Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (23 page)

“What I recall is the opposite,” Charles said. “My father had gone through a nightmare of litigation from 1929 to 1952, and as part of that, he’d countersued, which lasted a number of years. His saying about that is, ‘That was a mistake, that was a terrible mistake.’ He said, ‘Never sue.’ He said, ‘Out of those lawsuits, I finally settled. I settled for a million and a half dollars. The lawyers got a third, the government got a third, and I got a third, and I ended up with my business destroyed.’ So he said, ‘never sue,’ those were his words.”

Later, as he recounted the family’s last Christmas together in 1979, when Bill had launched into a tirade that had brought their mother to tears, Charles appeared to stare directly at his brother as he spoke: “He accused her of being a bad mother, of not loving him, and that whatever problems he had were largely her fault.”

Bill never looked up from the table in front of him.

Week after week, as the trial slogged on, Charles and David, sometimes accompanied by their wives, flew to Topeka on Sundays,
returning home for at best a few days at the end of the week—Charles to Wichita, David to New York. Then they began the whole exhausting ritual all over again.

During the trial, the brothers rented a Topeka mansion that had belonged to a member of the Menninger family, who had founded a famous psychiatric clinic and sanitarium in the city. Charles and David’s daily routine varied little. The brothers convened for breakfast with their lawyers and advisors to prep for trial, then caravanned over to the courthouse in black SUVs. They concluded the day in a similar fashion, debriefing with their lawyers and advisors over dinner.

The long legal battle had taken a noticeable toll on each of the brothers, but perhaps none more so than Charles. The typically energetic CEO wasn’t sleeping well. He looked drawn and haggard. It was not just his company but his values that were under assault.

“No question—that was the hardest period of Charles’ life. Beyond anything I could describe,” said Leslie Rudd, Charles’s close friend.

Gerald O’Shaughnessy, another close friend, observed that he had “never quite seen him so… distracted and preoccupied.”

In the months before the trial, Charles was aloof and withdrawn. Perhaps for the first time since he had gone to work for his father’s company in 1961, he seemed disengaged from the business. “I frankly didn’t think he was that focused on the company then,” said a former Koch executive. “During that period there were a bunch of questionable deals.”

Exhibit A was Koch’s $670 million acquisition of Purina Mills, completed several weeks before
Koch v. Koch Industries
went to trial. Before year’s end, the feed company filed for Chapter 11, inflicting major losses on Koch Industries. And by April 1999, this and other bad bets on its agriculture businesses forced hundreds of layoffs at the company, as Charles and the company’s management
struggled to turn around money-losing divisions or extricate themselves entirely. “The company had a couple of people who are gone now who just shouldn’t have had as much authority as they did,” recalled Tony Woodlief, who went to work as a Koch management consultant in March 1997 and later became a vice president of Charles’s charitable foundation. “They talked a good game and then they made some really stupid decisions.… Charles, you cannot get an ounce of bullshit past him, but at that time he was so checked out.”

Throughout the eleven-week trial, Charles watched the proceedings almost expressionless, even while Liz, his fiercely loyal wife, struggled to stifle her anger as Bill and Frederick’s lawyers painted her husband as a tyrant and a cheat. His wooden demeanor masked the inner tumult of watching his family’s private drama splayed out for the world to see. The litigation, the former Koch executive said, was “crushing” Charles. “You could see a side of Charles that no one had ever seen before and no one will likely ever see again. That trial—destroyed him is not the right word. It was as if he had aged 40 years.”

On Tuesday, June 16, after two-and-a-half months of testimony, Bartlit and Howard delivered their closing arguments. “The only thing that people like this recognize, unfortunately, is money,” Bartlit told the jury, arguing that Koch’s management had displayed the “attitude of somebody who will do it again unless they get more than a slap on the wrist.”

Howard called the case a “modern parable. And the moral is, beware of a brother driven by the need for more money, by greed, and by the desire to rule or ruin, because if you don’t, you’re in for 20 years of corporate warfare.”

Koch Industries had hired Courtroom Sciences Inc., the consulting firm cofounded by “Dr. Phil” McGraw, to advise on the case and empanel a shadow jury, who reported daily on their impressions of the evidence and testimony presented at trial. The shadow
jurors were told that their participation was solely for research purposes, but the electronic keypad lock on the room they were interviewed in and the anti-eavesdropping devices affixed to its walls suggested the endeavor was not just academic. Their true purpose was to give Charles and David’s legal team a glimpse into the psyche of the jury and the arguments and evidence they had been swayed by.

While the real jury deliberated, the CSI consultants delivered their verdict to Charles and David at the Menninger house. The brothers, the consultants said, needed to prepare themselves for the worst. “The CSI guys said you need to focus on loss—you guys have lost,” said someone familiar with this conversation. “David shut down.” In the event of a loss, one of the brothers might have to make a statement to the press. “Fuck it,” David said. “I’m not doing it.”

