek goddess of justice and divine order. It was a conscious effort to emulate the Democrats’ Catalist, a clearinghouse for voter data that was cofounded by former Bill Clinton aide Harold Ickes.
Observers of the Kochs’ political rise, from libertarian dilettantes to conservative powerbrokers, marvel at their ascent. “They were just gadflies; they had no political power,” the consultant who worked for Citizens for a Sound Economy in the 1990s said. “It is amazing to me how they’ve morphed and gone from spending money, hoping to have influence, to a point where they’re perceived to have influence. It took them… years to get to that point.”
Even prominent Democrats can’t help admiring what the Koch brothers have achieved. “The Kochs—with the team of strategists and organizational leaders they’ve financed—have done something that no other Americans have ever accomplished,” said Rob Stein, founder of the Democracy Alliance (the Democratic equivalent of the network controlled by the Kochs). “They began by building a distinct, durable wing—libertarianism—of a major political party that over the course of 35 years has become a dominant political force within Republicanism, and therefore within the country.
“They have accomplished this with deliberate strategic forethought, money, and superb organizing skills,” he continued. “They have been opportunistic. They have seeded and built idea and people networks that control the politics of over thirty states and the U.S. House of Representatives. It’s a brilliant, extraordinary accomplishment, and an unprecedented political phenomenon.”
For all its growing influence within the Republican Party, the Koch faction nevertheless occupied a somewhat tenuous place in the GOP. The brothers had their own political agenda, which in some cases clashed with the party line. They often aligned with the Republicans on free-market issues and downsizing government, but they fell on the other side of the political spectrum when it came to the social issues that animated the party’s powerful religious-conservative wing. Nor could Republicans count on the Kochs to fall in step on issues such as immigration, civil liberties, or defense, where they held more liberal views. The brothers and their company also opposed subsidies across the board, a position GOP members didn’t always share. “The Republicans don’t trust us,” said one Koch political operative.
The brothers’ government-spending zealotry also set them apart from the Republican mainstream. During the fight over raising the national debt ceiling that erupted in the summer of 2011, the Kochs’ Americans for Prosperity (and other groups aligned with the insurgent Tea Party) leaned on Republican lawmakers to hold firm in their opposition to raising the debt limit, while more pragmatic GOP organizations, including those associated with strategist Karl Rove, supported efforts by House Speaker John Boehner to broker a debt deal.
Occasionally, the Kochs seemed to work at cross-purposes with presumed allies. Their microtargeting operation, for instance, competed directly with a similar effort underwritten by the Republican National Committee called Data Trust; the brothers’ fund-raisers even canvassed some of the same donors Data Trust was soliciting, diluting the resources available for the party’s official effort. And the Kochs angered Mitt Romney’s campaign by holding one of their donor summits on the very same weekend when the candidate had scheduled a retreat for would-be campaign contributors.
In service of their larger goals, however, Charles and David’s network forged an uneasy alliance with groups across the GOP spectrum, including Rove’s American Crossroads super-PAC and its sister nonprofit, Crossroads GPS. In the lead-up to the midterms and again during the general election, emissaries of the Koch network attended meetings convened by Rove, where representatives of the GOP’s major outside political groups strategized. This informal coalition was known as the Weaver Terrace Group, because Rove first convened these meetings at his Weaver Terrace home in the tony Palisades neighborhood of Northwest Washington DC.
One of the Koch network’s liaisons to this ad hoc coordinating committee was a Phoenix-based political strategist named Sean Noble. A longtime congressional aide to Arizona Representative John Shadegg, Noble had flirted briefly with the idea of running for his boss’s seat when the Republican lawmaker announced his retirement in 2008. Instead, he followed the path of many Hill alums, opening a political consulting shop, DC London. Randy Kendrick, wife of Arizona Diamondbacks owner, Ken Kendrick, brought Noble into the Koch network.
Before the midterms, Noble, who was hired as a consultant to manage the network’s political spending, established a mysterious nonprofit called the Center to Protect Patient Rights. In documents filed with the Internal Revenue Service seeking tax-exempt status, Noble claimed the purpose of the organization was “building a coalition of like-minded organizations and individuals… to educate the public on issues related to health care with an emphasis on patients’ rights.”
In reality, the group acted as an ATM machine for dozens of conservative advocacy organizations. More than $200 million gushed into the nonprofit between late October 2009 (when Noble filed the paperwork to form it) and the fall of 2012; Noble dispensed this cash just as quickly as it arrived. The nonprofit formed one link in a daisy chain of trusts, LLCs, and nonprofits through which Koch network cash circulated en route to its final destination—one of any number of conservative political groups that included Americans for Prosperity, the Tea Party Patriots, the 60 Plus Association (a kind of right-wing counterpoint to the AARP), and many others. This elaborate system was designed to make it nearly impossible to trace contributions to their source. That’s what Kevin Gentry, Charles and David’s chief fund-raiser, had meant when he assured donors at the Vail meeting, “There is anonymity we can protect.”
The Kochs’ system for routing donor cash was more ingenious still. They created a 501(c)(6) nonprofit—typically used for business leagues and chambers of commerce—whose tax status could technically allow the Kochs and their donors to pour money into the political system and then write it off as a business expense. Originally headed by an ex-Koch lobbyist named Wayne Gable, this operation routed more than a quarter-billion dollars to Noble’s Center to Protect Patient Rights ($115 million), Americans for Prosperity ($32.3 million), and other groups in the year leading up to the 2012 election alone. The Kochs called their chamber of commerce the Association for American Innovation (it was later renamed Freedom Partners).
The Association for American Innovation was a cheeky moniker for a group bent on defeating the president, borrowing its name from an Obama administration economic policy called the “Strategy for American Innovation.” The Association for American Innovation’s founding documents, filed with the IRS, quoted the president and his strategy at length and suggested the group’s mission centered on advancing key aspects of the president’s policy. “This government policy and strategy is especially important today, when businesses, corporations, and even business innovation itself are under assault in the media and in the streets,” its mission statement read.
What the group didn’t say is that it planned to channel hundreds of millions of dollars into the 2012 elections in a bid to take down Obama and consolidate control of Congress. In fact, the Association for American Innovation told the IRS that it didn’t expect to play in politics at all: “Though it does not presently intend to do so, AAI may, to an insubstantial extent, also conduct activities that might be viewed as supporting or opposing candidates for elective office.”
The Koch faction’s money, said the leader of one conservative nonprofit, always came with strings attached. “Nobody really works with them—they work for them, or they don’t work with them at all,” he said. “They are kind of creating a monopoly” and seeking to “make the conservative movement theirs.”
The brothers’ political advisors, including Kevin Gentry and Sean Noble, micromanaged the expenditure of donor funds, according to Republican operatives who have worked with them. “Sean Noble was down to editing direct mail copy,” said a conservative strategist. Along with designing mailers, Koch operatives supplied political ads and approved messaging to recipients of Koch network cash. “If you want the money, here’s what you’re going to do with it,” was the message from the brothers’ political adjutants, said the leader of the conservative nonprofit. “These are the scripts you’ll use.” A GOP activist, who was employed by a group that received Koch donor cash, called contributions from the Koch network “directed grants.”
Charles and David’s top-down control, a Republican operative pointed out, conflicted with the decentralized, Market-Based Management practices of their company. “I joke with people that Obama, OFA [Obama for America], these guys operate from very much an entrepreneurial approach to politics, to advance more government, more of a state. Then you have these guys on the other side who are claiming they want to see less government, less spending, more diversified control, power, and they come from very much a command and control [perspective] to supposedly advance free-market entrepreneurism. It’s ironic. It’s centralized power to promote decentralized power.”
The brothers closely monitored the groups they bankrolled. David, in particular, was known for asking probing questions of the leaders of these organizations. “You don’t talk broad brush with David,” said Nancy Pfotenhauer, the former Koch lobbyist who is a veteran of both Citizens for a Sound Economy and Americans for Prosperity. “You lose all credibility.”
Americans for Prosperity board member James Miller said David “really raises questions, and if he doesn’t get answers, he keeps boring in.” Miller said the brothers have succeeded in their public policy philanthropy “because they’ve really gone about this in a businesslike manner” and because “they are hardheaded about making sure that the organizations are managed effectively.”
But the brothers’ “managerial approach to the movement,” as Richard Wilcke, who headed the Koch-funded Council for a Competitive Economy, put it, has often caused friction. In the fall of 2011, Charles and David’s effort to assert their authority over one of the cornerstones of their ideological empire ignited a civil war on the Right.
On October 26, 2011, seventy-eight-year-old William Niskanen, a former economic advisor to Ronald Reagan and the chairman emeritus of the Cato Institute, died after suffering a major stroke. His death brought a long-running (and secret) dispute between the Kochs and the leadership of the Cato Institute to an unavoidable head.
