Ex-CEO of KB Home Convicted on Charges Related to Options Backdating

April 22, 2010 (PLANSPONSOR.com) - A federal jury on Wednesday found the former chief executive officer of KB Home guilty of four charges relating to stock options backdating.

Bruce Karatz was convicted in the U.S. District Court for the Central District of California on two counts of mail fraud, one count of making false statements in a quarterly report filed with the Securities and Exchange Commission, and one count of making false statements to KB Home’s accountants, according to the National Law Journal. He was acquitted on five counts of mail fraud, five counts of wire fraud, three counts of securities fraud, and three counts of making false statements in a proxy statement.  

Prosecutors alleged that backdated stock options helped Karatz personally pocket more than $6.5 million between 1999 and 2005. The news report said his lawyers told the jury that everyone, including his client, believed that they were following the rules in the options granting process, often relying on their lawyers and accountants at Ernst & Young.  

The mail fraud counts for which Karatz was convicted relate to a letter sent from KB Home’s management to Ernst & Young and a report on stock option grants prepared by KB Home’s general counsel and delivered to Ernst & Young. The jury also found that Karatz had made false statements in KB Home’s quarterly report in July 2006, as the company was conducting its own investigation of stock options backdating. He was found guilty of having made false statements to Ernst & Young regarding that quarterly report.  

Karatz, who faces up to 80 years in prison, is scheduled to be sentenced on September 8.  

Karatz retired in November 2006 following the results of the company’s independent investigation into stock option grants practices (see KB Home CEO Retires Following Stock Options Investigation). The investigation by the Audit and Compliance Committee of the company’s board of directors found incorrect measurement dates were used for financial reporting purposes during the period from 1998 to 2005. Karatz and Gary Ray, KB Home’s head of Human Resources, selected grant dates under the company’s stock option plans. The board terminated Ray’s employment.