Former KB Home chief Bruce Karatz convicted of 4 counts in stock option backdating scheme

KB Home ex-CEO convicted in $6M stock option scam

LOS ANGELES — The chief executive who helped build KB Home into one of the country’s largest homebuilders was convicted Wednesday of four felony counts in a stock scheme that prosecutors say netted him $6 million.

A federal jury in Los Angeles found Bruce Karatz guilty of two counts of mail fraud, one count of lying to company accountants and one count of making false statements in reports to the Securities and Exchange Commission.

Karatz was acquitted on 16 other counts, including three counts of securities fraud, the most serious charges against him.

The 64-year-old former CEO showed no emotion as the verdicts were read. He remains free on bond and faces up to 80 years in prison when he is sentenced Sept. 8, prosecutors said.

Defense attorney John Keker said he was disappointed at the four convictions despite his client’s acquittal on the other charges. He planned to file a motion for a new trial.

“The jury got 80 percent of it right,” he said. “We will continue to fight those counts because he’s innocent of them. We are planning on Mr. Karatz’s eventual vindication of the last 20 percent of this case.”

It was the third time that top officials of high-flying California companies had been accused of criminally manipulating stock options. In March, former Brocade Communications Inc. CEO Gregory Reyes was convicted of nine counts of fraud and making false statements in connection with options backdating at the networking gear maker.

Reyes was originally convicted of similar charges in 2008 but an appeals court ordered a new trial, citing prosecutorial misconduct.

Last year, a federal judge in Orange County threw out similar cases against Broadcom Corp. co-founders Henry Samueli and Henry T. Nicholas III and Chief Financial Officer William Ruehle because of mistakes by prosecutors.

U.S. District Judge Otis Wright refused to allow Karatz’s attorneys to pursue similar misconduct claims, saying he found no evidence of wrongdoing.

Prosecutors claimed Karatz made some $6 million by illegally backdating stock options between 1998 and 2005 while he was chairman and chief executive of Los Angeles-based KB Home.

A stock option allows an employee to purchase a company’s stock at a preset price at a future date. Karatz retroactively tied the exercise price of his options to dates when the stock was selling for a low price, which increased his profit when he sold the shares.

The maneuver is legal if it is properly accounted for and disclosed to investors. Otherwise, it can allow companies to overstate profits and underpay taxes.

The counts Karatz was convicted of stem from mid-2006, when prosecutors say he concealed and lied about his role in the backdating.

At trial, former human resources head Gary Ray said his ex-boss helped engineer and benefited from a shift in company policy for awarding stock options, then tried to conceal his moves from investors.

Karatz’s lawyers argued that he didn’t knowingly break any laws and questioned Ray’s credibility, noting that he pleaded guilty last year to conspiracy to obstruct justice and agreed to testify in return for leniency.

Karatz, Ray and another KB Home executive were forced out in 2006 after the company discovered stock options had been favorably dated between 1998 and 2005. The probe found that no other senior executives had a role in the backdating scheme.

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