Ex-CEO Karatz is dealt blow in KB Home option case
A federal judge on Tuesday declined to investigate alleged misconduct by prosecutors in the stock option backdating case against former KB Home Chief Executive Bruce Karatz, citing an “astonishing” lack of evidence to support the allegations.
In a motion filed last month, Karatz’s lawyers accused prosecutors of manipulating witnesses in the upcoming trial, saying two former KB Home employees who once supported Karatz later changed their accounts after meeting with prosecutors. They asked the court to conduct a hearing to determine whether prosecutors crossed any lines during the investigation.
But U.S. District Judge Otis D. Wright II rejected the claims during a hearing at the federal courthouse in Los Angeles. The judge said he was particularly troubled by defense assertions that a finding of prosecutorial misconduct in the failed options case against Broadcom Corp. co-founders Henry Samueli and Henry T. Nicholas III was a sign that something could have gone awry during the Karatz investigation.
“I just find it astonishing to read this argument without anything that would approach proof of any wrongdoing at all,” Wright said, while addressing Karatz’s attorney, John Keker. The judge said that the defense team could cross-examine witnesses about any contact they had with prosecutors before the trial.
Karatz, 64, who rode the housing boom to become one of the highest-paid executives in the country, faces 20 counts of fraud and making false statements during an investigation of his company’s option grants. The trial is scheduled to begin March 9.
Keker had singled out two witnesses in the case: James Johnson, former chairman of the Westwood home builder’s compensation committee, and Gary Ray, the company’s former vice president of human resources.
They have both told prosecutors that they believe KB executives inappropriately changed option dates to enrich employees.
Stock option grants allow employees to buy stock at a set price -- usually the price on the day they are issued. If the stock price rises, employees can exercise their option to buy the stock at the low price and sell it at the current price for a profit. Backdating the options to a date when the price was lower can make them more valuable.
Companies are allowed to backdate option grants as long as they disclose it. In the KB Home case, the backdating was not disclosed to shareholders for nearly a decade.
The company ultimately adjusted its financial statements to account for $70 million in option-related expenses.
