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

by Daniel Schulman

  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 onslaug
ht 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.