I had to laugh last night as the social media mob moved to proclaim its undying love for upstart Lehigh after it vanquished Duke in the NCAA basketball tournament. Nothing against Lehigh, mind you, but it’s fascinating how the “Cinderella” mythology of college sports upsets leads people to ignore the reality that this wasn’t exactly a triumph of the poor underdog over the wealthy elite. This was elite-on-elite crime.
Lehigh and Duke are both private east coast colleges founded by wealthy industrialists, Lehigh by railroad construction magnate Asa Packer in the 1860s, Duke by tobacco producer James Duke in the early 20th century. Today they are both among the country’s most expensive schools. Lehigh’s reported total “cost of attendance” is $54,020 per year—not that far off from Duke’s $57,180 per year. While Duke may have a much stronger basketball pedigree, Lehigh is much closer culturally to Duke than most of the Blue Devils’ Atlantic Coast Conference brethren—say, the University of Maryland, where the cost of attendance for in-state residents is as low as $16,000 per year.
It’s also worth noting that Lehigh plays in the Patriot League, a conference originally created by several private universities for the express purpose of providing regular non-conference opponents for the Ivy League schools (Harvard, Yale, et al.) That’s not exactly a working-class pedigree.
Lehigh is, as a commenter familiar with the school said to me on Twitter last night, “a SUUUUUUPER rich kid school.” Perhaps that fact gets lost in all the anti-Duke euphoria. After all, Duke has long been held up as the standard-bearer for super-rich-kid schools, most infamously in the Mike Nifong scandal a few years ago when several Duke lacrosse players were falsely accused of rape. Would Lehigh have been as embraced if it had defeated a small public college like Norfolk State, which scored its own upset yesterday against a much larger government institution, the University of Missouri?
I get that everyone likes to crap on Duke basketball, particularly coach Mike Kryzewski. Schadenfreude drives a lot of sports fanaticism. But spare me any talk of the “little guys” triumphing over the Big Bad Behemoth in this situation. Lehigh had a nice game yesterday, but after the tournament ends, those Lehigh players will have a lot more in common with their Duke opponents than the 99% of the population that can’t afford either school.
Before I quit writing about antitrust last year, I attempted to learn how much the Department of Justice spent prosecuting Ian Norris, a retired British executive that American antitrust authorities spent years pursuing, forcibly extraditing him from the UK under a bullshit treaty. In December 2010, I filed a Freedom of Information Act request with the DOJ’s Antitrust Division, asking for documentation on how much it spent on the Norris case. Although FOIA required a reply within 20 days, I didn’t hear back from the Antitrust Division for eight months. But at least they gave me an answer, as I reported last year:
According to the one-page reply, the Antitrust Division spent a total of $1,132,971.39 prosecuting United States v. Ian P. Norris before the US District Court in Philadelphia. The bulk of that ($1,107,869.32) was for staff costs and benefits, with the remainder ($25,102.07) described as “travel, transcript and other costs.” The Division said its staff worked 15,336.25 hours on the Norris case, which did not include any unpaid overtime hours.
The Division’s figures apparently did not include the costs incurred by US taxpayers in securing Norris’ extradition from the United Kingdom, a process that took several years. According to the Antitrust Division, information regarding those costs must be obtained separately from the Office of International Affairs at the Justice Department’s Criminal Division.
So I then filed a second FOIA request with the Criminal Division asking for its spending on the case, including the extradition proceedings. In late September 2011, the Criminal Division responded, saying it would not proceed with my request unless I agreed to pay a search fee:
Unlike the Antitrust Division, the Criminal Division seems to think it’s a burden to ask for its spending on the Norris affair. In the letter I received today, the Criminal Division denies my request for a fee waiver — which puts my underlying FOIA request on hold until I agree to pay the unspecified fees — and asserts I have failed to prove why I am entitled to learn about government spending for free. “Aside from asserting that the information you seek will be made available to the public free of charge on the website you edit,” the Criminal Division’s letter said, “you have failed to demonstrate how the information about the Criminal Division’s cost of prosecuting Ian P. Norris will contribute significantly to the public’s understanding about the Division’s operations or activities.”
I never bothered to appeal this determination and assumed that was the end of it. Then, today, I receive a second letter from the Criminal Division:
This letter is in response to your Freedom of Information Act (FOIA) request dated September 6, 2011. In that request, you asked for copies of “information related to expenditure of Criminal Division funds to prosecute United States v. Ian P. Norris, Cr. No. 2:00-cr-00632 (E.D. PA, filed September 20, 2003) and a summary of the Division’s costs in connection with this case, including the extradition proceedings conducted by the Division’s Office of International Affairs”.
In responding to a FOIA request, the Criminal Division’s search will include responsive records in its control on the date the search began. Our search began October 3, 2011.
