Dark Money

by Jane Mayer

  In 1927, Fred, who was an inveterate tinkerer, invented an improved process for extracting gasoline from crude oil. But as he would later tell his sons bitterly and often, America’s major oil companies regarded him as a business threat and shut him out of the industry, suing him and his customers in 1929 for patent infringement. Koch regarded the monopolistic patents invoked by the major oil companies as anticompetitive and unfair. The fight appears to be an early version of the Kochs’ later opposition to “corporate cronyism” in which they contend that the government and big business collaborate unfairly. In Fred Koch’s eye, he was an outsider fighting a corrupt system.

  Koch fought back in the courts for more than fifteen years, finally winning a $1.5 million settlement. He correctly suspected that his opponents bribed at least one presiding judge, an incompetent lush who left the case in the hands of a crooked clerk. “The fact that the judge was bribed completely altered their view of justice,” one longtime family employee suggests. “They believe justice can be bought, and the rules are for chumps.” Meanwhile, crippled by lawsuits in America during this period, Koch took his innovative refining method abroad.

  He had already helped build a refinery in Great Britain after World War I with Charles de Ganahl, a mentor. At the time, the Russians supplied England with fuel, which led to the Russians seeking his expertise as they set up their own oil refineries after the Bolshevik Revolution.

  At first, according to family lore, Koch tore up the telegram from the Soviet Union asking for his help. He said he didn’t want to work for Communists and didn’t trust them to pay him. But after securing an agreement to get paid in advance, he overcame his philosophical reservations. In 1930, his company, then called Winkler-Koch, began training Russian engineers and helping Stalin’s regime set up fifteen modern oil refineries under the first of Stalin’s five-year plans. The program was a success, forming the backbone of the future Russian petroleum industry. The oil trade brought crucial hard currency into the Soviet Union, enabling it to modernize other industries. Koch was reportedly paid $500,000, a princely sum during America’s Great Depression. But by 1932, facing growing domestic demand, Soviet officials decided it would be more advantageous to copy the technology and build future refineries themselves. Fred Koch continued to provide technical assistance to the Soviets as they constructed one hundred plants, according to one report, but the advisory work was less profitable.

  What happened next has been excised from the official corporate history of Koch Industries. After mentioning the company’s work in the Soviet Union, the bulk of which ended in 1932, the corporate history skips ahead to 1940, when it says Fred Koch decided to found a new company, Wood River Oil & Refining. Charles Koch is equally vague in his book The Science of Success. He notes only that his father’s company “enjoyed its first real financial success during the early years of the Great Depression” by “building plants abroad, especially in the Soviet Union.”

  A controversial chapter is missing. After leaving the U.S.S.R., Fred Koch turned to Adolf Hitler’s Third Reich. Hitler became chancellor in 1933, and soon after, his government oversaw and funded massive industrial expansion, including the buildup of Germany’s capacity to manufacture fuel for its growing military ambitions. During the 1930s, Fred Koch traveled frequently to Germany on oil business. Archival records document that in 1934 Winkler-Koch Engineering of Wichita, Kansas, as Fred’s firm was then known, provided the engineering plans and began overseeing the construction of a massive oil refinery owned by a company on the Elbe River in Hamburg.

