The Battle for the Cato Institute

Charles Koch and Ed Crane were once allies in the libertarian movement. Now the former friends are facing off in a fight for control of Cato, the think tank they founded together 35 years ago.
Billionaire Charles Koch (left) has emerged as a champion of the Tea Party, while Ed Crane has remained a strict libertarian. Illustration by Steve Brodner.
Billionaire Charles Koch (left) has emerged as a champion of the Tea Party, while Ed Crane has remained a strict libertarian. Illustration by Steve Brodner.

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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