At issue was the unusual corporate structure of Cato, which had shareholders, unlike most nonprofits. (Before Charles excommunicated Murray Rothbard from the think tank in 1981, the libertarian economist had been one of them.)
Cato presently had four shareholders, including the Koch brothers and Ed Crane, Cato’s cofounder and president. Niskanen was the fourth—and the question now was what would become of his stock. Would it pass to his widow, Kathryn Washburn, along with the rest of his estate? Or would it be handed back to Cato, leaving the Koch brothers in majority control? Ed Crane and Bob Levy, Cato’s current board chairman, supported the former scenario. The Kochs and their advisors took the position that the shares were nontransferable, meaning the brothers controlled two-thirds of Cato and had the power to appoint the majority of the board.
When Cato was founded in 1977, Charles had pressed for this shareholder structure, believing it would provide an additional lever of control. Even as the composition of Cato’s board changed over time, its shareholders could ensure that the institute never drifted from its founding mission of advancing libertarianism. Charles later organized the Council for a Competitive Economy in the same way. “We want to make sure that we’re not investing in something for ideological reasons that changes its focus,” Richard Wilcke recalled Charles telling him of the shareholder arrangement.
For close to two decades, Crane and other Cato officials had tried to persuade Charles to reorganize the institute under a more traditional scheme of nonprofit governance. Each time the subject came up, Charles refused. But the issue could no longer be ignored.
Crane feared Charles would use Niskanen’s death to make a play for control of the think tank. Charles and David had become politically toxic. The notion that they “owned” the think tank would soil its independent reputation. “Who the hell is going to take a think tank seriously that’s controlled by billionaire oil guys?” Crane wondered.
Relations between Ed Crane and Charles Koch had frayed dramatically since Cato’s founding. Before Richard Fink became Charles’s ideological soul mate, Crane had occupied this place in the CEO’s life. Crane called himself a “genetic libertarian.” He and Charles held nearly identical beliefs on personal liberties and free markets. Crane didn’t suck up to anyone—not politicians, not billionaires. Charles must have found this refreshing—at least at first. In the early years, as Cato got off the ground, the pair consulted by phone daily and they traveled together in the early 1980s to the Soviet Union and China to see the depredations of communism up close. But by 1991, their fifteen-year friendship had fallen apart. Charles resigned from Cato’s board and cut off his financial support. David, who joined the board in the 1980s, remained a director. The year Charles departed, he became a Cato shareholder.
Charles framed his split with Crane as a divergence of visions. He told libertarian historian Brian Doherty: “I have strong ideas, I want to see things go in a certain direction, and Crane has strong ideas. I concluded, why argue with Ed? Rather than try to modify his strategy, just go do my own thing and wish him well.”
The sudden unraveling of their friendship perplexed Crane: “I’ll go to my grave not knowing what happened.”
One Cato scholar described their rift this way: “It’s like a breakup. You kind of know what the reason was, but maybe you don’t really understand why it ended.”
Their friendship suffered a series of fractures before the final break. One came in the mid-1980s, when Charles was beginning to formalize his Market-Based Management theories and tried to implement them at Cato. At one point, Charles dispatched a team of Koch engineers to Washington to school Cato’s staff in his management practices.
“We’re all just looking at each other like, ‘What the hell is this about?’ ” Crane recalled. “These guys were engineers, and you could tell that they didn’t even understand what they were supposed to be teaching.” Crane resisted the Market-Based Management regime, and Charles grudgingly let the matter drop.
In September 1990, during a second trip to the Soviet Union, Crane and Koch had another run-in. Cato was holding a landmark conference in Moscow at the Academy of Sciences’ Uzkoe Hotel, where prominent Soviet scientists stayed during visits to the capital. The hotel was grim and worn, like a cut-rate college dormitory. Members of the Cato delegation were surprised to learn that the bedraggled building—which had three floors but whose elevator had buttons for ten—was less than two years old.
The signature event of the conference, dubbed “Transition to Freedom,” was an open forum for Soviet citizens. At least 1,000 people attended, crowding into a room with a capacity of 700. The atmosphere was electric, charged with a sense of dawning freedom. In Crane’s telling, the scene moved Charles so deeply that he approached Crane at the last minute to ask if he could speak at the event. Crane, who’d painstakingly choreographed the program, was brusque. “Charles, we have negotiated every 30 seconds here,” Crane recalled telling him. “I can’t do that.”
Charles and Liz, who was traveling with her husband, departed Moscow the next day, cutting their trip short without explanation.
In Charles’s version of this story, he never asked to speak, though he did pull Crane aside with concerns about the conference agenda—that it didn’t delve deeply enough into the difficult transition from state-planned society to free-market economy. Crane, according to Charles, brushed these concerns aside.
Whatever took place, the conference formed a line of demarcation in their friendship. Political scientist Charles Murray, who presented there, recalled his surprise at Charles’s sudden departure. Members of the Cato group had planned a sightseeing trip to Leningrad, where Murray hoped to introduce some Russian acquaintances to a real American billionaire. “They really wanted to see the billionaire,” he recalled. Instead, he was forced to point out another wealthy member of their party: “That guy’s worth about $600 million.”
Murray remembered spending the evening before the citizens’ forum locked in boisterous debate with Ed Crane and Charles Koch over Saddam Hussein’s invasion of Kuwait the previous month. Crane and Koch, as usual, were simpatico: “I was being backed into a corner by both Charles and Ed because I was not as unequivocally anti-retaking Kuwait as they were.” He added, “Charles and Ed were as I had always seen them, which was a very joking, very warm relationship.… They were completely as they had always been.”
After Moscow, their relationship never recovered. By late 1990, the Rothbard-Rockwell Report, a libertarian newsletter authored by Murray Rothbard and former Ron Paul chief of staff Lew Rockwell, was gleefully reporting that Crane’s star had sunk within the Kochtopus, while Richard Fink’s had risen. “Richie, under Charles, now holds total power in Wichita,” Rothbard’s newsletter reported. It had to be true—Charles was no longer taking Crane’s calls.
“What I learned is, never piss off a billionaire,” Crane joked at a Cato gala years later, according to one think tank staffer, who said his boss occasionally made light of his bitter falling-out with Charles.
If only Crane had actually learned his lesson.
The bad blood between Crane and Koch was decades in the past, but a recent episode had reopened old wounds. The New Yorker’s Jane Mayer, in her August 2010 article about the Koch brothers, quoted a “top Cato official” disparaging Charles and Market-Based Management, a point of pride for the CEO who considered this philosophy the source of his company’s success and the bedrock of his legacy. Charles “thinks he’s a genius,” this official said. “He’s the emperor, and he’s convinced he’s wearing clothes.”
The remark infuriated Charles, and he and David were convinced they knew its source. The month after the story ran, David confronted Crane during a phone call. Was he Mayer’s “top Cato official”? Crane eventually fessed up. “Charles is really upset,” David told him during the call, according to Crane.
The brothers’ next move wasn’t subtle. That December, Charles called a Cato stockholders meeting, and the brothers invoked their shares for the first time anyone at the think tank could remember to appoint two new board members—Nancy Pfotenhauer, the former Koch lobbyist, and Kevin Gentry, the brothers’ chief fund-raiser and the organizer of their donor conferences. Both were Koch loyalists and neither was considered much of a libertarian (though Pfotenhauer, at least, had studied at George Mason University, under libertarian economist Walter Williams). “Anybody who even suggests that they are libertarians has got their head somewhere where the sun isn’t shining,” Cato chairman Bob Levy fumed. Crane stewed over the board appointments.
Crane possessed a legendary temper, and his fury over the Kochs’ power play finally erupted. In March 2011, during a board dinner held on the last Thursday of the month, Crane discussed Cato’s ongoing capital fund-raising campaign. Pfotenhauer, a petite and telegenic blonde who started her career as a Republican National Committee economist, chimed in with a question. Crane had detailed plans for expanding Cato’s physical facilities, but what was his vision for the think tank’s policy team? she wondered.
Crane’s short fuse turned to ash before everyone’s eyes. “Let me say something about these two new Koch operatives who have been placed on this board,” he snarled, crimson-faced, from his seat at the head of the table. He pointed to Kevin Gentry: “Kevin Gentry seated over there, has never once—never once!—invited me or any Cato scholar to speak at the donor conferences he organizes for Charles Koch.”
He rounded on Pfotenhauer. “How would you ever know anything about Cato’s policy priorities?”
Crane stomped off, as slack-jawed board members and Cato executives looked on.
“This was the accumulation of lots of things that were done by the Koch faction that Ed both thought were wrong as a management matter, and took personally,” said Bob Levy, who was present. “You certainly could say that Ed was provoked over a period of time, and this really was sort of the straw that broke the camel’s back.”
