Ex-KB Home chief gets blame, acclaim
Bruce Karatz may be facing prison time, but he was the one doing the comforting before his bail hearing in federal court last week.
The former chief executive of KB Home rubbed the shoulders of his visibly upset fiancee, Lilly Tartikoff, whispering in her ear and consoling her. By all appearances, you might not know that he was the one being forced to turn in his passport and pledge a Bel-Air mansion as collateral to make bail.
Karatz, 63, is set to be arraigned today on charges that he committed fraud in manipulating stock options in a case that one FBI agent says illustrates “avarice and dishonesty at its core.”
He is one of just six executives to face criminal charges in the nationwide stock option manipulation scandal. What’s more, among those six -- and among more than 70 other executives who have settled or still face civil complaints -- Karatz is one of the few alleged to have cooked the books mainly to benefit himself and not underlings, federal authorities and legal experts said.
Karatz, who pulled in $232 million in compensation for the three years ending in 2005, boosted his pay because of the illegal actions, authorities say.
“Here you have a case where the head of the company was already making a lot of money, and he’s accused of fiddling with stock options to get more,” Rosalind Ramsey Tyson, regional director for the Securities and Exchange Commission in Los Angeles, said of Karatz.
An entirely different picture of Karatz emerges from his friends and associates, who include former Los Angeles Mayor Richard Riordan and billionaire philanthropist Eli Broad, co-founder of KB Home.
“In the 35 years I have known him, I can’t think of any instance where he did anything unlawful, unethical or improper, even though he was always aggressively building the company,” Broad said.
In 1986, Broad handpicked Karatz to lead the company, then known as Kaufman & Broad Home Corp. A graduate of Boston College and USC Law School, Karatz joined the Westwood home builder in 1972 as a staff attorney, then made his mark by running the firm’s fledgling operations in France.
In his 20 years as chief executive, Karatz won acclaim as a marketing genius. In 2006, Fortune magazine named KB Home the country’s “most admired” home builder. The firm’s market capitalization increased more than 1,200% from 1995 to 2005.
With success came Karatz’s outsized compensation, making him a target for shareholder advocates railing against runaway executive pay. The criminal options case has only made him a bigger target.
“These charges have yet to be proven in court, but you have to wonder why a guy who is making that kind of money would engage in this flagrant, reprehensible conduct -- conduct that was so counter to shareholder interests, just to take a little cream off the top,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
Broad disagrees, pointing out that Karatz’s success at the company benefited those who owned the stock.
“If you look at how much he increased the market cap for shareholders, I’m not sure you can say that he was unfairly paid,” Broad said.
Karatz’s friends say the father of three has also performed for his community -- giving generously of his time and money to education and religious causes, including USC and the Wilshire Boulevard Temple, a Jewish synagogue where he served as president.
“Bruce was instrumental in making decisions for the institution that had profound and positive long-term consequences,” said Steven Leder, Wilshire’s senior rabbi and author of “More Money Than God,” a book that promises to tell readers about “living a rich life without losing your soul.” “He is someone I can always turn to for advice.”
Since 2005, Karatz has been seeing Tartikoff, the widow of former NBC entertainment chief Brandon Tartikoff and a high-profile supporter of cancer-fighting causes.
“I had to meet someone who wasn’t intimidated by me, and the thing with Bruce is, he doesn’t let me run the show,” she told the Times in 2007. “I try, but he just laughs.”
Another fan, Riordan, said Karatz always said yes when he tapped him to raise money for a project, including new computers for the Los Angeles Police Department and a drop-in center for homeless people.
“I would ask him to do things because I knew he was a doer,” said Riordan, who has served on the KB Home board. “He’s got an energy level like nobody else I have ever seen.”
Karatz, who declined to comment for this story, has indicated that he will plead not guilty at his court appearance today in U.S. District Court in Los Angeles. He has picked a powerful attorney to defend him: John Keker of Keker & Van Nest in San Francisco, who helped win acquittal for Frank Quattrone, the former Credit Suisse Group investment banker who was charged with obstruction in connection with a probe into illegal kickbacks in initial public stock offerings.
Legal experts, however, say the case against Karatz is compelling. It revolves around stock options, which companies generally grant to executives as an incentive. If the stock goes up, so does the value of the options.
Companies usually grant these options with an exercise price tied to the date of the grant. But at many firms, federal regulators say, executives looked back to pick a date when the stock price was lower -- creating an immediate gain on paper.
The practice is legal if the executives disclose the so-called backdated grants to shareholders and pay the appropriate taxes. At KB Home and about 250 other companies, regulators say, that did not always happen.
KB Home was forced to recognize more than $36 million in added expenses and $70 million in liabilities from the options that Karatz and others held.
Regulators say Karatz netted more than $7 million from the backdating of options at KB Home. Two other prominent executives who have been charged criminally in connection with the options scandal -- Broadcom Corp. co-founders Henry T. Nicholas III and Henry Samueli -- did not personally benefit.
Neither did Gregory Reyes, former CEO of Brocade Communications Systems Inc., the only executive convicted at trial so far in a backdating case.
In the eyes of the law, it does not matter that Karatz allegedly benefited personally, or that he allegedly took more than one-third of the backdated options for himself, legal experts say -- but it could matter to a jury.
“It’s almost never the case that someone is backdating options mostly for themselves,” said David Priebe, an attorney at DLA Piper in East Palo Alto who represents clients in financial crime cases. “When they are, it looks reckless.”
Most of the executives alleged to have backdated options faced civil sanctions from the SEC, but not criminal charges from the Justice Department. Legal experts, however, say the alleged backdating at KB Home was more egregious -- continuing into 2005, according to the criminal indictment. By comparison, most companies stopped backdating stock options after passage of the Sarbanes-Oxley securities reform act in 2002 toughened the rules, securities experts say.
The indictment charges Karatz with 20 counts of fraud and other charges, for which he could face up to 415 years in prison.
Karatz was personally involved in the backdating scheme, the indictment alleges, and then lied about it. KB Home, in restating its earnings in February 2007, put the blame squarely on Karatz and a human resources executive.
“Because he was so aggressive about it, the enforcement people at the SEC and then the DOJ said, ‘He’s a good target,’ ” said John Bizjak, a finance professor at Portland State University in Oregon who worked at the SEC as an economist.
According to the indictment, Karatz first tried to get KB Home to give him stock options valued at $1, ensuring a huge profit, in 1998. When the company balked, the indictment says, he worked closely with former KB human resources executive Gary Ray to cherry-pick stock option dates that would ensure a gain.
Karatz then concealed the backdating from KB Home’s board of directors, its compensation committee, its shareholders and the SEC, the indictment alleges -- even going so far as to help create a false internal report to present to auditors in 2006, saying there was “no evidence of the backdating of options or other manipulation by management.”
Ray was charged separately from Karatz. He pleaded guilty in February to conspiring with Karatz to thwart an SEC investigation. Now he is cooperating with prosecutors. Ray’s testimony will make the criminal case much stronger, experts said.
“The SEC has already done a tremendous amount of investigation and probably turned over a lot of documents to the FBI,” said Ken Springer, a former FBI investigator and the president of New York-based Corporate Resolutions, which performs financial investigations for companies.
“When you also have people who are corroborating information, that’s when people get indicted.”
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