Ed Crane lumbered into Capitol Hill’s Christ Church on a rainy

morning in October 2011. He walked the creaky floors in the 19th-century

nave and found a seat in the paint-chipped pews. Mourners crowded the

interior as the choir began singing.

William Niskanen’s death, at age 78, hadn’t come as a shock.

His health had been in decline for two years before his stroke four days

earlier. But to Crane, Niskanen’s passing meant more than the loss of a

friend and colleague.

“Crane was devastated,” said one observer. “He looked as though

it was his own family member who had died.”

For 26 years, Crane and Niskanen had shared a secret: They

weren’t just top executives at the Cato Institute, the nation’s most

prestigious libertarian think tank. Along with two others, they had

quietly signed a document in 1985 providing each with shares of Cato’s

stock—giving them collectively 50-percent control of the think tank. Few

outside Cato’s inner circle knew about the unusual

arrangement.

For many years, the shares had seemed unimportant. But as

Crane’s relationship with Cato’s other shareholders—billionaire brothers

Charles and David Koch—turned combative, the stock became crucial. And

because the document didn’t specify what would happen to a shareholder’s

stock upon his death, Crane worried that Niskanen’s passing would set off

a knife fight for control of Cato.

Since its founding in 1977, Cato has evolved from a band of

roguish scholars to a first-tier Washington think tank that cuts across

party lines to further its libertarian agenda. Its scholarship became the

intellectual spine of President George W. Bush’s unsuccessful effort to

privatize Social Security. And its work has helped make once-heretical

libertarian positions such as legalizing gay marriage and decriminalizing

marijuana more credible.

“Cato has made the case that libertarians aren’t just a bunch

of pot-smoking weirdos,” says Martin Wooster, an expert on foundations and

a senior fellow at the Capital Research Center. “It has helped make

libertarianism a respectable public-policy position.”

As the funeral ended, the crowd filed into an adjacent hall for

refreshments. Old friends and coworkers greeted one another with smiles.

But Crane was in no mood to catch up.

Crane, whom critics describe as a swaggering autocrat, sees

Cato’s success as a validation of his 35-year reign. Show me, he says, who

else could have built this place—from scratch—into an institution so

highly regarded in Washington and around the world.

He wasn’t about to let Charles Koch rob him of his life’s work.

No way.

Just before midnight on February 29, Crane was awakened by a

phone call at his Northern Virginia home. It was Politico

reporter Mike Allen.

Allen told Crane that Charles and David Koch had filed a

petition in a Kansas court staking claim to Niskanen’s Cato shares. If

successful, the maneuver would allow the Koch brothers to accumulate

two-thirds of Cato’s outstanding stock and take over the think

tank.

The prospect of Koch control sent chills through Cato

headquarters. Although Charles Koch, 76, had once been a die-hard

libertarian, he has emerged as a major financial champion of Republican

causes. He and his brother plan to direct more than $200 million to

conservative groups before Election Day, according to Politico.



Cato staffers were terrified that Koch would turn their beloved

think tank into a factory for GOP talking points. “We fear that a Koch

takeover would change our mission from one of winning hearts and minds for

the libertarian cause over the long run to one of winning elections and

legislative battles for the conservative movement in the short run,” says

Jerry Taylor, a Cato senior fellow.

Crane issued a statement shortly after the lawsuit was filed:

“We view Mr. Koch’s actions as an attempt at a hostile takeover and intend

to fight it vehemently.”

The outbreak of civil war at Cato stunned Washington.

Libertarian bloggers expressed outrage; Cato staffers pledged to

resign.

The Kochs’ motivations were a mystery even to libertarian

insiders. After all, Charles Koch himself had recruited Crane to launch

Cato in the late 1970s. Through $30 million in donations, the Kochs had

bankrolled Cato’s ascent. Along the way, Charles Koch and Crane had become

friends. And though Koch had become a conservative activist, Cato’s

support for lower taxes and less regulation aligned neatly with his

business interests.

