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Jury still out in Karatz options backdating case

April 16, 2010 |  9:44 am

A federal jury in Los Angeles began its fifth day of deliberations Friday in the stock options backdating prosecution of former KB Home chief Bruce Karatz.

The jury of nine men and three women began deliberations April 9 following one month of testimony before U.S. District Judge Otis D. Wright. The panel did not meet on Monday.

Karatz, 64, faces 20 felony charges of securities fraud, wire fraud, mail fraud, making false statements to accountants of a public company and making false statements in regulatory filings.

Prosecutors said Karatz backdated option grants for himself and other executives from 1999 to 2005, adding $6 million of compensation that was not disclosed to shareholders.

Karatz did not testify at the trial. Defense attorney John Keker told jurors that Karatz did not intend to defraud shareholders and had handled options the same way that many other executives did around the country.

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.

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.

Karatz served as KB Home's top executive for two decades before stepping down in 2006. He later paid $7.2 million to settle a backdating lawsuit with the SEC. Of that amount, more than $6 million was returned to KB for what the SEC determined were ill-gotten profits from the backdated options

-- Stuart Pfeifer