At 9:45 a.m. on June 19, when the jury sent a message to Judge Crow that they had reached a verdict, Charles and David were far from Topeka. David had returned to New York, where Julia was expecting the birth of their first child later that summer. Charles was trying to occupy himself with work in Wichita. Frederick, too, was MIA; he had flown back to Europe.

But Bill had remained in Topeka to anxiously await the verdict. It was only natural, since he had invested so much of his time and money into the case.

Judge Crow recessed the court and summoned the lawyers into his chambers to review the verdict. Bartlit emerged grim-faced not long after. “They’re guilty of misrepresentation,” he told Bill, “but it’s not material.” The jurors, in other words, believed that Koch Industries had concealed some facts during negotiations with the shareholders, but determined these omissions did not significantly affect the sale price. There would be no damages. Charles and David had prevailed.

Word of the victory spread quickly at Koch’s Wichita headquarters, where an e-mail circulated late Friday morning informing the
staff that “the jury unanimously ruled, as we’ve always known, that Bill Koch and the other shareholders were treated fairly when their stock was purchased for more than $1.1 billion.” Charles delivered the news to David by phone. The trauma of the trial behind them, the brothers both wept with relief.

Charles and David knew their battle with Bill was nowhere near over; Charles had resigned himself to the fact that Bill would keep coming at him as long as he had “breath or money.” But they had won a key battle.

Bill’s team, offering its own spin on the trial’s outcome, trumpeted in a press release that “Jury Finds Koch Industries Guilty of Misrepresentation.” Bill called the verdict a “moral victory.” But symbolic triumphs mattered little to the America’s Cup–winning skipper. In reality, he was shattered, and in the coming months a familiar gloom shrouded his life.

After the verdict, reporters cornered Bill outside the Topeka courthouse and peppered him with questions. Defiant, Bill announced that he would appeal. “These guys are crooks. In my opinion,” he said, “this is the 10th round of a 15-round championship fight.”

On August 24, 1996, in a rural subdivision fifty miles southeast of Dallas, an acrid smell wafted into the small trailer home Danny Smalley shared with his two daughters. The odor was mild at first, as if the pilot light of a stove had blown out. After Smalley’s seventeen-year-old daughter, Danielle, complained, the forty-year-old mechanic went outside to investigate and checked the propane tank behind their trailer. It wasn’t leaking, so he went back to watching the Little League World Series in his bedroom.

Danielle, meanwhile, buzzed around the house, packing and tidying up. Her friend Jason Stone had come by, and the teenagers were discussing plans for her farewell party that night. Danielle was the president of her high school theater club, and had won a drama scholarship to a nearby community college. The following day she planned to move into the dorms. A pretty girl with a bright smile, bangs, and long dark hair that fell past her shoulders, she had dreams of pop stardom. Once she was rich and famous, Danielle had told her father, she planned to buy him a new Harley.

The smell had gotten worse. Danielle felt queasy.

The Smalleys didn’t own a telephone, but she and Jason volunteered to drive over to a neighbor’s home to call in a report of a possible gas leak. A little after 3:30 p.m., Danny walked the teenagers outside and watched for a moment as Danielle backed his 1964 Chevy pickup truck out of the driveway, looped around a
telephone pole, and drove for the main road. A couple hundred yards from the house, the pickup stalled as it crossed a dry creek bed. Danielle turned the ignition. Nothing. She turned the key again.

The thunderous explosion spewed a geyser of flame hundreds of feet in the air. George York, the local constable, felt the concussion a couple miles away. He’d heard chatter about a gas leak over the radio. He raced toward the scene.

As York entered the Oak Trail Estates subdivision where the Smalleys lived, he saw terrified families fleeing into the road toward him. The tops of trees were charred and smoking. A picnic table was in flames. The area looked “like it was strafed by Napalm,” York recalled.

York spotted a man running toward him wearing nothing but athletic shorts and a demented expression. Tears streamed down Danny Smalley’s face; his trembling hands were raised to the sky. “You’re no God!” he bellowed. “You’re the devil!” Everything was on fire; it appeared to Smalley as if hell itself had opened up to claim his daughter and Jason Stone.

Their bodies lay about 50 feet apart. The teenagers had been on fire as they tried to run from the truck. Both were on their backs, in the fetal position. “They were still bubbling from the ears and the nose and the eyes,” York recalled. They were unrecognizable, their hair and clothes incinerated. The only way to tell them apart was by examining their genitals. York helped Smalley—still cursing God for stealing his daughter—cover their smoldering bodies.

At 3:09 p.m., in the dimly lit pipeline control center at Koch Industries’ Wichita headquarters, an alert flashed red on one of the six screens Danny Mills was monitoring. This was the nerve center of the company’s pipeline system, where a bank of computer consoles, arrayed in a semicircle, displayed the constantly updating
vital signs of Koch’s 40,000-mile network, which Charles and David had built over the last few decades into one of the largest in the nation.

