Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (21 page)

In the end, Koch Industries settled Bill Koch’s whistle-blower suit for $25 million. While most of the fines went to the federal government, the company paid over $7 million to Bill, along with his legal fees. As part of what came to be known in the family as the “global settlement,” by mid-2001 the warring brothers finally also agreed to a cease-fire. Charles, David, and Bill signed a pact promising no further litigation and agreeing to a binding non-disparagement clause that imposed hefty escalating financial penalties for violations. On at least one occasion when Bill spoke too freely about his brothers, the general counsel for Koch Industries warned him that he was risking a fine. The pact bought an uneasy peace. But the damage to the company’s image, and to the family’s reputation, was already profound.

T
he Koch Industries’ spokeswoman Melissa Cohlmia has said that the Kochs’ serious legal losses were a learning experience and that as a result the company stepped up its corporate compliance efforts. After the 1990s, the company’s overall environmental record did improve some,
although in 2010 the company was still rated as one of the top ten air polluters in the United States by the Political Economy Research Institute at the University of Massachusetts Amherst.
In 2012, the Environmental Protection Agency’s database revealed Koch Industries to be the number one producer of toxic waste in the country. Producing 950 million pounds of toxic waste, it topped the list of 8,000 companies required by law to account for their handling of 650 toxic and carcinogenic chemicals spun off by industrial processes.

Charles Koch has acknowledged that he miscalculated earlier, writing in his 2007 book,
The Science of Success
, “We were caught unprepared by the rapid increase in regulation.” As he explained it, “While business was becoming increasingly regulated, we kept thinking and acting as if we lived in a pure market economy.”

From Charles’s standpoint, the problem wasn’t so much Koch Industries’ conduct as the legal regime in which it operated. He seemed to be arguing that in the “pure market economy” that he favored, no such regulations would exist. As the Kochs took stock, it was clear that America was far from the laissez-faire utopia they idealized in the Freedom School. Having had their company fined hundreds of millions of dollars, labeled crooked by the U.S. Senate, and barely escaping federal criminal prosecution, the Kochs retooled. They sold off many of their most troublesome pipelines, paring their holdings down to four thousand miles, and they moved heavily into the finance sector, trading commodities and derivatives, where regulations and oversight were weaker. They diversified rapidly, acquiring DuPont’s synthetic textile division, Invista, for $4.1 billion in 2004, which made them the world’s producers of Lycra and other well-known brands such as StainMaster carpet. A year later, in 2005, they bought out Georgia-Pacific, the huge wood-products company, for $21 billion, which made them among the world’s biggest manufacturers of plywood, laminates, and ubiquitous paper products like Dixie cups, Brawny paper towels, and Quilted Northern toilet paper. It also made them a major producer of formaldehyde, whose classification as a human carcinogen Koch Industries quietly fought, despite David Koch’s public philanthropic support for cancer research.

The clash between Koch Industries’ corporate interests and David Koch’s philanthropic work surfaced publicly in 2009. While David Koch sat on the advisory board of the National Cancer Institute (NCI), and the National Institutes of Health was concluding that formaldehyde should be treated as a “known human carcinogen,” a top executive at Georgia-Pacific protested the government’s findings. Traylor Champion, the company’s vice president of environmental affairs, sent a formal letter of protest to federal health authorities stating that the company “strongly disagrees” with the NIH’s conclusion that formaldehyde should be treated as “a known human carcinogen.” David Koch neither recused himself from the NCI’s advisory board nor divested himself of his company’s stock while the carcinogenic properties of formaldehyde were evaluated.

When questions were raised, Koch, who had undergone rounds of advanced treatment for prostate cancer, was incensed that anyone could question his integrity. But James Huff, deputy director at the National Institute of Environmental Health Sciences, a division of the NIH, said it was “
disgusting” for Koch to be serving on the advisory board. “It’s just not good public health,” he said. “Vested interests should not be on the board. Those boards are very important. They’re very influential as to whether NCI goes into formaldehyde or not. Billions and billions are involved in formaldehyde.” Harold Varmus, a former director of the National Cancer Institute, who knew Koch as a donor to scientific institutions, noted that many philanthropists had large business interests but admitted that he was “
surprised” to learn of the company’s stance on formaldehyde.

The Kochs’ corporate interests clashed with their philosophical positions on other issues as well, including their opposition to government-supported “crony capitalism.” Koch Industries took full advantage of a panoply of federal subsidies, ranging from artificially low grazing fees on the 40 percent of their 500,000 acres of cattle ranches that used federal lands, to a deal with the Bush administration in 2002 to sell eight million barrels of crude oil to fill the Strategic Petroleum Reserve, a federal supply set aside as a hedge against market disruptions. “Can you think of any more anti-free-market tool than the Strategic Petroleum Reserve?” asked a former Koch executive. “Energy doesn’t operate in a free market,” he pointed out.