Later that year, when William Niskanen died suddenly, tensions between Crane and the Kochs reached a boiling point.
The week after Niskanen’s funeral, Levy flew from his home in Naples, Florida, to Dulles Airport, in the Virginia exurbs outside Washington DC. The seventy-year-old Cato chairman had requested an audience with David Koch. At the busy billionaire’s request, they arranged to meet at the airport, in a bland conference room attached to the hangar where David’s jet was parked.
Levy was a self-made millionaire who had started and subsequently sold a financial research firm, reinventing himself in his fifties as a lawyer and constitutional scholar. Levy hoped to avert a clash between the Crane and Koch camps over Niskanen’s shares. He wanted to gauge where both sides stood and see if there was any common ground on which to build an agreement.
Richard Fink and Kevin Gentry accompanied David to the meeting. The mood was tense from the outset. Crane’s belligerent treatment of Pfotenhauer and Gentry had angered David, who informed Levy bluntly that he and his brother wanted Crane gone within eight weeks, preferably sooner. Cato wouldn’t get a penny of his money, David said, until he felt it was back on the right path and under responsible leadership.
The Kochs didn’t just want a management change. The brothers and their advisors believed the think tank should do more to advance their political agenda in the upcoming election. The Republican Party, for all its flaws, offered the best hope for halting the country’s slide to socialism, David told Levy. Cato, he said, needed to start translating “esoteric concepts into concrete deliverables.”
What in the world did this even mean? Levy wondered.
“We would like you to provide intellectual ammunition that we can then use at Americans for Prosperity and our allied organizations,” David explained, according to Levy.
Levy was puzzled. Cato produced plenty of intellectual ammo, if that’s how you wanted to view the position papers and policy recommendations its scholars produced. Americans for Prosperity and any other outfit was free to use Cato’s materials to blast away at Obama and the Democrats.
“What gives you the impression that we aren’t providing intellectual ammunition?” Levy inquired. He never got a straight answer. After the meeting, Levy flew back home to Florida with a foreboding feeling.
The hostilities escalated throughout the winter of 2012, as both sides fruitlessly tried to reach a compromise. In return for eliminating the shareholder agreement, Levy offered to begin a search for Crane’s successor and give the brothers veto power over his replacement—the Koch brothers rejected the proposal. The Kochs proposed entering nonbinding mediation and later floated a plan for a “standstill agreement” until after the presidential election—Crane and Levy declined both offers.
In March 2012, the internal struggle leapt into public view. Crane had scheduled a shareholders meeting on March 1, where he planned to recognize Niskanen’s widow. Charles and David responded with a lawsuit to force Kathryn Washburn to relinquish her husband’s shares. And they used their Cato stock to install four handpicked board members, including Charles himself, displacing four existing directors.
“They thought we would back down rather than risk additional criticism from them and others on top of the many attacks we already face from opponents of a free society,” Charles said in a rare public statement. “They thought wrong.”
On the afternoon of March 2, Crane convened about a dozen mostly senior Cato officials in a conference room on the seventh floor of the institute’s headquarters, where its executives have their offices. One attendee described it as a “war meeting” that was led by Crane’s fastidious number two, David Boaz, who’d worked for the think tank since the salad days on San Francisco’s Montgomery Street. When Cato’s strange corporate structure was explained, there was a moment of surprise among staffers, who assumed the institute had been set up like any other nonprofit. “A lot of us had no idea we had shareholders,” the attendee recalled. But the meeting quickly turned pragmatic, he said, into “how do we stop this.” They discussed the coming news onslaught, and later a multipage internal memo of talking points was distributed to participants. It read in part:
Charles and David Koch have told Cato chairman Robert A. Levy that they intend to use their legal powers to remove Ed Crane, pack Cato’s board of directors, and coordinate Cato’s activities more closely with organizations that have political agendas. Predictably, their plans and motivations are not open and transparent. Charles Koch, David Koch and their representatives have publicly and privately declared their admiration for Ed Crane’s achievements which they describe as “remarkable” and “incredibly effective over the years.” Nevertheless David Koch told Bob Levy that the Koch family could only support Cato if Crane were removed as president. Koch offered no substantive reason for that demand. In a separate conversation Levy asked Charles Koch why he insisted on removing Crane after 35 years against the will of the board. Koch had no explanation other than that the two had a falling out some 20 years ago. The Kochs told Levy that they focused on defeating President Obama in 2012 and to that end they would like Cato to be the source of intellectual ammunition on key issues, advancing the efforts of Americans for Prosperity and allied groups by providing position papers, a media presence, and speakers on hot button issues.
Around Cato’s Massachusetts Avenue offices, in a modernistic cube of a building with a glass façade, staffers expressed anger but also befuddlement. Many scholars owed their careers, at least in part, to Charles and David’s philanthropy. They had done internships or fellowships sponsored by Charles’s foundation, participated in seminars or summer programs held by the Koch-funded Institute for Humane Studies, worked their way up through any number of nonprofits that received backing from the brothers, or all of the above.
“You’re talking about people at Cato who are big fans of Charles and David Koch,” Levy said, “so it’s inexplicable to them that the Kochs would do what they’re doing.”
The Kochs might as well have taken a bat to this hive of libertarian thought. Within days of the lawsuit, Catoites set up a “Save Cato” Facebook page and took to an assortment of blogs and news outlets to decry the alleged coup. “I don’t think they expected the Institution itself would reject their move,” said a Cato scholar. “When you take over an oil company, people might be scared they’re going to be fired, but you’re not going to have principled opposition. It’s not a question of whether you have a business when you’re done.”
If the Kochs gained control, Cato scholars and executives privately discussed resorting to the “Taiwan option”—forming a new think tank with the backing of Cato donors who remained loyal to Crane.
The Kochs and Crane, meanwhile, traded barbs in the press and via terse public statements. Crane accused the Kochs of an effort to “turn the Cato Institute into some sort of auxiliary for the GOP.” And he doubled down on his comments about Market-Based Management, calling Charles’s Science of Success, in an interview with Slate, “one of the worst books ever written.” David, resurrecting a charge once lobbed at Bill Koch during the brothers’ legal entanglements, blasted Crane for pursuing a “rule or ruin” strategy.
The Kochs’ reputation in libertarian and conservative circles for attempting to foist control over organizations they funded left them with scarce allies. Breitbart, the right-wing website founded by the late conservative firebrand Andrew Breitbart, emerged as one of their few defenders. It ran a series of unbylined articles that portrayed Ed Crane as a petulant, power-mad tyrant willing to burn the think tank to the ground if he could not run it. The eponymous website also floated thinly sourced allegations of sexual harassment by Crane, rumors amplified by websites associated with members of a libertarian faction loyal to the late Murray Rothbard.
Meanwhile, libertarian scholars and other allies on the Right closed ranks around their Cato comrades, pleading with the brothers publicly to back down, lest they do “irreparable harm to the credibility of Cato” and “undermine our community’s intellectual defenses” at the worst possible time, as the leadership of FreedomWorks said in a statement. Liberals, usually only too glad to pillory Cato, joined in the anti-Koch pile-on. The enemy of their enemy was their friend.
The Kochs expected the wrath of the Left. Little did they imagine that as the 2012 presidential election loomed, they would take heavy fire from within the movement they had helped to create.
The Cato conflagration distracted from the main battle the Kochs were fighting against the Obama administration. When the president’s reelection campaign unleashed its first ad of the general election in mid-January 2012, the spot didn’t trifle with Mitt Romney, Newt Gingrich, or any of the other Republican contenders; they were doing a good enough job of eviscerating one another without outside help. Team Obama, rather, directed its fire at the Koch brothers, whom David Axelrod, the president’s chief political strategist, had dubbed “contract killers in super-PAC land.”
“Secretive oil billionaires attacking President Obama with ads fact checkers say are ‘not tethered to the facts,’ ” the ad’s narrator intoned. A still frame of an Americans for Prosperity issue ad, targeting Obama for his support of the bankrupt solar company Solyndra, flashed on the screen.
The president’s political advisors devised the “secretive oil billionaires” ad as part of a carefully calibrated strategy to defang the Kochs and neutralize the impact of their attack ads. “Given the experience of 2010, at the outset of 2011 we were scared to death that between the Koch brothers and [Karl Rove’s American] Crossroads that the campaign would be outspent by hundreds of millions of dollars,” recalled Ben LaBolt, the Obama campaign’s press secretary.
