March 6, 2009 / 3:00 AM / 10 years ago

UPDATE 2-Ex-KB Home CEO indicted in alleged backdating scheme

* Ex-CEO Bruce Karatz accused in backdating scheme

* Karatz charged in 20-count indictment by L.A. grand jury

* Faces up to 415-yr sentence if convicted on all charges (Adds details from indictment, background, byline)

By Gina Keating

LOS ANGELES, March 5 (Reuters) - Former KB Home (KBH.N) CEO Bruce Karatz, one of the executives who made the most money from the U.S. housing boom, was indicted on Thursday on charges of fraud and making false statements to U.S. regulators about a scheme to inflate the value of stock options.

Federal prosecutors in Los Angeles said Karatz, who led the homebuilder for 20 years, awarded himself and others millions of dollars in undisclosed stock-based compensation by backdating the options over a seven-year period.

During that time, Karatz was one of the nation’s best-paid executives. His compensation totaled $232 million in his last three years at KB Home, much of it from stock awards.

If convicted of all criminal charges, Karatz, 63, faces up to 415 years in federal prison. He is one of the highest profile executives to be charged in a long-running investigation into stock options backdating at dozens of U.S. companies.

Karatz, who was also KB chairman, is expected to make his initial court appearance on March 26 in U.S. District Court in Los Angeles, where the company is based.

His attorney, John Keker, said he planned “to show a jury that Bruce Karatz, who as CEO helped create 5,000 jobs and oversaw significant company growth, acted appropriately.”

HOW FORTUNES CHANGED

KB Home, in announcing Karatz’s departure in November 2006, noted that the company’s total annual revenue had soared to more than $9.4 billion in 2005, from $1.4 billion a decade earlier. The company’s stock shot up 39 percent in 2005.

But by late 2006, KB Home’s fortunes turned as the housing market cooled and forced builders into survival mode — cutting jobs and dividends, leaving markets, and selling homes and land at a loss to generate cash and manage debt. KB Home has not made a profit for the past two years.

Karatz, in his heyday, was a force in Los Angeles’ business community. He was once married to Food Network host and cookbook author Sandra Lee. And he secured high-profile partnerships for KB Home with the likes of now-defunct mortgage giant Countrywide Financial Corp and design maven Martha Stewart, who herself served five months in prison for lying about a stock sale.

Karatz was charged with seven counts of mail fraud, five counts of wire fraud, three counts of securities fraud, four counts of making false statements in reports filed with the U.S. Securities and Exchange Commission, and one count of lying to KB’s accountants.

The indictment accuses him of falsely representing to the board that options for himself and other KB executives were “at the money,” or priced as of the date they were granted, meaning that no accounting charge was needed.

Karatz began conspiring with at least one other KB executive to secretly choose grant dates with historically low exercise prices in 1999 so that millions of options were “in the money,” or lower than fair market value when they were awarded, the indictment stated.

He also is accused of concealing the backdating from KB’s board by submitting false documentation of the company’s historical option-granting practices to an audit committee and outside auditor.

The company 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, the indictment said.

Karatz stepped down from his posts at KB Home in late 2006 as a result of pressure from the backdating investigation.

He had been implicated in the alleged scheme by an SEC civil lawsuit and in court documents filed last year with a proposed plea deal by his alleged co-conspirator, former human resources chief Gary Ray.

Ray agreed to plead guilty to conspiring to obstruct an internal investigation into options backdating, and to cooperate with prosecutors, the documents showed.

Karatz paid more than $7 million to settle the SEC claims but did not admit or deny wrongdoing in that case. (Reporting by Gina Keating in Los Angeles; editing by Carol Bishopric, Richard Chang)

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