Karatz’s attorney, addressing jurors during closing
arguments of a trial against the once high-flying corporate
chieftain on charges of securities fraud, denied Karatz
intended to defraud and emphasized his “wonderful legacy.”

Karatz, 64, served as the chief executive of KB Home for 20
years, becoming one of America’s highest-paid executives before
stepping down in 2006 amid a backdating scandal. That issue
embroiled nearly 200 companies midway through the decade as the
government targeted the possible manipulation of stock-option
grant dates.

The month-long trial in Los Angeles federal court is seen
as a test of those efforts to crack down on illegal stock
option backdating, where stock options are retroactively dated
to boost gains to employees but not properly accounted for in
financial documents.

Karatz failed to tell KB Home’s chief financial officer,
its legal team or compensation committee that he was engaged in
hindsight pricing and repeatedly lied to internal auditors,
Assistant U.S. Attorney Paul Stern told jurors.

“Mr. Karatz knew all along that what he was doing was
wrong, that he was committing a fraud on the company, on
investors,” Stern said in remarks to the jury that lasted
nearly four hours.

The fraud Karatz committed, which allegedly began in 1999,
was tantamount to “giving himself extra pay,” said Stern.

Stern said Karatz settled on the scheme after being told in
1997 that he should submit to performance measures to justify
his proposal to forego a significant chunk of cash compensation
in exchange for a large number of cheap stock options.

Starting in 1999, prosecutors say, Karatz departed from a
previous system of setting employee options prices on the date
of KB Home’s compensation committee meeting and instead began
looking back up to six weeks after the meeting for a low price.

These backdated options with discounted exercise prices
allowed him to reap millions of dollars that were never
disclosed or recorded as compensation, the government claims.

Karatz sat quietly between his lawyers at the defense
table, wearing a blue suit and striped tie, his hands folded
and looking straight ahead, occasionally glancing at the
prosecutor.

His wife, Hollywood philanthropist Lilly Tartikoff, sat in
the front row of the courtroom.

Backdating is a practice of locking in financial gains by
retroactively pricing option grants on days when a company’s
stock price was low, thereby increasing the value of options.
It is legal when recorded as a non-cash compensation expense.

I AM NOT A CROOK

Legal experts say illegal backdating cases are hard to
prove in the absence of a smoking gun like an incriminating
email due to the difficulties of proving intent.

The highest-profile executive to be accused in a backdating
investigation, Karatz was indicted last March on 20 criminal
counts related to securities fraud.

Karatz’s lawyer, John Keker, told jurors that his client
was a “terrific CEO” who provided great value for
shareholders.

“He built a wonderful legacy at the company and in Los
Angeles,” said Keker. “But the government says that in this one
area of his life he was a willful thief.”

“If the government is going to take a law-abiding citizen
and turn him into a thief … wouldn’t you want to have strong
evidence before you push him over a cliff?” he asked.

The defense case hinges on the trustworthiness of Gary Ray,
KB Homes’ former head of human resources who testified for the
government after making a plea deal with prosecutors that is
expected to keep him out of prison.

Ray’s testimony under oath that he conspired with Karatz in
the backdating scheme — which contrasted with his earlier
statements to investigators — was unreliable and comprised of
“concoctions,” Keker said.

Karatz’s legal team brought in well-known local celebrities
to act as character witnesses for Karatz. Both former Los
Angeles Mayor Richard Riordan and billionaire philanthropist
Eli Broad — a co-founder of KB Home — defended Karatz’s
integrity at the trial.

In 2007, KB Home restated financial documents and
recognized more than $30 million in compensation expense.

A year later, Karatz settled an SEC civil lawsuit over the
alleged backdating, paying more than $7 million without
admitting or denying any wrongdoing.

He made $232 million in compensation, much from stock
awards, over his last three years at KB Home, when the share
price doubled from the end of 2003 to the end of 2005.

