Shelling out more than $7 million for taking part in a scheme to secretly backdate options isn’t chump change for Bruce Karatz – but it’s not exactly breaking his bank either. Keep in mind that in his last three years as CEO of KB Home, Karatz collected more than $232 million in compensation ($135.6 million in his last year alone). In case you forgot, backdating happens when executives issue stock options for themselves and then go back and re-date them to an earlier point when the stock price was low. That way, they can purchase shares later on at that low price. Backdating is not illegal, but you have to disclose it to shareholders, which Karatz did not do.
As part of the deal, he'll pay $6.7 million in compensation and interest to KB and a $480,000 penalty to the U.S. Treasury. He’s also barred from serving as an officer or director of a public company for five years. Karatz, who declined to comment on the settlement, was ousted from the company when the backdating allegations were disclosed. Throughout the SEC inquiry, Karatz virtually disappeared from sight, quite a turnabout for a guy who had been a veritable party animal within the L.A. biz world. All he offered yesterday was a short statement from his high power attorney, John Keker: "Bruce is pleased to be able to put this matter behind him and is looking forward to focusing on the next chapter in his life." Here's the LAT story and here's the SEC press release. From the SEC:
The Commission's complaint, filed in federal court in Los Angeles, alleges that from at least 1999 through 2005, Karatz enriched himself and others at KB Home by using hindsight to pick advantageous grant dates for KB Home's annual stock option grants. On many occasions, the grant dates coincided with dates of low monthly closing prices for the company's common stock. In addition, the complaint alleges that Karatz continued to use hindsight for stock option grant dates even after the Sarbanes-Oxley Act of 2002 imposed stricter reporting requirements on officers of public companies. The complaint also alleges that, because of the backdating scheme, KB Home filed periodic reports and proxy statements with the SEC that inaccurately stated that KB Home granted options at fair-market-value on the date of the grant. Karatz received backdated annual stock option awards amounting to 2,860,000 shares of KB Home stock and profited more than $6 million from exercising many of these options.
I profiled Karatz in the May, 2007 issue of Los Angeles magazine. It's no longer available online, but here are some snippets:
There are plenty of people in L.A.’s business world who weren’t exactly sorry that Karatz got into trouble. Some of the gripes I heard were trivial, others more serious. But much of it came down to his studious avoidance of confrontation—in business and in relationships. Get a friend or a lackey to deliver bad news. Hope that the bad news will go away. Make a high-profile gesture and then back off. One person who had a ten-year working relationship with Karatz outside of KB told me that out of the blue, with no explanation, the assignments stopped coming in. After more than three months of being ignored or getting excuses from assistants, the person finally got Karatz on the line at his Beverly Hills home. “I’ve been dreading this call,” the employee remembers Karatz saying. “I wondered why he was dreading it. I was the one who was out of a job.”
Karatz’s extravagant lifestyle was fueled by a generous employment agreement with KB. To be fair, a lot of his freebies are standard issue in the CEO world: tickets to sporting events, meals and lodging, financial planning and tax preparation services, club membership fees, and an automobile and gasoline allowance. But sometimes the lines between Karatz’s personal and business life blurred, especially in the use of company-owned aircraft for personal outings. Last year those expenses totaled $558,009, more than double the figure from a year earlier (General Electric chairman Jeffrey Immelt expensed $219,533 for use of the GE plane). David Gilbreath, Karatz’s former personal trainer, says it wouldn’t be unusual for Karatz to call on a Friday morning and say, “What are you doing on Sunday? Meet me at the airport. We’re going to Monterey to play some golf.”