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Jury begins deliberations in trial of former KB Home CEO Bruce Karatz

A jury began deliberations Friday in the monthlong stock option backdating trial of former KB Home Chief Executive Bruce Karatz.

Karatz, who faces 20 felony charges, is accused of making millions of dollars by backdating options and then trying to hide the practice from shareholders and outside accountants.

The jury of nine men and three women began deliberations Friday afternoon in the Los Angeles courtroom of U.S. District Judge Otis D. Wright II.

Assistant U.S. Atty. Paul G. Stern told jurors that Karatz backdated stock options from 1999 to 2005, making $6 million in illegal profit in the process.

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“What this case is about is the defendant taking unauthorized compensation from the company and from the shareholders and not disclosing it,” Stern said.

Karatz, 64, who served as KB’s chief executive from 1986 to 2006, did not testify at the trial.

Defense attorney John Keker said Karatz did nothing improper and was open with accountants and lawyers about how grant dates for the options were chosen.

Regulations regarding stock options were confusing, Keker said, and KB Home was one of about 200 public companies that restated earnings after 2005 to clear up option expenses.

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“I’m not asking you for favors. I’m not asking you for mercy. I’m asking you to do the right thing, and you’ll end up deciding Mr. Karatz is not guilty . . . and send him home to his family,” Keker said.

Stock options are a form of incentive-based compensation. They allow eligible employees to buy stock at a certain price, usually the closing price on the date they’re granted. If the stock price rises, employees can exercise their option to buy at the lower price and sell for a profit.

If options are backdated to a date when the stock price was lower, they can be more valuable.

Backdating is not illegal as long as the practice is disclosed in public filings with the Securities and Exchange Commission. Prosecutors allege that KB Home backdated millions of options without making the required disclosures.

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KB Home, one of the nation’s largest home builders, was forced to restate its earnings in 2007, disclosing $36 million in previously unreported compensation expenses related to backdated options.

stuart.pfeifer@latimes.com


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