  The refinery was a highly unusual venture for Koch to get involved with at that moment in Germany. Its top executive was a notorious American Nazi sympathizer named William Rhodes Davis whose extensive business dealings with Hitler would eventually end in accusations by a federal prosecutor that he was an “agent of influence” for the Nazi regime. In 1933, Davis proposed the purchase and conversion of an existing German oil storage facility in Hamburg, owned by a company called Europäische Tanklager A.G., or Eurotank, into a massive refinery. At the time, Hitler’s military aims, and his need for more fuel, were already well-known. Davis’s plan was to ship crude petroleum to Germany, refine it, and then sell it to the German military. The president of the American bank with which Davis dealt refused to have anything to do with the deal, because it was seen as supporting the Nazi military buildup, but others extended the credit. After lining up the American financing, Davis needed the Third Reich’s backing. To gain it, he first had to convince German industrialists of his support for Hitler. In his effort to ingratiate himself, Davis opened an early meeting with Hermann Schmitz, the chairman of I.G. Farben—the powerful and well-connected chemical company that soon after produced the lethal gas for the concentration camps’ death chambers—by saluting him with a Nazi “Heil Hitler.” When these efforts didn’t produce the green light he sought, Davis sent messages directly to Hitler, eventually securing a meeting in which the führer walked in and ordered his henchmen to approve the deal. On Hitler’s orders, the Third Reich’s economic ministers supported Davis’s construction of the refinery. In his biography of Davis, Dale Harrington draws on eyewitness accounts to describe Hitler as declaring to his skeptical henchmen, “Gentlemen, I have reviewed Mr. Davis’s proposition and it sounds feasible, and I want the bank to finance it.” Harrington writes that during the next few years Davis met at least half a dozen more times with Hitler and on one occasion asked him to personally autograph a copy of Mein Kampf for his wife. According to Harrington, by the end of 1933 Davis was “deeply committed to Nazism” and exhibited a noticeable “dislike for Jews.”

  In 1934, Davis turned to Fred Koch’s company, Winkler-Koch, for help in executing his German business plan. Under Fred Koch’s direction, the refinery was finished by 1935. With the capacity to process a thousand tons of crude oil a day, the third-largest refinery in the Third Reich was created by the collaboration between Davis and Koch. Significantly, it was also one of the few refineries in Germany, according to Harrington, that could “produce the high-octane gasoline needed to fuel fighter planes. Naturally,” he writes, “Eurotank would do most of its business with the German military.” Thus, he concludes, the American venture became “a key component of the Nazi war machine.”

  Historians expert in German industrial history concur. The development of the German fuel industry “was hugely, hugely important” to Hitler’s military ambitions, according to the Northwestern University professor Peter Hayes. “Hitler set out to create ‘autarchy,’ or economic self-sufficiency,” he explained. “Gottfried Feder, the German official in charge of the program, reasoned that even though Germany would have to import crude oil, it would be able to save foreign exchange by refining the products itself.”

  In the run-up to the war, Davis profited richly from the arrangement, engaging in elaborate scams to keep the crude oil imports flowing into Germany despite Britain’s blockade. When World War II began, the high-octane fuel was used in bombing raids by German pilots. Like Davis, the Koch family benefited from the venture. Raymond Stokes, director of the Centre for Business History at the University of Glasgow in Scotland and co-author of a history of the German oil industry during the Nazi years, Faktor Öl (The oil factor), which documents the company’s role, says, “Winkler-Koch benefited directly from this project, which was designed to help enable the fuel policy of the Third Reich.”

  Fred Koch often traveled to Germany during these years, and according to family lore he was supposed to have been on the fatal May 1937 transatlantic flight of the Hindenburg, but at the last minute he got delayed. In late 1938, as World War II approached and Hitler’s aims were unmistakable, he wrote admiringly about fascism in Germany, and elsewhere, drawing an invidious comparison with America under Franklin Roosevelt’s New Deal. “Although nobody agrees with me, I am of the opinion that the only sound countries in the world are Germany, Italy, and Japan, simply because they are all working and working hard,” he wrote in a letter t
o a friend. Koch added, “The laboring people in those countries are proportionately much better off than they are any place else in the world. When you contrast the state of mind of Germany today with what it was in 1925 you begin to think that perhaps this course of idleness, feeding at the public trough, dependence on government, etc., with which we are afflicted is not permanent and can be overcome.”

  When the United States entered World War II in 1941, family members say that Fred Koch tried to enlist in the U.S. military. Instead, the government directed him to use his chemical engineering prowess to help refine high-octane fuel for the American warplanes. Meanwhile, in an ironic turn, the Hamburg refinery that Winkler-Koch built became an important target of Allied bombing raids. On June 18, 1944, American B-17s finally destroyed it. The human toll of the bombing raids on Hamburg was almost unimaginable. In all, some forty-two thousand civilians were killed during the long and intense Allied campaign against Hamburg’s crucial industrial targets.

