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Bruce Karatz brings in star character witness: Richard Riordan

Former L.A. mayor vouches for the ex-CEO of KB Home in his stock-options backdating trial, saying he believes Karatz would not knowingly commit a crime. Philanthropist Eli Broad is expected to follow.

April 02, 2010|By Stuart Pfeifer

Former KB Home chief Bruce Karatz turned to a powerful ally Thursday in his defense against stock-options backdating charges, presenting former Los Angeles Mayor Richard J. Riordan as the first of his character witnesses.

Riordan, who served as mayor from 1993 to 2001, told jurors at the federal courthouse in Los Angeles that he's known Karatz for 30 years, considers him a close friend and does not believe Karatz would knowingly commit a crime.

"I think he's an outstanding character who respects the law. He has a very high level of integrity," said Riordan, whose voice was so powerful that defense attorney John Keker instructed him to back away from the microphone.

During a brief cross-examination by Assistant U.S. Atty. Alexander A. Bustamante, the former mayor acknowledged that he was not familiar with the evidence in the case. His testimony lasted 10 minutes.

After he stepped down from the witness chair, Riordan hugged Karatz's wife, Lilly Tartikoff, and left the courthouse.

Riordan was the first of two rich, powerful friends expected to defend Karatz's character as his trial on options-related charges winds down. On Friday, billionaire philanthropist and KB Home co-founder Eli Broad is expected to take the witness stand.

Broad, whose net worth was estimated last month at $5.7 billion by Forbes magazine, led the fundraising for Walt Disney Concert Hall, was founding chairman of the Museum of Contemporary Art and drove efforts to bring the 2000 Democratic National Convention to Los Angeles.

In an interview with The Times shortly after Karatz was indicted, Broad said, "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."

The effect of such star-studded testimony remains to be seen. But at least one juror appeared to have been impressed by Riordan. As the former mayor spoke to a Times reporter on the steps outside the courthouse, the juror approached Riordan, extended a hand and said, "I'd like to thank you for your years of service to the city."

A white-collar criminal defense attorney on Thursday questioned the value of the character testimony.

"High-profile character witnesses never concerned me," said Wayne Gross, a former federal prosecutor. "While they are interesting to watch testify, they by definition don't know the facts of the case being prosecuted, and therefore the impact of their testimony is usually quite limited."

Karatz was KB's chief executive from 1986 to 2006, during which time the company became one of the top home builders in the country. From 1995 to 2005, the company's revenue rose 576% and the value of its stock soared.

Karatz, 64, retired from KB amid increasing scrutiny of the company's stock-option grants to executives. Options allow employees to buy stock at a set price, usually the closing price on the day it is granted. If the stock price rises, employees can exercise their option to buy at the lower price and then sell at the current price for a profit.

Companies are allowed to backdate options to dates when the stock price was lower, making the options more valuable, as long as they account for the practice in filings available to shareholders. Prosecutors allege that Karatz directed company executives to conceal the backdating, through which he made millions of dollars.

Keker, the defense attorney, told jurors in his opening statement that Karatz and other KB employees thought the company handled options properly and never intended to deceive shareholders.

In a motion filed Monday, he said prosecutors had proved only that KB backdated options -- not that Karatz intended to deceive shareholders.

"The government has proven, at most, backdating," Keker's motion said. "That, in and of itself, is not a crime. And that is not enough to convict Mr. Karatz of the crimes charged."

In an interview outside the courthouse, Riordan said he and Karatz remained close. After he was elected mayor, Riordan said, he turned to Karatz for help in raising millions of dollars to equip police patrol cars with computers and to build a center to help the homeless.

The two had dinner together last weekend, Riordan said. Dealing with the allegations has been a challenge for Karatz, he said.

"It's an incredible beating he's taken," Riordan said. "But he can take it."

stuart.pfeifer@latimes.com

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