Behind the scenes, though, the relationship between Crane and

Koch had been souring for years. Personal acrimony—over Koch’s management

philosophy and Crane’s handling of a conference in Moscow—led in the early

1990s to the breakup of their friendship. After Crane criticized Koch in a

2010 New Yorker article, it was all-out war.

Ed Crane was first drawn to libertarian ideals as a boy growing

up in Los Angeles. The son of a doctor, he began reading the complete

works of Ayn Rand in high school. Arriving at the University of

California, Berkeley, in 1963, he subscribed to underground libertarian

newsletters. The more Crane learned about libertarianism, the more sense

it made.

Libertarians believe you should be able to do whatever you

want—bundle mortgage-backed securities, sleep with a prostitute—so long as

you don’t deprive others of those same rights. Like conservatives,

libertarians tend to back gun rights and fewer regulations on businesses.

But their non-interventionist foreign policy and support for civil

liberties can align them with liberals.

“Libertarianism is a skepticism of government in the bedroom,

in the boardroom, and abroad,” says Brink Lindsey, a former Cato

scholar.

The philosophy resonated for Crane. During his junior year at

Berkeley, he launched a campaign for the student senate on a platform of

abolishing it. He lost.

Although he had been active in California libertarian politics,

Crane didn’t appreciate the movement’s diversity until he attended the

Libertarian Party’s first national convention in 1972. At the Radisson

Hotel in Denver, Crane mingled with anarchists dressed all in black and

Ayn Rand devotees carrying long cigarette holders. “It was like a Star

Wars bar scene,” he says. Wearing a jacket and tie, Crane stood out.

Three years later, he gave up a career in finance and moved to Washington

to manage the 1976 presidential campaign of Libertarian candidate Roger

MacBride.

By then, Charles Koch had spent a decade at the helm of a

booming oil conglomerate. The second of four boys from a rowdy Wichita

household, Koch acquired a strict work ethic from his father, Fred Koch,

who had founded Koch Industries in 1940. “By the time I was eight, [my

father] made sure work occupied most of my spare time,” Koch once

wrote.

Ed Crane, who has little regard for politicians, told a colleague that Cato’s glass-fronted headquarters faced away from the Capitol “so Congress can kiss my ass.” Photograph by Eric Uecke.

While doing business in the Soviet Union in the 1930s, Fred

Koch witnessed the brutality of Joseph Stalin’s regime. He returned to the

United States a free-market evangelist. “[My father] was constantly

speaking to us children about what was wrong with government,” David Koch

told author Brian Doherty in Radicals for Capitalism, a history

of the libertarian movement. “It’s something I grew up with—a fundamental

point of view that big government was bad.”

When his father died in 1967, Charles Koch inherited a large

fortune and became CEO of the family business. Today Koch Industries—which

produces everything from fertilizer to Dixie cups—is the nation’s

second-largest private company, generating nearly $100 billion in revenue

in 2011.

In 1962, Charles Koch began reading about Austrian economics, a

staunchly free-market philosophy often embraced by libertarians. “I spent

the next two years almost like a hermit, surrounded by books,” he told the

Wall Street Journal in 1997. He attended lectures at the Freedom

School, a Colorado Springs institution led by prominent libertarian

scholars. As Koch Industries expanded, he emerged as the libertarian

movement’s leading patron. The network of libertarian groups he bankrolled

became known as the Kochtopus.

Charles Koch and Ed Crane met when Koch hosted a Roger MacBride

campaign fundraiser at his Wichita home. Crane was impressed by Koch’s

commitment to libertarian principles. “He was more hard-core than I was,”

Crane says.

As the campaign wrapped up—with MacBride receiving 0.2 percent

of the popular vote—Crane looked forward to moving back to California and

resuming his career in finance. But Koch approached him with a question:

“What would it take to keep you in the movement?”

