The Securities and Exchange Commission has launched a formal investigation into stock option practices at KB Home, a move that could distract the home builder as it struggles to rebound from a deep housing slump, analysts said.
The probe, which KB disclosed Friday, comes at a crucial time for the Los Angeles-based company. KB Home, along with the rest of the home-building industry, is struggling to bounce back from a steep slide in sales and rapidly eroding profit margins.
For The Record
Los Angeles Times Tuesday January 30, 2007 Home Edition Main News Part A Page 2 National Desk 2 inches; 77 words Type of Material: Correction
KB Home probe: An article in Saturday's Business section reporting that the Securities and Exchange Commission had launched a formal investigation into stock option practices at KB Home stated that the company's chief legal officer was fired in November for his role in the selection of incorrect measurement dates on grants of stock option awards. He wasn't dismissed; he resigned. The company's board concluded that he had played no role in the misdating of stock option grants
A formal SEC probe, which must be approved in a vote by the agency's commissioners, ratchets up regulators' ability to use tough enforcement tools, such as subpoenas, to obtain additional records and compel testimony. Responding to the inquiry is likely to require considerable attention from KB's senior executives.
"In any business when you have top management focused on things other than executing the business strategy, it will be a distraction," said analyst John Tomlinson of Majestic Research in New York.
The probe also could further hinder the company in convincing Wall Street that it has a workable turnaround plan, analysts said. Whereas its competitors have sought to keep Wall Street abreast of changing business conditions, KB Home has been largely mum about its sales or specific business conditions since last summer, when it disclosed that federal authorities had opened an informal probe of its stock option grant practices.
"They haven't been able to keep investors updated on the state of the business," said Gregory Gieber, a home-building analyst with A.G. Edwards & Sons. "This has to take time away from the CEO, who has to deal with this nasty housing environment."
KB Home disclosed in a regulatory filing this month that the value of its housing stock had dropped $255 million and that it would record $88 million in penalties as the result of canceling land purchases.
On Friday, the company declined to comment other than to say that it was continuing to fully cooperate with regulators.
KB shares tumbled $1.24, or 2%, to close at $50.98 on Friday as part of a broad sell-off among home-builder issues.
The SEC has launched informal and formal probes of more than 130 companies that allegedly manipulated stock option grants to enhance their value through a process called backdating. On Friday, an SEC spokesman declined to comment on the KB Home case.