The fear of being outspent by the Kochs and their allies drove the Obama campaign, already known as pioneers in the use of microtargeting and voter analytics, to become that much more data-focused. “You can count the concern about the Koch brothers and the outside groups” in the dozens of staffers the campaign allocated to its analytics department, said Larry Grisolano, who oversaw the Obama campaign’s advertising. Heading into the election, there remained only a small sliver of the electorate—perhaps 15 percent—who could be swayed left or right. Plans by the Kochs to dump hundreds of millions of dollars into the election motivated the Obama campaign to strive for ruthless efficiency in its own expenditures. The campaign developed a system called “the Optimizer,” which mingled voter and TV viewer data and guided its hypertargeted ad strategy. The campaign couldn’t play “the traditional advertising game of casting a really broad net and hoping that you get the fish,” Grisolano said. “We wanted to basically have a very laser-like focus on where those targets were and have as little spillage into inefficient targets as possible. It was all because of our pre-occupation with spending by the Koch brothers and other outside groups.”
The “secretive oil billionaires” ad was born of the Obama team’s realization that it could not refute Americans for Prosperity ad for ad. When the campaign focus-grouped possible responses to Americans for Prosperity’s attack ads, it found that viewers often disregarded the group’s message once they became aware of AFP’s connection to the billionaire Koch brothers. “If you just outlined who the Koch brothers were in that response ad,” said LaBolt, “then people tended to discredit the argument. You could educate people about what AFP was, so that they would remember when they saw subsequent advertisements who was behind it.”
The Obama campaign’s debut ad reminded voters—as it would do over and over again throughout the election—that a pair of petrochemical billionaires lurked behind many of the political ads attacking the president. According to Grisolano, the campaign found that the name “Americans for Prosperity” itself made some voters suspicious. It sounded like a front group. “They kind of helped us in this idea of the secretive oil billionaires by the ambiguity of the name and what their aims were.”
The Obama campaign’s opening salvo touched a nerve. Former George W. Bush administration solicitor general Ted Olson, who represented Koch Industries, fired back in a Wall Street Journal op-ed that accused President Obama and his reelection team of engaging in Nixonian tactics against the Koch brothers in a “multiyear, carefully orchestrated campaign of vituperation.”
The Obama campaign had no plans of retreating. In February, Obama’s campaign manager Jim Messina invoked the brothers in a fund-raising appeal, noting that Mitt Romney, who was scheduled to appear at an Americans for Prosperity event, was courting men “whose business model is to make millions by jacking up prices at the pump” and “who bankrolled Tea Party extremism.”
By March, as the Cato feud went public, the Obama team and Koch Industries were dueling in deliciously passive-aggressive open letters. “It is an abuse of the President’s position and does a disservice to our nation for the President and his campaign to criticize private citizens simply for the act of engaging in their constitutional right of free speech about important matters of public policy,” chided Philip Ellender, the president of Koch Industries’ government and public affairs division.
Messina, who carefully tracked Americans for Prosperity’s spending on a whiteboard in his Chicago office, only too gladly replied: “It is a cynical stretch to describe the political activities of your employers as furthering democracy when they are courting huge checks from special interest donors to pay for negative ads, with no public disclosure of the identity of those donors.” He challenged the Kochs to disclose Americans for Prosperity’s contributors, who, the brothers’ representatives insisted, disingenuously, were largely average citizens from “across the country and from all walks of life.”
By May, the tit-for-tat graduated to web videos, each side responding acidly to the latest provocation.
“You may have heard of the Koch brothers,” Obama’s deputy campaign manager Stephanie Cutter said, speaking directly into the camera and betraying more than a tinge of annoyance. “… These guys are going to say whatever it takes to tear down the president. They will literally say anything.… So we’re going to call their BS when we see it.”
Koch Industries’ PR shop retorted with its own slickly produced video: “Yet again, low-minded invective aimed at job creators. The president and his campaign offer no solutions and no principled discussion.”
While the bitter Republican primary campaign slogged on, it was as if President Obama were running against the Koch brothers.
While Charles and David fought for the political soul of the country and did battle over Cato, their brother Bill was busy waging wars of his own—against such evildoers as shady wine dealers and Oxbow employees he suspected of fraud. These fights, as usual, involved high-priced lawyers, shadowy investigators, and made-for-TV-movie-style intrigue.
By 2012, Bill was seven years into his latest legal crusade, one that had begun in 2005 when Boston’s Museum of Fine Arts was preparing an exhibition of his eclectic collections of art and memorabilia called “Things I Love.” He counted four bottles of eighteenth-century French wine, two Brane Mouton and two Lafite, engraved with the initials “Th.J,” among the jewels of his collection. Bill had purchased the wine, said to have belonged to Thomas Jefferson, for $500,000 in 1988. But as his aides attempted to trace the provenance of the Jefferson bottles in preparation for the show, the story behind them grew murkier and murkier. It began to look like they were fakes.
If there was one thing that got Bill’s blood boiling and drew out his most obsessive impulses, it was being cheated. “I’ve bought so much art, so many guns, so many other things, that if somebody’s out to cheat me I want the son of a bitch to pay for it,” he has said. Bill wanted the SOB who’d peddled the bogus Jefferson bottles to be locked up, and he turned to retired FBI agent Jim Elroy to spearhead the investigation. Elroy, whose cell phone ring tone was the theme for The Good, the Bad, and the Ugly, had a long history with Bill. They’d known each other since the late 1980s, when the veteran agent had worked on the Senate investigation that implicated Koch Industries in widespread oil theft from Native American lands. Since retiring from the FBI, Elroy had frequently performed investigative work for Bill, and he put together an international team of detectives that included a former Scotland Yard Inspector and an ex-MI6 agent to pursue the case.
The investigation led from Monticello, Thomas Jefferson’s historic estate in Charlottesville, Virginia, to the Alps of southeastern France, where Elroy, toting two bulletproof suitcases that held the Jefferson bottles and two other suspected counterfeits, traveled to have them isotope-tested by a scientist who’d pioneered a novel method for dating wine. Though these tests proved inconclusive, Elroy also had the engravings on the Jefferson bottles analyzed. He discovered that only a power tool—perhaps a dental drill—could have made the markings.
The deeper Elroy looked, the deeper the fraud seemed to go. The problem went beyond a few phony bottles. Forgeries, shady dealers, and shadowy middlemen plagued the industry. Collectors who realized they’d been duped, meanwhile, often placed their counterfeit bottles back up for auction, offloading them on the next rube. Soon Bill’s investigation expanded beyond the Jefferson bottles. He wanted to purge the industry of fake wine, one cheat at a time.
Bill and his inner circle thought about this quest—which at first had focused on a mysterious German wine aficionado named Hardy Rodenstock, the man who claimed to have discovered the Jefferson bottles—in cinematic terms. “This is National Treasure,” his spokesman Brad Goldstein told Benjamin Wallace, author of The Billionaire’s Vinegar, which recounts the gripping tale of the bogus Jefferson bottles. When it came to casting, Bill’s aides joked that Michael Caine should play their boss in the movie version.
Before long, Bill presided over at least six civil lawsuits. He took on the wine auction house Zachys (eventually settling with the company) and sued Christie’s (the case was ultimately thrown out). And he pursued alleged counterfeiters Hardy Rodenstock (who denied peddling phony wine and managed to elude Bill’s legal dragnet, despite a default judgment entered against him) and Rudy Kurniawan (an Indonesian wine dealer who was arrested by the FBI in March 2012 and subsequently convicted of fraud).
One of Bill’s recent targets was Silicon Valley entrepreneur Eric Greenberg, who Bill alleged had knowingly sold him two-dozen bottles of counterfeit Bordeaux—their vintages ranging from 1864 to 1950—for $355,000. Greenberg and his lawyer said that, upon learning the bottles were fakes, the tech tycoon repeatedly offered to reimburse Bill, but the billionaire rebuffed these entreaties. He wanted to make an example out of Greenberg—and eventually he did. In April 2013, Bill stood triumphantly outside a federal district courthouse in lower Manhattan clutching a bottle of bogus 1921 Château Pétrus, having won a jury award of nearly $380,000. (He was later awarded $12 million in punitive damages.) “I absolutely can’t stand to be cheated,” Bill told reporters. “Now we got one faker so we’re marching down our hit list of fakers. This is just a start.” Then he decamped to a pricey French restaurant on Manhattan’s Upper East Side to savor his victory over a glass of fine wine.
Bill pursued crooked wine dealers like some litigious, latter-day Wyatt Earp, but he reserved a special brand of justice for employees of his energy company Oxbow who he believed had ripped him off.
In 2011, Bill had received a one-page anonymous letter. It accused three Oxbow employees—Larry Black, Kirby Martensen, and Charlie Zhan—of lining their pockets by secretly selling shipments of petroleum coke at preferential pricing to third-party buyers in China. Black, who oversaw the company’s petroleum coke sales in Asia and was based in the Bay Area, had worked for Oxbow since 1984, rising to become the executive vice president of a subsidiary called Oxbow Carbon. He supervised Martensen, one of Oxbow’s star salesmen in the Pacific Rim, who had recently relocated to Singapore at the company’s request; and Zhan, a Chinese national who managed an Oxbow office in Tianjin, located in Northern China.