During his time in Washington, Crane had been impressed by the

think-tank establishment, especially the conservative American Enterprise

Institute and the liberal Brookings Institution, both of which he saw as

able to influence policy in meaningful ways.

“It would be nice to have a libertarian think tank,” Crane told

Koch. “But you don’t want me to run it, because I am going back to

California.”

Koch offered to build a libertarian think tank in California if

Crane would run it. Crane agreed.

In the early years, Charles Koch was Cato’s real monarch, calling the shots from Wichita. He and Ed Crane spoke nearly every day by phone. Photograph by Bo Rader/Wichita Eagle/MCT/Getty Images.

To create the new think tank, Koch changed the name of a Kansas

nonprofit he had formed in 1974—the Charles Koch Foundation—to the Cato

Institute. The name referred to Cato’s Letters, a collection of

essays on political liberty that influenced the American

Revolution.

In a highly unusual step, Koch structured Cato as a stock

organization. Cato’s shareholders were empowered to appoint a board of

directors, which would oversee the institute’s management. Kansas is among

the few states that permit nonprofits to issue stock.

“Scuttlebutt around the Kochtopus offices in the late ’70s and

early ’80s was that Charles had put it in place to protect his own

interests: If he was funding this organization, he didn’t want it saying

or doing things he deplored—things that would embarrass him,” Jeff

Riggenbach, who joined Cato in 1978, said via e-mail. “He wanted to retain

the ability to pull the plug.”

Cato’s five original shareholders were Koch, Crane, MacBride,

libertarian economist Murray Rothbard, and George Pearson, a former

employee of Koch’s. Koch “liked the idea of being in control of things

even though he is not recognized as being in control,” says David Gordon,

who worked at Cato in 1979 and 1980. “He picked the people as stockholders

because he thought they would do what he wanted.”

Crane didn’t realize how peculiar this corporate structure was.

He signed the shareholder agreement and paid $12 for a dozen shares of

Cato stock.

Cato christened its San Francisco headquarters in 1977. Its

mission was to insert libertarian ideas into the national discourse

through academic research, a daily radio program, and a monthly magazine,

Inquiry.

Crane was just 32 when he became Cato’s CEO. His management

style was criticized by some as tyrannical, and he became known in

libertarian circles as Boss Crane. His allies were called the Crane

Machine.

Early employees, however, say Koch was Cato’s real monarch. He

and Crane spoke nearly every day by phone. “Ed Crane would always call

Wichita and run everything by Charles,” Gordon says. “It was quite clear

that Koch was in charge.” Koch traveled to San Francisco every couple of

months to meet with Crane and the staff. “Whatever Charles said went,”

says Ronald Hamowy, an early Cato employee.

But in communicating with Cato employees, Koch could be

frustratingly passive-aggressive. When Riggenbach suggested recruiting

’60s activist Abbie Hoffman for Cato’s radio program, Koch seemed

surprised but didn’t say what he thought. “Ed had to tell me later how

much Charles really hated the idea,” Riggenbach says. “He had to explain

to me further why I should have understood Charles’s brief comments as a

strict order to scotch any such plan.”

While other libertarians believed it would take generations for

their ideas to trigger broad reform, Koch was less patient, Riggenbach

says: “He expected to see results from his investment in the

popularization of ideas, and he expected to see them within his

lifetime.”

Crane and Koch became close friends. They traveled to the

Soviet Union together in 1981, taking a train from Finland to St.

Petersburg. They visited China in 1983, lodging at the same state

guesthouse where President Nixon had stayed in 1972. Their political views

were nearly identical. Says Charles Murray, an AEI scholar who has known

Crane and Koch since the 1980s: “I don’t think you could get a piece of

paper between them.”

Crane took a leave of absence from Cato to run the 1980

presidential campaign of Libertarian candidate Ed Clark. By selecting

Charles Koch’s brother David as the vice-presidential candidate, the

campaign was able to gain access to David Koch’s personal wealth without

violating campaign-finance laws. In the end, Clark received more than 1

percent of the popular vote—to this day the best-ever showing for a

Libertarian presidential candidate.