We searched the Criminal Division Sections most likely to maintain records of the type you requested. Thorough searches by knowledgeable personnel failed to locate any records responsive to your request.
So after telling me there would be no search unless I agreed to pay a fee—which I didn’t—the Criminal Division, on its own initiative, changed its mind and began a search that yielded no records. Keep in mind, I only filed the second FOIA request with the Criminal Division because the Antitrust Division told me to ask the Criminal Division about spending related to the extradition. The Antitrust Division believed such records existed, but not the “knowledgeable personnel” at the Criminal Division. Um, OK.
Last month, I detailed the lengths some universities in the Southeastern Conference went to in monitoring the use of social media by athletes. (Per Jay Bilas’ rant, I won’t refer to them as “student-athletes.”) Several SEC members hired an outside company—run by a former Department of Defense drug war consultant—that directly monitors athletes’ Twitter and Facebook feeds for certain words. Louisiana State University’s athlete handbook described the relationship thusly:
The LSU Athletic Department partners with U-Diligence to assist in monitoring social media databases. Currently enrolled student-athletes, managers and trainers are required to register with U-Diligence and grant all requested permissions on the application. The monitoring system is used to help protect your reputation. You not only represent yourself and your family, but also the athletic program and LSU. U-Diligence will alert the LSU Athletic Administration and coaches of any possible negative postings and, at the same time, you will receive negative e-mail alerts whenever something potentially problematic is posted on your pages by you or your friends.
Such heavy-handed monitoring has already spurred a political backlash in one state. The Maryland Senate recently advanced legislation to restrict the ability of universities in that state to monitor all student social media usage. This would include athletes. In its current form, the bill says schools cannot require a current student or applicant for admission to “disclose any user name, account name, password, or other means for accessing” that person’s personal accounts. It would further prohibit a school from disciplining, or threatening to discipline, a student or applicant for failing to disclose such information. These restrictions would not apply to any email or social media accounts provided by the school itself, nor would it prevent students from “voluntarily disclosing” such information to school officials.
Given that last provision, I wonder if Maryland athletic departments would argue that since participation in intercollegiate athletics is itself voluntary and a “privilege,” that social media restrictions by coaching staffs would not be exempt from this bill. I don’t know what current policies Maryland’s universities have—my study was limited to the SEC—but college athletics is a copycat world. If coaches in the SEC are monitoring usage with fancy outside contractors, coaches in other conferences will want to do the same, if they aren’t already.
I also question the broad application of this bill to private universities. The bill defines its applicability to all institutions of “postsecondary education.” I don’t think a state legislature should regulate the contractual relationship between purely private entities. I understand that the Maryland legislature is also considering measures to restrict social media monitoring by all employers. I oppose that for similar reasons.
Overall, however, I think it’s good that a state legislature has taken up this issue. Government-run universities should never be in the business of “monitoring” student speech. I strongly disagree with segregating athletes into some sort of free-speech ghetto because they happen to play a high-profile sport. (And yes, while I don’t think the legislature should tell private schools what to do, I think those schools should choose to err on the side of respecting student speech.) The problem with restricting one group’s liberties is that it tempts officials to eventually extend those restrictions to the rest of the student body.
Via a new Tumblr account called “Rothbard’s Complaint,” the Dos Equis spokesman weighs in on Koch vs. Cato:
David Boaz, the Cato Institute’s executive vice president, spoke with conservative broadcasters Mark Newgent and Andrew Langer yesterday. The interview (starting around the 24:30 mark) was largely a rehash of Cato talking points, but Boaz did raise one issue worth briefly discussing. When asked why Cato adopted a shareholder structure in the first place, Boaz said, “Charles Koch wanted tight control” over Cato. But then Boaz went on about how Koch essentially neglected Cato’s management for 35 years, during which time Boaz described the board of directors as “self-replacing” until Koch and his brother reasserted their ownership rights a couple years ago.
What Boaz didn’t say is that the shareholder structure really allowed Ed Crane—the only remaining shareholder from 1977 along with Charles Koch—to maintain tight control over Cato. Given Koch’s absentee ownership, it was Crane who was almost certainly picking the directors for most of the past 35 years. Boaz may say the board elected its own successors, which is the norm for nonprofit corporations, but legally, only the shareholders can elect directors. And if Koch declined to exercise his voting rights, then logically it was Crane, together with the late Bill Niskanen, who was really picking Cato’s board. In that sense, the board was no more “independent” than it is now that the Kochs are actively participating in director elections.
