Federal prosecutors are defending the investigation that led to felony option-backdating charges pending against former KB Home Chief Executive Bruce Karatz.
In a motion filed in federal court in Los Angeles, the prosecutors accused Karatz of making baseless allegations of prosecutorial misconduct in order to block damaging testimony against him at his trial set for next month.
Two weeks ago, defense attorneys filed a motion accusing prosecutors of intimidating two former KB Home employees, who now say Karatz improperly changed the dates of stock option grants to enrich himself and others without accounting for them in regulatory filings.
The defense wants a pretrial hearing to determine whether prosecutors improperly influenced James Johnson, former chairman of the Westwood home builder's compensation committee, and Gary Ray, the company's former vice president of human resources.
The U.S. attorney's office fought back in a motion filed Wednesday, saying prosecutors acted properly and Karatz had not demonstrated the need for such a hearing.
"Defendant has not adduced a scintilla of evidence that the government has actually manipulated or improperly influenced any witness," prosecutors said in the motion.
The motion also accused Karatz's attorneys of making unfounded allegations to generate sympathetic news coverage that could influence prospective jurors.
Karatz is scheduled to stand trial Feb. 23 before U.S. District Judge Otis D. Wright II in Los Angeles.
Karatz, who oversaw KB Home during the housing boom and became one of the nation's highest-paid executives, faces 20 counts of fraud and of making false statements about the company's options practices.
Stock option grants allow employees to purchase stock at a set price -- usually the price on the date of the grant. If the stock price rises, employees can exercise their option to buy the stock at the lower grant price and then sell it for a profit. Backdating the options to a date when the price was lower can make them more valuable.
Companies are allowed to backdate option grants as long as they account for it as an expense in public filings. In the KB Home case, prosecutors allege, the backdating was not acknowledged until nearly a decade after it began. The company ultimately adjusted its filings to account for $70 million in options-related expenses.
Karatz's allegations followed a federal judge's decision in December to throw out option-related prosecutions of Broadcom Corp. co-founders Henry Samueli and Henry T. Nicholas III and the company's former chief financial officer. The judge in that case accused prosecutors of improperly influencing witnesses.