The case is USA v. Karatz, U.S. District Court, Central
District of California, No. 09-00203.
(Writing by Alexandria Sage; Editing by Dan Whitcomb, Richard
Chang and Matthew Lewis)

Karatz, once one of America’s highest-paid executives,
failed to inform KB Home’s chief financial officer or other top
executives that he was engaged in hindsight pricing and
repeatedly lied to internal auditors, Assistant U.S. Attorney
Paul Stern said during closing remarks in Karatz’s trial on
securities fraud charges.

“The question you have to answer is why wasn’t Mr. Karatz
more forthcoming?” Stern asked the jury in the trial in federal
court in Los Angeles. “Mr. Karatz knew all along that what he
was doing was wrong, that he was committing a fraud on the
company, on investors. That’s why in 2006 he blatantly denied
what he was doing.”

“Mr. Karatz called all the shots. … He was the one who
was reaping the most benefit,” Stern said, adding that it took
a long time to discover the illegal activity because “Mr.
Karatz was trying to hide it.”

Stern told jurors the fraud committed by Karatz, which
allegedly began in 1999, was tantamount to “giving himself
extra pay.”

The month-long trial is seen as a test of government
efforts to crack down on the financial crime of illegal stock
option backdating, where stock options are retroactively dated
to boost gains to employees but not disclosed to shareholders.

Karatz, 64, sat quietly between his attorneys at the
defense table, wearing in a blue suit and striped tie, his
hands folded and looking straight ahead, occasionally glancing
at the prosecutor.

Karatz served as the chief executive of KB Home for 20
years before stepping down in 2006 amid the backdating scandal
that embroiled many companies midway through the decade as the
government targeted financial fraud.

DEFENSE SET TO ADDRESS JURY

More than 170 companies faced investigations by U.S.
authorities or conducted internal probes into possible
manipulation of stock-option grant dates.

The most high-profile executive to be accused in a
backdating investigation, Karatz was indicted last March on 20
criminal counts related to securities fraud.

Starting in 1999, prosecutors say, Karatz departed from KB
Home’s previous system of setting options prices for employees
on the date of the company’s compensation committee meeting and
instead began looking back four to six weeks after the meeting
for a low price.

The government claims these backdated options with
discounted exercise prices allowed Karatz to reap millions of
dollars in compensation that were never disclosed or recorded
as compensation expense.

Backdating is a practice of locking in financial gains by
retroactively pricing option grants on days when a company’s
stock price was low, thereby increasing the value of options.
It is legal when recorded as a non-cash compensation expense.

The defense is expected to address the jury for the last
time on Thursday afternoon.

Karatz’ legal team brought in well-known local celebrities
to act as character witnesses for Karatz. Both former Los
Angeles Mayor Richard Riordan and billionaire philanthropist
Eli Broad — a co-founder of KB Home — defended Karatz’s
integrity at the trial.

Other executives from KB Homes testified that they were
unaware that the company’s backdating practices could be
construed as illegal.

Defense attorneys unsuccessfully tried to get the case
thrown out, arguing that two prosecution witnesses changed
their testimony under pressure from the government.

In 2007, KB Home restated financial documents and
recognized more than $30 million in compensation expense.

A year later, Karatz settled an SEC civil lawsuit over the
alleged backdating, paying more than $7 million without
admitting or denying any wrongdoing.

He made $232 million in compensation, much from stock
awards, over his last three years at KB Home, when the share
price doubled from the end of 2003 to the end of 2005.

The case is USA v. Karatz, U.S. District Court, Central
District of California, No. 09-00203.

(Writing by Alexandria Sage; Editing by Dan Whitcomb and
Richard Chang)

Karatz, once one of America’s highest-paid executives, failed to inform KB Home’s chief financial officer or other top executives that he was engaged in hindsight pricing and repeatedly lied to internal auditors, Assistant U.S. Attorney Paul Stern said during closing remarks in Karatz’s trial on securities fraud charges.

“The question you have to answer is why wasn’t Mr. Karatz more forthcoming?” Stern asked the jury in the trial in federal court in Los Angeles. “Mr. Karatz knew all along that what he was doing was wrong, that he was committing a fraud on the company, on investors. That’s why in 2006 he blatantly denied what he was doing.”

