March 11, 2009
Friedman, Karatz Criminal Charges Rock L.A. Philanthropic Community
On March 4, Bruce Friedman, a Sherman Oaks-based mortgage banker, was charged by the Securities and Exchange Commission (SEC) with orchestrating a $216 million real estate investment fraud.
The news came as yet another big blow to Los Angeles’ philanthropic community, as Friedman’s family foundation, a major partner of the Dodgers, had committed $10 million to the Children’s Museum of Los Angeles.
Still more bad news came the next day, when Bruce Karatz, former KB Home CEO and one-time president of Wilshire Boulevard Temple, was indicted by a federal grand jury in a stock options backdating case that has dragged on since the housing boom went bust.
Friedman and his attorney have not commented on the charges; Karatz has proclaimed his innocence.
Despite their differences, the coincidence in timing of these two cases sent shudders through the Jewish community last week. It is not just a matter of lost dollars, but rather the notion that both men were major donors to charitable causes, even as their business practices may have been illegal. This link has thrown even more unwelcome light on the community during a period of intense Jewish sensitivity to the casting of Jews as dishonest businessmen and conspiring moneylenders.
Immediately after Lehman Brothers failed in September and Wall Street collapsed, sending the United States and global economies into an ever-deepening downward spiral, anti-Semites piled on, blaming history’s favorite financial scapegoat for the world’s problems. Then in December, Bernard L. Madoff was arrested after reportedly admitting to operating a $50 billion Ponzi scheme, personifying every ugly slur about Jews and mammon and, on top of the broader financial crisis, devastating Jewish charities financially and emotionally. Madoff is expected to plead guilty on Thursday.
To be sure, the broad brushstroke is extremely unfair: “There are lots of Jewish money managers,” said Gary Tobin, president of the Institute for Jewish & Community Research in San Francisco. “Friedman and Madoff are rare, unsavory exceptions.”
And Karatz, Tobin said, should not be looked at in the same way.
“Bruce Karatz, in my view, never intended to defraud anybody. So you can’t lump him together with guys like Friedman and Madoff and this guy Stanford,” Tobin said, referring to Texas tycoon Allen Stanford, who is not Jewish and was charged last month by the SEC with a “massive ongoing fraud” related to an $8 billion investment fund. “They are part of a different crew,” Tobin said.
According to the SEC’s complaint filed in U.S. District Court, Friedman raised $216 million in investments for his companies, Diversified Lending Group (DLG) and Applied Equities Inc. (AEI), by promising 9 percent to 12 percent annual returns. The money was not invested in real estate, the SEC claims, and at least $17 million was diverted to Friedman’s $6.5 million Malibu home, European vacations, clothing, jewelry and home renovations totaling $4 million, as well as luxury cars costing $1.2 million and a $3 million jet.
The SEC also claims that Friedman transferred at least $1.8 million in investor funds to the Friedman Charitable Foundation, of which he is president, and $275,000 to Tina Placourakis of Scottsdale, Ariz, whom the SEC identifies as his girlfriend. (Placourakis said she was never “romantically involved” with Friedman. “He is my employer nothing more or nothing less,” she said.)
Messages left for Friedman and his attorney, Mark C. Holscher, were not returned. Neither were calls to Daryn Friedman, executive director of the Friedman Charitable Foundation, or Dina Coster Kaplan, a member of its board.
Friedman, 59, has had legal troubles before. In 1981, he pleaded no contest to a felony charge of grand theft and was sentenced to 40 months.
His past and current legal issues came as a surprise to many. The news resonated over the weekend at Congregation Or Ami in Calabasas, the temple where Friedman worships and his brother-in-law is a past president.
“Or Ami is a congregation that attempts to be nonjudgmental about the tsuris [troubles] people are going through,” Rabbi Paul J. Kipnes said. “And so we reach out to our congregants as they go through their problems and deal with their issues.”
Friedman’s philanthropy was identified more with Los Angeles’ cultural community than Jewish causes, and the organizations the foundation had pledged to support may now be in limbo.
A new $58.5 million home for the Children’s Museum of Los Angeles in Lake View Terrace, scheduled to open June, 2010 had already faced major delays and is still counting on the $10 million from the Friedman Charitable Foundation, by far its biggest donor.
