Daddy's Money

After the 1967 death of Fred Sr., his oldest son, Charles, now 62, took control of Koch Industries and began to pump 90 percent of the company's profit back into the business. The practice meant huge growth for the company, but smaller dividends for its shareholders.

After several years, some members of the Koch family became fed up with the policy, and in 1980 they mounted a challenge to Charles's control of the company. Led by William Koch, one of Charles's younger brothers, the dissidents argued that Koch stockholders deserved to receive more cash from their investment, and that the company should go public. (Bill, an avid sailor, cultivated an expensive hobby: In 1992 he would win the America's Cup.)

Bill's plan to wrest control of Koch Industries from Charles involved increasing the company's board of directors from nine members to eleven. The plan would also have removed Howard Sr. from the board.

"I personally like him very much," Koch said in an August 1997 deposition. "He had a very powerful presence, very professorial, was extremely articulate, had a good sense of logic about him. He did show a number of strange peculiarities, however. He tended to get drunk a lot, passed out at one of the stockholders meetings. When he got drunk, he got very foolish. At one stockholders meeting he got up and gave a toast to Koch Industries, to his ex-wife, to his current wife, to his kids, to just about everybody in the room. It was embarrassing."

Key to Bill Koch's scheme was the backing of one, if not both, of J. Howard Marshall II's sons.

In a deposition taken in 1983, Bill Koch states that in the spring of 1980, he approached both Marshall brothers. According to Koch, even Pierce, the supposedly loyal son, was initially interested in the plot.

"I remember Pierce telling me he supported me 100 percent," testified Koch. But Pierce, he said, was "wishy-washy" and "started backing off that commitment."

In Howard Jr., however, Bill Koch found a more willing conspirator. For this Marshall, it seems, the deal boiled down to two things: libertarianism and liquidity. Howard Jr. was no fan of Charles Koch's support of groups such as the Cato Institute. But perhaps more important, Howard Jr. needed to cash in his Koch Industries stock to help support MDH, Inc., his fledging electronics company.

By Thanksgiving 1980, Bill Koch was set to call the special meeting of the Koch Industries board that would change the makeup of its directors. But then Howard Sr. got wind of the deal.

On November 29, Pierce Marshall called his father to warn him about the impending coup. "I told my father that the dissidents had been joined by Howard," Pierce testified last July, "and were planning to deelect the entire board of Koch Industries and elect a majority for themselves."

Howard Sr. was furious and immediately phoned Howard Jr. Howard Jr. acknowledges that during that tirade, his father promised to disinherit him. But the next day, when the elder Marshall phoned again, he calmly asked for a meeting. Howard Jr. agreed.

On the morning of December 1, 1980, Howard Sr. arrived at Howard Jr.'s office in Pasadena, California. In a 1983 deposition, Howard Jr. said he was shocked by his father's physical appearance: "He could hardly walk or stand or talk carefully.'Sick' is the word I guess you can use."

The old man's message was simple. He would pay $8 million -- or more than $200 a share -- for Howard Jr.'s Koch Industries stock, the 4.25 percent given to him six years earlier. Howard Sr. was prepared to write a check there on the spot, but he did not want to get into a bidding war with the Koch dissidents. Take it or leave it, was his position.

Over Monday and Tuesday, Howard Jr. and his father and other officials from Koch Industries, including Charles Koch, met several times. By late Tuesday the deal was done, and the elements were put to paper. In addition to the $8 million, Howard Jr. also received a note of indemnity and a hold-harmless agreement in the event Bill Koch decided to sue him for reneging on his agreement to back Bill in the takeover attempt.

Now, 18 years later, Howard Jr. is suing his dead father for breach of another contract that he says was made that week -- a verbal contract. In Harris County probate court, Howard Jr. is contending that Howard Sr., in a private discussion, rescinded his threat of disinheritance and promised he'd treat both sons equally in his will.

Howard Jr. says he could have sold his stock for twice the $8 million his father paid him. Instead, he claims, he sold to his father because the old man looked so frail -- and because the old man promised to remember him in his will.

Of that promise, Howard Jr. can offer little proof other than his own word.