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Former KB Home exec pleads guilty in options-scandal case

December 15, 2008 |  7:15 pm

KB Home Corp.’s former head of human resources has agreed to plead guilty to conspiring in 2006 with then-CEO Bruce Karatz to obstruct a probe of options-backdating at the L.A. home builder.

Gary A. Ray, 50, signed the plea agreement today, the U.S. attorney’s office in L.A. said in a statement. He faces up to five years in prison.

KB Home fired Ray in November 2006 after the company said he and Karatz, the firm’s longtime CEO, had a direct role in cherry-picking dates for stock option grants, after the fact, so as to inflate their value for executives.

Normally, the purchase, or exercise, price of an option is supposed to be the stock price on the date of the grant. By backdating grants to days when the stock price was particularly low, a company could turn options into guaranteed income for officers.

KB Home is one of more than 200 companies that have been investigated in the options scandal since 2005. The backdating practice, routinely hid from shareholders, was another way executives found to enrich themselves.

Ray "agreed to plead guilty to conspiring with the CEO of KB in spring 2006 to impede and obstruct a contemplated investigation by the Securities and Exchange Commission into stock option backdating at KB," the U.S. attorney’s statement said.

Ray said he and Karatz collaborated to cause the firm's general counsel to submit a "false and misleading report" on KB Home's option-granting practices to the company's directors, the government said.

There was no mention of Karatz, by name, in the statement. Karatz, 63, left the company at the same time Ray was fired.

In September of this year Karatz agreed to pay more than $7 million to settle SEC claims that he took part in the backdating scheme, but as usual in civil settlements, he didn’t admit or deny wrongdoing.

The government said its criminal probe of the KB Home case was continuing, and that Ray had agreed to cooperate.

"Corporate officers have an obligation to truthfully report the operations and financial activities of the companies that they serve, particularly in the area of executive compensation," said U.S. Atty. Thomas P. O’Brien. "Efforts to corrupt compliance with these reporting obligations and to obstruct the oversight function of the SEC will be aggressively investigated and prosecuted by this office."

-- Tom Petruno