“The Children’s Museum of Los Angeles did the review that we have to do in order to accept a gift. I feel very comfortable with the gift that was given to the museum,” said Cecilia Aguilera-Glassman, the museum’s CEO.
Less clear is what will happen to the Dodgers’ plans to build 42 “dreamfields” across the region. At a news conference last November, Dodgers owner Frank McCourt announced that the Friedman Charitable Foundation would match the Dodgers dollar for dollar in building ballparks throughout greater Los Angeles. Dodgers’ spokesman Charles Steinberg, who did not return calls from The Journal for comment, told the Los Angeles Times that the team has yet to ask Friedman for any money.
Regardless of what happens to donations Friedman pledged to these organizations, the case against him raises troubling, though not new, questions about the relationship between philanthropy and ill-gotten gains.
“The robber barons in the gilded age exploited the country and its resources terribly and then became great patrons of culture. Both sides — commerce and culture — need one another. The businessmen/criminals need the validation from these tony, upscale institutions in order to justify to themselves their criminal activity, and the institutions need the infusion of cash,” said David N. Myers, a UCLA history professor and director of the Center for Jewish Studies. “I suspect if you went back to antiquity, you would find high-level criminals were funding major cultural institutions.”
Yet while Friedman has received the ignominy of being accused of mini-Madoff status, Karatz is the much bigger macher.
According to forms filed with the IRS for the year 2007, the most recent available, the Bruce Karatz Family Foundation had assets of $4.7 million and gave about $233,000 in grants. Most of the donations went to Jewish causes.
The largest, $50,000 each, were given to the United Jewish Fund and the City of Hope Medical Center. The Israel Air Force Center received $6,000, while $5,000 each went to Wilshire Boulevard Temple, Seeds of Peace and the USC Annenberg School for Communication. Jewish Big Brothers/Big Sisters got $1,250.
In the early 1990s, when Karatz spent three years as president of Wilshire Boulevard Temple, it wasn’t so much about giving his money but his time, Rabbi Steven Leder said.
“Anybody who saw Bruce operating as the president of the temple up close had and continues to have immense respect for him as a leader and his commitment to the temple. He really made a difference,” Leder said. “He was instrumental in the push to establish ourselves on the Westside of Los Angeles. Instrumental.”
Not that Karatz, now 63, didn’t have plenty of money.
When he was pressured out of KB Home in 2006, after 20 years at the helm, Karatz was one of the highest paid executives in the United States. Fortune magazine had ranked KB Home the nation’s top homebuilder. The company’s stock value had quadrupled in the previous 10 years and assets had increased by almost the same proportion.
The SEC claimed Karatz backdated stock options between 1999 and 2006 without reporting his actions to stockholders or paying taxes on the gains. He agreed last September to pay more than $7 million to settle with the SEC. But that didn’t stop a grand jury inquiry.
“This investigation painted a picture of avarice and dishonesty at its core,” Salvador Hernandez, assistant director in charge of the FBI in Los Angeles, said in a prepared statement.
On March 5, Karatz was indicted on 20 felony counts, including securities fraud. If convicted on all counts, he could face up to 415 years in prison.
John Keker, Karatz’s attorney, said his client has been unfairly targeted.
“We are disappointed that during this economic collapse the government chooses to waste its resources on backdated options, an issue that has long ago been fixed at KB Home and generally in the corporate world,” Keker said in a statement. “But since they made that choice, we will show a jury that Bruce Karatz, who as CEO helped create 5,000 jobs and oversaw significant company growth, acted appropriately.”
While Karatz and Friedman share little beyond their commitment to Jewish causes, anti-Semites have wasted little time in capitalizing on their troubles. Last weekend, a report about Friedman on The God Blog gave rise to numerous rabidly anti-Semitic comments.
These were in keeping with a survey released last month by the Anti-Defamation League of Europeans in seven countries — Austria, France, Hungary, Poland, Germany, Spain and Britain — which found that 40 percent of respondents feel Jews have too much power in business, and nearly a third said Jews are to blame for the global financial crisis.
The ADL has not administered a similar survey in the United States, but the blog comments indicate that many Americans share the Europeans’ sentiments. And this, in turn, fuels the fear that the more Jewish names are associated with financial calamity and misdeeds, the more common and openly expressed those sentiments could become.
Contributing Editor Tom Tugend contributed to this report.
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