“Mr. Karatz called all the shots. … He was the one who was reaping the most benefit,” Stern said, adding that it took a long time to discover the illegal activity because “Mr. Karatz was trying to hide it.”

Stern told jurors the fraud committed by Karatz, which allegedly began in 1999, was tantamount to “giving himself extra pay.”

The month-long trial is seen as a test of government efforts to crack down on the financial crime of illegal stock option backdating, where stock options are retroactively dated to boost gains to employees but not disclosed to shareholders.

Karatz, 64, sat quietly between his attorneys at the defense table, wearing in a blue suit and striped tie, his hands folded and looking straight ahead, occasionally glancing at the prosecutor.

Karatz served as the chief executive of KB Home for 20 years before stepping down in 2006 amid the backdating scandal that embroiled many companies midway through the decade as the government targeted financial fraud.

DEFENSE SET TO ADDRESS JURY

More than 170 companies faced investigations by U.S. authorities or conducted internal probes into possible manipulation of stock-option grant dates.

The most high-profile executive to be accused in a backdating investigation, Karatz was indicted last March on 20 criminal counts related to securities fraud.

Starting in 1999, prosecutors say, Karatz departed from KB Home’s previous system of setting options prices for employees on the date of the company’s compensation committee meeting and instead began looking back four to six weeks after the meeting for a low price.

The government claims these backdated options with discounted exercise prices allowed Karatz to reap millions of dollars in compensation that were never disclosed or recorded as compensation expense.

Backdating is a practice of locking in financial gains by retroactively pricing option grants on days when a company’s stock price was low, thereby increasing the value of options. It is legal when recorded as a non-cash compensation expense.

The defense is expected to address the jury for the last time on Thursday afternoon.

Karatz’ legal team brought in well-known local celebrities to act as character witnesses for Karatz. Both former Los Angeles Mayor Richard Riordan and billionaire philanthropist Eli Broad — a co-founder of KB Home — defended Karatz’s integrity at the trial.

Other executives from KB Homes testified that they were unaware that the company’s backdating practices could be construed as illegal.

Defense attorneys unsuccessfully tried to get the case thrown out, arguing that two prosecution witnesses changed their testimony under pressure from the government.

In 2007, KB Home restated financial documents and recognized more than $30 million in compensation expense.

A year later, Karatz settled an SEC civil lawsuit over the alleged backdating, paying more than $7 million without admitting or denying any wrongdoing.

He made $232 million in compensation, much from stock awards, over his last three years at KB Home, when the share price doubled from the end of 2003 to the end of 2005.

The case is USA v. Karatz, U.S. District Court, Central District of California, No. 09-00203.

(Writing by Alexandria Sage; Editing by Dan Whitcomb and Richard Chang)

Karatz appeared in federal court in Los Angeles on Thursday
as prosecutors began their latest case against illegal stock
option backdating, or the practice of retroactively dating
options awarded to employees.

Prosecutors are hoping for a high-profile victory after a
case against telecommunications company Broadcom Corp <BRCM.O>
was dismissed in December for prosecutorial misconduct.

The brash, motorcycle-driving Karatz sat silently beside
his attorneys, hands folded on a table.

Karatz rode the U.S. housing boom for two decades as chief
executive of KB Home, becoming one of the highest-paid
executives in the United States.

“He stole $6 million without shareholders knowing it. He
padded his pay between 1999 and 2005. When asked about it, he
lied,” Assistant U.S. Attorney Alex Bustamante said in opening
remarks.

He said Karatz had created a “false report” to cover up his
crime and quashed an internal investigation at KB Home.

“You need to find him accountable for his greed and convict
him on all charges,” Bustamante said.

Karatz’s attorney, John Keker, countered that Karatz
believed he was correctly following the company’s option plan.

“The evidence is going to show that everyone involved …
including Bruce Karatz, thought they were playing by the rules.
It was legal by the rules as they existed at the time,” Keker
said.

Karatz’s trial is one of the highest profile cases brought
by the government against an executive accused of backdating.

