One of California's highest-paid executives, KB Home chief Bruce Karatz, was ousted Sunday, becoming the latest casualty in a national scandal over the manipulation of lucrative stock option grants.
The Los Angeles-based home-building company said an internal investigation by its board concluded that from 1998 to 2005, Karatz had a direct role in setting "incorrect" dates for stock option grants that inflated their value for himself and other executives.
Karatz, 61, has reaped hundreds of millions of dollars running the fifth-biggest U.S. home builder, much of which came in recent years from cashing in stock options awarded for his performance during the recently ended housing boom. Last year, he took in $155 million, mostly from options, on an annual salary of $1 million. On Sunday, KB Home said Karatz had agreed to repay the company $13 million and retire effective immediately.
Karatz becomes one of the highest-profile executives to be fired in the option scandal. More than 150 U.S. companies are under internal or external investigations of alleged efforts to inflate the value of option grants, which are often used by companies to provide top performers a chance to profit from rises in a company's stock price.
Many of the probes have focused on so-called backdating, in which the dates on grants are timed to coincide with low points in the stock price. Doing so increases the potential profit for the recipient.
The company was careful to say that the investigation didn't reach any conclusion about whether there was intentional wrongdoing on Karatz's part.
KB Home on Sunday named Jeffrey T. Mezger, 51, the company's chief operating officer, to succeed Karatz. It also fired another executive, and a third executive resigned.
The Karatz ouster ends the career of one of the Southland's longest-serving corporate leaders, who directed the transformation of a mid-size regional firm into a national powerhouse. The firm, formerly named Kaufman & Broad, also was an instrumental player in the suburbanization of Southern California, building affordable tract homes throughout the region.
A 34-year veteran of the company, Karatz had served as CEO since 1986.
"I am extremely proud of everything that the entire KB team and I have accomplished over the past 20-plus years," Karatz said in a statement. He declined to comment further.
Option grants are rights to buy stock at a set price within a certain time period. They have become widely used over the last three decades as a compensation tool in corporate America, for executives and for rank-and-file employees.
But over the last year internal company investigations and probes by federal authorities have uncovered widespread manipulation of option grants as far back as the early 1990s.
Securities regulations generally require that the purchase price of an option be the stock's market price on the day the option is granted by the company's board.
It now appears that many companies engaged in backdating of option grants -- looking back weeks or months for a date when the stock was trading at its lowest price, say, for that quarter.
Backdating can be legal if it's disclosed to shareholders. But it appears that few if any companies that engaged in the practice ever disclosed it publicly. That opens executives to civil, and possibly criminal, securities fraud charges, unless they can show that the practice simply resulted from sloppy bookkeeping.
The hard-driving Karatz is considered one of the building industry's most successful -- and charismatic -- leaders. Under his management, KB Home has largely shaken its reputation as a builder of entry-level homes and grown into a builder with international presence that constructs a wide variety of projects, including high-rise condos, master-planned suburban communities and multimillion-dollar mansions with golf course views.
Last year, KB built more than 37,000 homes in the U.S. and France and posted nearly $10 billion in sales. It has 6,700 employees.
Founded by Eli Broad and partner Don Kaufman in Detroit in 1957, Kaufman & Broad set out to build entry-level homes that were affordable for a wider range of the public. The company started building homes in Phoenix a few years later, and in 1961, moved its headquarters to Los Angeles to build homes in Southern California.
The company was prolific, and by 1977, it had built 100,000 homes. It launched so many housing projects that Kaufman & Broad became a symbol of the new suburban tract houses that still dominate the region's home building today.
Karatz brought to the company a flair for marketing and image-building. He once built a life-size replica of the Simpsons' cartoon house in Las Vegas. Recently, the company has partnered with Martha Stewart to build homes, and the company built a 3,000-square-foot home for a family on the television series "Extreme Makeover: Home Edition."