Though Bill had dabbled in alternative energy in the 1980s and 1990s, he ultimately built his business on more traditional energy sources. He owned coal mines in the western United States, and his company had become the world’s largest distributor of petroleum coke (“petcoke,” in industry shorthand), shipping 11 metric tons of this coal-like fuel source annually. Asia—particularly Japan and Korea—was one of Oxbow’s most lucrative markets.
After receiving the anonymous tip, Bill quietly launched an extensive internal investigation that included a forensic review of his employees’ communications, including their e-mails and Skype records.
Bill grew convinced that there was indeed fraud afoot in his Asia operation, and by March 2012, he was finally ready to confront the culprits. He invited Black, Martensen, Zhan, and a few of their colleagues to attend a retreat at Bear Ranch, his 4,500-acre spread located a two-hour drive from Aspen. On this property, hemmed in by the Anthracite Range and the West Elk Mountains, Bill was constructing an elaborate replica of an Old West town. It featured dozens of buildings, including five saloons, a bank, a church, and even a faux brothel (which was being converted into guest quarters). The structures had come largely from a decommissioned MGM tourist attraction, which Bill bought for $3.1 million in 2010 and reassembled on his property. Showcasing his extensive collection of Western memorabilia, including a Springfield rifle that once belonged to General George Custer, the town served as a purely private playground for friends, family, and other guests. “It all gets back to trying to create a place where I can enjoy life and enjoy my family and friends without having to worry about my enemies,” he once said. “And I’m doing it because I can.”
Yet, in this instance, Bill had decided to lure his enemies to his refuge for a showdown. Black, who’d attended business meetings at Bear Ranch in the past, was told the purpose of the two-day retreat was to review his group’s sales strategy and go over their 2011 results. The executive welcomed the opportunity. His division had just completed a record year, generating more than $200 million in profits.
On March 21, Black, Martensen, and Zhan flew from San Francisco to Aspen, where they had lunch with Bill at his home in the resort town, before lighting out together by car for his ranch. That evening, Bill wined and dined his guests at the main lodge on the property, where everyone spent the night. Cell phone service at the ranch was nonexistent, and the Oxbow employees were informed that the landline and Internet were down. This was no accident. The phone and Internet service had been deliberately cut off to prevent Bill’s employees from communicating with the outside world.
After breakfast the following day, Black delivered a sales presentation. Then the visiting Oxbow employees drove out to the site of Bill’s Western town, where the billionaire had organized a helicopter tour of the area. Lunch followed in the still-under-construction town, and afterward Bill announced unexpectedly that he wanted to hold employee reviews. Black, Martensen, and Zhan were split up and led into separate buildings.
Black and the others had started to get an eerie feeling—and not just from the Wild West décor and period weaponry on display. Something didn’t feel right, but they had little choice but to go along with whatever their boss had planned. Bill conducted Black’s review personally, asking the Oxbow executive vice president to assess the performance of Martensen, Zhan, and others. Black offered high praise for the members of his team.
Bill’s genial demeanor quickly turned accusatory.
How would he feel about Zhan’s performance if he knew that the Chinese national was stealing from Oxbow? Bill asked. And, he probed, “Would you feel the same way about Kirby if you thought he stole from the company?” Black was stunned. Bill walked out of the room and returned with a large stack of papers. One by one Bill showed Black documents, telling the executive that Zhan and Martensen had taken part in an elaborate conspiracy to defraud the company; it involved the purchase of Oxbow’s petroleum coke at discounted rates by companies linked to Zhan, which went on to sell the product in China at high profit margins. A hidden camera rolled as Bill questioned Black, and in a nearby control room two Oxbow lawyers monitored the interview, along with the interrogations of Zhan and Martensen elsewhere in the town.
Oxbow chief operating officer Steven Fried and another employee grilled Martensen, a fifteen-year Oxbow veteran in his late forties. According to Martensen, they questioned him relentlessly for several hours, accusing him of accepting kickbacks from Zhan. At around 5:00 p.m., they escorted the shaken Oxbow salesman to a waiting SUV and told him to sit in the back. On the outskirts of Bill’s town, the car stopped and a man handed a sheaf of documents to Martensen through an open window. These were his termination papers; he’d also been served with a lawsuit alleging that he, Black, and Zhan had defrauded Oxbow of millions.
Martensen was driven back to the main house on the ranch, which was now swarming with at least eight security guards. This contingent included current and former police officers with the Palm Beach and West Palm Beach police departments, who were moonlighting on Bill’s security detail. Jim Elroy, Bill’s loyal investigator, ran point on the operation and managed the security team.
One of the guards searched Martensen’s bags and took away his company cell phone, replacing it with a cheap, prepaid mobile. Black experienced the same treatment. Neither of the men dared to use the cell phones, believing they might be tapped.
A member of Bill’s security detail took Martensen to a cabin not far from the main lodge. A squad car from the Gunnison County Sheriff’s Office sat outside. “A sheriff is here to make sure you don’t wander off,” the guard told him, according to Martensen. The fired executive spent the next several hours inside the cabin, panicking about the fate Bill Koch had in store for him. Was he going to be arrested? Martensen didn’t know it at the time, but the cop posted outside his door was an off-duty sheriff’s deputy who was being paid $50 an hour to be on the premises. (The department later placed the deputy on administrative leave and investigated him for misconduct, though no further action was taken.)
Martensen was finally told he’d be taken to the airport. He and Zhan were placed in an SUV, driven by two off-duty Palm Beach police officers. According to Martensen, he asked them to drive him to Aspen, where he was booked on a return flight to San Francisco the next morning. But the off-duty officers said other travel arrangements had been made. They instead drove three hours past Aspen to a small airport in Denver. When they arrived at 2:00 a.m., a private plane was waiting. On board, in addition to the pilot and copilot, was a former police officer who Martensen believed was armed. “For all intents and purposes,” he would later recall, “especially after the policeman is parked outside the front door and I’m held in a room for three-and-a-half hours and then I’m told to get in the car and we’re going to Denver, not the place I want to go. For all practical purposes, I’m under arrest.”
The plane touched down in Oakland, California, at 4:00 a.m. Martensen’s escort wanted to take him to a nearby Marriott hotel, but he refused. Martensen asked an airport employee to call him a cab and drove off into the darkness wondering what the hell had just happened to him.
Very little about the Bear Ranch episode made sense. Black, who’d been flown by private jet to Denver, before boarding a Southwest flight back to San Francisco, reconnected with Martensen and Zhan in the Bay Area on Friday, March 23. The men felt as if they’d just lived through the plot of a corporate thriller. Together, they read through the legal complaint against them, and Black learned that some of the accusations Bill had made against Martensen and Zhan were true. Zhan had indeed worked with a company called Nova Industries to resell Oxbow’s petcoke in China. And Martensen had received payments of some $50,000 from Zhan. (“I gave this money to Kirby Martensen in exchange for his agreement to keep secret my improper involvement and arrangements with Nova,” Zhan later said in a deposition. Bill eventually dropped Zhan and Black from the suit, but continued to pursue his case against Martensen.)
Martensen and Zhan had clearly committed fireable offenses—but this begged the question: Why hadn’t Bill simply fired them and filed suit? Why bring them out to Bear Ranch, give them a scenic helicopter tour, then drop the hammer? “I’ve known Bill for 28 years. He’s the world’s greatest planner,” Black reflected later. “And he spends lots of money getting everything right.… It was very well orchestrated. And this is the type of thing that Bill does.”
The whole psychodrama seemed to fulfill little more than a primal desire for retribution. Bill, apparently unable to fathom that the questionable events at Bear Ranch could have any repercussions, was surprised and outraged when Kirby Martensen later retaliated with a lawsuit of his own. It accused the billionaire of kidnapping and false imprisonment. (The case is scheduled to go to trial in November 2014.)
Their legal fight also surfaced accusations that potentially had broader ramifications for Bill and his business empire. After filing suit against Bill, Martensen approached the Internal Revenue Service with allegations that Oxbow had engaged in a major tax evasion scheme.
Martensen divulged that, in 2010, Bill’s company had created an entity called Oxbow International, located in the Bahamas. “The idea as explained to me in several conference calls was if Oxbow transferred its supply contracts (… with refineries that supplied petroleum coke to Oxbow) to OI and changed the point at which title was transferred to Oxbow’s overseas customers from at ships rail at the load port, which is standard, to ‘on the high seas, in international waters,’ this would satisfy the basic requirements of the I.R.S.,” Martensen told the agency in a whistleblower complaint (which is currently pending).