There’s also the mystery of David Koch’s addition as a shareholder in 1991. If, as Boaz characterizes the history, Charles Koch allowed Crane to run Cato free of interference since 1977, why then was a fifth shareholder added? Crane and Niskanen, who held 50% of the shares from 1985–1991, presumably had to consent to this. If the shareholder agreement was dormant, why reopen it at all? For that matter, why was a new agreement signed in 1985, when Niskanen was added as the fourth shareholder? This part of the story has never been explained by either side.
A few months before Steve Jobs died, the DOJ announced a civil antitrust settlement with Apple and a handful of technology companies, including Pixar, which Jobs co-founded. The problem, according to the DOJ, was that these companies—I think there were six involved altogether—had informally agreed among themselves not to “cold call” each other’s key technical employees and solicit them for employment. In other words, it was a “no poaching” agreement. Some accounts said Jobs was the ringleader and that he was, in effect, bullying the other firms not to try and “steal” Apple talent, even though there were no legal or contractual prohibitions on doing so.
The DOJ ruled this was a clear case of illegal price-fixing. It was unnecessary to identify any individual employee who might have been denied a better job; price-fixing is a per se antitrust violation, meaning the conspiracy itself is the violation separate from any injury (although the employees could certainly file their own civil antitrust class action, and I believe several have done so).
I bring all this up, of course, because of what the NFL did yesterday. Now if it was illegal for Jobs and his competitors to have an informal no-cold-call agreement, how is then legal for the NFL to have an unwritten agreement that purported to overrule a signed collective bargaining agreement with a clear “no salary cap” rule in effect for the 2010 season? The labor exemption should not apply here, as the NFL only procured after-the-fact consent from the NFLPA through what appears to be coercion and fraud. This is arguably much more serious than the civil offenses that Apple, et al., committed.
If the Justice Department didn’t fear a lengthy court battle or the political blowback, I daresay there would be a criminal grand jury empaneled this very day to look into the “warnings” Goodell said he gave the Redskins and Cowboys. Because, yes, price-fixing is a felony in the United States. I don’t happen to agree with that, but it’s a well settled principle of law, as the Apple case demonstrated.
Today at Saturday Down South, I look at how college football might reduce or realign its schedule in the wake of realignment and the ongoing push for a multi-round playoff.
After 12 days, I think we’ve explored as much of the Koch vs. Cato litigation as we can. So there won’t be any new posts on the case until something actually happens in court. I will continue to update the bibliography, which has moved to this page. And you can also download my ebook compilation of my earlier coverage at Amazon.
I’ve talked about how the Koch vs. Cato dispute encompasses several arguments—the lawsuit, the personality conflict, the battle for public opinion—but it’s also, like many high-profile disputes, about the money. This morning, Cato’s director of health policy studies, Michael Cannon, emailed me to “clarify” that, “It is the Kochs’ lawsuit, not the Kochs per se, that poses the threat to Cato.” He added, “We hope and would be thrilled to have the Kochs’ continued support.” Now, I take that to mean, “We want the Kochs’ money, just not the Kochs or their friends on our board of directors.”
I don’t think this is an unreasonable position, mind you. By Cato’s account, and the Kochs have not disputed this, the Kochs have not been significant donors to Cato for many years. Cato president Ed Crane has developed his own substantial donor network and his first priority is to keep that group happy. As Cato chairman Robert Levy said to me last week, and again in a statement today, “Several of Cato’s largest donors had announced they would discontinue their donations until it became clear that the Kochs would not control Cato.” Of course Cato will side with the people who fund them today over the people who funded them 35 years ago.
But it’s also disingenuous then to act like this is all about defending libertarian principles from Republican and conservative interlopers, a key element of Cato’s public relations strategy. If Cato’s current donors weren’t threatening to revolt—or if Charles and David Koch were still footing most of Cato’s bills—the current dispute would likely not exist. More importantly, we don’t really know why the current donors are threatening to revolt—because we don’t know who those donors are. I asked Levy point-blank last Friday to identify the “largest donor” who threatened to cut off support if there was a Koch takeover. He declined to do so.
Levy is certainly not legally obligated to disclose Cato’s donors to me. And if I were in his position, I’d be reluctant to do so as well. However, once again, it’s disingenuous to act as if the Kochs have stepped outside the boundaries of civilized conduct by asserting their original donor rights while simultaneously claiming you’re fighting to preserve the rights of faceless current donors. For all we know, these donors simply have a personal dislike for the Kochs that has nothing to do with libertarian ideology or principles.
Editor’s note: I received the following statement this morning from the Cato Institute.
On March 1, after filing suit in Kansas court to gain control over the Cato Institute, Charles Koch issued a statement to the press: “We are not acting in a partisan manner, we seek no ‘takeover’ and this is not a hostile action.” The purpose of the suit, he insisted, was simply “to ensure that Cato stays true to its fundamental principles.”