Koch Industries’ practices belied its owners’ virtuous talk in other ways, too. According to an investigative report by
Bloomberg Markets
, Koch Industries was “
involved in improper payments to win business in Africa, India and the Middle East” and had “sold millions of dollars of petrochemical equipment to Iran, a country the U.S. identifies as a sponsor of global terrorism.” The report suggested that the Kochs’ Iranian deals flouted a trade ban put in place against the outlaw state by President Clinton in 1995. Koch Industries acknowledged that it had helped Iran build what became the largest methanol plant in the world in the midst of the trade embargo but insisted that the deal had been structured in a strictly legal way, by relying on foreign subsidiaries. The company subsequently fired the employee who exposed the controversial practices.

Yet as Charles and David continued to plow 90 percent of their company’s profits back into their business—a strategy they often noted would be impossible if they were required to pay quarterly dividends to public shareholders—its revenues grew phenomenally. In 1960, it grossed a healthy $70 million, but by 2006 it was grossing an astounding $90 billion. “
It is beyond spectacular,” one Wall Street investment banker, Roger Altman of Evercore, observed. “It’s just gigantically successful. It is in
everything
.”

After suffering humiliating losses in the courts and Congress, the Kochs began to retool their approach not just to business but also to politics. They began to engage far more strategically, funneling money into the pursuit of power in a whole new way. More than anyone else, the man behind the Kochs’ political transformation was Richard Fink, nicknamed the Pirate by detractors within their sphere for the handsome living he made on their payroll.

Fink was famous for flying to Wichita in the late 1970s as a twenty-seven-year-old graduate student, wearing a garish blue tie, a checkered shirt, and a brand-new white-piped black polyester suit, to beg for money from Charles. “
What a jackass I looked like,” he later admitted. After growing up in Maplewood, New Jersey, in a family that he joked made
The Sopranos
look like a home movie, Fink had become a devotee of Austrian free-market theory. He hoped Charles would fund a program in it at Rutgers in New Jersey, where he was teaching part-time while pursuing a graduate degree at NYU. Courses in Austrian economics were as rare as Viennese waltzes in most colleges at that time. But soon after Fink made the pitch, Charles pledged $150,000 for the program. When Fink later asked Charles why he’d thrown so much money at a long-haired, bearded graduate student in a shiny disco suit, Charles had supposedly quipped, “I like polyester. It’s petroleum based.”

By the late 1980s, Fink had supplanted Cato’s Ed Crane as Charles Koch’s main political lieutenant. Unlike Crane, who was interested in libertarian ideas but regarded it as “
creepy when you have to deal with politicians,” Fink was fascinated by the nuts and bolts of power. After studying the Kochs’ political problems for six months, he drew up a practical blueprint, ostensibly inspired by Hayek’s model of production, that impressed Charles by going beyond where his own 1976 paper on the subject had left off. Called “The Structure of Social Change,” it approached the manufacture of political change like any other product.
As Fink later described it in a talk, it laid out a three-phase takeover of American politics. The first phase required an “investment” in intellectuals whose ideas would serve as the “raw products.” The second required an investment in think tanks that would turn the ideas into marketable policies. And the third phase required the subsidization of “citizens” groups that would, along with “special interests,” pressure elected officials to implement the policies. It was in essence a libertarian production line, waiting only to be bought, assembled, and switched on.

Fink’s plan was tailor-made for Charles Koch, who deeply admired Hayek and approached both business and politics with the systematic mind-set of an engineer. While some might find it disturbing to regard the democratic process as a factory, Charles soon adopted the approach as his own. As he told Brian Doherty, the libertarian writer, “To bring about social change requires a strategy that is vertically and horizontally integrated.” It must span, he said, from “idea creation to policy development to education to grassroots organizations to lobbying to political action.” Before long, libertarian wags had dubbed the Kochs’ publicity-shy, multiarmed assembly line
the Kochtopus, a name that stuck.