Meanwhile, according to Martensen, sales deals that Oxbow had previously completed in the United States the company now consummated in the Bahamas, where the tax rate was 15 percent; he estimated that during 2010 and 2011, Bill’s company dodged paying $70 million in taxes. “It was clear no one wanted to explain to Bill that what we were asked to do may not be legal and certainly not ethical,” he said. Martensen, Black, and other members of his division privately griped about the legality of this tax scheme via e-mail—missives, it turned out, that Bill and his investigators were closely monitoring. “It is strongly believed that our questioning of the tax avoidance scheme Oxbow had implemented… was a major contributor to our being fired,” Martensen told the IRS.
Martensen’s lawyers did not stop there: They also investigated possible anticompetitive practices by Oxbow at the Port of Long Beach, outside Los Angeles, where Bill’s company controlled a significant amount of the shipping of petroleum coke and coal bound for the Asian market. Martensen’s lawyers also pressed the Colorado Bureau of Investigation to launch a criminal probe into their client’s false imprisonment charges. (The bureau declined to prosecute.)
If this onslaught hadn’t targeted Bill, he would have had to admire the tactics of bringing all forms of pressure to bear on a legal adversary—a move right out of his own playbook.
Like their brother, Charles and David had underestimated their rivals. Their fight with the leadership of the Cato Institute triggered a severe backlash. Bad press was one thing, but the brothers also came under intense pressure from friends and members of their donor network. “People who had been around them their entire lives refused to speak to them,” said a conservative activist.
Cato’s chairman Bob Levy noted: “There’s a lot of overlap between Cato donors and Koch donors.… And a lot of the folks who know both organizations were very upset by all of this, and I think made their views known, both to us and to David and Charles.”
In the late spring of 2012, negotiations between the two warring sides quietly commenced. Both factions realized that if they maintained their current course, there might be nothing left to fight over—Cato would be reduced to rubble. Real estate investor Howard Rich, a longtime Cato board member who had worked with Charles in the past to promote libertarian causes, was among the Cato emissaries who traveled to Wichita to hammer out an accord with the CEO and his lawyers, according to Levy. Over two months, during a pair of meetings in Wichita and a series of conference calls, the outlines of an agreement took shape. Though a formal deal wouldn’t be signed until late September, the cessation of the Cato-Koch feud was made official on the afternoon of June 25, when anxious Cato staffers piled into the think tank’s Friedrich Hayek auditorium.
Levy outlined the agreement, announcing that Charles and David Koch had finally agreed to get rid of the shareholder agreement, ensuring Cato’s lasting independence. In return, Ed Crane would have to step down. Libertarian philanthropist John A. Allison IV, a friend of Charles’s and the former CEO of BB&T Bank, would replace him. Allison, who hailed from North Carolina, was known for handing out copies of Ayn Rand’s Atlas Shrugged to new bank executives.
Under the deal, Cato’s sixteen-member board would have four members, including David, selected by the Kochs. The think tank’s directors in the future would choose their own successors. Along with stepping down as Cato’s president, Crane was also forced to relinquish his seat on Cato’s board. The sixty-eight-year-old, once described as “the lion king of button-down libertarianism,” had poured more than half his life into Cato and its broader mission of advancing the libertarian worldview. Leaving it behind was agonizing.
“Basically, it was taken from him,” said Levy. “He would not have stepped down when he did.… And it wouldn’t have been under those circumstances. And it wouldn’t have been to settle a disagreement with the Kochs, because I’m sure there’s still difficulty between those parties.” Levy added, “He definitely didn’t like it. There’s no question about that.”
On his final day as a Cato employee later that year, Crane alluded only briefly to the “recent unpleasantness” in a short farewell e-mail to staff. “The essence of the American Experiment is a respect for the dignity of the individual,” he wrote. “It is axiomatic that such dignity depends on liberty. That is what Cato is all about.”
Crane signed off simply, “Aloha.”
“In the end,” said one friend of Crane’s, “they paid him a fat sum. He left with a gag in his mouth and a non-compete clause that barely lets him get dressed in the morning.”
In early July 2012, two weeks after the Cato settlement was announced, a small plane buzzed over the Atlantic, flying past David’s $18 million Southampton estate. A large banner fluttered behind it: MITT ROMNEY HAS A KOCH PROBLEM. A cheer rose up through the throng of protestors who had gathered on the beach near the billionaire’s home.
During David’s bachelor days, the beachfront mansion had been the site of all-night parties that drew comparisons to Hugh Hefner’s debauchery-filled soirees. On July 8, a more subdued crowd queued up on Meadow Lane in Range Rovers, Benzes, and Beamers awaiting entry to a $50,000-a-head fund-raiser ($75,000 per couple) benefiting the former Massachusetts governor.
Romney had clinched the Republican presidential nomination in late May, following a brutal primary fight in which the candidates had done Obama’s work for him by savaging one another. Newt Gingrich, after all, had helped to cast Romney as a “vulture capitalist,” whose tenure at private equity firm Bain Capital involved enriching himself while destroying jobs and businesses. The Obama campaign only too happily added to this portrait once Romney emerged as the de facto nominee. Thanks to the Tea Partyized atmosphere, Romney—a historically moderate, Northeastern Republican whose health-care reform effort in Massachusetts formed the inspiration for Obama’s—was running on a “severely conservative” platform. Doing so forced him to engage in the kind of political contortionism that made it seem like he was willing to say anything to get elected.
David had supported Romney during his 2008 White House bid. And in August 2010, before Romney officially announced his second attempt on the presidency, he and Julia convened a Hamptons mixer for the politician attended by about 150 well-heeled donors, including New York financier and former Port Authority chairman Lew Eisenberg, private equity investor Donald Marron, and real estate billionaire Stephen Ross. Despite this early signal of support, David had changed horses by 2011 and pledged his backing to Chris Christie, should the New Jersey governor decide to enter the race.
In October 2011, after Christie publicly put an end to any presidential speculation, Romney quickly reached out to David seeking his endorsement, according to an internal Romney campaign memo that described the Koch brother as “the financial engine of the Tea Party.” The following month, pursuing David’s support, Romney even skipped the famous Ronald Reagan Dinner in Des Moines—where the other Republican hopefuls had gathered to court Iowa voters ahead of the state’s bellwether primary—to keynote an Americans for Prosperity conference in DC.
But David withheld his formal support until the candidate vanquished his GOP rivals. “David very much admired Romney’s success in business and his values,” said a close friend. “I know that David and Romney and Romney’s wife and Julia bonded. So I think he was very much a Romney supporter.” The friend added, chuckling: “Charles loved the governor from New Mexico, Gary Johnson,” the Libertarian Party’s presidential candidate.
David’s twin brother, Bill, by contrast, did not play hard to get with his endorsement. His relationship with Romney stretched back to the 1980s, before Bill relocated from Massachusetts to Florida. Long before Romney clinched the nomination, Bill and companies he controlled began pouring money into Restore Our Future, the pro-Romney super-PAC. Over the course of the campaign, Bill steered at least $2 million to the group and hosted two Restore Our Future fund-raisers at his Palm Beach mansion. During one of them, held during the second half of 2012, the super-PAC’s fund-raisers displayed a PowerPoint presentation outlining their strategy. One slide contained a picture of a Frederic Remington painting, depicting a Union cavalry officer galloping forward, gun drawn. The super-PAC, this image was meant to convey, was Romney’s cavalry. Bill, according to an attendee, couldn’t help pointing out that he owned the painting.
Bill also held multiple fund-raisers for the candidate himself, and he contributed more than just cash to Romney’s candidacy. During a 2011 visit to Homeport, Bill’s Cape Cod property, Romney recounted the story of how his parents read to him from Irving Stone’s Men to Match My Mountains during childhood drives through national parks. Bill interrupted, saying, “You know, the title of that book comes from a poem.” And he began to recite it.
Bring me men to match my mountains,
Bring me men to match my plains.
Men with empires in their purpose,
And new eras in their brains.
Romney committed Sam Walter Foss’s 1894 poem “The Coming American” to memory and thereafter it became a fixture of his stump speech.
Before the July fund-raiser at the Kochs’ Southampton compound, David and Julia huddled privately with the Romneys. Whatever was said during their half-hour tête-à-tête, the men emerged from an upstairs room with a confident glow about them, descending “like two world leaders with their first ladies,” according to one guest. The Kochs served a simple dinner of tomato and mozzarella corn fritters and chicken and arugula salad to their guests. David was overheard that evening telling attendees soberly, “We can’t afford these levels of debt.… We don’t want to end up bankrupt like Greece.”
The high-dollar fund-raiser—attended by donors including New York Jets owner Woody Johnson and Miami Marlins owner Jeffrey Loria—was one of a trio Romney attended in Southampton that day, which collectively netted $3 million for his campaign.
