Core Wealth Receives $42 Million Verdict – Santa Barbara News-Press

Businessman, company awarded $42M in civil suit

January 7, 2007

A Santa Barbara jury awarded a nearly $42 million verdict to local businessman Michael Klein and his company, Core Wealth Management, in a Superior Court civil trial that lasted almost two months and concluded Thursday.

The case revolved around allegations that five former employees of Mr. Klein had plotted to steal confidential information and clients from Core Wealth, of which Mr. Klein was chief executive officer and sole owner, and form their own competing company. The five all quit on the same day, May 5, 2004, while Mr. Klein was out of the country on a business trip, according to court records.

The jury was dismissed Thursday afternoon after deciding on no punitive damages for either side in the case, after having awarded Mr. Klein $41,734,727 in compensatory damages in a verdict Dec. 22 in Judge James W. Brown’s courtroom.

Everyone on both sides was ordered by the court not to speak about the case until after the jury acted on possible punitive damages.

During instructions to jurors on Dec. 19, Judge Brown advised them that Core Wealth claimed it was harmed by the defendants’ “conspiracy to misappropriate the trade secrets and customer lists of Core Wealth Management,” among other claims. Full details of those instructions and closing arguments by both sides are detailed in a 331-page transcript.

Of the six defendants in the case — Ronald Heller, Timothy Gramatovich, Heather Rupp, Peritus 1 Asset Management, Fred Rifkin and Edgar A. Robie Jr. — four countersued Mr. Klein. The “cross-complainants,” Mr. Heller, Mr. Gramatovich, Ms. Rupp and Peritus, were claiming that Mr. Klein committed conduct with malice, oppression or fraud, according to the transcript.

Representing Mr. Klein was A. Barry Cappello, Matthew Clarke and Dugan Kelley, with the Santa Barbara law firm of Cappello & Noel. The defendants were represented by Jamie Broder with the Los Angeles firm of Paul, Hastings, Janofsky & Walker, assisted by Timothy Metzinger of the Santa Barbara firm of Price, Postel & Parma.

“Obviously, after the wrongdoing that these folks were engaged in, it is gratifying to have this behind us and to have 12 independent, honorable people come to the same conclusion that has been our belief for the last two and one-half years since the events took place,” Mr. Klein said.

“The jurors were in a very long trial,” he said. “It’s an awful lot to ask of a jury to spend eight weeks of their life and then after the holidays to come back. . . . I think they did a great job and it was not an unexpected outcome.”

Mr. Heller, a key defendant in the case, did not return several phone calls seeking comment. The former National Football League tight end achieved a career highlight playing in 1989’s Super Bowl XXIII with the San Francisco 49ers, who defeated the Cincinnati Bengals 20-16. Then, in later years, Mr. Heller succeeded as a senior portfolio manager.

Speaking for Mr. Heller, attorney Ms. Broder said they were “probably not going to be able to comment too much because this is still pending.”

Ms. Broder said she is preparing post-trial motions that will be filed within the next few weeks with Judge

Brown, seeking to reverse or reduce the verdict.
“We have to see what the judge says to the verdict,” Ms. Broder said. “The entire picture could change in the next month.”

In retrospect about the case, Mr. Cappello described Mr. Klein as having grown up in Santa Barbara, “a very bright boy” who graduated from college at the age of 17. Then, Mr. Klein achieved success in the software industry, “and got out when the smart ones got out and didn’t get caught in the bust,” Mr. Cappello said.

Later, Mr. Klein had funds to invest in a local financial advisory company, Peritus Asset Management, owned by Mr. Heller and Mr. Gramatovich, according to Mr. Cappello.

At one point in their business dealings, Mr. Klein loaned the two men money, which they reportedly could not pay back, so he foreclosed and took over that company. Then, he offered to hire both men at his new company, Core Wealth, along with Ms. Rupp, an investment analyst, in 2002.

“The company was extraordinarily successful, but by late 2002, early 2003, Gramatovich and Heller started to . . . secretly plot setting up another company and taking the assets of Core Wealth, as well as the company employees and trade secrets,” Mr. Cappello said.

As the plot thickened, the defendants claimed “that they had a secret oral partnership agreement with Michael Klein that they were going to be partners in Core Wealth,” Mr. Cappello said. “They were never able to demonstrate, not a note, not an e-mail, not a letter, nothing, not a piece of paper. There was not even another witness that said I heard a conversation where Michael said they would be his partners.”

The defendants also sued Mr. Klein for $24 million, claiming they were entitled to the bonuses on bonds they had allegedly stolen from the company, according to Mr. Cappello.

The case filed on behalf of Mr. Klein focused on alleged breach of contract; violation of Penal code section 509, which prohibits taking, using or accessing the files of someone else’s computer; for allegedly stealing trade secrets and confidential information; breach of fiduciary duty; and for allegedly stealing the trade name “Peritus,” according to Mr. Cappello.

“They countersued us for this oral partnership agreement that they claimed existed and for the bonuses they claimed they were entitled to, even though they stole all our files and quit our company,” Mr. Cappello said. “And the bonus plan said you were not entitled to bonuses if you quit.”

One defendant, Ms. Rupp, did receive $70,000 as part of the jury’s verdict, because she was due an unpaid bonus from 2002.

The $41,734,727 verdict was against all the defendants, who are liable for it, and there is no insurance, “so it’s going to be the assets of the individuals and the companies that will have to pay it,” Mr. Cappello said.

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