Former KB Home exec testifies he lied in stock options inquiry
The key prosecution witness against former KB Home Chief Executive Bruce Karatz admitted in cross-examination Thursday that he told numerous lies about the company’s stock option practices during his initial meetings with the FBI and federal prosecutors.
The concession by KB Home’s former human resources chief, Gary Ray, came during five hours of questioning by Karatz’s defense attorney. On Wednesday, Ray implicated Karatz in a scheme to conceal the backdating of employee stock options from authorities.
Ray left KB Home in 2006 as questions about the Los Angeles home builder’s stock options began to attract federal scrutiny. He met several times with federal authorities in 2008, eventually acknowledging that he and Karatz backdated stock options to make them more valuable to employees and themselves -- a practice he said they concealed from authorities.
Ray, 52, pleaded guilty last year to conspiring to obstruct justice and agreed to testify against Karatz in exchange for prosecutors’ promise to request a lenient sentence.
Defense lawyer John Keker spent his five hours of cross examination attacking Ray’s credibility, repeatedly pointing to inconsistencies in Ray’s numerous meetings with authorities.
He asked Ray why he first told prosecutors that the company’s compensation committee gave him permission to handpick stock options grant dates to make them more valuable.
“It was a lie,” Ray said.
The lawyer asked why Ray initially said that numerous employees in the company knew he and Karatz were backdating options, only to change his story later.
“The concept that it was an open, transparent thing was a lie,” Ray said.
Keker asked why Ray had insisted during initial meetings with authorities there was nothing improper about the way the option dates were chosen.
“I was not prepared to live up to what I had done wrong,” Ray said.
Karatz, 64, who served two decades as KB’s top executive, turning the company into one of the most successful home-building companies in the U.S., was indicted last year on 20 felony charges related to the backdating of company stock options.
Stock options allow employees to buy a certain amount of stock at a set price, usually the date that they are granted. If the stock price rises, employees can exercise their option to buy at the lower price and sell at the higher price for a profit. By selecting a date when the price was low, employees can make even more profit.
The practice is not illegal as long as it is disclosed in public filings. Prosecutors allege that Karatz made more than $6 million in additional profit by dating options from 1999 to 2005 and that he sought to keep the practice a secret from others in the company and from the Securities and Exchange Commission.
Keker said Ray implicated Karatz to get a lighter sentence.
“This whole story is something you made up in order to get your deal,” Keker said.
“No sir,” Ray answered.