The pressure in the Sterling I pipeline had dropped to zero. It stretched 570 miles, from Medford, Oklahoma, to Mount Belvieu, Texas. Unknown to Danny Smalley and most of his neighbors, it ran within several hundred feet of their homes, coursing with a thousand barrels an hour of highly volatile liquid butane. (The clear gas is used to fuel cigarette lighters, as an aerosol propellant, and is also blended into gasoline and propane.)

The pressure reading couldn’t be right. A malfunction, Mills assumed. Perhaps one of the transmitters that relayed data back to the control center was on the fritz.

Twenty minutes later another alert blinked on his screen, this one showing abnormally low suction at a pumping station. Mills beckoned a coworker over, who peered at the monitor. “It looks like you have a problem,” he said.

A ringing telephone interrupted Mills as he tried to diagnose what had gone wrong with Sterling I. On the line was Rick Burgett, a former Koch contractor who happened to live in the same subdivision as the Smalleys. “You have a major leak in this area,” Burgett told Mills.

A few minutes later, Mills was on the phone with the Kaufman County Sheriff’s Office. He needed to get a technician out to the site immediately. “This is Danny with Koch Industries. The pipeline that ruptured, I need to know where this place is.”

After being transferred a few times, a dispatcher finally gave Mills directions to Oak Trail. “You’ll see it when you get there. They said that the flames are about 200 feet.”

“Flames?” Mills started to panic; he thought there was just a leak.

“Yeah.”

“What caught fire?” he asked.

“It’s a gas main broke, blew up,” the dispatcher said.

“Good God.”

The clear liquid gushing from the ground looked at first like water. But it quickly vaporized after hitting the air. Danielle and Jason had unwittingly driven directly into a cloud of butane that had drifted down the creek bed. All it had taken was a single ignition spark to set off a massive explosion that scorched more than a dozen acres of land.

Following the tragedy, Danny Smalley descended into a vortex of despair. Diagnosed with post-traumatic stress disorder, he needed pills to sleep; even when he drifted off, he often woke up mid-scream, as he dreamt night after night about the explosion. While out driving, sometimes a song came on the radio that reminded him of Danielle. But he couldn’t picture her anymore. All he saw was her burnt corpse.

Smalley blamed himself for his daughter’s death—he should have been the one in that truck—and became suicidal. A year after the explosion, friends discovered Smalley in the cemetery where he buried his daughter. He had doused himself in gasoline and was preparing to take his life, as Danielle’s had been taken.

By 1998, the Stone family had settled with Koch, as had Danielle’s mother, Judy, who split with Danny in 1990. Danny pressed forward with a lawsuit, holding out even as Koch’s lawyers threw out higher and higher figures, eventually offering $10 million on the day the case went to trial. Smalley sought something more valuable. He wanted the opportunity to sit on the witness stand and stare down the company that had robbed him of his daughter. He wanted Charles and David Koch to understand just what they had taken from him. He wanted his day in court.

Smalley had hired Ted Lyon, a well-known Texas trial lawyer. A veteran of state politics, Lyon had served for fourteen years as
a Democratic legislator in the Texas House and Senate. With a surplus of folksy charm, he was a master at courting juries, as his history of winning record-setting verdicts could attest.

Whenever Lyon took on a personal injury case, he insisted on pacing the accident scene. When he represented parents who had lost a son or a daughter, he made a point of calling on them at home, where he would inevitably find a shrine to the child. In court, he was a storyteller. The details brought the narrative to life; the narrative swayed the jury.

Koch Industries retained its own retinue of legal heavy-hitters to represent the company, including attorneys from the high-powered Houston-based law firm of Fulbright & Jaworski. During one early deposition in the case, Koch’s representatives numbered at least a dozen. On the other side of the conference table sat Lyon and Marquette Wolf, a fresh-faced associate who had recently graduated from Southern Methodist University’s law school. The intimidating display of legal firepower spooked the young lawyer. But it wasn’t Lyon’s first showdown with a powerful corporation trying to flex its muscles. Turning to Wolf, Lyon invoked the catchphrase of the Texas Rangers, the legendary frontier lawmen. “One riot,” he drawled, “one Ranger.”

Meanwhile, in Washington, a dogged, platinum-haired prosecutor named Angela O’Connell was also taking on Koch Industries. She had grown up in the DC area and joined the Justice Department in 1982, after graduating from Georgetown Law School. She was now the lead attorney on one of the largest environmental cases in the agency’s history. In 1995, the federal government had filed suit against Koch under the Clean Water Act, alleging that the company’s pipelines and storage facilities had leaked millions of gallons of oil into the waters of six states across the South and the Midwest. One of the reasons for these spills, the agency believed, was the decrepit state of the company’s pipeline system. Koch had
grown into a business behemoth by shrewdly buying up undervalued oil assets that Sterling Varner called “junk”—and in some cases it was now starting to show.

