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KB Home exec Gary Ray gets probation in stock option-backdating case

Gary A. Ray, a key prosecution witness in the trial of KB Home ex-CEO Bruce Karatz, also is ordered to serve four months of home detention, perform 600 hours of community service and pay a $10,000 fine.

February 17, 2011|By E. Scott Reckard, Los Angeles Times

A former KB Home executive who became a key prosecution witness in the stock-manipulation trial of the company's former chief executive was sentenced Wednesday to three years' probation.

Gary A. Ray, KB's former vice president of human resources, had pleaded guilty to conspiring with former CEO Bruce Karatz to obstruct justice. U.S. District Judge Otis D. Wright II in Los Angeles also sentenced Ray to four months of home detention and 600 hours of community service and fined him $10,000.

Ray testified that Karatz told him to backdate stock options and to keep the practice secret from others, including the compensation committee at the Westwood home builder.

Backdating options to when the price of a company's stock was low makes them more valuable to recipients and is supposed to be disclosed to other shareholders. Ray testified that he knew he was doing something improper, although he initially told the FBI he didn't think he had done wrong. Karatz's lawyers made that inconsistency a key part of their defense.

Karatz was convicted of mail fraud, making false statements in regulatory filings and lying to KB's accountants but was acquitted of intentionally defrauding shareholders. He was sentenced to five years' probation, including eight months of house arrest, fined $1 million and ordered to perform 2,000 hours of community service.

Prosecutors and defense attorneys agreed that Ray deserved probation.

"He was cooperative and pleaded guilty and was contrite," said Assistant U.S. Atty. Paul Stern, a prosecutor in the case. "So I think the sentence was appropriate."

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