Last week, Mr. Koch circulated a longer “Statement Regarding the Cato Institute,” again professing his “steadfast intent” that Cato remain “a principled and non-partisan organization that would advance the ideas that enable all people to prosper – by promoting individual liberty, limited government, free markets and peace.”
But actions speak louder than words. The Kochs’ takeover attempt has included packing Cato’s board of directors with individuals, almost all of whom are financially entangled with the Kochs and have no history of libertarian advocacy.
Moreover, their latest statement does nothing to address the genuine concerns expressed by their friends and ours that the action the Kochs have taken will pointlessly and grievously injure the movement for individual liberty that they have previously done so much to advance.
It should have been obvious to Charles Koch that filing this suit would necessarily result in a public battle that would threaten the Cato Institute’s credibility – wounding allied organizations and scholars in the process. You be the judge. Imagine that Charles Koch prevails in his lawsuit against Cato, and that he and his brother then “own” two-thirds of Cato’s stock. Would an Institute whose board of directors is appointed by the Kochs be viewed as a credible source of non-partisan, non-aligned, independent commentary on vital public policy questions? Or would the think tank now known as Cato cease to exist because its 35-year unimpeachable reputation is critically damaged by the (unfortunately accurate) perception that Cato is literally “owned by the Kochs”?
In his latest message, Mr. Koch relates “the facts behind what we have done and why.” I regret to report that his facts are, at best incomplete and accompanied by a host of misleading assertions. What follows are the Cato Institute’s responses to the central points Charles Koch raises.
Koch: “My brother David and I have every intent to ensure Cato continues its work on the full spectrum of libertarian issues for which it has become known.”
Recent actions by the Kochs elicit doubts about that proclamation. If the Kochs seek to ensure that Cato stays true to its fundamental libertarian principles, why would nearly all of their nominees to Cato’s board be Koch employees, consultants, and outside counsel who have never supported the Institute, never attended its events, never been interested in its governance, and never distinguished themselves as advocates for libertarianism?
Indeed, why did the Kochs appoint Koch Foundation vice president Kevin Gentry, a prominent official with the Virginia Republican Party, or Koch Industries spokesperson Nancy Pfotenhauer, who served with the McCain campaign and has defended, among other things, the military’s “don’t-ask-don’t tell” policy and the war in Iraq? Why did the Kochs nominate Tony Woodlief, who has described libertarianism as “a flawed and failed religion posing as a philosophy of governance”? Woodlief seems to like libertarians (and vice versa), but he’s nonetheless written that “libertarians sound like absolute fools when they talk about foreign policy.” Why did the Kochs nominate John Hinderaker, who sometimes describes himself as a neocon and believes “the original Patriot Act was entirely reasonable”?
Is that how the Kochs would ensure that Cato “continues its work on the full spectrum of libertarian issues”? What is it that Cato has done to convince Charles Koch that Cato’s work on libertarian issues needs help from directors who are demonstrably not libertarians and would never have been nominated by Cato’s then-current board?
Koch: “We proposed a standstill agreement to delay for one year or longer any discussion on the shareholders agreement.”
Yes, the Kochs proposed a standstill agreement that Cato rejected because the status quo could not be maintained. Too many key people had learned of the looming problem. Several of Cato’s largest donors had announced they would discontinue their donations until it became clear that the Kochs would not control Cato. A number of Cato benefactors said they would change their wills to eliminate Cato as a beneficiary if Koch dominance was an ongoing threat. Essential employees had expressed their intent to leave Cato unless the governance issue could be resolved in a timely manner. Cato’s search for professional talent, including most particularly a successor to president Ed Crane, was frustrated by the obligation to disclose the impending shareholder conflict.
The purpose of the Kochs’ disingenuous standstill proposal – confirmed in a meeting with me – was to “get past the election,” after which the Kochs would be less anxious about alienating the army of Cato’s libertarian loyalists. Put bluntly, a standstill would have jeopardized Cato’s day-to-day operations while resolving nothing.
Koch: “We asked to delay any shareholders meeting, which would have left the pre-March 1 board of directors in place during this period.”
The Institute’s bylaws require an annual meeting of shareholders on the first business day of December. The shareholders unanimously agreed to postpone the meeting for a “reasonable period” to try to resolve the dispute over Cato’s governance. After 90 days, during which the Kochs rejected a Cato proposal that addressed all their professed concerns (see more below), the meeting was rescheduled for March 1. Further delay would have been equivalent to the Kochs’ standstill proposal, which they knew Cato could not accept.
