More fraud charges on Wall Street
Former KB Home CEO Bruce Karatz indicted on fraud charges linked to stock option backdating
LOS ANGELES -- A federal grand jury has charged the former chairman and chief executive of KB Home with multiple counts of fraud and other crimes related to a stock option backdating scheme that authorities say bilked the homebuilder's shareholders out of millions of dollars.
The 20-count indictment returned Thursday charges Bruce E. Karatz with 15 counts of mail, wire and securities fraud, four counts of making false statements in reports filed with the Securities and Exchange Commission, and one count of lying to the company's accountants, according to the U.S. attorney for the Central District of California.
Karatz, 63, faces up to 415 years in prison if convicted on all charges.
"Mr. Karatz allegedly broke the rules, and then lied about it, to line his pockets and then to conceal his windfall from his company and the trading public," said United States Attorney Thomas P. O'Brien.
Karatz, who lives in the Bel Air Estates neighborhood of Los Angeles, agreed in September to pay $7.2 million to settle civil charges of backdating stock options.
Under terms of the settlement, the executive didn't admit or deny the allegations brought by the SEC, which claimed he profited by more than $6 million from exercising many of his stock options.
In response to a call seeking comment, San Francisco-based attorney John Keker, who represents Karatz, issued a collection of published accolades and corporate milestones achieved by his client and a two-sentence statement saying the government is wasting its resources by pressing its case on backdated stock options.
"We will show a jury that Bruce Karatz, who as a CEO helped create 5,000 jobs and oversaw significant company growth, acted appropriately," Keker said.
Last month, another ex-KB executive, Gary A. Ray, pleaded guilty to conspiring with Karatz to obstruct justice by causing KB Home to file a false report on its option-granting practices in a bid to avert an SEC probe.
Stock option backdating isn't necessarily illegal as long as the stock options are properly recorded on the company's books. But if the accounting of the perks is bungled, it can exaggerate corporate profits and improperly lower taxes.
According to the indictment, for seven years, Karatz altered the grant date on his options to one on which KB Home shares traded more cheaply, but didn't report it in public filings. That hid the actual value of stock-based compensation that KB was awarding him and other executives, prosecutors said.
This enabled Karatz to reap millions of dollars when he exercised his options, while making it appear the gains were the result of the normal appreciation of the market value of KB's stock, prosecutors said.
Karatz, Ray and another executive were forced to step down in 2006 after KB discovered that the chief executive benefited from favorably dated option awards between 1998 and 2005. He agreed to repay the company $13 million.
The KB Home probe found that no other senior executives had a role in establishing incorrect grant dates.
Karatz is expected to make an initial court appearance on March 26.
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