Karatz was indicted last March on 20 criminal counts
including securities fraud, wire fraud and making false
statements.

Prosecutors have said Karatz schemed to hide from the
company and shareholders illegal backdating that resulted in
him and others receiving below-market exercise prices for stock
options.

They claim that millions of backdated options with
discounted exercise prices allowed Karatz to reap millions of
dollars in compensation that were never disclosed or recorded
as compensation expense.

The backdating of stock options grants, used extensively to
attract and retain top talent, became a major issue in 2007,
with more than 170 companies investigated by U.S. authorities
or conducting internal inquiries into possible manipulation of
stock-option grant dates.

Backdating is a practice of locking in financial gains by
retroactively pricing option grants on days when a company’s
stock price is low, increasing the value of the options. It is
legal when recorded as a non-cash compensation expense.

Bustamante pointed out that Karatz was an attorney with a
securities background and said Karatz would have reaped profit
of nearly $11 million had he exercised all the backdated
options. He said the actual profit was $6.6 million.

Keker told the jury that Karatz had not randomly hunted for
low strike prices, but confined strike price choices to a
defined window of time after the company’s compensation
committee met to decide how many options would be granted.

“The compensation committee told management they should
pick an advantageous date in the options grant practice
window,” Keker said.

He said that Gary Ray, who was the head of human resources,
believed the company’s practices were lawful.

Keker said that Ray, who is cooperating with prosecutors
after pleading guilty to conspiring with Karatz to lie during
an internal investigation, was terrified of prison and met
prosecutors 17 times for up to six hours at a time.

The defense is trying to show that under pressure from
prosecutors Ray changed his testimony to stay out of prison.

In 2007, KB Home restated financial documents and
recognized more than $30 million in compensation expense. It
had to pay $60 million to the Internal Revenue Service,
Bustamante said. Karatz, CEO since 1986, stepped down in late
2006.

In 2008, Karatz settled an SEC civil lawsuit over the
alleged backdating, paying more than $7 million without
admitting or denying any wrongdoing.

He made $232 million in compensation, much from stock
awards, over his last three years at KB Home, when shares
doubled from the end of 2003 to the end of 2005.

The case is USA v. Karatz, U.S. District Court, Central
District of California, No. 09-00203.
(Writing by Alexandria Sage; Editing by Edwin Chan and Matthew
Lewis)

Karatz appeared in federal court in Los Angeles on Thursday
as prosecutors began their latest case against illegal stock
option backdating, or the practice of retroactively dating
options awarded to employees.

Prosecutors hope for a high-profile victory after the
latest government-led attempt to punish executives for
backdating — a case against telecoms firm Broadcom that was
dismissed for prosecutorial misconduct — fizzled.

The brash, motorcycle-driving Karatz, who rode the boom in
U.S. housing for two decades at the helm of the homebuilder to
become one of the nation’s highest-paid executives, sat
silently beside his attorneys, hands folded on a table.

“He stole $6 million without shareholders knowing it. He
padded his pay between 1999 and 2005. When asked about it, he
lied,” Assistant U.S. Attorney Alex Bustamante said during
opening statements.

Karatz created a “false report” to cover up his crime and
quashed an internal investigation at the company, the
prosecutor told the jury.

“You need to find him accountable for his greed and convict
him on all charges,” Bustamante said.

Karatz’s attorneys have said his actions were lawful.

His trial is one of the highest-profile cases to date
against an executive accused of backdating brought by the
government, whose efforts to secure convictions have faltered.
In December, a federal judge dismissed all charges against the
top former executives of Broadcom Corp <BRCM.O>, on grounds of
prosecutorial misconduct.

Karatz, who served for two decades as KB Home’s CEO, was
indicted last March and charged with 20 criminal counts,
including multiple counts of securities fraud, wire fraud and
making false statements.

SCHEMING

Prosecutors say Karatz engaged in a scheme to hide from the
company and shareholders illegal backdating that resulted in
Karatz and others receiving below-market exercise prices for
stock options.

Millions of backdated options with discounted exercise
prices allowed Karatz to reap millions in compensation that
were never disclosed nor recorded as compensation expense, the
government says.

