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Former KB Home CEO Bruce Karatz sentenced to five years' probation

Penalty in options-backdating case includes eight months of house arrest. Karatz is also ordered to pay a $1-million fine and do 2,000 hours of community service.

November 11, 2010|By Stuart Pfeifer, Los Angeles Times

Bruce Karatz, whose 20-year run as chief executive of home-building giant KB Home was derailed by allegations that he manipulated the value of stock options, was sentenced Wednesday to five years' probation, including eight months of house arrest.

U.S. District Judge Otis D. Wright II also fined the former executive $1 million and ordered him to perform 2,000 hours of community service. Wright rejected prosecutors' request for a lengthy prison sentence, noting that there was no evidence that the crimes damaged KB Home or its shareholders.

Karatz, 65, was convicted in April on charges that he lied about the Westwood-based company's practice of backdating options. Prosecutors said the misinformation was given to KB accountants and also appeared in a 2006 quarterly report filed with the Securities and Exchange Commission.

In a brief statement to the judge before the sentence was imposed, Karatz said the criminal prosecution "has been the most difficult time of my life." He did not apologize.

The sentence fails to satisfy the "blood lust to see CEOs sent to jail," said Peter Henning, who teaches securities law at Wayne State University Law School in Detroit.

But Henning said the sentence was proportionate to a crime in which financial damage was hard to define.

"The issue in the options backdating cases has always been, 'Who got hurt?' " he said. "I don't want to say it's a victimless crime, but it's a crime that it's hard to estimate the impact."

Karatz is one of the most prominent corporate executives to be prosecuted in the government's long-running crackdown on options backdating and one of the few to be convicted. Only a handful have received prison sentences.

A federal probation officer had recommended the sentence that Wright imposed, saying he was swayed by Karatz's long history of philanthropy, previously clean record and the lack of a financial loss.

Before imposing the sentence, Wright issued a strong rebuke to prosecutors Paul Stern and Harvinder Anand, who had said in court papers that a probation sentence would suggest "that there is a two-tiered system of justice, one for well-connected CEOs who can break the rules, secretly inflate their compensation and lie about it with virtual impunity, while ordinary citizens ... will face far more severe penal consequences." They had asked for a sentence of more than six years in prison and a $7.5-million fine.

"It was distressing to read the tone of the government's remarks," Wright said. "I think it was mean-spirited and it was beneath this office.

"I and every other federal judge took an oath that we will administer justice and do equal right to the poor and the rich."

After the sentencing in federal court in Los Angeles, Karatz kissed his wife, Lilly Tartikoff, and embraced relieved supporters who included KB founder and billionaire Eli Broad, former Los Angeles Mayor Richard J. Riordan and Father Greg Boyle, director of gang intervention program Homeboy Industries, which Karatz supports.

Under the sentence, Karatz will spend eight months confined to his Bel-Air mansion while monitored by a global positioning satellite device. He declined to comment about the sentence.

Defense attorney John Keker said no decision had been made on possibly appealing the conviction.

Karatz served as KB Home's chief from 1986 to 2006, guiding the company to significant growth and profitability and becoming one of the highest-paid executives in the U.S., earning an estimated $40 million a year. During that time, the company's revenue grew to $11 billion from $491 million and its workforce swelled to 7,000 from 500.

He resigned in 2006 under increasing pressure from investigations into the company's handling of stock options, 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. KB did not make those disclosures and ultimately restated earnings to reflect its past backdating.

After his resignation, Karatz paid more than $7 million in fines and restitution to KB to resolve a lawsuit filed by the SEC.

It was unclear Wednesday when Karatz would begin his house arrest. In his statement to the judge, Karatz said he planned to continue working with Homeboy Industries, helping the financially troubled organization raise funds.

Boyle praised the judge and said he looked forward to a long relationship with Karatz.

"Every single day, he's there, at Homeboy Industries helping out," Boyle said. "He's a great man, and this was a just result."

stuart.pfeifer@latimes.com

Times staff writer Nathan Olivarez-Giles contributed to this report.

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