Bruce Karatz, who rode the housing boom to become one of the highest-paid executives in the country, was indicted by a federal grand jury Thursday on charges of manipulating stock options -- becoming one of the few executives to face criminal charges in the nation's options backdating scandal.
Karatz, 63, served as chairman and chief executive of Westwood-based KB Home from 1986 to 2006, when he resigned under fire. Over a three-year period ending in 2005, Karatz garnered more than $232 million in compensation.
"This investigation painted a picture of avarice and dishonesty at its core," said Salvador Hernandez, who heads the FBI office in Los Angeles.
Karatz's lawyer said his client did nothing wrong and was being unfairly prosecuted.
"We are disappointed that during this economic collapse the government chooses to waste its resources on backdated options, an issue that has long ago been fixed at KB Home and generally in the corporate world," attorney John Keker said in a prepared statement.
Karatz, who has already been forced to pay $20 million to the company and the federal government in connection with the case, faces up to 415 years in prison if convicted on all 20 counts of the indictment, which includes charges of fraud and making false statements.
The indictment said Karatz orchestrated the backdating of stock options from 1999 to 2006. Stock options typically are granted to employees with an exercise price tied to the date of the grant. Companies can legally backdate stock options to a date when the stock price was lower -- insuring an immediate paper gain -- but they must account for it properly, pay taxes accordingly and report the backdating to shareholders.
In the KB Home case, the backdating was not disclosed until nearly a decade after it began. The company was forced to adjust its financial statements by $70 million when the backdating of options held by Karatz and other shareholders was finally disclosed in 2008.
In Karatz's case, the backdating made his stock options worth $1.63 to $4.56 more per share, according to the indictment -- a fact that should have been disclosed to other shareholders, it said.
The indictment does not say exactly how much Karatz gained as a result, but KB Home required Karatz to pay back $13 million in backdating gains when he left the company in 2006. And the SEC agreed to a settlement of $7.2 million with Karatz in 2008 to cover what it reckoned were his gains.