Meanwhile, Crane and Charles Koch struggled to keep Cato’s

staff united; internal feuds were common during Cato’s early years.

Shortly after the 1980 election, Cato shareholder Murray Rothbard blasted

the Clark campaign—which Crane had managed—for watering down libertarian

tax ideals in the hope of attracting voters. “They sold their souls—ours,

unfortunately, along with it—for a mess of pottage,” Rothbard wrote in a

libertarian journal.

Rothbard was fired from Cato. He claimed that his shares of

Cato stock, which were held in Charles Koch’s Wichita office, were

canceled. Rothbard accused Crane and Koch of breaking the law and

violating libertarian principles. “This movement is too big for any set of

power-hungry villains to control,” Rothbard wrote.

(Rothbard is rumored to have written some of the racist

passages in Ron Paul’s newsletter that drew national attention during this

year’s Republican presidential primary. He died in 1995.)

Crane knew that most Americans still didn’t take libertarians

seriously, and he worried that Cato’s ideas were being dismissed because

the institute was based in San Francisco. In 1982, Cato moved into a

Capitol Hill townhouse. The organization hosted receptions and sent

scholars to conferences at AEI and Brookings. “We needed to interface with

the Washington community to show we didn’t have horns on our heads,” Crane

says.

Crane, however, had little regard for politicians. He once

called a restaurant to reserve a round table for a dinner meeting with a

senator and his staff. He believed round tables better accommodated group

discussions. When he arrived at the restaurant and learned that the

senator had moved the group to a booth, Crane left without saying a word,

says John Tamny, a senior associate in Cato’s development

office.

“In Washington, politicians get treated extremely well by

everyone,” Tamny says, “but not by Ed.”

Most Washington organizations try to shape legislation through

lawmakers. Cato focuses on influencing the public. Voters, Cato hopes,

will then force politicians to come around to its policy

positions.

“Politicians surf public opinion,” says Cato scholar Jim

Harper. “They are not interested in the right answer; they are interested

in the answer that gets them reelected.” Crane told a colleague that the

entrance to Cato’s building faced away from the Capitol “so Congress can

kiss my ass.”

Ed Crane, whom some describe as tyrannical, became known in libertarian circles as Boss Crane. His allies were called the Crane Machine. Photograph courtesy of the Cato Institute.

Taking the message directly to voters is a long-term strategy.

“We realize we are all going to be dead before we succeed in this thing,”

Crane says. “But other people will carry the battle forward.”

Among Crane’s challenges was finding a way to wean Cato off

Charles Koch’s checkbook.

“Charles said frequently that if an organization he launched

couldn’t find other sources of revenue within a few years at most, that

was a sign that it wasn’t worthy of his own support—that he was apparently

alone in seeing merit in what that organization was doing,” Riggenbach

says.

Over time, Crane was able to land new donors and widen Cato’s

funding base. “When he began to attract fundraising sources independent of

the Kochs, Ed became more independent from the Kochs,” says Jack Shafer, a

Reuters columnist who was Inquiry’s managing editor in the early

1980s.

Meanwhile, Charles Koch began pushing for Cato to adopt a

management philosophy he had developed, Crane says. The approach—which

Koch called “market-based management”—aims to improve performance by

creating market forces within a company.

Koch was proud of market-based management, Crane says. For many

years, he personally taught it to Koch Industries’ executives in front of

a blackboard. His 166-page book, The Science of Success, spells

out the philosophy, and he even trademarked the phrase “market-based

management.”

Sometime in the mid 1980s, engineers from Koch Industries

arrived at Cato to teach the staff market-based management. As the

engineers clicked through a PowerPoint presentation, Cato staffers were

puzzled by their recommendations. For example, Crane says, the engineers

said they could improve performance by stopping every 15 minutes to write

down everything they had done.

