Defense lawyers take aim on plea deal received by witness in KB Home stock backdating case

Defense blasts witness plea deal in KB Home case

LOS ANGELES — Defense lawyers took aim Friday on the credibility of a witness who pleaded guilty to conspiracy in a deal with prosecutors then testified during the stock backdating trial of former KB Home chief Bruce Karatz.

In closing arguments, attorneys for Karatz sought to portray former KB Home human resources head Gary Ray as untrustworthy and eager to satisfy federal prosecutors in exchange for a lighter sentence.

Defense lawyer John Keker told jurors the plea deal cast doubt on the government’s case.

“I am not asking you for favors, I am not asking you for mercy. I’m asking you to do the right thing,” Keker said. “The government has not proven its case beyond a reasonable doubt.”

Prosecutors countered that Ray’s testimony was corroborated by other witnesses and evidence.

Karatz, 64, has pleaded not guilty to 20 counts, including mail, wire and securities fraud, lying to company accountants and making false statements in reports to the Securities and Exchange Commission.

He is accused of illegally backdating stock options in a scheme that earned him more than $6 million.

Prosecutors said Karatz retroactively listed his KB Home stock purchases as occurring on dates when the price was low, allowing him to later sell at a higher profit.

That’s not illegal if it’s disclosed to investors, but prosecutors claim Karatz tried to conceal it.

Ray pleaded guilty last year to conspiracy to obstruct justice and agreed to testify for the prosecution.

During the trial, he said Karatz benefited from a 1999 shift in company policy for awarding stock options that he helped engineer.

The shift was made without the knowledge of the KB Home compensation committee, and Karatz later tried to hide it from investigators, Ray testified.

In his instructions, U.S. District Judge Otis Wright warned jurors to treat Ray’s testimony with caution.

“You should consider that Mr. Ray’s testimony may have been influenced by his having entered into a plea agreement” that grants him leniency in sentencing in exchange for cooperation, Wright said.

The proceedings ended for the day without the panel beginning deliberations.

Karatz remained free on bond.

Karatz, Ray and another KB Home executive were forced out in 2006 after the Los Angeles-based homebuilder discovered stock options had been favorably dated between 1998 and 2005.

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