Legal News

After Backdating Setbacks, Feds Chop Former KB CEO Karatz

By Amir Efrati

The Justice Department has seen a little bit of everything in its prosecutions of stock-options backdating offenses. There have been victories (here and here), several recent defeats (here, here and here), and a colorful fugitive.

Now comes word of the conviction of Bruce Karatz, former CEO of KB Home, one of the largest home builders in the U.S., after a six-week trial. Karatz was involved in a backdating scheme in which he awarded himself and other execs millions of dollars in stock-based compensation, a jury found. Background on Karatz is here and here.

The 64-year-old faces 80 years in prison after being convicted of four felony counts including wire fraud and lying to his company’s auditor, Ernst & Young, about the matter, according to the U.S. attorney’s office in Los Angeles. He was acquitted on 16 other counts.

Karatz is one of the highest-profile casualties of the stock-options scandal, which has claimed the jobs of dozens of executives and directors and once was the offense-du-jour for DOJ and the Securities and Exchange Commission, which brought numerous civil actions.

In case you haven’t heard the primer on how these schemes work, will give you one: Options allow recipients to buy stock at a preset exercise price, generally set at the market price on the day they were granted. Backdating involves pretending that an option was granted on an earlier date when the market price was lower, conveying an opportunity for extra profit. The practice can lead to overstated profits and significant tax problems for the companies and executives involved.

Full post as published by Law Blog - WSJ.com on April 21, 2010 (boomark / email).