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KB Home’s Bruce Karatz Guilty in Backdating Trial

Former KB Home Chief Executive Officer Bruce Karatz was found guilty by a U.S. jury of hiding from auditors and regulators that he backdated stock options.

Jurors in federal court in Los Angeles today found Karatz guilty of two counts of mail fraud and two counts of making a false statement. He was acquitted of 16 charges, including mail and wire fraud, securities fraud and filing false proxy statements.

Karatz, 64, was accused of unauthorized and undisclosed backdating of stock options that brought him $6.62 million in compensation he wasn’t entitled to from 1999 to 2005. He stepped down as chief executive at Los Angeles-based KB Home in 2006 after 20 years in charge of the homebuilder.

“The jury got 80 percent of it right,” Karatz’s lawyer, John Keker, said outside the courthouse. “We’re very disappointed about the other counts. We’ll continue to fight those.”

Keker said he’ll file requests for acquittal by the judge and for a new trial, and if those fail, he’ll file an appeal. In a separate statement Keker said he was pleased that the jury acquitted Karatz of all charges that alleged backdating.

U.S. District Judge Otis D. Wright scheduled sentencing for Sept. 8 and increased Karatz’s bail to $2 million.

Karatz faces as long as 80 years in prison on the four counts for which he’s been convicted, Thom Mrozek, a spokesman for U.S. Attorney Andre Birotte Jr., said in a statement.

Grants Dates

Keker argued during the trial that Karatz had been authorized by the company’s compensation committee to select the grant dates of the options awarded to him and other executives. Karatz didn’t hide that the option dates weren’t the same as the dates on which the committee awarded them and nobody at KB Home thought there was an issue with that, according to his lawyer.

Prosecutors said Karatz, with the help of KB Home’s former head of human resources, who pleaded guilty and cooperated with the government, selected the dates with the lowest possible price of the options, sometimes weeks after the compensation committee had awarded these, and then lied to an in-house lawyer investigating the options program.

“I will continue to get strength from the support of my family, including my wife, children and grandchildren, good friend and former colleagues,” Karatz said in an e-mailed statement.

SEC Settlement

In September 2008, Karatz agreed to pay almost $7.2 million to settle U.S. Securities and Exchange Commission claims he had used hindsight to pick advantageous dates for options grants. KB Home said at the time of Karatz’s resignation in 2006 that he would repay $13 million to cover gains he shouldn’t have received.

Karatz was paid about $43 million in 2005, including stock option grants, which made him the highest paid homebuilding industry executive in the U.S. KB Home said in February 2007 that it had understated stock-based compensation by $36.3 million from 1999 to 2005.

Karatz’s conviction for the backdating-related charges follows that of former Brocade Communications Inc. Chief Executive Officer Gregory Reyes in San Francisco last month. Reyes was found guilty of nine of the 10 counts he had been charged with, including securities fraud.

Lower Stock Price

Stock options allow holders to buy shares at a later date, usually at the trading price on the day they were granted. Through backdating, companies change the grant date to a day with a lower stock price, giving recipients built-in profits. Unless disclosed and recorded as an expense, the practice is illegal because it hides costs from shareholders and regulators.

In December, a federal judge in Santa Ana, California, threw out the backdating cases against former Broadcom Corp. executives after finding that the prosecutors there had intimidated witnesses to cooperate. Karatz unsuccessfully sought to have his case dismissed for alleged prosecutorial misconduct.

Wright said in February that there was no connection between the Broadcom case and Karatz’s.

The case is U.S. v. Karatz, 09-203, U.S. District Court, Central District of California (Los Angeles).

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