The backdating of stock options grants — used extensively
to lure and retain top talent — became a major issue in 2007,
with more than 170 companies investigated by U.S. authorities
or conducting internal inquiries into possible manipulation of
stock-option grant dates to benefit recipients.

Backdating is a practice of locking in financial gains by
retroactively pricing option grants on days when a company’s
stock price is low, increasing the value of the options. It is
legal when recorded as a non-cash compensation expense.

Bustamante, who pointed out that Karatz was an attorney
with a securities background, said the former CEO would have
reaped profit of nearly $11 million had he exercised all the
backdated options. Actual profit was $6.6 million, he said.

KB Home in 2007 restated its financial documents and
recognized more than $30 million in compensation expense. It
had to pay $60 million to the Internal Revenue Service, said
Bustamante.

Karatz, CEO since 1986, stepped down in late 2006.

In 2008, the executive settled a SEC civil lawsuit over the
alleged backdating, paying more than $7 million without
admitting no denying wrongdoing.

The executive made $232 million in compensation — much
from stock awards — over his last three years at KB Home, when
shares rose 100 percent from the end of 2003 to the end of
2005.

Attorneys for Karatz have argued in court documents that
the compensation committee chair at KB Home and the head of
human resources both believed the company’s stock option grant
practices were lawful. But both changed their testimony under
pressure from prosecutors.

The case is USA v. Karatz, U.S. District Court, Central
District of California, No. 09-00203.
(Writing by Alexandria Sage; Editing by Edwin Chan and Matthew
Lewis)

A federal court dismissed a lawsuit led by the New York City Employees’ Retirement System, finding among other things, that investors had not shown a link between stock dilution caused by the plan and their losses, the opinion said.

The 9th U.S. Circuit Court of Appeals upheld that finding but determined the lower court had erred in denying investors the chance to amend their lawsuit to include a potentially viable claim asserted in an earlier version of the suit.

An Apple spokesman could not be reached for comment.

The plaintiffs’ lawyer, Michael Barry, said his clients plan to reassert a claim for securities fraud in place of the proxy violation claim that was dismissed.

“We are very pleased with the result at the 9th Circuit,” Barry said. “Obviously, I would have liked it if they had agreed with us on the economic loss causation.

The lawsuit was prompted by Apple’s $105 million restatement of financial results to account for thousands of backdated stock options grants between 1997 and 2002.

Investors contended that they unwittingly authorized the issuance of 205 million shares, or 20 percent of Apple’s stock float, as a result of misleading statements in a 2005 proxy about the company’s stock options plan.

The dismissed suit sought reversal of the shareholders’ votes, compensatory damages for share dilution, a court-ordered accounting and declaration that the defendants are liable for damages, the opinion said.

Backdating involves setting a stock option price at a date in the past rather than the date it is issued and is legal when companies account for the price disparity in their books.

Apple was among about 170 U.S. companies touched by a government backdating probe that produced a flurry of internal investigations and a handful of civil settlements since 2006.

The U.S. Securities and Exchange Commission sued Apple’s former General Counsel Nancy Heinen and former Chief Financial Officer Fred Anderson over backdating-related claims in 2007. Both paid fines to settle the lawsuits without admitting wrongdoing.

The case is: New York City Employees’ Retirement System v. Steven P. Jobs et al, Case No. 08-16488, 9th U.S. Circuit Court of Appeals.

(Reporting by Gina Keating; Editing by Richard Chang)

Netflix said last quarter that it would launch a small, streaming-only operation in one country in the second half of 2010, and learn from it before moving into other markets.

“We are focused on entering one country and seeing how we do. Because we are launching in the second half of the year I don’t think we could do a second country this year,” Chief Executive Reed Hastings told Reuters.

Hastings declined to identify the market but hinted at how a roll-out might happen.

“The big market for Hollywood content (after the U.S.) is Europe…Third is Asia. Fourth is the rest of the world,” Hastings told Reuters. “Canada is and was an option. It’s sort of international-lite.”