“I understand there is a plane out there saying Mitt Romney has ‘a Koch problem,’ ” Romney remarked to attendees of David and Julia’s fund-raiser. “I don’t look at it as a problem; I look at it as an asset.”
The following month, on August 30, Romney’s asset awaited the candidate’s grand entrance at the Republican National Convention in muggy Tampa. At the back of the Tampa Bay Times Forum, the black curtains parted and Romney emerged, holding a wide smile and wearing a navy suit as impeccable as his trademark gray-flecked coif. The band, competing with the crowd roar, launched into Kid Rock’s “Born Free,” the candidate’s theme song. Romney worked his way slowly down the red-carpeted aisle, soaking up the adulation as he glided past the delegations from Tennessee, Indiana, and Idaho, then crossed the aisle to glad-hand supporters from Utah and Illinois.
When Romney reached New York’s 95-member delegation, the candidate found David in the crowd and clasped his outstretched hand, on which David wore, as usual, his gold MIT class ring depicting the school’s mascot, the industrious beaver. Romney clapped David on the back with his free hand and continued on toward the dais to formally accept the Republican presidential nomination.
The convention had attracted to Tampa all the disparate elements of the current Republican Party, along with the crew of megadonors who would help to make the 2012 presidential race the most expensive in American history. Wheelchair-bound casino mogul Sheldon Adelson (who alone pumped nearly $150 million into the 2012 race) took in the proceedings with Karl Rove from a fourth-floor skybox. Foster Friess ($2.5 million in publicly disclosed contributions, not counting his donations to the Koch network) leaned against a wall on the convention floor, proudly pulling out his cell phone to show a reporter a picture of the fourteen-foot crocodile he’d bagged on a recent hunting expedition in Tanzania.
But no one was more sought after than David, who had accepted the invitation of the chairman of New York’s Republican Party, Ed Cox, to attend the convention as an alternate delegate. On the convention floor, where David often sat beside Cox, the son-in-law of the late Richard Nixon, delegates and journalists alike excitedly crept up to furtively snap pictures of the industrialist, who did his best to ignore the attention.
One evening, as Michele Bachmann sashayed up the aisle nearby wearing a flesh-colored knee-length dress, and twenty feet away Wisconsin’s Scott Walker received a rock star’s welcome from the Washington delegation, a pair of fresh-faced convention pages nervously sidled up to David. Getting his attention, the young men asked for career advice. “I’m the evil billionaire Koch brother,” David replied, a grin spreading to his face. “You’re not afraid of me?”
When roving journalists approached David on the convention floor, one of at least three PR representatives—among them, Nancy Pfotenhauer and Cristyne Nicholas, Rudy Giuliani’s former communications director—intercepted them. Glued to his side throughout the four-day convention, the billionaire’s handlers passed out a three-paragraph statement from David in lieu of interviews. “The 2012 election may be the most important of our lifetimes,” it read in part. “Profoundly different political philosophies are competing for our hearts and minds—and our votes. I have made no secret about which philosophy I support—the one that provides the greatest economic and personal freedom possible.”
Despite the force field surrounding him, David—considered a loose cannon within Koch’s public affairs division—still managed to generate headlines when he espoused views that veered well to the left of Republican Party orthodoxy during an Americans for Prosperity reception held in his honor. “I believe in gay marriage,” he told a Politico reporter. The Republicans, meanwhile, had just approved a party platform that supported a constitutional amendment banning it. David also confided that he backed reductions in defense spending and believed tax increases might be a necessary component of any deficit reduction strategy. (Congressional Republicans had fought bitterly to keep tax hikes off the table.) The brothers’ political advisors cringed at his comments. It wasn’t the time or place to break ranks with their GOP allies.
Romney’s 37-minute convention speech drew tepid reviews from pundits and voters alike, but in the moment, with thousands of delegates and spectators on their feet and chanting his name, the convention crowd was electrified. Joined by his large family and his vice presidential running mate, Wisconsin’s Paul Ryan, Romney beamed from the stage as thousands of red, white, and blue balloons floated down from the ceiling, blanketing the convention floor.
David stood in the aisle, clapping rhythmically and smiling up at the blizzard of confetti that swirled above. He high-fived a fellow delegate and swatted balloons as they rained down. A choir was singing “America the Beautiful” and David sang enthusiastically along with it. Moments later, one of his press handlers led him away through balloons and confetti and discarded MITT! signs. Slowly climbing a stairway out of the arena, he plaintively scanned the dissipating crowd and the clock in the corner of the arena that had been recording the dizzying amount of debt the United States had accrued since the convention started. He turned back, disappearing into the crowd.
Perhaps they could win this thing.
A little after 9:00 p.m. on November 6, the networks called Pennsylvania. Then Wisconsin, New Hampshire, and Iowa. As the battleground states fell into Obama’s column, Romney’s path to victory narrowed, then disappeared completely. “Four more years,” the president tweeted at 11:16 p.m., after winning Ohio. On Fox News, Karl Rove refused to accept defeat, claiming that key Republican precincts had yet to report. But at 740 Park Avenue, reality was sinking in.
Late that evening David’s home phone rang. He was monitoring the election results with disbelief. Obama had dispatched Romney easily. Meanwhile, Democrats had increased their ranks in the House and strengthened their Senate majority. He and his brother Charles had pulled out the stops to usher in a new conservative era, and they had almost nothing to show for their considerable efforts.
David answered the phone to the gravelly voice of his Deerfield friend John Damgard, who was calling to commiserate.
David “was pissed,” Damgard recalled. The Republicans had a real opportunity to win the Senate, and heading into the election, it was hard to imagine a more vulnerable incumbent president than Obama, who was saddled with a major unemployment crisis. The stars had seemed aligned for the political transformation the Kochs and their allies had dreamt of. Then bone-headed candidates mired themselves in controversies over abortion and “legitimate rape.” And Romney, playing to the Tea Party mood of the GOP, alienated large swaths of the electorate—women, Hispanics, not to mention the 47 percent of Americans who “believe that they are entitled to health care, to food, to housing, to you name it,” as the candidate inelegantly put it during a surreptitiously recorded fund-raiser. David believed the primary process, with its endless debates, had hobbled Romney from the start. He’d run so far to the Right that he could never course-correct back to the center.
“We’ve got to do better with primaries,” David said, according to Damgard. “We’ve got to find ways to make sure our candidate is advantaged.” And he complained about the crop of wild-eyed candidates who had derailed the GOP’s chances of taking over Congress. “We’ve got to make sure better candidates surface.”
David, still reeling from the loss, rang off. “Four more years of this guy,” he groaned.
All the plotting and planning, the donor conclaves, the piles of money—it hardly seemed worth it. Charles and David had taken a high-profile stand, just as their political Svengali, Richard Fink, advised they should four years earlier. They had accepted the scorn and the death threats and the damage to their family legacy. But in the end they had paid the price without reaping the reward. They hadn’t changed the country; they had only changed the way the country perceived them and their company, and not for the better.
Charles hated to lose at anything. He even golfed like he was competing in the Masters. (“You think that Michael Jordan is competitive—well, Charles is competitive,” said one of his close friends.) And the political game had much higher stakes.
“We obviously miscalculated,” the bitterly disappointed CEO confided to friends after the election. “We’ll just have to work harder.” According to his friend Nestor Weigand, Charles didn’t point fingers. “He wasn’t blaming Rich Fink. He wasn’t blaming people. It’s just that they perceived that there would be more people that would want a freer society and less governmental intervention and less people dependent upon the federal government. He thought… that people would see it, and they didn’t.” Charlie Chandler, another Wichita friend of Charles’s and a member of the donor network, said the brothers were self-critical about the loss. “I never heard one word [of], ‘so and so should have done this.’ It was always, ‘We failed. We didn’t get where we wanted to be. End of story.’ ”
In the wake of Obama’s reelection, though, there were still the donors to answer to—many who viewed politics through the businessman’s lens of ROI (return on investment). The Kochs had pressed their wealthy friends and acquaintances to pony up a staggering amount of money, and they had delivered, pouring hundreds of millions of dollars into the Koch-led political effort. In the lead-up to the election, the level of confidence within the Kochs’ political operation had bordered on euphoric. “They were pretty exuberant,” said a conservative strategist. “They thought they had it.” The Kochs and their overconfident political advisors, another political operative said, made big promises to their donors. “They… basically promised these donors that, ‘if you continue to fund what we’re doing, we will win this election through our efforts, through AFP and others.’ There was quite a bit of overpromising.”