“We’re all just looking at each other like, ‘What the hell is

this about?’ ” Crane says. “These guys were engineers, and you could tell

that they didn’t even understand what they were supposed to be

teaching.”

After the engineers left, Crane told Koch he wasn’t adopting

market-based management at Cato.

“I knew that would be your reaction,” Koch replied, according

to Crane.

Crane now thinks his rejection of market-based management may

have offended Koch more than he realized at the time.

“Charles has always been fascinated with academics,” Crane

says. “He likes to hang out with them, he funds them, and it may well be

that he wanted to be one of them and that he thinks his contribution to

academia was market-based management.”

In September 1990, Cato organized the first-ever conference on

freedom in the Soviet Union. Held in Moscow, the conference required

months of preparation, including meticulous negotiations with the US State

Department and Soviet officials. Crane, Koch, and several Cato staffers

made the trip.

The economic situation in Moscow was so desperate that a

security detail had to guard a tray of cold cuts Cato ordered for lunch.

The marquee event was an open forum in an auditorium that held 700. More

than 1,000 Soviets showed up—“hanging literally from the rafters,” Crane

says. For Cato staffers, who devoted their lives to promoting freedom, it

was a moving turnout.

Minutes before the program began, Koch pulled Crane aside and

said, “I need to speak to these people.”

The request frustrated Crane. After spending so much time

working out the details of the event, he felt it was too late to change

the lineup of speakers. “Charles, we have negotiated every 30 seconds

here,” Crane replied. “I can’t do that.” Koch never got to

speak.

Although Koch had planned to stay in Moscow for two more days,

he left early the next morning without saying goodbye.

Crane regrets his decision not to let Koch speak. “If I had

been smarter, more mature, I would have said, ‘Okay, Charles, we’ll work

something out—you can take my spot,’ ” Crane says.

Months later, Crane read in a libertarian newsletter that he

was no longer Koch’s top political adviser. The newsletter reported that

Crane had been supplanted by Richard Fink, a former economics professor

whom Crane had selected to run Citizens for a Sound Economy—a Koch-funded,

grassroots organization—when it was formed in 1984, Crane

says.

Crane was surprised and called Koch to find out what had

happened. Koch refused to take the call, Crane says.

Crane describes Fink—who now runs Koch Industries’

government-relations arm—as a slippery opportunist. He believes Fink

praised market-based management to gain favor with Koch and squeeze Crane

out.

“Fink, I think, went a long way to convince Charles that

market-based management was one of the great breakthroughs in

social-science history,” Crane says.

By 1991, Koch had resigned from Cato’s board of directors,

slashed his donations to the think tank, and all but cut off communication

with Crane.

“I have strong ideas, I want to see things go in a certain

direction, and Crane has strong ideas,” Koch told Doherty in Radicals

for Capitalism. “I concluded, why argue with Ed? Rather than try to

modify his strategy, just go do my own thing and wish him

well.”

Crane worried that Cato might suffer after losing its founder

and key benefactor. But by 2011, Cato had 118 employees and a $39-million

budget, and it now stands atop Washington’s think-tank establishment

alongside AEI, Brookings, the Heritage Foundation, and the Center for

American Progress.

Cato staffers—including foreign-policy expert Christopher

Preble and constitutional scholar Roger Pilon—made more than 1,100 media

appearances in 2010. Political commentator Tucker Carlson and humorist

P.J. O’Rourke are Cato fellows.

Inside Cato’s glassy headquarters on Massachusetts Avenue,

Crane—who earned $454,000 in 2011—is a larger-than-life

figure.

“It’s interesting to watch the staff at Cato events—some of

them cower around Crane,” a former Cato fellow says.

Crane, who is married, is an office flirt, according to two

former female employees. “He’s a big, overweight guy who enjoyed flirting

with his attractive, 20-year-old female employees,” says one, who adds

that she never thought Crane crossed the line.

