Bruce Karatz’s legal team shifts focus to keeping him out of prison

One day after he was convicted on felony charges related to the manipulation of stock options, former KB Home Chief Executive Bruce Karatz and his legal team shifted their focus Thursday to a new legal battle: trying to keep him out of prison.

Defense attorneys have said they intend to ask U.S. District Judge Otis D. Wright II to reverse the four convictions for lack of evidence. That motion is expected to be filed next month.

Barring a reversal, Karatz’s defense team has indicated that it will appeal. That action is likely to address two rulings the defense lost during the trial. One would be that Wright declined to instruct jurors that they would have to find Karatz not guilty if they believed he was acting on the advice of his attorneys when he committed the actions in question.

An appeal could also focus on the judge’s decision to prohibit the defense from calling a legal expert to testify about how executives make decisions based on the advice of their lawyers. During the trial, a former KB Home lawyer testified that she did not think the way the company priced its options was illegal.

Matthew Levine, a former federal prosecutor who handled one of the first option-backdating cases, said the jury instruction issue could have merits.

“If the judge found there was a little bit of evidence” that Karatz had acted on the advice of attorneys, “the jury ought to be able to consider that,” said Levine, who now practices white-collar criminal defense in New York. “So that’s potentially a real appellate issue.”

Any appeal, however, could not be filed until after Karatz is sentenced Sept. 8. The sentence itself will also be a point of contention.

Federal legal experts say Wright will have broad discretion when imposing sentence — anything from probation to as many as 10 years in prison.

Karatz was convicted Wednesday on four charges related to his efforts in 2006 to conceal the company’s backdating of stock options. The jury acquitted Karatz of 16 other charges, rejecting prosecutors’ argument that he intentionally defrauded shareholders by backdating options and failing to properly account for the practice in regulatory filings.

Legal experts said a key point of contention at sentencing is likely to be whether Karatz’s actions caused a financial loss to KB Home or its shareholders. Prosecutors have said that Karatz made more than $6 million in “secret pay,” by backdating options to make them more valuable. If Wright attaches that loss to the four charges on which Karatz was convicted, it could add years to his potential sentence, legal experts said.

Bruce Karatz: An article in Friday’s Business section about the legal strategy of former KB Home Chief Executive Bruce Karatz after his conviction on fraud charges said the company earned $11 billion in 2006. KB Home reported $11 billion in revenue, not earnings, for that year.

The jury’s verdicts came on its seventh day of deliberations. During a monthlong trial, prosecutors had portrayed Karatz as a greedy executive who manipulated options to get a deal unavailable to the public.

Defense lawyers said he never intended to defraud shareholders and thought the company handled its options properly. They put on a star-studded defense, calling former Los Angeles Mayor Richard Riordan and billionaire philanthropist Eli Broad — one of KB’s founders — as character witnesses.

He was one of the most prominent executives in the country to face criminal charges in the government’s long-running crackdown on stock-options backdating. The company had flourished under Karatz’s leadership, reporting a record $11 billion in revenue in 2006. He was one of that nation’s highest-paid executives.

Karatz, who left the courthouse hand in hand with his wife, Lilly Tartikoff, issued a statement after the verdicts that said he remained proud of the work he did at KB Home.

“Bruce is doing remarkably well and he remains very optimistic,” defense attorney Elliott Peters said.

Prosecution and defense attorneys declined Thursday to comment on the appropriate sentence. Karatz, 64, who ran the Westwood-based company for two decades, remains free on $2-million bond, secured by his Bel-Air house.

Defense attorney Peters said he would ask that Karatz remain free on bond, even after sentencing, until his appeals are exhausted. That process could take one year or longer.

“I think it’s standard for a person in this situation,” Peters said. “I would expect him to remain on bail.”

Jurors found that Karatz attempted to conceal the backdating in 2006 when he caused the company’s general counsel to write a report that said the company had never backdated options.

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 mixed verdict seemed unusual to John Hueston, a former federal prosecutor who now practices white-collar defense in Orange County.

“It’s stunning and highly unusual for a jury to buy a cover-up, but not the underlying crime,” said Hueston, who prosecuted the Enron fraud cause when he was with the U.S. attorney’s office. “It’s almost mind-boggling. If they found there was no fraud, there should not have been a cover-up.”

“The defense will likely argue that the jury nonsensically convicted Karatz for the cover-up and not the crime itself. That presents a strong argument for the sufficiency of the evidence.”