Corporate Governance

Former KB Home CEO Found Guilty

By Ashley Dietrich

On April 21, 2010, a federal jury in the Second Circuit found Bruce Karatz, the former CEO of KB Home, guilty of four felonies in a stock backdating scam.  Karatz was found guilty of two counts of mail fraud, one count of lying to company accountants, and one count of making false statements in reports to the Securities and Exchange Commission. 

The case involved allegations of backdating. Karatz was said to have set his stock option price at dates in the past when the share price was low.  In doing so, this allegedly allowed Karatz to sell the shares at a much higher profit at a later date.  The prosecution contended that Karatz backdated options from 1998 to 2005 and made over $6.62 million in profits as a result.

Backdating itself is not illegal.  The violation arises out of the failure to properly disclose or account for the options.  Karatz failed to disclose to investors that his own stock options were retroactively granted on dates when the price was low.

The prosecution argued that Karatz changed a company policy regarding stock option awards, then took advantage of his own new policy, concealing it from investors.  The defense attorneys responded that Karatz did not knowingly break any laws.

Although guilty on four counts, Karatz was acquitted on sixteen others, including securities fraud, wire fraud, and filing false proxy statements.  Defense attorney John Keker said that the defense plans to appeal the four felony convictions.

Other recent backdating government convictions include Gregory Reyes, the former chief executive of Brocade Communications, Kobi Alexander, the former chief executive of Comverse Technology, and  James Treacy, the former president and chief operating officer at Monster Worldwide.

Additional posts regarding backdating in the criminal context can be found here, here, and here.

The primary materials for this case may be found on the DU Corporate Website.

Full post as published by The Race to the Bottom on May 14, 2010 (boomark / email).