Some ex-employees say he behaves as if the think tank is his

personal property. “It’s the institute that Ed built, and he runs it his

way—either you like it or you don’t,” says one. Staffers joke that Cato

stands for “Crane and the others.”

Despite Charles Koch’s strained relationship with Crane, David

Koch continued to serve on Cato’s board and provide financial support.

Unlike his brother, David was easygoing and affable, says onetime Cato

scholar Peter Ferrara.

David Koch and Crane were friends. David told him on several

occasions that he thought market-based management was overrated and that

everyone at Koch Industries headquarters considered it nuts, Crane

says.

In 1993, Crane sent a letter to Charles Koch. “I’d like an

opportunity to talk with you about the Cato stock situation,” Crane wrote.

“I have for a long time favored the dissolution of the corporation, giving

clear legal control of the Institute to the Board of

Directors.” Koch politely refused, noting that the agreement was essential

to ensuring that Cato remained true to the vision it was founded upon,

Crane says.

Over time, Crane grew concerned about the shareholder agreement

he had signed. Cato staffers insist that the Kochs’ patronage never

influenced their work. But Crane worried that the very existence of the

agreement could undermine Cato’s reputation for independence.

In 1993, Crane sent a letter to Charles Koch. “I’d like an

opportunity to talk with you about the Cato stock situation,” Crane wrote.

“I have for a long time favored the dissolution of the corporation, giving

clear legal control of the Institute to the Board of

Directors.”

Koch politely refused, noting that the agreement was essential

to ensuring that Cato remained true to the vision it was founded upon,

Crane says.

At a reception one evening in the mid-1990s, Crane tried to

convince David Koch that scrapping the shareholder agreement was in Cato’s

best interest.

“Ed, I hear you, and in fact I agree with you,” Koch said,

according to Crane. “But I will never cross my brother.”

Meanwhile, in the 1990s, the Koch-funded Institute for Humane

Studies, in Arlington—which offers seminars and scholarships for students

interested in libertarianism—underwent a change in direction that one

former employee described as “the Shadow falling on

Rivendell.”

“[Charles] Koch, evidently beginning to despair at the

prospects of achieving political goals in his lifetime, became obsessed

with a quick fix and decided that IHS needed to have ‘quantifiable

results,’ ” onetime IHS professor Roderick T. Long wrote on his personal

blog in 2008.

Long said IHS officials began feeding students’ application

essays into a computer program that counted how many times the applicants

mentioned libertarian heroes such as Ayn Rand or Milton

Friedman—regardless of what they actually wrote.

“Then the management began to do things like increasing the

size of student seminars, packing them in, and giving the students a

political questionnaire at the beginning of the week and another one at

the end, to measure how much their political beliefs had shifted,” Long

said.

More recently, Americans for Prosperity—a David Koch-founded

activist group with ties to the Tea Party—has worked to change public

policy by getting Republicans elected. AFP earmarked $45 million for

elections in 2010, the Washington Post reported.

Crane says Fink is behind Charles Koch’s newfound willingness

to align with Republicans for the sake of near-term results: “He’s hired

Fink to do this sort of stuff, and Fink is leading him down the wrong

path.”

In 2010, Jane Mayer, a staff writer for the New

Yorker, began reporting an article on the Koch brothers. Ed Crane

agreed to sit for an interview.

Mayer arrived at Crane’s office with an audio recorder, which

she turned on at the start of the interview. Although most of their

conversation was on the record, Crane asked that his name not be

associated with certain comments he made, Mayer says. This method of

attribution is known as “on background.”

Crane says he participated only because Mayer told him the

article was about the libertarian influence on the Tea Party—not a profile

of the Kochs. “It became very clear a couple of minutes into the interview

that she wanted to do a hatchet job on the Kochs,” he says. Crane claims

he agreed to speak about the Kochs if his comments were kept off the

record—meaning they could not be used in the story.

