This was a happy life for a while, but a sense of uneasiness began to creep in. He was living like an ordinary, workaday white-collar guy. But in his world, this life could be considered a failure. The mythology of his father hung over him. His dad earned multiple degrees from MIT and became CEO of Koch Industries in his early thirties. Compared to this, it looked like Chase Koch was stagnating, even failing.
In 2003, Chase Koch traveled to New York to watch the US Open with his family. When the game was rained out, Chase joined his father and their family friend Leslie Rudd for lunch. When they sat down, Rudd started asking Chase how he was enjoying Austin. How was the marketing gig? How was life? Was Chase happy? Charles Koch sat silently and watched. Chase tried to act disinterested and dodge the questions. Things were fine. The job was good. Austin was great.
Rudd did not relent. He pressed Chase—why didn’t Chase come back to Wichita and work for the family business? Why was he wasting time down in Texas playing in a band? Then Rudd put on the hard sell. Chase should give a hard look at coming back to the family company.
“What I said to him was: ‘Chase, it’s a fabulous company. Your dad’s a great CEO,’ ” Rudd said. “ ‘It’s fine if you want to turn it down, but you’ve got to earn the right to turn it down. You’ve got to go—find out what it’s about, work there, and then decide. You can’t just say no hypothetically.’ ”
Chase looked over at his father, who seemed to be acting studiously disinterested in Rudd’s line of questioning. Rudd insisted later that Charles Koch didn’t put him up to the job of convincing Chase to return. Rudd said he cared about Chase and gave him advice that he would have given to his own son.
The conversation changed Chase Koch’s life. He quit his job in Austin, quit the band, and came back home to Wichita. Soon after he returned, Chase Koch attended a meeting with his father and Steve Feilmeier, Koch Industries’ chief financial officer. Charles Koch and Feilmeier explained that Chase Koch would take a series of jobs that were something like a training course. He would receive the equivalent of an MBA degree during his first years at the company. But the MBA degree was specifically tailored to Koch’s way of doing business. Chase Koch’s real education about the family company had begun.
* * *
Chase Koch began a rotation of high-level jobs that exposed him to the strategic pillars of Koch Industries’ modern business. It was telling what Chase Koch did not learn. He was not sent to the oil refineries, or to a pipeline farm, or to a natural gas processing plant. Charles Koch didn’t necessarily want to teach his son about the energy industry. Instead, Charles Koch selected a series of jobs that reflected what Koch Industries had become over the last decade and how it planned to carry on into the future.
The rotation of jobs was set forth, roughly, as follows:
Class 1. Private equity acquisitions and mergers.
Class 2. Accounting and taxes.
Class 3. Market-Based Management training.
Class 4. Trading.
One of Chase’s first assignments was to Koch’s development group, the internal committee that looked for new companies to acquire. He joined a division called Koch Equity Development, which bought shares of publicly traded firms. Chase worked in this office when Koch’s acquisition spree was at its peak, shortly after the Invista and Koch Fertilizer deals and during the $21 billion purchase of Georgia-Pacific.
Chase assembled spreadsheets and did other analysis to figure out the best ways to value a company. This was critical to Koch Industries’ overall strategy of developing a sharper, more accurate view of the marketplace than its competitors. Koch was looking for gaps in the market, small dysfunctions that presented opportunities for Koch to seize.
Chase also worked in a group of tax and accounting analysts. This might sound arcane and boring. Nobody grows up dreaming that they’ll become a tax analyst. But Chase would have discovered that these skills were just as critical to Koch’s success as was the company’s expertise in managing complex pipeline and refinery systems. There was virtually no terrain in the American economy that was more complex, more prone to manipulation, and more financially valuable than the American tax code.
Managing Koch Industries’ massive tax liability—measured in the billions of dollars each year—created a deep tension between two of Charles Koch’s primary philosophical principles.
The first principle was that government taxation was little more than state-sanctioned theft. Murray Rothbard, who cofounded the Cato Institute with Charles Koch and Ed Crane, called taxes “state robbery,” to take one of many examples. Taxation forcibly took money from a successful group of people and spent it in ways that those people couldn’t control. It seemed morally justified to avoid paying taxes however possible. But the second principle Charles Koch believed in was that of 10,000 percent compliance. Charles Koch espoused obeying the letter of every law, every day. When the law required a company to pay taxes, it must pay taxes.
These two competing ideas led Koch to approach its tax bill in a way that became standard for large corporations in America, from Apple to General Electric. Koch used the US tax code’s own complexity as a tool to avoid paying as much in taxes as possible. The company created numerous companies, limited liability corporations (called LLCs, for short), and subsidiaries around the globe. Many of them seemed to be little more than a name on a post office box. Charles Koch, for example, is listed as an employee or director of such companies as KCM Advisors/GP, LLC; EKLP, LLC; and FHR Alaska Guarantor, LLC.
It took massive amounts of time and effort to scatter these legal entities in a network around the globe, but the payout for doing so was enormous. By 2016, the US federal government was losing about $128.5 billion a year in tax revenue from corporations due to the use of tax havens like the Cayman Islands or the small European nation of Luxembourg. Such tax havens were only available to bigger companies that could afford to employ teams of tax analysts, attorneys, and traders to carry out the plans.
Koch Industries, like many US companies, had an office on Grand Cayman, the biggest island in the small Caribbean nation. Koch’s office was nondescript and easy to miss. It was located at 802 West Bay Road, a palm-tree-lined street that ran down the west side of the narrow island, just a few minutes south of the Ritz-Carlton Golf Club.
Grand Cayman is an island nation with no income tax and a permissive set of corporate laws that have only basic requirements for a company to register there. A company need only have a nameplate on a door, and perhaps an employee or two, to set up shop on Grand Cayman. The tax-free zone of the Cayman Islands drew some of the largest financial firms in the world to Grand Cayman, the largest of the islands. There was a private school system on Grand Cayman that compared in quality to those of the United States, along with high-end shopping, nightclubs, golf courses, and seemingly endless miles of beach on which to spend the weekends.
Koch Industries had a surprisingly diverse array of holdings in the Caymans, considering that the nation had few natural resources and very little in the way of industrial infrastructure. A liberal activist group called American Bridge combed through business registries in the Caymans and found more than two hundred companies it suspected were tied to Koch, with names like Koch Minerals Cayman, Ltd., Koch NGL Cayman, Ltd., and Koch Nitrogen Shipping, Ltd.