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Ex-KB chief settles SEC suit

Bruce Karatz doesn't admit liability but will pay $7 million in a backdating complaint.

September 16, 2008|Roger Vincent | Times Staff Writer

The former head of one of the nation's largest home builders will pay more than $7 million to settle claims that he took part in a scheme to backdate stock options -- and then failed to disclose it, the Securities and Exchange Commission said Monday.

Former KB Home Chief Executive Bruce Karatz, who as part of the settlement did not admit liability, was accused by the SEC of signing reports that he knew were false and violating disclosure and anti-fraud laws.

"Karatz improperly increased his compensation by millions of dollars without telling KB Home shareholders," said Linda Chatman Thomsen, director of the SEC's Division of Enforcement.

He will pay about $6.7 million in compensation and interest to KB Home and a $480,000 penalty to the U.S. Treasury. He is also barred from serving as an officer or director of a public company for five years.

Karatz declined to comment Monday.

"Bruce is pleased to be able to put this matter behind him and is looking forward to focusing on the next chapter in his life," said his attorney, John Keker.

Karatz, 62, was a three-decade veteran of the Los Angeles-based home builder and one of the nation's highest-paid executives when he left the company in 2006 under pressure from the SEC probe. In his last three years with KB Home he collected more than $232 million in compensation, much of which came from cashing in stock option grants.

The SEC complaint filed Monday in federal court in Los Angeles -- and settled the same day by Karatz -- alleges that Karatz issued stock options to himself and others at the company that were deliberately backdated to a time when KB Home stock had traded for a lower price.

That increased the value of the options for the holders because they could redeem them by buying stock at the old low price and selling it at the current higher price.

Karatz used this method, called hindsight, from at least 1999 through 2005 to pick advantageous grant dates for KB Home's annual stock option grant to enrich himself and other company officers and employees, the SEC said.

On many occasions, the grant dates coincided with dates of low monthly closing prices for the company's common stock, the SEC said.

Backdating is legal as long as it is disclosed to shareholders and properly accounted for. But Karatz continued to backdate stock options even after the Sarbanes-Oxley Act of 2002 imposed stricter reporting requirements, the SEC said.

"Our complaint alleges that Karatz engaged in self-dealing over many years," said Rosalind Tyson, director of the SEC's Los Angeles office.

Wall Street watchdogs said they were pleased with the SEC's action and with the settlement. "We welcome any settlement that derives money for investors that was stolen," said Dan Pedrotty, director of investment for the AFL-CIO.

KB Home declined to say what it would do with the money from Karatz or comment on the settlement.

Paul Hodgson of the Corporate Library, a corporate governance research firm, said Karatz and others at KB Home could have profited enormously on the company's stock options without resorting to backdating -- simply because the home builder was performing well on Wall Street at the time.

"It really beggars belief to consider that someone already making that kind of profit on stock options should take the trouble to backdate them to make a few more million dollars," Hodgson said.

In its complaint, the SEC said KB Home filed periodic reports and proxy statements with the SEC that inaccurately stated that the company granted options at fair-market value on the date of the grant.

Karatz received backdated annual stock option awards amounting to 2.86 million shares of KB Home stock and profited more than $6 million from exercising many of these options, the SEC said.

Last year, KB Home said the Justice Department was also investigating the practice.

KB Home is not the only public company wracked by a scandal over backdating stock options, a practice that was relatively common until it was exposed publicly and then regulated by the Sarbanes-Oxley Act.

Last week, the former chief executive of health insurance giant UnitedHealth Group Inc., William McGuire, agreed to personally pay $30 million to shareholders and give up stock-option rights to settle a class-action lawsuit that grew out of a 2006 scandal in which UnitedHealth provided executives with windfalls by backdating stock options given as incentive payments.

Shares of KB Home closed down $1.39, or 6.2%, on Monday at $20.93.

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roger.vincent@latimes.com

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