Risk & Compliance

KB Ex-CEO Settles SEC Backdating Claim

Bruce Karatz agrees to pay $7.2 million for his role in a fixing the homebuilder's stock-option prices.
Stephen TaubSeptember 15, 2008

The former chairman and CEO of homebuilder KB Home Inc., Bruce E. Karatz, agreed to pay $7.2 million to settle civil charges for his role in a stock-option backdating scheme that benefitted himself and other KB Home officers and employees.

According to the regulator, from at least 1999 through 2005, Karatz enriched himself and others at KB Home by using hindsight to pick advantageous grant dates for KB’s annual stock options. On many occasions, the dates coincided with dates of low monthly closing prices for the company’s common stock. The complaint also alleged that he continued to use hindsight in selecting grant dates after the Sarbanes-Oxley Act of 2002 imposed stricter reporting requirements on officers of public companies.

Karatz, who agreed to settle the commission’s charges without admitting to or denying the allegations in the complaint, will pay more than $6.7 million in disgorgement and interest and a civil penalty of $480,000. He also agreed to be barred from serving as an officer or director of a public company for five years.

The complaint also alleged that, because of the backdating scheme, KB Home filed financial reports and proxy statements that inaccurately stated that KB Home granted options at fair-market-value on the date of the grant.

Karatz received backdated annual stock option awards amounting to 2.86 million shares of KB Home stock, and profited more than $6 million from exercising many of these options, according to the SEC.

In November 2006, Karatz retired as chairman, CEO, and as director of KB Home after an internal investigation found that he and Gary A. Ray, the head of human resources, “selected grant dates under the company’s stock option plans,” according to a regulatory filing at the time. Karatz agreed to forfeit $13 million. Ray was fired, the homebuilder said in a regulatory filing.

In addition, Richard B. Hirst resigned as executive vice president and chief legal officer. Jeffrey T. Mezger, the company’s executive vice president and chief operating officer since 1999, was appointed CEO, a director, and a member of the board’s executive committee. The company said in the filing that Mezger and the other current senior executives had no role in establishing incorrect grant dates.

After an investigation into past options practices, a subcommittee of the audit and compliance committee and its independent legal counsel concluded that the homebuilder used incorrect measurement dates for financial reporting purposes for annual stock option grants from 1998 to 2005, said the statement.

In February 2007, KB said that the Department of Justice was looking into its past stock option practices. The homebuilder said in a press release at the time that the company itself was not a target of the investigation.