To set the record straight, the shareholders meeting did not precipitate anything. It simply satisfied a legal requirement and, in the end, allowed the Kochs to add four directors to Cato’s board. Cato and the Kochs could have continued their attempt to negotiate a settlement, reserving the right to take legal action should the negotiations prove fruitless. But one day before the meeting, the Kochs filed a lawsuit in Kansas (accompanied by a “Politico Exclusive”) that exposed this dispute to intense scrutiny. It should have been obvious to the Kochs that filing the lawsuit would generate a public battle that would – no matter which party prevailed – harm the entire libertarian movement.
Koch: “We proposed third-party mediation … and alternative corporate structures.”
More specifically, the Kochs proposed non-binding mediation – merely a timing tactic that would have meant protracted and unproductive talks between Cato and Koch representatives instructed to “get past the election” and otherwise make no concessions.
As for alternative structures, the Kochs proposed two eight-person boards, one selected by them and one selected by Cato’s current board. After their initial selection, the two boards would function as one, but each of the two components would elect their own successors. In other words, the Kochs wanted to control not the three board seats they held at the time, but eight seats – an outcome even less acceptable to Cato than the standstill that had already been rejected. For more than a decade, Ed Crane had tried to persuade the Kochs to restructure the Institute’s governance, thereby removing the threat to Cato’s autonomy that 50 percent Koch control entailed. The Kochs’ “alternative” was another version of the same unsustainable 50/50 scheme.
The only real alternative was proposed by Cato: Abandon the shareholder structure and implement a member-elected board with the directors themselves serving as members – a governance arrangement favored by the Internal Revenue Service and practiced by most non-profits (including Cato for more than 30 years). In return, the Kochs would be assured that their key stated objective – preserving original donor intent – would be satisfied. Charles and David Koch would have veto power over any material change in the Institute’s mission, sale of the Institute’s assets, merger, or other combination. Moreover, Ed Crane agreed to an immediate search for his successor; and the Kochs would have veto power over the person selected.
Revealingly, Crane’s offer to leave wasn’t enough for the Kochs; they demanded control of the Institute’s board in addition to its president. That point bears emphasizing: However much it might serve the Kochs’ interests to portray this dispute as a personality clash between two men, the facts do not support that narrative. In a bid to save the Institute and its mission, Ed Crane offered to retire in an expedited fashion in exchange for undoing the shareholder arrangement. Although Cato rejected the Kochs’ untenable demand that Crane’s successor be installed within eight weeks, this fight has never been about Crane’s position at Cato. It has always been about the efficacy of the Institute as an independent advocate for personal freedom and limited government.
Koch: “Every counterproposal we received required we forfeit our shareholder rights…. [A] new shareholder was to be recognized in violation of our long-standing written agreement and the Institute’s bylaws and articles of incorporation.”
The threshold legal question in the lawsuit filed by the Kochs against Cato and its other two shareholders is how to interpret the murky provisions of an agreement signed more than three decades ago. The Kochs portray this dispute as a denial of their property rights. They ask how libertarians could fail to honor contractual commitments – as if the existence of the contract requires Cato to embrace Charles Koch’s interpretation of its terms.
Prior to the October 2011 death of Cato’s former chairman, William Niskanen, the Kochs controlled 50 percent of Cato’s stock. Today, the Kochs claim they control 67 percent because Niskanen’s shares must either be purchased by Cato or by its remaining shareholders. But the agreement signed by the shareholders provides that Cato may elect not to purchase the shares. Furthermore, the shares need not be offered to the other shareholders unless Cato’s board deems that a purchase by Cato would have been “inconsistent with its corporate purposes.” Otherwise, the shares can be transferred to Niskanen’s widow, Kathryn Washburn, in accordance with his last will and testament. Recognition of Ms. Washburn as a “new shareholder” would be wholly consistent with Cato’s bylaws and articles.
Cato’s position is correct: The Kochs control 50 but not 67 percent of the stock. Ultimately, however, the courts will resolve that issue. It is not the crucial issue. Rather, the crucial question is whether Cato can survive if its donors, employees, and the public policy community perceive that the Kochs have elected a pivotal number of the Institute’s directors – whether 50 percent or 67 percent – who would be responsive to Koch political and corporate demands.
Koch: “We want to ensure Cato remains consistent with the principles upon which it was founded.”
The best way to ensure Cato’s consistency with libertarian principles is to restore board, not shareholder, governance. Organizations such as the Ford and MacArthur foundations were led astray when apostate directors took control over large endowments. Significantly, Cato is not endowed and must raise all of its operating funds on an annual basis. Charles Koch provided seed money, but not an endowment that directors could expropriate.
As long as Cato’s board was self-perpetuating, it stayed rigorously on its libertarian course. Only now, with directors chosen by four shareholders in or approaching their 70s, who have uncertain mortalities and differing governance perspectives, has the course of the Institute become volatile and unpredictable. That’s proven by recent board elections, in which Charles and David Koch replaced committed libertarians with acknowledged non-libertarians. Those changes have not been “consistent with the principles upon which [Cato] was founded.” Who knows what could transpire when the remaining shareholders pass on?
