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.

“It’s very sad, and it shouldn’t have turned out this way,” says Broad, who maintains that the board’s decision to oust Karatz was too hasty.“There are several directors who thought it was unfortunate that [the board] acted the way [it] did.” Broad wouldn’t name names (“a lot of them are my friends”), but he told me that“sometimes when you get lawyers involved, and a board listens to lawyers, they don’t act in the best interest of their shareholders.” Karatz declined to talk, but his spokesman, Christopher Lehane, insists that “Bruce Karatz always acted appropriately, and anyone objectively analyzing his leadership at KB Home can only come to one conclusion: Shareholders, employees, the company, and customers all did exceedingly well.”

No one, however, did as well as Karatz, and that will make any defense seem a little awkward. Total compensation in 2005—his last full year as CEO—was a stunning $135.6 million (only three executives of public companies in the United States made more that year). Over a five-year stretch, he made $227.4 million. Even by the recent standards of excessive executive pay, that’s way over-the-top. So when KB’s investigation found that the backdating overages amounted to a relatively modest $13 million (which Karatz has offered to return), everyone was asking the same thing: Why on earth would he risk losing all that fame and fortune for the sake of a few more bucks?

There are plenty of people in L.A.’s business world who weren’t exactly sorry that Karatz got into trouble. Some of the gripes I heard were trivial, others more serious. But much of it came down to his studious avoidance of confrontation—in business and in relationships. Get a friend or a lackey to deliver bad news. Hope that the bad news will go away. Make a high-profi le gesture and then back off . One person who had a ten-year working relationship with Karatz outside of KB told me that out of the blue, with no explanation, the assignments stopped coming in. After more than three months of being ignored or getting excuses from assistants, the person finally got Karatz on the line at his Beverly Hills home. “I’ve been dreading this call,” the employee remembers Karatz saying. “I wondered why he was dreading it. I was the one who was out of a job.”

He’s had a rocky personal life. Karatz’s first wife, Janet, filed for divorce in 1999 (KB stock options totaling $23 million helped cover the terms of the settlement), and soon after that he became involved with homemaking doyenne Sandra Lee, the host of Semi-Homemade on the Food Network. More than 20 years his junior, Lee was named KB’s “national lifestyle spokesperson” in 2001, the year they got married. (There’s no mention of the couple’s relationship in company proxy statements.) That ended in a turbulent divorce in early 2006. Karatz is now seeing Lilly Tartikoff , widow of NBC executive Brandon Tartikoff , and Lee is dating New York attorney general Andrew Cuomo.

Karatz’s extravagant lifestyle was fueled by a generous employment agreement with KB. To be fair, a lot of his freebies are standard issue in the CEO world: tickets to sporting events, meals and lodging, financial planning and tax preparation services, club membership fees, and an automobile and gasoline allowance. But sometimes the lines between Karatz’s personal and business life blurred, especially in the use of company-owned aircraft for personal outings. Last year those expenses totaled $558,009, more than double the figure from a year earlier (General Electric chairman Jeffrey Immelt expensed $219,533 for use of the GE plane). David Gilbreath, Karatz’s former personal trainer, says it wouldn’t be unusual for Karatz to call on a Friday morning and say, “What are you doing on Sunday? Meet me at the airport. We’re going to Monterey to play some golf.”

12:02 PM Tuesday, May 8 2007 • Tell Mark what you think
http://www.laobserved.com/biz/2007/05/the_rise_and_fall_of.php