Karatz, who has already been forced to pay $20
million to the company and the federal government in connection with
the case, faces up to 415 years in prison if convicted on all 20 counts
of the indictment, which includes charges of fraud and making false
statements.

The indictment said Karatz orchestrated the
backdating of stock options from 1999 to 2006. Stock options typically
are granted to employees with an exercise price tied to the date of the
grant. Companies can legally backdate stock options to a date when the
stock price was lower -- insuring an immediate paper gain -- but they
must account for it properly, pay taxes accordingly and report the
backdating to shareholders.

In the KB Home case, the backdating
was not disclosed until nearly a decade after it began. The company was
forced to adjust its financial statements by $70 million when the
backdating of options held by Karatz and other shareholders was finally
disclosed in 2008.

In Karatz's case, the backdating made his
stock options worth $1.63 to $4.56 more per share, according to the
indictment -- a fact that should have been disclosed to other
shareholders, it said.

The indictment does not say exactly how
much Karatz gained as a result, but KB Home required Karatz to pay back
$13 million in backdating gains when he left the company in 2006. And
the SEC agreed to a settlement of $7.2 million with Karatz in 2008 to
cover what it reckoned were his gains.

Karatz has long been a
target of shareholder activists and labor unions, who accused him of
taking more than his fair share of company profit. In 2005, the year
before he stepped down, Karatz had take-home pay of $6.3 million, but
he received an additional $150 million, mostly from exercising stock
options.

"For the whole backdating scandal, he was one of the
biggest poster CEOs," said Patrick McGurn, a special counsel for New
York-based Risk Metrics Group who specializes in executive
compensation. "He had to hand back more of his gains than almost anyone
else."

The indictment accuses Karatz of concealing the practice
from KB's board of directors and compensation committee as well as from
shareholders.

It alleges that when KB undertook an internal
investigation into the stock-option grants in May 2006, Karatz falsely
denied his orchestration of the backdating scheme and caused a false
report of KB's options practices to be submitted to the company's
auditors, resulting in improper disclosures in filings with the
Securities and Exchange Commission.

The SEC and other agencies
have investigated more than 250 companies for backdating improprieties
since 2005, and there have been some large settlements. In December
2007, United Healthcare CEO William W. McGuire agreed to pay $458
million to settle a civil case with the SEC over backdating.

The KB Home case produced one of only a handful of criminal indictments under which executives might lose more than money.

The
case also stands apart because of how much Karatz himself allegedly
benefited. In most of the backdating cases, including the case of
Broadcom founders Henry T. Nicholas III and Henry Samueli, the
companies and executives are accused of using backdating to attract and
keep employees.

"Companies can say they were using these options
to equalize the pay among employees who entered at different times,"
said Michael Lemmon, a University of Utah finance professor who has
studied backdating. "It becomes a much harder story to sell when you
have the CEO benefiting personally."

Karatz's resignation in
November 2006 surprised Wall Street analysts who had watched him, since
he took over as CEO in 1986, expand the company from its Los Angeles
roots into one of the country's largest home builders.

more...http://www.latimes.com/business/la-fi-karatz6-2009mar06,0,6937523.story?track=rss