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Contrasting portraits of former KB Home chief as trial opens

The prosecution paints Bruce Karatz as a greedy man who manipulated stock option grant dates and lied about them. The defense says he was a hardworking leader who never intentionally violated laws.

March 12, 2010|By Stuart Pfeifer
  • Former KB Home CEO Bruce Karatz, flanked by family members, arrives at federal court last month. He faces 20 felony charges of fraud and making false statements about the company's stock options practices.
Former KB Home CEO Bruce Karatz, flanked by family members, arrives at federal… (Nick Ut / Associated Press )

The stock option backdating trial of former KB Home chief Bruce Karatz opened Thursday in Los Angeles with two vastly conflicting portraits of the man who steered the giant home-building company for decades.

A federal prosecutor told jurors in his opening statement that Karatz was a greedy man who made more than $6 million in "secret pay" by manipulating stock option grant dates and then lying about it in regulatory filings and in interviews with lawyers and accountants.

"He stole without shareholders' knowing about it and he used stock options to do it," Assistant U.S. Atty. Alexander A. Bustamante said.

"When he was asked about it, he lied. . . . He lied within the company. He lied outside the company."

Defense attorney John Keker told the jury that Karatz was a hardworking leader who never intentionally violated any securities laws. KB handled its options the same way that hundreds of other companies did -- and neither Karatz nor any other company executives acted improperly, Keker said.

"No one believed at the time they were doing anything wrong or improper," Keker said. "They're not people coming to work looking to commit a crime, year after year."

Karatz, 64, who led KB Home from 1986 to 2006 and helped the company expand from a few hundred to more than 7,000 employees, faces 20 felony charges of fraud and making false statements about the company's options practices. The trial before U.S. District Judge Otis D. Wright II is expected to last more than three weeks.

Jurors were told they could expect a primer on stock options, which are a common form of compensation. They give employees the option to buy a set amount of stock at a set price -- usually the closing price on the date they're granted. If the stock price rises, employees can exercise their option to buy at the lower price and then sell at the current price for a profit.

Companies are allowed to make the options more valuable by backdating them to dates when the stock price was lower, as long as they acknowledge it in public disclosures.

Prosecutors contend that Karatz and the company's human resources chief, Gary A. Ray, secretly selected grant dates when the price was low in order to enrich themselves and others without making the disclosures.

Ray, who has pleaded guilty to a federal charge that he made false statements about the option practices, is expected to be a key government witness against Karatz.

The executives handled options improperly from 1999 until 2006, when news reports about alleged option abuses sparked investigations by the Securities and Exchange Commission and the Justice Department, Bustamante said.

By 2006, Karatz became so concerned about a potential investigation that he authorized the hiring of a private investigator to see whether a company attorney was talking to anyone about the company's options, Bustamante said.

Karatz left the company in 2006, and KB issued a news release that said he would reimburse the company for up to $13 million in profits generated through backdated options. Two years later, Karatz resolved a lawsuit with the SEC by paying a fine and making a $6.7-million payment to KB -- the amount the SEC determined Karatz had made through the backdating of options.

Keker, the defense attorney, told jurors that his client acted above board throughout the process and went as far as authorizing an investigation by an outside law firm to determine whether the company had properly issued options.

"What kind of criminal trying to hide what happened would recommend an independent investigation by an outside firm?" Keker said.

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