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Karatz probation sentence the latest setback for prosecutors in backdating cases

November 11, 2010 | 11:49 am

The probation sentence handed down to former KB Home chief Bruce Karatz on Wednesday was the latest in a string of disappointments in the Justice Department’s crackdown on stock options backdating.

The criminal investigations began in 2005, following the disclosure that many public companies had secretly inflated the value of executive stock options. Within four years, prosecutors had charged corporate executives from about two dozen companies across the country.

Otiswright The courtroom results were mixed, with only a handful of executives receiving prison time. 

Last December, U.S. District Judge Cormac J. Carney dismissed backdating-related charges against Broadcom Corp. co-founders Henry Samueli and Henry T. Nicholas III, accusing prosecutors of a "shameful" campaign to intimidate witnesses and obtain unjustified convictions.

Prosecutors said they would appeal the Broadcom dismissals to the 9th U.S. Circuit Court of Appeals, but in May announced that they were giving up.

On Wednesday, U.S. District Otis D. Wright II lambasted Karatz’s prosecution team for filing court papers that suggested anything less than a prison term for Karatz was evidence of a “two-tier system of justice.”

“To invite public ridicule and public scorn on this institution I think is unspeakable,” Wright told Assistant U.S. Attys. Paul Stern and Harvinder Anand.

Prosecutors were dealt another setback in 2008, when former McAfee Inc. general counsel Kent Roberts was acquitted of options-related charges.

In a sentencing memo, Karatz’s attorney, John Keker, had noted that sending Karatz to prison would have been unjust in part because few of the other executives caught up in the scandal had been sent to prison.

Prosecutors have had some success. James Treacy, former president of Monster Worldwide Inc., received a two-year sentence in 2009. In June, former Brocade Communications Systems Inc. Chief Executive Gregory Reyes was sentenced to 18 months in prison.

-- Stuart Pfeifer

Photo: U.S. District Judge Otis D. Wright II. Credit: Southwestern Law School