Since launching its U.S. streaming service in 2007, Netflix has focused on piggybacking on devices with a large installed bases — Blu-ray DVD players, gaming consoles, PCs — and the international service will start the same way, he said.

“The biggest installed base is laptops. They are pretty ubiquitous,” Hastings said when asked what user population the new service targets. And video game consoles, if you are talking about the most advanced countries, he said.

Hastings said Netflix content managers are cutting separate deals for the international territory leading up to the launch, which he will talk about publicly in September or October, but gave no word of how large the title selection will be.

Nor would he comment on whether the company faces any major competition in the new market, but indications are that Netflix expects little resistance to its initial foray.

“(The new service) is compatible with our (forecasts for a) global 11 percent operating margin,” Hastings said.

BIG DIFFERENCE

Netflix was the pioneer of online movie rental and a fast-growing darling of tech investors when it shuttered its U.K. DVD-by-mail service weeks before its 2004 launch to respond to a challenge by Blockbuster Inc and rumors that Amazon.com Inc would enter the space.

The company lost about $10 million in the aborted endeavor as well as short-term hopes for easy subscriber growth fueled by access to international markets.

After a grueling, years-long price war that seriously wounded Blockbuster, and claimed Movie Gallery as collateral damage, Netflix emerged stronger and bigger with a streaming option that is cheaper and easier to deploy abroad.

Movie Gallery, once the second largest store-based rental chain, lost market share to the battling online services and filed for bankruptcy in 2007. Movie Gallery is preparing to file again, according to the Wall Street Journal on Wednesday.

“The big difference is we were entering with DVDs only (in 2004),” Hastings said on Wednesday. “It’s streaming only (now). That’s a big difference — no warehouses, no integration with the Royal Mail.”

Another difference: Netflix has grown four-fold on a revenue basis — from $501 million in 2004 to a projected $2 billion this year.

“We are a lot bigger when we enter and streaming means less operational complexity — not having to figure out the mail for each country,” he said.

(Reporting by Gina Keating; editing by Carol Bishopric)

Receiver Ralph Janvey, who is charged with recovering assets for Stanford investors, had asked the court to allow CB Richard Ellis to publicly auction the dozens of parcels of properties in the continental United States and U.S. Virgin Islands “in an efficient and cost-effective manner.”

“Marketing efforts will begin immediately,” Janvey said in a statement. “However, the timing of any sale will necessarily depend on … relevant market conditions and debt obligations associated with each property.”

U.S. District Judge David Godbey approved Janvey’s plan but ordered him to notify the Stanford Condominium Owner’s Association if he tries to sell property owned by the Stanford Development Corp, and give residents a chance to object.

Stanford, his former chief investment officer Laura Holt and former accounting executives Gilbert Lopez and Mark Kuhrt and an Antiguan regulator, face criminal and civil charges for defrauding investors in a $7 billion Ponzi scheme involving certificates of deposit.

Stanford, 59, is in jail awaiting a January 2011 trial. Stanford, Holt, Kuhrt and Lopez have denied any wrongdoing.

Although Stanford has yet to be tried, the court “has found good cause to believe that defendants violated federal securities laws,” according to court documents.

The procedures call for the receiver to select a “stalking horse bidder” to set the floor for the public auction price, and to pay a break-up fee of 3 percent should that bidder not prevail, court documents showed.

Competing offers are to be submitted to the receiver at least five days prior to the auction, the documents showed.

Janvey will post a notice of the proposed sales on its website, here, and in at least one local newspaper for at least four weeks prior to the sale, the order said.

The properties to be auctioned are located in various counties in Texas, Michigan, Tennessee, North Carolina, and Mississippi and in the U.S. Virgin Islands.

Janvey also was granted permission to dispose of certain parcels through private sales, the court order showed.

The case is Securities and Exchange Commission v. Stanford International Bank, Case No. 3-09-CV-0298, U.S. District Court for the Northern District of Texas, Dallas. (Reporting by Gina Keating in Los Angeles; Editing Bernard Orr)

The findings in the case involving the $3.7 billion fund
have broad implications for other public pension funds that
appoint trustees from among the beneficiaries, said attorney
Nick Hanna, who represented trustee Cathy Lexin.

