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.
