The rise and fall of Bruce Karatz

Los Angeles magazine has posted my May piece on the ousted chairman and CEO of KB Home. Karatz, of course, was just about the most prominent chief executive of any L.A. public company. Certainly, he was among the most visible - there were the black-tie fund-raisers, the CNBC interviews, the pro bono favors for mayors and governors. And then, suddenly, it was over. The company's own investigation had implicated him in the backdating of stock options, and that was that. At this point, both the U.S. Attorney’s Office and the Securities and Exchange Commission are investigating his actions at KB. There also are a bunch of shareholder law suits.

It’s a strange and complicated tale, one of the most bizarre business scandals to come along in years, because not everyone believes it’s really a scandal. Backdating may sound underhanded, but it’s not always illegal—and it has been done for years at more than 140 public companies. Many of those companies are now trying to sort out rightfrom wrong, and in the process there have been firings, resignations, internal inquiries, federal inquiries, shareholder lawsuits, and earnings revisions—a real mess. In addition, the Justice Department must fi gure out when backdating is indeed a crime, and when it is, jail time is warranted. Which means that Bruce Karatz, perhaps the most celebrated nonentertainment CEO in town, could conceivably be facing a prison sentence. No wonder he’s hired John Keker, who defended former Enron executive Andrew Fastow and is considered one of the nation’s best whitecollar defense attorneys.

To Eli Broad, the billionaire philanthropist who cofounded the company as Kaufman & Broad 50 years ago, it’s much ado about not much—certainly not a big enough deal to force out Karatz, who turned KB into the nation’s fifth-largest home builder and who oversaw huge increases in the company’s stock price. Consider that $100 worth of KB shares in 2001 was worth $431 four years later. Compare that with the S&P 500 Index, where that same $100 would have been worth a measly $118.