The Kochs have repeatedly cast this dispute, not as a battle for control, but an effort to guard against ideological drift and preserve “donor intent.” In an email message sent by the Koch Foundation to its alumni network, recipients were told that Charles and David Koch, “as active donors contributing tens of millions to Cato … feel the shareholder structure is important to preserve donor intent.”
Original donor intent is one factor to be recognized. But over the past 35 years, the Kochs have provided roughly nine percent of the Institute’s cumulative budget. More recently, it’s been four percent. Currently, it’s zero percent. The Cato directors replaced by Koch nominees have contributed nearly as much as Charles and David Koch and their allied foundations combined. Yet Charles Koch insists that the original donor’s intent is all that matters. What about the intent of the donors who now fund 100 percent of Cato’s operations?
In a normal business environment, with no endowment and ongoing capital requirements, the founders’ ownership position would be significantly diluted unless they continued to provide all of the funding. In this instance, not only do the Kochs not provide all of the funding, they do not provide any of the funding. The Kochs, who believe in market-oriented principles, would never finance a for-profit organization that gives total control to a few original donors who now contribute nothing and no control to current donors who now contribute everything.
Koch: “There is a great deal of speculation as to what direction we would take Cato if we were to be in a position to elect a majority of the board.”
Perhaps there is “a great deal of speculation,” but there need not be. David Koch and chief Koch lieutenant Rich Fink expressly announced their intentions at a meeting with me in November. The Kochs want Cato’s work to be more closely coordinated with Koch-allied groups such as Americans for Prosperity, a 501(c)(4) grassroots activist organization committed to free markets and limited government. Cato would become the source of “intellectual ammunition” for AFP – through position papers, a media presence, and speakers on hot-button issues. That might strike some libertarians as puzzling. After all, AFP already has a sister 501(c)(3) organization, the AFP Foundation. And Koch financial resources, which have not been directed toward Cato, are surely available to generate the intellectual ammunition that AFP wants – without compromising the integrity of the Cato Institute, which cannot take its marching orders from the Kochs or any of their affiliates.
Equally puzzling, Cato and AFP both declare their devotion to free markets and limited government. Why, then, would Cato’s current efforts not yield the kind of intellectual ammunition that could be used by AFP and others? When I asked David Koch and Rich Fink that question explicitly, they had no direct answer. The clear implication was, they wanted to be in the driver’s seat – not just with respect to Cato’s philosophic base, with which the Kochs had no disagreement, but also with respect to issue choice, timing, and even geographic focus. Of course, that is precisely the sort of coordination and direction that would gravely undermine Cato’s independence and decimate the Institute in its role as a source of intellectual ammunition for the public policy community at large.
Koch: “These officers and board members would act independently from me.”
Again, that’s an assertion we are supposed to take on faith. But Koch-backed appointees to Cato’s board now include the three largest shareholders of Koch Industries, a vice president at the Charles Koch Foundation, an authorized spokesperson for Koch Industries, and a distinguished Republican lawyer who represents and publicly speaks for Koch Industries.
Moreover, it is necessary but not sufficient for officers and board members to act independently of whoever controls an organization such as Cato. Just as important, the officers and board members must be viewed by outsiders as separate, scrupulously autonomous, and self-governing. Because of the Kochs’ vast corporate interests and their well-publicized engagement in electoral politics, Cato simply cannot be viewed as free of Koch influence if the Kochs elect the board of directors.
The Kochs point to the Mercatus Center and its sister organization, the Institute for Humane Studies, as examples of 501(c)(3) entities untainted by their close connection to Charles Koch, David Koch, and Rich Fink. But Mercatus is not Cato. It’s a university-based academic research center, led by a faculty director appointed by the provost of George Mason University, staffed primarily by GMU scholars, focused on domestic economic and regulatory issues, and, accordingly, much better insulated from outside control than Cato would be under the arrangement that the Kochs seek to implement. Moreover, Cato’s agenda is far broader than Mercatus’s, comprising not only domestic economic policy, but also foreign affairs, national defense, social issues, global freedom, constitutional questions, civil liberties, criminal justice, libertarian theory, and other areas.
Similarly, the Institute for Humane Studies, which also operates under a George Mason University umbrella, is devoted to the development of talented and productive students and scholars. While IHS shares Cato’s commitment to liberty, it is not immersed in ongoing public policy debates. And neither IHS nor Mercatus has shareholders who elect the organization’s board of directors.
