Karatz Gets Probation for KB Home Backdating Over Prosecutors' Objections

Bruce Karatz, the KB Home ex-chief convicted of hiding backdated stock options from auditors and regulators, was sentenced to five years of probation by a federal judge who rejected prosecutors’ call for prison time.

U.S. District Judge Otis D. Wright II, at a hearing yesterday in Los Angeles, ordered the former chief executive officer to pay a $1 million fine, serve eight months of home detention with electronic monitoring and perform 2,000 hours of community service.

Wright said he had “lost a lot of sleep over the right thing to do in this case.” He said his decision on how to punish Karatz was consistent with federal sentencing guidelines and his own record of not meting out prison time to defendants with no criminal record and no history of violence.

In April, Karatz, 65, was found guilty by a jury of two counts of mail fraud and two counts of making a false statement. The conviction stemmed from Karatz’s actions in 2006 during an internal investigation of backdated options. He was acquitted of 16 charges, including securities fraud, related to the actual options prosecutors said he illegally backdated.

The judge acquitted him of one count of mail fraud on Oct. 15, finding that prosecutors had failed to provide evidence that a misleading report on the homebuilders’ process of picking option dates had been sent to KB Home’s auditors by mail.

Prosecutors said in an Oct. 14 filing that sentencing Karatz to home detention at his 24-room mansion in Bel Air, California, would suggest that there is a two-tier justice system in which well-connected chief executives can break the rules with virtual impunity.

‘Wealthy’ Defendant

“To promote respect for the law, the public must be assured that a wealthy, well-connected individual, regardless of his station, array of prominent friends and associates, history of private success or acts of public largesse, will be subject to the same standard of criminal justice as those less fortunate,” prosecutors said in the filing.

Wright yesterday called the government’s remarks “mean- spirited and beneath this office.”

“But what was even more disturbing was the inflammatory language in the government’s report that if this court did not impose a harsh sentence that it was evidence of a two-tiered justice system, one of the rich and one for everyone else,” the judge said.

The hearing was attended by about 50 people, mostly well- wishers for the defendant, who cried as he was being sentenced.

Karatz declined to speak to reporters afterwards.

‘We’re Relieved’

“We were nervous,” his attorney, Elliot Peters, said after the sentencing. “He was acquitted of 17 of 20 counts. He’s 65 and they were trying to put him in prison for six years. We’re relieved and we have a great deal of respect for the judge.”

Assistant U.S. Attorney Paul Stern, whose office was seeking a 6 1/2-year prison term for Karatz, said, “We respectfully disagree with the judge’s decision.” He declined to comment further.

Los Angeles billionaire and philanthropist Eli Broad, who co-founded homebuilder Kaufman & Broad Inc., which became KB Home in 2001, was a character witness for Karatz at the trial.

Karatz, who was chief executive officer of Los Angeles- based KB Home from 1986 until 2006, was accused of making about $6.62 million more than he was he entitled to, from 1999 to 2005, by retroactively picking the dates he was to have received stock options grants.

One of Karatz’s lawyers, John Keker, said during the trial that there was no criminal intent because nobody at KB Home believed they were doing anything wrong at that time. It isn’t illegal to pick a grant date for stock options different from the date the compensation committee decides on them, and the accounting rules weren’t clear, the lawyer said.

The case is U.S. v. Karatz, 09-00203, U.S. District Court, Central District of California (Los Angeles).

To contact the reporters on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net; Tori Richards in Los Angelest .

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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