I
n contrast to their idealistic but amateurish approach during the old Libertarian Party days, with Fink’s help the Kochs’ methods became decidedly more pragmatic. Facing serious threats to their business, they began playing the Washington political game as aggressively as any other corporation, if not more so. After the public relations fiasco of the Senate hearings into Indian oil theft, for instance, Koch Industries crossed ideological lines to hire Robert Strauss, the former chairman of the Democratic National Committee, who was by then Washington’s premier lobbyist. The company soon opened an office in the capital, which grew into a formidable in-house lobbying operation. Fink explained that it had been necessary for the company to establish a presence in Washington because it had felt “
so brutalized by the process” and lacked “
corporate defense” capabilities.

The Kochs had previously disdained conventional politics, but now they became major Republican donors. “
It was the investigation that got them to the Republican Party,” notes Kenneth Ballen, the former counsel to the Senate’s investigative committee. Before that, he points out, “Charles had been so far right he was off in the ether. They thought Reagan was a sellout. But they were worried about their business. It was about power.” Doherty saw the Kochs’ embrace of the Republican Party in much the same way. He credits the Kochs with being by far the largest funders of libertarian ideas but notes they also became “direct funders of Republican politicians for all the same reasons other businesses are. It confuses a lot of people in the libertarian world, who think of them as sellouts,” he conceded.

Their investment quickly transformed the brothers’ political status. By 1996, they had grown into major players in the Republican Party. David Koch went from dismissing Bob Dole, the senator from Kansas, the home of Koch Industries, as just another “
Establishment” politician “with no moral principles,” in the early 1980s, to becoming the vice-chair of Dole’s 1996 presidential campaign against Bill Clinton. No longer an outsider, the Koch family became Dole’s third-largest financial backer. David Koch in fact hosted a birthday party for Dole, at which the candidate raised $150,000.

Dole reportedly helped the Kochs, too. Critics said he did them a legislative favor designed to indemnify companies like theirs that had been charged with regulatory violations from having to pay huge federal legal fines. But the proposed legislative fix died when a sudden outbreak of salmonella in hamburgers scared Congress from weakening such penalties.
Had it passed, though, it would have nullified tens of millions of dollars in fines that had been levied on Koch Industries. According to
The Washington Post
,
Koch Industries did succeed in getting Dole’s help on another matter, an exemption from a new real estate depreciation schedule, a favor that saved the company millions of dollars. As Dole conceded decades later, after he retired from politics, “
I’ve always believed when people give big money, they—maybe silently—expect something in return.”

The Kochs’ affinity for hardball in politics, as in business, soon stirred controversy. In 1997, they became the focus of yet another Senate investigation. That year, the Clintons were in the headlines for campaign-finance scandals ranging from virtually renting the Lincoln Bedroom to big donors to taking contributions from a dubious Democratic bundler who later pleaded guilty to raising some of the money from China. The bundler, Johnny Chung, had infamously said, “
I see the White House is like a subway. You have to put in coins to open the gates.” In retaliation, the Democrats in the Senate, who were in the minority, conducted their own much less noticed probe, which soon led to the two little-known brothers from Wichita.

The Democrats produced a scathing report exposing what they called an “audacious” scheme by undisclosed big donors to illegally buy elections in the final moments of the 1996 campaign. It was undertaken by a suspicious shell corporation called Triad Management Services that had paid more than $3 million for unusually harsh attack ads against Democratic candidates in twenty-nine races. More than half of the advertising money came from an obscure nonprofit group whose real source of funds was a mystery, the Economic Education Trust. The Senate committee’s investigators believed that “the ‘trust’ was in fact financed in whole or in part by Charles and David Koch of Wichita, Kansas.” The trust was a front group, according to the Senate report, designed to conceal the real donors’ identities, in violation of campaign-finance laws.

The brothers, who had long opposed restrictions on their political spending, were suspected of having secretly paid for the attack ads, most of which aired in states where Koch Industries did business. In Kansas, where Triad Management was especially active, the funds were suspected of having tipped the outcome in four close races.
The conservative Republican Sam Brownback’s race for the U.S. Senate received a special boost, which included a barrage of phone calls informing voters that his opponent, Jill Docking, was a Jew. The shady victories in Kansas had national impact, helping Republicans retain control of the House of Representatives, despite President Clinton’s reelection.

The Kochs, when asked by reporters if they had given the money, refused to comment. Charles Koch also failed to respond to an inquiry from the Senate investigators. In 1998, however,
The Wall Street Journal
finally confirmed a link, noting that a consultant on the Kochs’ payroll had been involved in the scheme. Republicans argued that they were simply trying to balance the score against spending by labor unions, but in 1998 business outspent labor by a ratio of twelve to one. In the end,
the Federal Election Commission ruled that the Triad scheme was illegal and fined its president and founder,
Carolyn Malenick. Other participants, however, were never identified.

