Ex-KB Home exec Bruce Karatz may avoid prison
Federal probation officials are recommending that former KB Home executive Bruce Karatz spend no time in prison for his conviction on felony fraud charges related to stock manipulation, according to court documents filed by prosecutors Friday.
The United States Probation Office suggested that Karatz, 64, receive a sentence of five years’ probation, including eight months of home confinement, prosecutors said. Federal prosecutors filed an objection to the recommendation at the federal courthouse in Los Angeles, noting that the home detention would be served “in defendant’s 24-room Bel-Air mansion situated on a one-acre estate.”
The recommendation “suggests that there is a two-tiered system of justice, one for well-connected CEOs who can break the rules, secretly inflate their compensation and lie about it with virtual impunity, while ordinary citizens … will face far more severe penal consequences,” federal prosecutors Paul Stern and Harvinder Anand said in their objection.
The probation office’s pre-sentencing report is confidential under federal law and not available for review.
But the prosecutors in their motion said probation officials made the recommendation because they felt Karatz’s criminal misconduct “did not cause any losses to the victim of his crime.”
Prosecutors countered that KB Home had suffered a financial loss from the backdating of stock options and that Karatz had made $6 million in restitution to the company to cover “illicit gains he received through KB Home’s stock option award program.”
Karatz’s attorney, John Keker, declined to comment on the probation recommendation. He said he expected to file a response to the prosecution’s report within two weeks.
The sentencing recommendation went to U.S. District Judge Otis D. Wright II, who is not obligated to follow it.
Karatz received another dose of good news Friday when Wright overturned one mail fraud conviction against Karatz for lack of evidence. Karatz, who is free on bond secured by his home, is scheduled to be sentenced Nov. 10 on three remaining felony fraud convictions. Experts in federal criminal law have said Karatz could face up to 10 years in prison.
Fernando L. Aenlle-Rocha, a former federal prosecutor who now advises clients in stock-option backdating cases as a white-collar defense lawyer in Los Angeles, said he understands the prosecutors’ objections to the sentencing report.
“I don’t know what the people over at probation were thinking,” Aenlle-Rocha said. “The prosecution has argued that Karatz made about $6 million more than he otherwise would have due to the backdating, which would equate to a loss for KB Home and that would mean prison time.”
But Marc Greenberg, a former assistant U.S. attorney who now is a white-collar criminal defense lawyer in Long Beach, said the probation recommendation might not be as lenient as the prosecution is arguing.
“This is all very difficult to quantify,” Greenberg said. “It seems what the probation office is saying is that they don’t feel this is a sufficiently heinous loss, a sufficiently terrible, evil enough of a crime to warrant prison time.”
The problem with deciding how much time Karatz should spend in prison comes down to how much loss his actions caused any victims.
“If you rob a bank, you walk out and there is an amount of money in the bag. You can count it,” Greenberg said. “It’s overly simplistic to say the loss to KB Home and its shareholders is the value of the stock options simply because of the accounting error of how it was documented.
“He certainly was entitled to something because the company was performing so well.”
At his trial earlier this year, prosecutors portrayed Karatz as a greedy executive who approved the backdating of stock options so that he and other executives could make millions in extra pay.
Stock options allow employees to buy stock at a set price, typically the price on the date they were granted. Companies can boost the value of these options by backdating them to dates when the stock price was lower. The practice is not illegal if companies account for it as a compensation expense in public filings. KB Home restated earnings in 2007, accounting for $36 million in previously unreported option expenses.
The jury rejected the government’s claim that Karatz intentionally defrauded shareholders by secretly backdating stock option grants from 1999 to 2005 to make them more valuable. But it found him guilty of lying about the backdating to KB accountants and in a 2006 quarterly report.
Karatz was convicted in April of two counts of mail fraud, making false statements in a regulatory filing and lying to KB Home’s accountants. He was acquitted of 16 other charges.
Karatz was one of the most prominent executives in the country to have faced criminal charges in the government’s long-running crackdown on stock-option backdating.
KB Home, based in Westwood, flourished under Karatz’s leadership, reporting a record $11 billion in sales in 2006. He was one of the nation’s highest-paid executives.
nathan.olivarezgiles@latimes.com