Koch: “With its emphasis on education, Cato has contributed greatly to the marketplace of ideas and is now a respected thought leader.”
We couldn’t agree more. The testimonials to Cato’s effectiveness from independent parties on the political Left, Right, and Center who have followed the Koch lawsuit affirm Charles Koch’s public acknowledgment of our success. But why, then, have the Kochs insisted on precipitously replacing Cato president Ed Crane and ousting key members of the Institute’s board of directors who have contributed to that success? What is the rationale for a new leadership team and a new direction for our institute? We have repeatedly asked the Kochs and their representatives those very questions and have never received a straightforward answer, in private or in public.
Here is the bottom line: Cato cannot function as an independent voice for liberty if it is thought to be under the thumb of Charles Koch or Rich Fink – indeed, literally owned by the Koch family. Nor, if the lawsuit succeeds, will Cato be considered a reputable and credible source of “intellectual ammunition” by anyone outside the small circle of already committed libertarians. Instead, the Kochs will control a shell think-tank that can be dismissed out of hand as a front for Koch Industries. That’s the clear consensus of nearly everyone who has seen this lamentable and unwelcome dispute unfold.
Nothing good can come of this – not for Cato, not for the Kochs, and not for the libertarian movement. It’s time to restore common sense and adopt a governance structure for Cato that eliminates the prospect of Koch control.
The lawyers are already hard at work, I can tell. Here’s what the Cato Institute’s website said on Friday regarding its legal position against the Koch lawsuit:
Cato acknowledges that, at some point, Niskanen’s stock must be tendered to the Institute. But the Agreement specifies that Cato need not purchase the offered stock. If the board elects not to purchase, the stock is then offered to the remaining stockholders, but only if the board deems that a purchase by Cato would have been “inconsistent with its corporate purposes.” In other words, if the board declines to purchase the stock for some other reason — e.g., to honor Niskanen’s wishes as expressed in his will — the stock does not have to be offered to the remaining stockholders and may be transferred pursuant to Niskanen’s last will and testament. (italics added)
And here’s what the website says this morning:
The Agreement could be construed to require that at some point, the Estate’s stock must be tendered to the Institute for possible purchase. However, the Agreement does not require that Cato purchase the offered stock. Further the Agreement does not provide that the stock must be offered to the other stockholders unless Cato deems that a purchase by Cato would be “inconsistent with its corporate purposes.” (italics added)
So in the course of roughly 72 hours, Cato went from “acknowledging” there would come a point when the stock must be offered for sale back to the corporation to saying that the agreement “could be construed” that way. I’m sure the Koch lawyers will have fun with that.
I’d also point out here that the Cato Institute is presuming to speak here about the legal obligations of the Estate of William Niskanen, which Cato has no legal relationship with, except as a beneficiary of Niskanen’s will. Kathryn Washburn is the sole personal representative for the estate. And as far as I can tell from the Kansas court records, the estate has not entered an appearance; the only defense counsel of record are lawyers for the Cato Institute. I don’t know if Washburn intends to retain separate counsel, but until she clarifies matters, we should be careful not to confuse Cato’s representation of the estate’s duties with the estate’s representation.
Peter Klein announced today that the Mises Economics Blog has closed after almost nine years. I wrote on-and-off for the Mises Blog from 2004–2011, with my final post last July. A Twitter correspondent tells me I had the third-most posts at the blog—631—trailing only Jeffrey Tucker and Stephan Kinsella.
I suppose the Blog’s demise was inevitable after Tucker left Mises last year to assume the helm of Laissez Faire Books. And as Klein wrote, the “group blog” may have outlived its usefulness in a world dominated by more diversified social media. Klein said a new, smaller blog, The Circle Bastiat, would continue at the Mises website. I wish them well.
A commenter at Volokh Conspiracy raises an interesting question:
The primary problem with not splitting the [Niskanen] shares 1/3-1/3-1/3 (and probably would be partial ownership of the last share), would be deciding on the valuation of the shares. The question would be are those actually worth only $1 each (just because they were bought at that price doesn’t mean that is their value)? Or as they are controlling an organization with a total net worth of over $50 million, are they worth $800,000 each share. My guess is if Kathryn [Washburn] decides $1 year, the Kochs will dispute that.