Charles Lewis, who heads the Investigative Reporting Workshop at American University and who founded the Center for Public Integrity, a nonpartisan watchdog group, describes the Triad scandal of 1996 as a “historic” moment in American politics. There had of course been many bigger campaign scandals before then. But Triad was a new model. He said it was the first time a major corporation used a tax-exempt nonprofit as a front group or, as he put it, “a cutout to secretly influence elections in a threatening way.” He said the Kochs showed that “you could dump a million dollars on someone’s head by using cutouts.” After reporting on political corruption in Washington for years, Lewis concluded that “Koch Industries was the poster child of a company run amok.”

What made the Koch family’s growing financial role in American politics extraordinary was not just its willingness to flout the rules but also the way that in accordance with Fink’s plan it merged all forms of political spending—campaign, lobbying, and philanthropic—into one investment aimed at paying huge future dividends to the donors. Lewis’s Investigative Reporting Workshop spent a year in 2013 culling through the Kochs’ financial records and concluded that their operation was “
unprecedented in size, scope, and funding” and also in the way that it was “mutually reinforcing to the direct financial and political interests” of Koch Industries.

In 1992, David Koch likened the brothers’ multipronged political strategy to that of venture capitalists with diversified portfolios. “
My overall concept is to minimize the role of government and to maximize the role of the private economy and to maximize personal freedoms,” he told the
National Journal
. “By supporting all of these different [nonprofit] organizations I am trying to support different approaches to achieve those objectives. It’s almost like an investor investing in a whole variety of companies. He achieves diversity and balance. And he hedges his bets.”

What resulted from this approach was a complicated flowchart enabling the Kochs to use their fortune to influence public policy from an astounding number of different directions at once. At the top, the funds all came from the same source—the Kochs. And in the end, the contributions all served the same pro-business, limited-government goals. But they funneled the money simultaneously through three different kinds of channels. They made political contributions to party committees and candidates, such as Dole. Their business made contributions through its political action committee and exerted influence by lobbying. And they founded numerous nonprofit groups, which they filled with tax-deductible contributions from their private foundations. Other wealthy activists made political contributions, and other companies lobbied. But the Kochs’ strategic and largely covert philanthropic spending became their great force magnifier.

By 1990, enterprising conservative and libertarian activists were wearing a path to Wichita, where they, like Fink before them, would pitch their proposals to Charles Koch in hopes of his patronage. Typical was the experience in 1991 of two former Reagan administration lawyers, Clint Bolick, a former aide to Clarence Thomas, and William “Chip” Mellor III, in search of seed money for a new kind of aggressive, right-wing public interest law firm that would litigate against government regulations in favor of “economic liberty.” Mellor recalled thinking, “
Who else would give us enough money to be serious?” According to Mellor, after lower-level aides initially turned down the proposal, Charles Koch himself committed $1.5 million on the spot, but with strings attached, keeping him in control. As Mellor recalled, “He said, ‘Here’s what I’m going to do. I’ll give you up to $500,000 a year for three years, each year, but you have to come back each year and demonstrate that you’ve met these milestones that you’ve set out to accomplish and I will evaluate it on a yearly basis, and there’s no guarantees.’ ” The legal group, the Institute for Justice, went on to bring numerous successful cases against government regulations, including campaign-finance laws, several of which reached the Supreme Court.

“
In recent years,” a prescient news story noted in 1992, “money from Wichita has gushed into the coffers of virtually every Washington think tank and public interest group dedicated to free-market economics and the libertarian credo of minuscule government regulation.” In 1990 alone, the article noted, the three main private foundations controlled by Charles and David Koch disbursed $4 million to such ostensibly nonpartisan but politically motivated groups.

Few outside the rarefied world of far-right, laissez-faire economics noticed, but
the Kochs’ multidimensional political spending kept growing. Between 1998 and 2008, for instance, Charles Koch’s private fund, the Charles G. Koch Charitable Foundation, made more than $48 million in tax-deductible grants, primarily to groups promoting his political views. The Claude R. Lambe Charitable Foundation, which was controlled by Charles and his wife, Liz, along with two company employees and an accountant, similarly made more than $28 million in tax-deductible grants. David Koch’s fund, the David H. Koch Charitable Foundation, made more than $120 million in tax-deductible grants—many to cultural and scientific projects rather than political. Meanwhile, during those years Koch Industries spent more than $50 million on lobbying. Separately, the company’s political action committee, KochPAC, donated some $8 million to political campaigns, more than 80 percent of it to Republicans. In addition, the Kochs and other family members spent millions more on personal campaign contributions.