When Mayer asked about Charles Koch’s book on market-based

management, Crane told her he thought the book was garbage but Koch’s

subordinates had convinced him it was a masterpiece.

“I recognized that this was going to piss Charles off, which is

why I said, ‘It’s off the record,’ ” Crane recalls. “But I wanted Jane to

know that I wasn’t a Koch sycophant, because I didn’t want Cato that

closely aligned to what Koch’s doing.” Mayer says he’s confusing the terms

“on background” and “off the record.”

Several weeks later, a New Yorker fact-checker

contacted Crane to confirm his comments. Crane claims he verified the

comments but said he had been assured certain ones were off the record. He

told the fact-checker to review the audio recording; the fact-checker said

Mayer’s device had malfunctioned.

Though she believed the comments in question were among those

Crane had made on the record, Mayer removed Crane’s name from the passage

and attributed the comments to “a top Cato Institute official.” At the

time, Crane seemed comfortable with the change, Mayer says.

Mayer’s story, published in August 2010, exposed the Kochs’

underground support for the Tea Party. It included the following passage:

“A top Cato Institute official told me that Charles ‘thinks he’s a genius.

He’s the emperor, and he’s convinced he’s wearing clothes.’ ”

Shortly after the article appeared, David Koch called Crane to

ask if he was the Cato official quoted. Crane admitted he was.

“Charles is really upset,” David said.

In December 2010, Charles Koch called the first meeting of

Cato’s shareholders since 1981. Cato now had four shareholders: Charles

and David Koch, Ed Crane, and William Niskanen, Cato’s aging chairman

emeritus. The Kochs used their shares to appoint two new directors to

Cato’s board: Nancy Pfotenhauer and Kevin Gentry.

Crane and Niskanen were stunned. Pfotenhauer was a former

spokesperson for Republican John McCain’s presidential campaign. She had

supported the Iraq War and the Army’s “don’t ask, don’t tell”

policy—positions that run counter to libertarian ideals. Kevin Gentry was

vice chairman of the Virginia Republican Party and a top executive at the

Charles Koch Foundation.

“Whatever they are, they are not libertarians,” says Bob Levy,

Cato’s board chairman.

Gentry has asked other board members why they tolerate Crane’s

behavior. “The response is a shrug of the shoulders and a ‘That’s just

Ed,’ ” Gentry says. “Some have even said that’s part of his

charm.”

Crane seethed over the appointments. At a dinner on March 31,

2011, he couldn’t contain his anger. While Cato directors and scholars

finished dinner, the new board members were asked to speak. The evening

included a discussion of a Cato fundraising campaign, which would

eventually rake in $47 million to expand the institute’s Washington

operations. Pfotenhauer asked about the long-term vision for Cato’s policy

staff.

Crane believed Fink had told Pfotenhauer to raise the issue in

public to suggest that Crane was mismanaging donor funds. Crane stood up;

his face was red with anger, Gentry says. “I just want to say something

about these Koch people,” Crane said. “Kevin Gentry sitting over there has

never once—never once!—invited me to one of the Koch donor events that he

organizes for Charles! Nor has he invited anyone from Cato!”

He turned to Pfotenhauer. “What would you know about policy at

the Cato Institute?” Crane shouted.

Crane stormed out. Pfotenhauer stayed and accepted apologies

from other directors.

At a subsequent board meeting, Crane refused to acknowledge

Pfotenhauer or Gentry even though they were the only other directors in

the room, Gentry says. (The rest of the board participated by

phone.)

Gentry has asked other board members why they tolerate Crane’s

behavior. “The response is a shrug of the shoulders and a ‘That’s just

Ed,’ ” Gentry says. “Some have even said that’s part of his

charm.”

Says a former Cato employee: “So much of this dispute is about

Ed’s ego and his desire to maintain his power at Cato.”

Neither Charles nor David Koch donated to Cato in 2010 or

thereafter.

