Kansas Oil Firm Frets Over Playmate’s Case

The executives at Koch Industries, the Wichita, Kan.-based oil conglomerate and the second-largest privately held company in America, have been keeping a close eye on former Playboy playmate and lingerie model Anna Nicole Smith.

But not for the reason you might think.

The billion-dollar energy giant has been dragged into the middle of Smith’s nasty, six-year legal battle over the estate of her late husband, oil tycoon J. Howard Marshall of Houston.

At stake in the case, which is now before a U.S. District Court judge in Santa Ana, is the Marshall fortune. The estate consists almost exclusively of Koch Industries stock, a 16% ownership interest that Marshall often referred to as his “family jewels.”

If Smith wins, the now-bankrupt Playboy pinup not only would lay claim to a sizable chunk of the Marshall fortune but also could stir up all sorts of financial headaches for the two brothers at the helm of Koch Industries: Charles and David Koch.

Just how big a splash Smith could make hinges on a simple-yet-elusive question: How much was J. Howard Marshall and his Koch Industries stock worth? Estimates range from $170 million to $1.5 billion.

Because Smith contends that her husband promised her half his fortune, the answer, if she wins, could ultimately mean the difference between an $85-million and a $750-million judgment.

The value of Koch Industries has been debated for years, because the company’s stock has never been publicly traded--and 96% of the shares are in the hands of Charles and David Koch and the Marshall estate. A federal court ruling on Smith’s behalf would put a value on those assets and carry major estate-tax implications for the Koch brothers and Marshall’s heirs.

For years, Marshall and Forbes magazine argued over the value of his 16% stake in Koch, a company that has 13,000 employees and operations in oil, natural gas, refining, petrochemicals, energy services, trading and agriculture. Forbes figured it was worth enough to make him one of the 400 richest people in the United States, which both Marshall and his family have disputed.

Smith, 34, met Marshall in 1991 when she was dancing at a Houston strip club, GiGis. He was 89 when they married in 1994 and died 14 months later. The court battle over his estate commenced almost immediately because Smith was left out of Marshall’s will and was never named as a beneficiary of his estate.

Smith accuses E. Pierce Marshall, her stepson, of cheating her out of any inheritance because he despised her and coveted his father’s wealth. Pierce Marshall, the sole heir, said his father left Smith out of his will because he realized that marrying her was a mistake after she squandered millions and rarely spent time with him in his final years.

A bankruptcy judge in Los Angeles sided with Smith a little over a year ago, awarding her $475 million. Six months later, a Texas probate court sided with Pierce Marshall, declaring him the sole heir.

The case is now before U.S. District Judge David O. Carter in Santa Ana, who tossed out the bankruptcy court ruling and listened to weeks of new testimony in December. His decision is expected this month.

If Carter rules in Smith’s favor, she may be entitled to a portion of the Koch stock, or at least a monetary equivalent, which could force Pierce Marshall to put some holdings up for sale.

“I doubt Koch would want those shares in the hands of a third party or sold to a third party that they are not comfortable with,” said economist Ehud I. Ronn, director of the center for energy finance research at the University of Texas, echoing a sentiment voiced by some Wall Street analysts who monitor the company. “She’d be entitled to reports, dividends, you name it.”

Generally regarded as a solid, well-run company, Koch Industries is notoriously private about its business operations, Ronn said. With more than $30 billion a year in sales, the company can well afford to buy back those shares to prevent another party from breaking into its inner sanctum, he said.

Still, if Carter determines a high value for the Koch stock, the decision could increase the estate-tax liabilities for shareholders and their heirs.

“I presume [the Koch brothers] have done some estate planning, but there still would be tax implications for the heirs,” Ronn said.

Attorneys for Pierce Marshall consider such speculation pointless because they’ve already won the probate case in Texas and are confident of a victory in the federal case.

Still, officials at Koch were concerned enough to send an attorney to the Santa Ana courthouse to monitor the trial. Not only is the value of Koch stock at issue, but Pierce Marshall sits on the Koch Industries board of directors.

“It behooves us to understand what is going on,” said Koch Industries spokesman Jay Rosser in Wichita. “Pierce is a board member. Ultimately, this will be a long and protracted litigation.”

Rosser declined to discuss the matter further. “I can’t speculate on what the judge’s decision may or may not be,” he said.

In 2000, U.S. Bankruptcy Judge Samuel Bufford ruled that Marshall’s Koch holdings were worth $1.6 billion and that Smith was entitled to $449.7 million, the amount J. Howard Marshall’s assets increased during their 14-month marriage. Bufford made the ruling based on estimates provided by Smith’s financial expert in the case, Wayne Elggren.

Pierce Marshall’s attorneys and their financial expert argued that the real value of the Koch stock is closer to $170 million.

They said Bufford failed to give proper weight to the lack of a market for Koch stock.

First of all, Marshall holds a minority stake of mostly nonvoting stock, so as a shareholder he has no say about how the company is run. Plus, unlike publicly traded companies, Koch stock is not traded on Wall Street--so there never has been an established market price. Finally, Koch is known for paying low dividends, so the income from the investment is relatively small.

“Nobody who I can think is in their right mind would buy their stock from him,” said Rusty Hardin, Pierce Marshall’s lead attorney. “There’s no market. Who would want it?”

Smith’s attorneys aren’t the only ones who think differently, however.

For years, Forbes magazine has listed Marshall and, after his death, his son, among the 400 richest people in America. Just this week, Forbes magazine estimated Pierce Marshall’s net worth at $1.3 billon. And for years, the Marshalls have demanded to be removed from the magazine’s list of richest people, saying Forbes had grossly inflated the value of their stake in Koch Industries.

“Forbes’ calculation of my father’s wealth is a wildly inflated fantasy,” Pierce Marshall said Friday, calling the list of billionaires a shameless publicity stunt.

In the past, Pierce Marshall has said the family’s net worth is a fraction of the figure listed by the magazine. He also believes it was the magazine’s “wild speculation” about his father’s wealth that lured Smith to the altar.

Smith’s attorney, Philip W. Boesch of Los Angeles, said the Marshall family has consistently low-balled the family’s net worth to reduce their potential tax liability and to keep Smith from her rightful inheritance. And even if Smith gets half the estate, Pierce Marshall will remain well off.

“No matter what happens,” Boesch said, “Pierce Marshall is still going to be one of the wealthiest men in the United States.”