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Prosecutors allege former KB Home chief padded his pay
Former KB Home chief executive Bruce Karatz was accused today of padding his pay and lying about it during the opening day of his trial in Los Angeles federal court for illegal stock-option manipulation.
Karatz is charged with 20 counts, including mail, wire and securities fraud and making false statements in reports to the Securities and Exchange Commission in connection with alleged financial fraud.
In opening statements, Assistant U.S. Attorney Alex Bustamante told the downtown jury Karatz was driven by greed and deserved to be convicted on all counts.
Defense attorney John Keker countered that his client never intentionally broke any laws.
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Prosecutors contend Karatz, 64, submitted false and misleading information on the Los Angeles-based home builder's option-granting practices to the company's audit committee with the intent of obstructing a potential SEC investigation.
Karatz allegedly operated a long-running scheme to make it appear as if his stock options had been granted at fair market value. In fact, Bustamante alleges, Karatz used hindsight to pick dates when the stock options were most valuable, raising the value of his options by as much as $4.50 a share.
Prosecutors contend Karatz pocketed more than $6 million a result of the alleged scheme. KB — founded in 1957 as Kaufman & Broad — required him to pay back $13 million in backdating gains when he left the company in 2006, prosecutors said.
It is legal for executives to backdate, as long as it is reported to shareholders and reflected in the company's financial reports. Executives at companies across the country have been charged in recent years for not reporting their backdating.
Karatz left the homebuilder in November 2006 at the same time Gary A. Ray, the company's head of human resources, was fired.
In September 2008, Karatz agreed to pay more than $7 million to settle SEC claims that he was part of the backdating scheme, but did not admit or deny any wrongdoing, according to court papers.
Ray, who pleaded guilty one year ago to conspiring to obstruct justice in connection with the stock-option backdating probe that began in 2006, is set to be sentenced July 12. He is expected to be one of the prosecution's chief witnesses against Karatz.
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If convicted of all charges, Karatz faces as much as 415 years in federal prison, the U.S. Attorney's Office said.
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