Federal prosecutors accused of misconduct in backdating case against former KB Home chief

Prosecutors accused of misconduct in KB fraud case

LOS ANGELES — The former head of building giant KB Home asked a federal judge to look into alleged prosecutor wrongdoing in his stock-options backdating case, citing two similar cases that were tossed out last year because of official misconduct.

U.S. District Judge Otis Wright was scheduled Tuesday afternoon to consider that motion and about 20 others filed by lawyers for Bruce E. Karatz.

Karatz, 63, pleaded not guilty in March to 19 counts, including mail, wire and securities fraud and making false statements in reports to the Securities and Exchange Commission. He remains free on bond and could face up to 415 years in prison if convicted of all charges.

Prosecutors contend that Karatz acted illegally in retroactively setting stock-option exercise prices to a low point in the stock’s value. The maneuver, known as backdating, can boost profits when the shares are sold. lt is legal when properly accounted for, but if not properly disclosed it can allow companies to overstate profits and underpay taxes.

Karatz, 63, was forced to step down in 2006 after KB discovered that he benefited from favorably dated option awards between 1998 and 2005. He agreed to repay the company $13 million.

Karatz agreed to pay another $7.2 million in September to settle civil charges of backdating stock options but did not admit any wrongdoing.

In one of their motions, Karatz’s lawyers asked the judge to explore allegations that federal prosecutors bullied or tricked two witnesses into making damaging statements against their client in government interviews. Their motion cited findings of prosecutorial misconduct that led federal courts last year to toss out criminal convictions in stock-backdating cases against William Ruehle, former chief financial officer of Broadcom Corp., and Gregory Reyes, former chief executive of Brocade Communications Systems, Inc.

Prosecutorial misconduct also was cited by an Orange County judge who threw out prosecutions against Broadcom co-founders Henry Samueli and Henry T. Nicholas III.

The U.S. attorney’s office called the Karatz allegation “bogus” in a court document opposing the motion and said there was no connection to the other cases.

Karatz “offers only his own fanciful, self-serving inferences of alleged witness intimidation to explain why the two witnesses have provided statements adverse to him,” the reply argued.

One witness was identified as Gary A. Ray, former KB Homes head of human resources. He pleaded guilty last year to conspiring to obstruct justice by causing KB Home to file a false report on its option-granting practices in a bid to avert an SEC probe. He is awaiting sentencing.