Former KB Home Exec Accused of Netting $7M in Scam

A former chief executive of Los Angeles-based home builder KB Home pleaded not guilty Monday to financial fraud charges.

Bruce E. Karatz, 63, is charged in U.S. District Court with seven counts of mail fraud, five counts of wire fraud, three counts of securities fraud, four counts of making false statements in reports filed with the Securities and Exchange Commission and one count of lying to KB's accountants.

Karatz was allowed to remain free on bond while awaiting trial after pledging $750,000 in equity from his Bel Air mansion last Thursday. U.S. Magistrate Judge Jeffrey W. Johnson scheduled Karatz's next court appearance for April 6.

If convicted of all 19 charges, Karatz could be sentenced to up to 415 years in federal prison, according to U.S. Attorney Thomas P. O'Brien.

Regulators said Karatz netted about $7 million, according to the Los Angeles Times.

Karatz and others are accused of submitting false and misleading information on KB's option-granting practices to the company's audit committee to obstruct a potential investigation by the SEC.

Prosecutors contend Karatz operated a long-running scheme to make it appear as if his stock options had been granted at fair market value. In fact, the former executive 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.

The indictment does not say how much Karatz made as a result, but 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, and in recent years, executives at companies across the country have been charged for not reporting their backdating.

In a related case, KB's former head of human resources, Gary A. Ray, 50, of Pacific Palisades, pleaded guilty last month to federal charges of conspiring to impede and obstruct a federal probe into alleged stock-option manipulation at the company, O'Brien said.

The federal grand jury indictment naming Karatz comes six months after Ray agreed to a plea deal that required him to cooperate in the government's probe of stock-option backdating at the state's largest home builder.

At the time, Ray admitted that he and Karatz agreed they would collaborate to cause KB's general counsel to prepare and submit a false and misleading report on the option-granting practices.

The false report was used by KB managers to make disclosure decisions with respect to required SEC filings, O'Brien said.

Karatz resigned from KB in November 2006, when Ray was fired. Ray faces up to five years in prison when he is sentenced Aug. 10.

Last September, 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 wrongdoing, according to court papers.

Copyright AP - Associated Press
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