The Estate of William Niskanen remains open before the Register of Wills in the District of Columbia, where Niskanen and his wife, Kathryn Washburn, resided. The estate is considered “unsupervised,” which means Washburn does not have to file a formal inventory or accounting with the probate court, just with the interested parties to the estate (e.g., the beneficiaries named in the will). Nonetheless, Washburn must adhere to following DC probate law with respect to valuing any estate assets:
If the administration is unsupervised, the personal representative, if not a special administrator or a successor to another representative who has previously discharged this duty, shall, within 3 months after appointment, prepare and deliver or mail to each interested person an inventory of property owned by the decedent at the time of death, listing each item of such property with reasonable detail, and indicating as to each listed item, its fair market value as of the date of the decedent’s death, and the type and amount of any encumbrance that may exist with reference to any item. (italics added)
So what is the “fair market value”? If we were talking about a publicly traded security, say shares of Apple, the general rule is that “fair market value” is the average (mean) of the reported highest and lowest sale prices for the day of the decedent’s death. But shares of a close corporation are not publicly traded. IRS regulations, which separately define the “fair market value” of a decedent’s assets for estate and gift tax purposes, offers this vague guidance:
In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined.
However, if we’re talking about shares that are restricted by a buy-sell or shareholders agreement, as is the case here, then the IRS has more concrete thoughts regarding “fair market value”:
Frequently, in the valuation of closely held stock for estate and gift tax purposes, it will be found that the stock is subject to an agreement restricting its sale or transfer. Where shares of stock were acquired by a decedent subject to an option reserved by the issuing corporation to repurchase at a certain price, the option price is usually accepted as the fair market value for estate tax purposes. … Where the option, or buy and sell agreement, is the result of voluntary action by the stockholders and is binding during the life as well as at the death of the stockholders, such agreement may or may not, depending upon the circumstances of each case, fix the value for estate tax purposes. However, such agreement is a factor to be considered, with other relevant factors, in determining fair market value.
The “option price” of the Cato shares, under the shareholders agreement, is $1.00, or $16.00 for all Niskanen-held shares. Based on the IRS guidelines, I’d say that’s probably the “fair market value” of the shares. The other “relevant factors” cited by the IRS are largely inapplicable to a nonprofit like Cato. Those factors include dividend-paying capacity—Cato can’t pay any dividends under its articles of incorporation; the market price of stocks for similar businesses, of which there are none; and earning capacity—again, Cato has no earnings as such.
I’d also note that contrary to the Volokh commenter’s point, it’s probably not in the Kochs interest to challenge the value of the shares. It’s irrelevant to their lawsuit, which seeks only declaratory, not monetary, relief based on the terms of the shareholders agreement. The only parties this is relevant to are Washburn, as personal representative and a beneficiary of the will, and the other named legatees, Cato and the Institute for Justice, since all three must receive equal “in-kind” distributions from the residue of the estate. And, of course, it’s relevant for estate tax purposes. (Based on my understanding of the value of Niskanen’s estate, there won’t be any federal estate tax owed, but there could be DC estate tax liability.)
The group Common Cause sent a letter to the Internal Revenue Service today asking for an “investigation into whether attempts by Charles G. Koch and David H. Koch, shareholders of the Cato Institute, to take control of and manipulate the Cato Institute for partisan political purposes expose a flaw in the Cato Institute’s structure that jeopardize its tax exempt status.”
There’s no new information in the letter. Rather, Common Cause cited an earlier Chronicle of Philanthropy article that quoted a single ex-IRS employee, Marcus Owens, who questioned whether the shareholder structure itself ran afoul of federal law. I previously addressed Owens’ arguments and found them unconvincing. Beyond that, Common Cause cited Cato’s own statements about the Kochs’ partisan intent, particularly chairman Robert Levy’s account of a November meeting with the Kochs.
Common Cause is well-known for its support of campaign finance restrictions, which Cato and the Kochs strongly oppose. Another pro-campaign finance restriction group, United Republic, is planning a rally in support of Cato management next Tuesday.
The only real takeaway from the Common Cause letter is that Cato management’s public relations strategy could prove more harmful than the Kochs’ lawsuit. In their zeal to discredit the Kochs’ efforts as a “hostile takeover” motivated by a partisan agenda, Levy and Ed Crane have opened the door for groups like Common Cause to come in and attack Cato’s tax exempt status.
Cato itself addressed the governance-tax status issue today on its “Save Cato” website:
Finally, with respect to the Institute’s governance structure: A stockholder arrangement for a nonprofit corporation is unusual, but not impermissible. That type of structure is clearly allowed under Kansas and federal law. Moreover, the Institute has disclosed its structure on its Form 990, filed annually with the Internal Revenue Service. Stockholders of a nonprofit can elect the board of directors, but stockholders do not have a property right in corporate assets or a financial interest in donations. An alternate and more typical nonprofit structure — control by “members” — involves designating individuals as members whose function is to elect the board. In many nonprofits, the members are the directors themselves. Thus the board, in effect, is self-perpetuating. But nothing would preclude the members from being other persons, including the same persons who are currently the Institute’s stockholders. In other words, the designation as a “member” or “stockholder” of a nonprofit is not material. There are no “owners” — just persons who elect the board.