  Fred Koch’s willingness to work with the Soviets and the Nazis was a major factor in creating the Koch family’s early fortune. By the time he met his future wife, Mary Robinson, at a polo match in 1932, the oilman’s work for Stalin had put him well on his way to becoming exceedingly wealthy.

  Robinson, a twenty-four-year-old graduate of Wellesley College, was tall, slender, and beautiful, with blond hair, blue eyes, and an expression of amusement often captured in family photographs. The daughter of a prominent physician from Kansas City, Missouri, she had grown up in a more cosmopolitan milieu. Koch, who was seven years older than she, was so smitten he married her a month after they met.

  Soon, the couple commissioned the most fashionable architect in the area to build an imposing Gothic-style stone mansion on a large compound on the outskirts of Wichita, Kansas, where Winkler-Koch was based. Reflecting their rising social status, the estate was baronial despite the flat and empty prairie surrounding it, with stables, a polo ring, a kennel for hunting dogs, a swimming pool and wading pool, a circular drive, and stone-terraced gardens. Some of the best craftsmen in the country created decorative flourishes such as wrought-iron railings and a stone fireplace carved with a whimsical snowflake motif. Within a few years, the Kochs also purchased the sprawling Spring Creek Ranch near Reece, Kansas, where Fred, who loved science and genetics, bred and raised cattle. Family photographs show the couple looking glamorous and patrician, hosting picnics and pool parties, and riding on horseback, dressed in jodhpurs and polo gear, surrounded by packs of jolly friends.

  In the first eight years of their marriage, the couple had four sons: Frederick, known by the family as Freddie, was born in 1933, Charles was born in 1935, and twins, David and William, were born in 1940. With their father frequently traveling and their mother preoccupied with social and cultural pursuits, the boys were largely entrusted to a series of nannies and housekeepers.

  It is unclear what Fred Koch’s views of Hitler were during the 1930s, beyond his preference for the country’s work ethic in comparison with the nascent welfare state in America. But he was enamored enough of the German way of life and thinking that he employed a German governess for his first two sons, Freddie and Charles. At the time, Freddie was a small boy, and Charles still in diapers. The nanny’s iron rule terrified the little boys, according to a family acquaintance. In addition to being overbearing, she was a fervent Nazi sympathizer, who frequently touted Hitler’s virtues. Dressed in a starched white uniform and pointed nurse’s hat, she arrived with a stash of gruesome German children’s books, including the Victorian classic Der Struwwelpeter, that featured sadistic consequences for misbehavior ranging from cutting off one child’s thumbs to burning another to death. The acquaintance recalled that the nurse had a commensurately harsh and dictatorial approach to child rearing. She enforced a rigid toilet-training regimen requiring the boys to produce morning bowel movements precisely on schedule or be force-fed castor oil and subjected to enemas.

  The despised governess ruled the nursery largely unchallenged for several years. In 1938, the two boys were left for months while their parents toured Japan, Burma, India, and the Philippines. Even when she was home, Mary Koch characteristically deferred to her husband, declining to intervene. “My father was fairly tough with my mother,” Bill Koch later told Vanity Fair. “My mother was afraid of my father.” Meanwhile, Fred Koch was often gone for months at a time, in Germany and elsewhere.

  It wasn’t until 1940, the year the twins were born, when Freddie was seven and Charles five, that back in Wichita the German governess finally left the Koch family, apparently at her own initiative. Her reason for giving notice was that she was so overcome with joy when Hitler invaded France she felt she had to go back to the fatherland in order to join the führer in celebration. What if any effect this early experience with authority had on Charles is impossible to know, but it’s interesting that his lifetime preoccupation would become crusading against authoritarianism while running a business over which he exerted absolute control.

