Judge: No evidence of misconduct by prosecutors in case against ex-KB Home chief

Judge: No evidence of misconduct in KB Home case

LOS ANGELES — A federal judge indicated Tuesday that he won’t allow the former head of construction giant KB Home to look into alleged wrongdoing by prosecutors in his stock-options backdating case.

U.S. District Judge Otis Wright said in a hearing that Bruce E. Karatz’s lawyers had not convinced him of their claim that prosecutors intimidated two KB Home employees while soliciting testimony in their felony-backdating case against the building company’s former chief.

“I have seen absolutely nothing to indicate there has been any overreaching by prosecutors or any misconduct of any kind,” Wright said.

Wright’s tentative ruling was on the defense team’s request for a preliminary hearing to investigate the alleged misconduct. It was among 20 decisions he issued on which witnesses and evidence to allow in Karatz’s upcoming trial.

Karatz’s lead attorney, John Keker, had no comment on the judge’s tentative decision after the hearing. U.S. attorney’s office spokesman Thom Mrozek also had no comment.

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. It 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 pay some $7 million in September to settle civil charges of backdating stock options but did not admit any wrongdoing.

In one of the motions Wright said he was inclined to reject, Karatz’s lawyers 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.

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.

Wright did not indicate when he would issue a final ruling.

(This version REMOVES incorrect reference to $13 million repayment)