After the election, some longtime contributors to the Koch network were understandably disappointed. Some blamed the electoral defeat on the quality of the Republican presidential candidate (“When you try and sell crap, you lose, right?” said Minnesota billionaire Stan Hubbard), but others wondered if the Koch brothers’ vaunted political operation had lived up to its reputation, according to fund-raisers and strategists who know the conservative donor world well. “I’ve heard there are people who have pulled back and there are people asking, ‘Where did my money go?’ ” said the conservative strategist. A Republican fund-raiser identified Wyoming investor Foster Friess—a major backer of the Kochs’ 2012 efforts—as one of the donors who’d grown deeply disillusioned with the brothers’ political network. (Friess declined to comment.)
Charles had pledged to donors that his team would invest their contributions wisely to produce the maximum political dividends, but there was some question about whether their money had been well spent. Americans for Prosperity, a major recipient of donor funds, delivered an underwhelming performance. Its get-out-the-vote efforts fell flat and its political ads were poorly targeted. “In terms of the buying strategy, they were not particularly sophisticated,” recalled Larry Grisolano, the Obama campaign’s ad guru. The Obama team noticed early on that their real competition was Karl Rove’s Crossroads groups, whose well-produced ads closely tracked their own buys. AFP’s Tim Phillips, unveiling a $6.2 million ad campaign two months before the election, made a comment that seemed revealing in retrospect. “It’s difficult to assess the kind of bang for buck, candidly,” he told a reporter. “We just wanted to take a stand.” This was the opposite of the hypertargeted, data-centric strategy employed by the Obama campaign (and Crossroads), which did not use its precious resources for symbolic purposes.
Themis, the voter microtargeting operation that the Kochs and their network funded to the tune of $18 million between 2010 and 2012, was also a disappointment. Activists who used Themis data said they found it rudimentary and ineffective. “I’m trying to figure out what the point is,” said the leader of one conservative group. “Themis is nothing more than a massive database where they can find more donors and continue to build their empire.”
Charles ruthlessly assessed performance within his company, measuring the contribution of each employee and jettisoning unprofitable business units without a second thought. Yet the scale of the post-2012 reckoning within the Kochs’ political operation seemed muted, though a few heads did roll.
Most notably the brothers’ main outside political strategist, Sean Noble, was “pushed aside,” according to someone who knows him. “He’s the fall guy for ’12.”
The instinct to keep Noble at arm’s length was understandable. His political machinations had sparked a money-laundering investigation by California’s political watchdog, the Fair Political Practices Commission, and the state’s attorney general. The probe veered dangerously close to the Koch brothers.
In the run-up to the election, the commission had started looking into the mysterious source of an $11 million contribution to a local political action committee; this PAC, the Small Business Action Committee, had in turn poured the funds into two ballot measures. It backed one initiative curtailing the ability of unions to collect money for use in political campaigns and worked to defeat another raising the state’s sales and income taxes. (The PAC failed on both counts.)
California authorities tracked the labyrinthine path, through three nonprofits, that the cash took before winding up in the Small Business Action Committee’s bank account. Noble’s Center to Protect Patient Rights, a conduit for the disbursement of Koch network money, formed one key link in the chain. Because of the seriousness of the allegations, Noble retained Malcolm Segal, one of California’s top white-collar crime defense lawyers.
The California investigation slowly peeled back the layers of an elaborate financial shell game Noble and other political operatives had engaged in to obscure the source of contributions.
The main fund-raiser behind the California effort was a Sacramento-based strategist named Tony Russo. In 2011, inspired by Wisconsin Governor Scott Walker’s triumph over his state’s powerful public unions, Russo and his allies began crafting a plan of their own to take on organized labor in California. Russo believed the Kochs and their extensive political network might help in this fight, and he sat down with Noble in October 2011 to gauge his interest. “We had met with some other people from Koch, through some donors who are part of Koch,” Russo recalled in a deposition. “… They have a network of c4’s do issue advocacy. And so I ended up meeting with Sean because he’s their outside consultant. And they had said that’s who I should be meeting with.”
Russo explained, “Conceptually, we talked about, would you guys be interested in engaging in this type of a fight in California?… It followed on the steps of Wisconsin.” Noble signed on, and not long thereafter he footed the bill to hire Republican pollster Frank Luntz to conduct focus groups around the issues Russo and his allies were targeting; Noble also paid for the development and testing of ads. Russo initially envisioned conducting part of his campaign through a group called Americans for Job Security, but thanks to a quirk in California’s campaign finance law, which strengthens disclosure requirements during the two months before an election, he had to abandon the plan. Fearing that donors who’d been promised anonymity could be outed, Russo turned to Noble.
“I have a big hiccup here in California,” he told the Kochs’ strategist during a phone call in early September 2012. “We have money raised… but I don’t think we can spend it in California. Can we support some of your national efforts and, in turn, do you have groups that can help us in California?” Russo proposed donating the money he’d raised to the Kochs’ political network, on the understanding that Noble would find a way to route it back into California through the web of national advocacy groups that received Koch donor funds. Noble agreed and told Russo to send his cash to the Center to Protect Patient Rights. In mid-October, as the election neared, Russo sent a text message to Noble requesting him to direct $11 million to the Small Business Action Committee. Barely had the check arrived—from an Arizona-based group Russo had never heard of called Americans for Responsible Leadership—when California’s Fair Political Practices Commission began asking questions. They followed the money, and it led to Sean Noble.
The case resulted in a record $1 million fine for Noble’s Center to Protect Patient Rights and Americans for Responsible Leadership. When a settlement was eventually announced, the commission’s then-chair Ann Ravel said the case highlighted “the nationwide scourge of dark money nonprofit networks hiding the identities of their contributors.” Ravel’s commission directly implicated the “Koch brothers’ dark money network,” but Koch Industries responded in much the same way it had when Charles and David’s names first surfaced as Tea Party financiers. Who us? “We were not involved in any of the activities at issue in California,” said the company’s spokeswoman Melissa Cohlmia.
On December 6, 2012, a month to the day after the election, an onward-and-upward e-mail from Charles arrived in the in-boxes of his fellow donors. “Despite November’s disappointing election results, I am convinced that America’s long-term decline is far from a foregone conclusion,” he wrote. “Our goal of advancing a free and prosperous America is even more difficult than we envisioned, but it is essential that we continue, rather than abandon, this struggle.”
Charles was writing to inform members of the donor network that he had decided to postpone the upcoming seminar, scheduled as usual for late January. “We are working hard to understand the election results and, based on that analysis, to re-examine our vision and the strategies and capabilities required for success.”
When Charles and David finally convened their next donor retreat in late April 2013, the topics under discussion hinted at the strategic recalibration under way within the Kochtopus: “reaching the right people with the right message,” “Hispanic, women and youth engagement,” and “candidate recruitment and training.” Koch fund-raiser Kevin Gentry told participants ahead of the conference that “a plan will be shared to help recruit more principled and effective advocates of free enterprise to run for office.”
The caliber of the lawmakers who flocked to the event suggested that the Koch brothers’ standing as conservative kingmakers hadn’t declined. Attendees included South Carolina Gov. Nikki Haley, Ohio Gov. John Kasich, and Sens. Rand Paul of Kentucky and Ted Cruz of Texas, all of whom are considered possible presidential or vice presidential contenders in 2016.
The month after the conference, there were already signs that the Kochs were testing out new strategies. For decades, Charles and David had focused almost exclusively on free-market issues, but in May, as the immigration debate heated up on Capitol Hill, the Charles Koch Institute partnered with the website BuzzFeed to hold a “BuzzFeed Brews” forum on the topic, featuring a number of pro-reform panelists. It reflected an effort by the Kochs’ political operation at youth engagement and an attempt to play a greater role in guiding the direction of the Republican Party away from some of the extreme positions that have turned off voters.
In June, a little more than a month after the Kochs unveiled their candidate recruitment plan to donors, Jeff Crank, the former chief operating officer of Americans for Prosperity, formed a political consultancy called Aegis Strategic to identify “electable advocates of the freedom and opportunity agenda.” The firm, whose staff includes operatives with deep ties to the Kochs’ political network, noted in its online marketing materials that it “takes on a limited number of candidates each election cycle and markets them to Aegis’ exclusive fundraising network.”
Charles and David, far from backing away from politics, are digging in for the electoral fights of the 2014 midterms and beyond, their friends say. “If you’re going to play in this arena, you don’t play only when it’s lukewarm, you play when it gets hot, too, and it’s gotten hot. They’re still playing,” said Charles’s longtime friend Nestor Weigand.
And the brothers, observed a former Koch executive who knows them well, won’t likely repeat the errors of 2012. “They were key in developing a strategy that at the end of the day didn’t get them much,” he said. “Did that make them less powerful? It may make them more powerful. They are smart people. They learn from their mistakes. They’ll develop a better, more effective strategy next time. They’re not the kind of people who will bury their heads in the sand and lick their wounds.”
They had lost the battle, but the Mother of All Wars was far from done.