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KB Home exec pleads not guilty in stock-option scandal

Bruce Karatz, chief executive of the home-building company, is accused of backdating stock options for a personal profit of $7 million. If convicted on all 20 charges, he could face life in prison.

March 31, 2009|Stuart Pfeifer
  • Bruce Karatz leaves Roybal Federal Court with his attorney and fiancee.
Bruce Karatz leaves Roybal Federal Court with his attorney and fiancee. (Gina Ferazzi / Los Angeles…)

Former KB Home Chief Executive Bruce Karatz pleaded not guilty in federal court Monday to charges that he secretly backdated stock options to enrich himself, then concealed the scheme from regulators and investors.

Karatz, 63, entered the plea during a brief court appearance before U.S. District Magistrate Judge Jeffrey W. Johnson in Los Angeles. Johnson scheduled a trial date for May 19.

Karatz, who declined to comment after the hearing, could face a maximum sentence of 415 years in prison if convicted on all 20 felony charges. Regulators say Karatz personally netted more than $7 million from the backdating of options at Westwood-based KB Home. He served as chairman and chief executive from 1986 to 2006, when he resigned under fire.

He is one of just six executives nationwide to face criminal charges in the stock-option-manipulation scandal and one of the few accused of backdating options to enrich himself.

Free on $750,000 bond secured by his Bel-Air mansion, Karatz appeared in court with attorney John Keker of the San Francisco law firm of Keker & Van Nest. Keker declined to comment after the hearing.

According to an indictment returned earlier this month, Karatz first tried to get KB Home to give him stock options valued at $1, ensuring a huge profit, in 1998.

When the company balked, the indictment says, he worked closely with former KB human resources executive Gary Ray to backdate options repeatedly from 1999 to 2006.

Karatz then concealed the backdating from KB Home's board of directors, its compensation committee, its shareholders and the SEC, according to the indictment.

Ray was charged separately from Karatz. He pleaded guilty in February to conspiring with Karatz to thwart an SEC investigation. Now he is cooperating with prosecutors.

Stock options typically are granted to employees with an exercise price tied to the date of the grant. Companies can legally backdate stock options, making them more valuable, but they must account for them properly, pay taxes accordingly and report the backdating to shareholders.

KB Home did not disclose the backdating until nearly a decade after it began, authorities said. The company had to adjust its financial statements by $70 million when the backdating of options held by Karatz and other shareholders was finally disclosed in 2008.

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stuart.pfeifer@latimes.com

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