Metropolitan News-Enterprise


Friday, December 2, 2011


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Ex-CEO Ordered Disbarred Over Mail Fraud Conviction




The former chief executive officer of KB Home, convicted of mail fraud in connection with the alleged backdating of stock options, has been ordered disbarred by the state Supreme Court.

The action against Bruce E. Karatz, taken Wednesday at the justices’ weekly conference in San Francisco, was announced yesterday.

U.S. District Judge Otis Wright sentenced Karatz to five years’ probation last November based on a single count of mail fraud and two counts of making a false statement. His conviction on another count of mail fraud was thrown out for lack of substantial evidence, and jurors earlier acquitted him of 16 other charges.

A 1970 USC Law School graduate, he was associate general counsel of Kaufman & Broad, the predecessor of KB Home, before moving to the business side of the company. According to published accounts, he built the company’s French division into one of France’s largest homebuilders, then returned to Los Angeles and became chief executive in 1986.

KB Home was one of about 2,000 companies where stock options were allegedly backdated in the past decade, to the detriment of shareholders. About 150 companies restated earning for the relevant periods, but Karatz is one of the few executives to face criminal prosecution.

In addition to his business activities, for which he earned a reported $232 million in compensation during his last three years at the company, Karatz has been a leader of numerous civic endeavors, including Rebuild LA, which he chaired after the civil unrest of the early 1990s. He has won numerous awards for his philanthropic efforts.

He resigned from KB Home in 2006, reportedly returning $8.5 million to the company, and was indicted in 2008.

In rejecting prosecutors’ request for a prison sentence—they recommended one of more than six years—Wright sided with the Probation Office, which cited Karatz’s community service and the lack of any harm to shareholders resulting from the crimes. The judge said prosecutors’ suggestion that a lenient sentence would reflect a “two-tiered” justice system based on wealth was “inflammatory” and insulting to the court.

Both sides appealed the outcome, but mutually dismissed the appeals a month later. State Bar and Supreme Court records show that Karatz—who was suspended from the State Bar three times for non-payment of dues—was suspended in August of last year following his conviction, subsequently attempted to resign from the State Bar, and did not petition for review of his summary disbarment for having been convicted of a felony involving moral turpitude.

In other conference action, the justices:

Denied review of a ruling by this district’s Court of Appeal that borrowers who claim that Countrywide Financial Corporation and founder Angelo Mozilo misled investors into buying pooled mortgages based on inflated property valuations cannot sue the lender on a fraudulent concealment theory.

Div. Three held in Bank of America Corporation v. Superior Court (Ronald) (2011) 198 Cal.App.4th 862:

“Due to the generalized decline in home values which affects all homeowners (borrowers of Countrywide, borrowers who dealt with other lenders, and homeowners who owned their homes free and clear), there is no nexus between Countrywide’s alleged fraudulent concealment of its scheme to bilk investors and the diminution in value of the instant borrowers’ properties.”

Presiding Justice Joan Dempsey Klein explained that “while Countrywide had a duty to refrain from committing fraud, it had no independent duty to disclose to its borrowers its alleged intent to defraud its investors by selling them mortgage pools at inflated values.”

The court directed that the fraudulent concealment cause of action in the complaint brought by 248 borrowers be dismissed. The suit is proceeding before Los Angeles Superior Court Judge William Highberger on other theories, including negligent and intentional misrepresentation, invasion of privacy, and unfair competition.

Agreed to decide whether the elected executive committee of the medical staff of a hospital, in conducting a peer review in the case of a physician denied reappointment to the staff, was permitted to delegate the appointment of a hearing panel to the hospital governing board.

This district’s Div. Four held in El-Attar v. Hollywood Presbyterian Medical Center, B209056, filed Sept. 7, that the task could not be delegated in the absence of a bylaw permitting the committee to do so.

Left standing the award of $13.8 million in punitive damages to the family of a woman who died of lung cancer after smoking cigarettes manufactured by Philip Morris USA for 45 years.  

This district’s Div. Three held in Bullock v. Philip Morris USA, Inc. (2011)  198 Cal. App.4th 550 that the award, which was 16 times the compensatory damages of $850,000, was not excessive in light of the company’s “extremely reprehensible” conduct, which included “intentionally deceiving smokers and the public in general for several decades concerning the adverse health effects of cigarette smoking, while formulating its cigarettes so as to make them more addictive, and aggressively advertising to youths and others,” Justice Walter Croskey wrote.

Denied review of a ruling by this district’s Div. One, allowing the owner of a movie theater to bring an antitrust claim against a larger competitor that allegedly uses its power in the marketplace to prevent the plaintiff from obtaining films. The court held that the owner of the 10-screen Cinemas Palme D’Or in Palm Desert may sue the owner of the Century 15 at the River theater, located in Rancho Mirage less than two miles away.

The trial judge agreed that the relevant market for antitrust purposes was the entire Coachella Valley and that Century lacked sufficient power in that market to cause competitive harm. But Justice Frances Rothschild, writing for the Court of Appeal, said Flagship can show antitrust injury by proving that it suffered loss from competition-reducing conduct by the defendant, even if it cannot show evidence—such as proof of higher prices or reduced supply—that the market has become uncompetitive or less competitive.

That may, the justice said, include evidence of conduct by Century outside the local market that had an effect in that market.

The case is Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc. (2011) 198 Cal. App. 4th 1366.

Left standing the decision of this district’s Div. Four in West Chandler Boulevard Neighborhood Association v. City of Los Angeles (Chabad of the Valley, Inc.), B226663, decided Aug. 16 and subsequently ordered published, which overturned a decision by the city of Los Angeles to grant a conditional use permit and parking variance for a synagogue in a residential section of Van Nuys.

The court said the Los Angeles City Council did not comply with the relevant provisions of the City Charter and Municipal Code in granting permission for Chabad of the Valley Inc. and Chabad of North Hollywood to expand their facility on West Chandler Boulevard.

Denied requests by the secretary of state and state controller to depublish Brown v. Chiang (Bowen) (2011) 198 Cal.App.4th 1203, in which the Third District upheld the governor’s authority, with the approval of the Legislature, to furlough employees of other constitutional officers in times of budget emergency.


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