In early November 2010, federal Judge Otis Wright gave former KB Home chief Bruce Karatz detention in his 24 room Beverly Hills mansion after Mr. Karatz pled guilty to stock backdating. The Judge followed the Probation Department recommendation. Along the way, the Judge blistered the U.S. attorney for disagreeing with the lenient Probation Department position. Judge Wright specifically mentioned that he agreed with the Probation Department analysis that there was no economic loss to KB Home or its investors associated with Mr. Karatz’s crimes.
But the Judge, the Probation Department and the U.S. Attorney overlooked significant economic losses for which there should have been restitution.
In 2007, KB was forced to restate its earnings to reflect more than $36 million in compensation expenses due to options that were backdated from 1999 to 2005, according to the indictment. That meant significant and large accounting fees for a publicly held company.
Then there were the legal fees: those incurred by Mr. Karatz for which KB paid in the criminal case. The immense fees in the civil backdating case. The fees to respond to the
formal investigation by the U.S. Securities and Exchange Commission. Certainly tens of millions of dollars of attorneys’ fees.
KB was out all those accounting and legal fees as a result of Mr. Karatz backdating. It is likely that shareholders would care. Those who held stock in 2007 (when the backdating first came to light) have seen their stock plummet from about $48 to about $12 to share. This is not to suggest that Mr. Karatz is in any way responsible for the stock market decline. But it is to suggest that stockholders who have taken such a beating are probably not cool with leaving millions of dollars on the table.
Perhaps one answer is that there was insurance. But that does not mean there was no victim, it just means a different victim. Title 18 U.S.C. §3664 (j) (1) provides: “[i]f a victim has received compensation from insurance or any other source with respect to a loss, the court shall order that restitution be paid to the person who provided or is obligated to provide the compensation . . .“ The insurers, if they paid for much of the huge legal expenses, were also eligible for restitution.
The problem is that no one carefully thought of losses and victims.