The Justice Department had documented over 300 spills since 1990. The worst of them had occurred in October 1994, when a pipeline in southern Texas disgorged nearly 100,000 gallons of crude and painted a 12-mile oil slick on Nueces and Corpus Christi Bays.

Spills happen in the oil business, but the scope of Koch’s violations and the company’s disregard for the environmental consequences had attracted federal scrutiny. In the event of a spill in U.S. waters, oil companies are required by law to report the estimated amount to the Coast Guard, which marshals resources accordingly and responds to the scene. But Koch “repeatedly lied about the amount to avoid penalties,” O’Connell said. “These guys would call in two barrels when they had something that was a shocking amount of oil.” (In the case of the Corpus Christi spill, the company had originally reported that just 420 gallons of oil had spilled.) Asked by government lawyers whether they had ever knowingly downplayed the size of spills, several Koch officials pleaded the Fifth Amendment.

“Many of Koch’s spills… occurred in remote areas and were never reported to any authorities. Many of these were in the amount of 5 to 6 barrels, although I estimate that there were dozens of spills of over 50 barrels which entered the water,” noted Phil Dubose, who worked for Koch Industries for twenty-six years, rising to become a division manager of its marine subsidiary.

When the authorities did respond, Dubose said, Koch employees were instructed to cover up the extent of the accident by using techniques like “wheel washing,” in which a boat’s engine blade churns up the oil slick to mask it. “It was understood that we should either ‘wheel wash’ the spill, or to cover it up with soil if it was on land,” he noted. “ ‘Wheel washing’ was a standard practice
for Koch in my division. Crews often did so on their own initiative, since they wanted to protect their jobs.”

Bill Koch had warned years earlier about the company’s knack for getting into trouble with regulators. Now the government was scrutinizing Koch Industries as never before—and behind the scenes, Bill and his lawyers were providing information to the Justice Department to assist the agency in its investigation.

During O’Connell’s twenty-five-year career at Justice, she had prosecuted nearly every oil company out there—but none, she said, like Koch. “They’re always operating outside of the system. It’s kind of like what they used to call Texas Justice, only it’s happening in Wichita.”

O’Connell began to suspect that Koch had placed her under surveillance. “I thought that my trash can was taken outside my house several days,” she recalled. “I was upset enough about it at the time to report what I thought was a bugging and what I thought was the trash being taken—a number of incidents.” The Justice Department was never able to prove that Koch had targeted one of its prosecutors, but for the first time in her career, O’Connell operated as if everything she said and did was being monitored.

She was especially careful during visits to Koch’s Wichita headquarters, an edifice of sleek brown granite rising incongruously from the Kansas prairie. “When I was in their headquarters and they’d say, ‘Oh, feel free to use the phone, feel free to talk in this office’—we never said anything inside those offices,” O’Connell said. “I never made a phone call inside that place.”

In 1999, as Ted Lyon worked on the Smalley case, he hired a security firm to sweep for listening devices in his offices, located on the fifth floor of an office tower in the Dallas exurb of Mesquite. He suspected that he and other lawyers at his firm were being spied on, perhaps by investigators working for Koch Industries. “There
were things during the case that no else would have known about, but somehow they knew about it,” he said.

“We had a lot of different witnesses we had to run down,” Lyon added, “people who had formerly worked for them and things of that nature. We would be talking about them on the phone with an investigator or we’d be talking about them between Marquette and I, and they would suddenly be visited by Koch representatives.”

The security consultants discovered that transmitters had been planted in the firm’s offices and set to broadcast to an FM frequency. “I’m not saying that the Kochs did it,” Lyon said carefully. “I just thought it was very interesting that it happened during the time we were litigating that case.”

Lyon also discovered that the company was having Danny Smalley tailed. He said he turned the tables by hiring a private detective of his own to follow Koch’s investigator, then subpoenaing the PI once he discovered his identity. Koch also attempted to track down witnesses who would chisel away at Smalley’s credibility at trial. According to Lyon, they dug up one woman who was prepared to testify that the grieving father was an alcoholic who beat his daughters; it turned out, though, that she wasn’t much of a character witness. She was a paranoid schizophrenic who had been in and out of a mental institution, where she underwent repeated shock therapy treatments.

“They did everything they could to intimidate us,” Lyon said. “It was battle after battle after battle.” The only option was to match the company’s aggressive legal strategy with their own.

“Unrelenting,” Wolf noted, “was the only way with them.”

Document by document, deposition by deposition, a picture began to emerge of an unusually profit-obsessed corporate culture in which almost everything came second to the bottom line.