“The interpretation of the district attorney of San Diego
was such that if they voted on anything that impacted their own
benefits under the system, then they were committing a felony,”
Hanna, of Gibson Dunn & Crutcher in San Francisco, said.

“What the Supreme Court said was, so long as those benefits
that they are voting on are not unique to them … there is no
conflict and there is no crime,” he said.

San Diego County District Attorney Bonnie Dumanis said in a
statement that her office would “continue to aggressively
pursue conflict of interest matters within our community, as
honest and open government are essential qualities which must
be vigilantly maintained.”

The six trustees were charged in 2005 with violating the
state conflict of interest laws after the city misrepresented
its obligations to the fund in bond issues in 2002 and 2003.

The multiyear scandal prompted state and federal
investigations, class-action lawsuits and the suspension of the
city’s credit rating.

Prosecutors said the six broke the law by voting to let the
city cut funding to the retirement system in exchange for
increasing benefits to city employees, including themselves.

But the high court dismissed the charges against five
trustees, saying they hadn’t committed crimes since their stake
in the vote was the same as that of other city employees.

The court upheld the charge against trustee Ronald
Saathoff, who was seeking enhanced benefits due to his status
as a union president and negotiator.

San Diego City Retirement System (SDCERS) ran into trouble
during the 2001 dot-com bust, when trustees voted to let the
city out of a $25 million balloon payment needed to make up for
previous underfunding and investment losses.

In exchange, the city agreed to increase retirement
benefits for its four municipal unions.

Fallout from the crisis, prompted the mayor’s resignation
and amendments of the city’s charter to change the composition
of the board overseeing the retirement system.

The defendants were Lexin, Saathoff, Mary Elizabeth
Vattimo, Teresa Aja Webster, Sharon Kay Wilkinson and John
Anthony Torres.

The case is Cathy Lexin v. Superior Court of San Diego
County, Case No. S157341, California Supreme Court.
(Reporting by Gina Keating; Editing by Steve Orlofsky)

The lawsuit was filed in San Francisco Superior Court, two weeks after Wells lost its own court bid against the U.S. Internal Revenue Service to claim $115 million in deductions related to “sale in/lease out,” or SILO, shelters.

Wells has a related lawsuit pending in Minnesota federal court to seek SILO-related tax refunds, the complaint said.

A Wells Fargo spokeswoman declined to comment, saying the San Francisco-based bank had not finished reviewing the latest lawsuit.

According to the lawsuit, Wells managers sought to take advantage of the tax shelters in 2002 despite knowing they were about to be outlawed, and then rejected a chance to settle with the IRS during a 2008 amnesty period.

Wells accumulated $1.6 billion in SILO-related assets even after IRS audits in 2002 and 2003 disallowed $162 million in deductions and fined the bank $8 million, the lawsuit said.

“Even when it was known that Congress and the IRS were challenging these aggressive tax shelters, and then formally disallowed them, Wells Fargo was allowed to continue seeking millions of dollars in tax deduction, at great cost and waste of corporate and judicial assets,” according to the complaint filed by Wells investor Robert Marshall.

The shelters call for companies to “buy” assets such as buses and railcars from public agencies, and then “lease” them back while reaping a tax break on the purchases and income.

A similar vehicle, known as “lease in/lease out,” was outlawed in 2002.

The defendants including Chairman and Chief Executive John Stumpf, his predecessor Richard Kovacevich, and board members Enrique Hernandez, Cynthia Milligan, Philip Quigley, Judith Runstad, Susan Swenson, Lloyd Dean, Nicholas Moore, Susan Engel, Donald James, Richard McCormick and Stephen Sanger.

The shareholder derivative action, brought by Marshall and other investors on behalf of Wells Fargo against its managers, seeks the return of unspecified damages to the company.

The case is Marshall v. Kovacevich et al, San Francisco Superior Court, No. 10-496137.

(Reporting by Gina Keating; Editing by Richard Chang)