Trial of ex-KB Home CEO, accused of greed, begins

* Opening statements in backdating trial of Bruce Karatz

* Prosecutor cites "greed," says Karatz stole over $6 mln

By Gina Keating and Alexandria Sage

LOS ANGELES/SAN FRANCISCO, March 11 (Reuters) - Prosecutors accused once high-flying head of KB Home (KBH.N) Bruce Karatz of succumbing to greed and lining his pockets via securities fraud, firing the opening salvo in a courtroom battle that will test government efforts to crack down on financial crime.

Karatz appeared in federal court in Los Angeles on Thursday as prosecutors began their latest case against illegal stock option backdating, or the practice of retroactively dating options awarded to employees.

Prosecutors hope for a high-profile victory after the latest government-led attempt to punish executives for backdating -- a case against telecoms firm Broadcom that was dismissed for prosecutorial misconduct -- fizzled.

The brash, motorcycle-driving Karatz, who rode the boom in U.S. housing for two decades at the helm of the homebuilder to become one of the nation's highest-paid executives, sat silently beside his attorneys, hands folded on a table.

"He stole $6 million without shareholders knowing it. He padded his pay between 1999 and 2005. When asked about it, he lied," Assistant U.S. Attorney Alex Bustamante said during opening statements.

Karatz created a "false report" to cover up his crime and quashed an internal investigation at the company, the prosecutor told the jury.

"You need to find him accountable for his greed and convict him on all charges," Bustamante said.

Karatz's attorneys have said his actions were lawful.

His trial is one of the highest-profile cases to date against an executive accused of backdating brought by the government, whose efforts to secure convictions have faltered. In December, a federal judge dismissed all charges against the top former executives of Broadcom Corp (BRCM.O), on grounds of prosecutorial misconduct.

Karatz, who served for two decades as KB Home's CEO, was indicted last March and charged with 20 criminal counts, including multiple counts of securities fraud, wire fraud and making false statements.

SCHEMING

Prosecutors say Karatz engaged in a scheme to hide from the company and shareholders illegal backdating that resulted in Karatz and others receiving below-market exercise prices for stock options.

Millions of backdated options with discounted exercise prices allowed Karatz to reap millions in compensation that were never disclosed nor recorded as compensation expense, the government says.

The backdating of stock options grants -- used extensively to lure and retain top talent -- became a major issue in 2007, with more than 170 companies investigated by U.S. authorities or conducting internal inquiries into possible manipulation of stock-option grant dates to benefit recipients.

Backdating is a practice of locking in financial gains by retroactively pricing option grants on days when a company's stock price is low, increasing the value of the options. It is legal when recorded as a non-cash compensation expense.

Bustamante, who pointed out that Karatz was an attorney with a securities background, said the former CEO would have reaped profit of nearly $11 million had he exercised all the backdated options. Actual profit was $6.6 million, he said.

KB Home in 2007 restated its financial documents and recognized more than $30 million in compensation expense. It had to pay $60 million to the Internal Revenue Service, said Bustamante.

Karatz, CEO since 1986, stepped down in late 2006.

In 2008, the executive settled a SEC civil lawsuit over the alleged backdating, paying more than $7 million without admitting no denying wrongdoing.

The executive made $232 million in compensation -- much from stock awards -- over his last three years at KB Home, when shares rose 100 percent from the end of 2003 to the end of 2005.

Attorneys for Karatz have argued in court documents that the compensation committee chair at KB Home and the head of human resources both believed the company's stock option grant practices were lawful. But both changed their testimony under pressure from prosecutors.

The case is USA v. Karatz, U.S. District Court, Central District of California, No. 09-00203. (Writing by Alexandria Sage; Editing by Edwin Chan and Matthew Lewis)