Niskanen’s health faded in the fall of 2011. After undergoing

heart surgery in September, he was recovering at home when he suffered a

massive stroke. He died the next day, October 26, with his wife at his

side.

Within days of the funeral, the Kochs made a play for

Niskanen’s shares, Crane says. They insisted that under the terms of the

underlying agreement, Niskanen’s stock must be offered to Cato’s remaining

three shareholders for purchase, giving the Kochs two-thirds control over

Cato’s board. Crane and Levy argued that Niskanen’s widow, Kathryn

Washburn, should inherit his shares.

In November, Levy agreed to meet David Koch and Richard Fink at

Dulles Airport, in a conference room adjacent to a hangar where Koch’s jet

was parked.

Koch told Levy that Crane’s treatment of board

members—presumably Pfotenhauer and Gentry—was unacceptable and asked that

Crane be fired within eight weeks.

Levy had long contemplated Cato’s succession plan and even put

out feelers for candidates should the 67-year-old Crane step down. But he

considered eight weeks far too short a timetable.

Levy made an offer: If the Kochs agreed to dissolve the

shareholder agreement, Levy would launch a search for Crane’s successor

and give the Kochs veto power over the selection. The Kochs later turned

down the deal.

David Koch also said Cato should do more to turn “esoteric

concepts” into “concrete deliverables.” He suggested that Cato “serve as a

source of intellectual ammunition” for the conservative activist group

Americans for Prosperity, Levy says.

Koch’s recollection of the conversation is more nuanced. He

says he told Levy only that Cato should be supportive of organizations

such as AFP. “I never asserted that Cato should be directed by, or at the

whim of, any other organization, or that they should aspire to advocate

the way AFP does,” Koch said in a statement. The Kochs have pledged to

maintain Cato’s independence from the Republican Party should they take

control.

Both sides agreed to postpone a previously scheduled December 1

shareholder meeting while trying to work out a solution. During

negotiations, the Kochs proposed a standstill agreement—delaying official

discussion of the shareholder agreement for one year—as well as a

nonbinding third-party mediation. Levy rejected both offers.

Although the Kochs repeatedly asked for more time, Crane

rescheduled the shareholder meeting for March 1. The Kochs say they were

forced to file their suit in advance of the meeting rather than recognize

Niskanen’s widow as a shareholder. “They thought we would back down,”

Charles Koch said in a statement. “They thought wrong.”

At the March 1 shareholder meeting—held just hours after the

Kochs filed their lawsuit—the Kochs appointed four new directors to Cato’s

board, including Charles Koch; Republican lawyer Ted Olson, who represents

Koch Industries; and former judge Andrew Napolitano, a libertarian Fox

News commentator.

The appointments split Cato’s board into two factions: nine

directors aligning with Crane, seven supporting Koch. But at a March 22

board meeting, Levy moved to expand the board by adding four Crane-aligned

directors. With its two-vote advantage over the Koch faction, Crane’s

supporters passed the motion.

The gambit enraged the Kochs. On April 9, they filed a second

lawsuit demanding that the March 22 vote be invalidated. The Kochs called

Levy’s move a “board-packing scheme.”

The battle isn’t likely to end soon.

Levy says that even if the court rules in Cato’s favor on the

fate of Niskanen’s shares, the think tank’s management will continue to

fight until it’s free from Koch control. Meanwhile, the Kochs have accused

Crane of organizing a “public smear campaign” in an effort to “rule or

ruin” Cato.

But as Crane and the Kochs dig in, Cato’s extended family is

beginning to wonder if everyone hasn’t lost sight of what’s best for the

institute.

“I’m appalled by the damage we’re all doing to Koch interests,

Cato interests, and the broader goals we share,” Levy said in a March 23

e-mail to the Kochs. “Reasonable people should be able to resolve this

situation.”

This article appears in the June 2012 issue of The Washingtonian.

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