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Homebuilding

UPDATE 2-KB Home ex-CEO found guilty of mail fraud, lying

* Acquitted on main securities fraud counts

* Verdict shows limits of gov’t crackdown in backdating (Adds details throughout, bylines)

LOS ANGELES/SAN FRANCISCO, April 21 (Reuters) - Bruce Karatz, the former head of KB Home KBH.N, was found guilty on Wednesday of mail fraud and making false financial statements but he beat most of the government's charges.

The jury in U.S. District Court in Los Angeles acquitted the once high-flying chief executive of securities fraud, handing the government a setback in its years-long effort to crack down on illegal backdating of employee stock option grants.

Out of 20 counts against him, Karatz was found guilty on four: two counts of mail fraud, one count of making false statements in a quarterly report and one count of making false statements to accountants of a publicly traded company.

He was acquitted of three counts of securities fraud, the most serious charges against him, as well as additional counts of mail fraud, wire fraud and making false statements.

Karatz showed no emotion as the verdict was read and he declined to comment as he left the courthouse. Prosectors also declined to comment.

Sentencing was set for Sept 8. Karatz faces up to 20 years in prison.

“The jury got 80 percent of it right,” Karatz’s lead attorney, John Keker, said outside the court after the verdict. “Mr. Karatz is not guilty on sixteen of the counts. We’re very disappointed on the other four.”

Keker said he would file a motion for a new trial, and failing that, he would appeal the verdict.

Karatz, 64, was indicted in March 2009 on charges of securities fraud dating back to 1999.

One of the highest-paid executives in the United States before stepping down as CEO in 2006 in the midst of the backdating scandal, Karatz had been accused of making millions in profit after retroactively pricing stock option grants on days when KB Home’s stock price was low.

The practice is legal when properly accounted for as compensation expense, but prosecutors said Karatz “engaged in a scheme to defraud,” failing to alert the company’s senior executives and outside auditors of his actions.

During the month-long trial, Keker argued that Karatz, whose wealth increased during the U.S. housing boom, was innocent and that he had been caught up in the government’s drive to secure convictions related to illegal backdating.

Illegal backdating allows employees to make a greater profit on stock options, as a retroactively chosen grant date when the share price is low ensures greater profit later after the stock rises and grants are exercised.

KB Home was forced to restate its financial results in 2007 for the period between 1998 and 2005 to recognize $36 million in new compensation expenses as a result of the fraud, as well as $70 million in additional expenses.

In 2007, KB Home was forced to restate financial documents to recognize more than $30 million in compensation expense as well as $70 million in additional expenses.

A year later, Karatz settled a U.S. Securities and Exchange Commission lawsuit over the alleged backdating, paying more than $7 million without admitting or denying any wrongdoing. (Editing by Edwin Chan)

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