  Fred Koch was himself a tough and demanding disciplinarian. John Damgard, David’s childhood friend, who became president of the Futures Industry Association, recalled that he was “a real John Wayne type.” Koch emphasized rugged pursuits, taking his sons big-game hunting in Africa and filling the basement billiard room with what one cousin remembered as a frightening collection of exotic stuffed animal heads, including lions and bears and others with horns and tusks, glinting glassy-eyed from the walls. In the summer, the boys could hear their friends splashing in the pool at the country club across the street, but instead of allowing the boys to join them, their father required them to dig up dandelions by the time they were five, and later to dig ditches and shovel manure at the family ranch. Fred Koch cared about his boys but was determined to keep them from becoming what he called “country-club bums,” like some of the other offspring of the oil moguls with whom he was acquainted. “By instilling a work ethic in me at an early age, my father did me a big favor, although it didn’t seem like a favor back then,” Charles has written. “By the time I was eight, he made sure work occupied most of my spare time.”

  All four sons later professed admiration and affection for their father, but their fond recollections gloss over a dark streak. Fred Koch’s rule was absolute, and his idea of punishment was corporal. He did not just spank the boys for their transgressions. Sometimes he hit them with a belt or worse. One family member remembers seeing him take a tree branch, strip it down, and “whip the twins like dogs.” They had marred the stone patio in some way that enraged him. “He was a hard man to love,” adds the family member, who declines to be identified. A second family member too remembers the belt beatings. Fred Koch “wasn’t around much,” he said, but when his sons misbehaved, they “really got it.”

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  Sibling rivalry in the family, which reached epic levels in adulthood, was always intense. Family photographs and films show the brothers fenced in outdoor playpens, grabbing each other’s toys, making each other cry, and boxing at early ages with gloves almost as big as their heads. Before long, Charles, the second born, emerged as the domineering leader of the pack. Fiercely competitive, driven, and self-confident, he appeared a paragon of handsome, blond athleticism. One family member recalls that Charles’s favorite game was king of the hill. “It hasn’t changed,” another family member said.

  Charles rarely lost, but when he did, he took it badly. When his younger brother Bill defeated him once in a boxing match, according to family lore, Charles refused to ever box again.

  It became clear early that Freddie was different from the others, and not of his rough-hewn father’s type. He was bookish and oriented toward his artistic mother, preferring to disappear into his room to read while the twins played ball with Charles, who liked to give commands. (Freddie did, however, hold his own against Charles on at least one occasion, punching him so hard in the face he broke his brother’s nose.) Charles later told Fame magazine, “Father wanted to make all
his boys into men and Freddie couldn’t relate to that regime.” Charles added, “Dad didn’t understand and so he was hard on Freddie. He didn’t understand that Freddie wasn’t a lazy kid—he was just different.”

  The father was hard on the other boys too. David liked reading and became obsessed for a while with the Wizard of Oz books, which of course are set in Kansas, but his father preferred that he do chores. Increasingly, David attached himself to his elder brother Charles, becoming his sidekick and accomplice, willing to drop everything at his brother’s command. “I was closer to David because he was better at everything [than the others],” Charles told Fame, bluntly.

  Mary Koch recalled that as a result, “Billy always felt that Charles and David were leaving him out.” She said that he “had no confidence or self-esteem.” The only redhead among the pack, Bill had an explosive temper that resulted in memorable tantrums, including one in which he picked up a priceless antique vase and hurled it to the floor, shattering it. Fred Koch’s response was more spanking.

  Clayton Coppin, a former associate professor and research historian based at George Mason University, was one of the rare outsiders to the Koch family with firsthand knowledge of its inner workings. In 1993, Koch Industries commissioned him to write a confidential corporate history. For the next six years, Coppin had nearly unlimited access to the private archives in the company’s headquarters in Wichita, along with the private papers of Fred and Mary Koch. He also had carte blanche to interview their business associates. After he completed the history in 1999, the company laid Coppin off. Subsequently, in 2002, Bill Koch hired him for a second confidential research project, this time on his brother Charles’s political activities. In interviews, Coppin described what he learned about the family while researching the first report and shared a copy of the second report, a lengthy three-part 2003 study titled “Stealth: The History of Charles Koch’s Political Activities.”