KB Home CEO Leaves After Errors Found

LOS ANGELES -- One of the nation's highest-paid executives has left his job after becoming ensnared in a stock options scandal that already has forced dozens of companies across the country to wipe out billions in combined profits.

Bruce Karatz, chairman and CEO of KB Homes, agreed to retire Sunday and repay the Los Angeles-based company $13 million after an internal report concluded the home construction company incorrectly reported stock option grants.

Jeffrey T. Mezger, KB's executive vice president and chief operating officer since 1999, will succeed Karatz, the company announced.

The company also announced the firing of Gary A. Ray, head of human resources, and the resignation of Richard B. Hirst, executive vice president and chief legal officer.

The board concluded Karatz and Ray "selected grant dates under the company's stock option plans," the company said. Additionally, the review found that other senior executives "had no role in establishing incorrect grant dates."

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Karatz, 61, is the latest corner-office victim of so-called backdating of employee stock options without properly accounting for the maneuver. So far, at least 30 executives and directors, including William McGuire of UnitedHealth Group Inc., have lost their jobs. McGuire resigned as chairman last month and UnitedHealth said he will step down as CEO by Dec. 1. More than 160 companies nationwide have disclosed their stock option practices are under internal review or being investigated by the government.

Backdating isn't necessarily illegal as long as backdated stock options are properly recorded on the company books. If the accounting for the rewards is bungled, it can exaggerate corporate profits and improperly lower taxes.

The company's review didn't reach any conclusion about whether there was intentional wrongdoing on Karatz's part.

The KB review found the company used incorrect measurement dates for financial reporting purposes for yearly stock option grants from 1998 to 2005, the company said in a statement. As a result of the errors, KB expects a non-cash compensation expense of no more than $50 million. It said the errors may also require an increased tax provision.

KB was still determining whether to restate previously filed financial statements. It said it was cooperating with a Securities and Exchange Commission inquiry.

Karatz was one of the highest-paid executives in 2005, making $155.9 million, mostly from exercising options, according to the Wall Street Journal. He had served as KB's CEO since 1986.

"I am extremely proud of everything that the entire KB team and I have accomplished over the past 20-plus years," Karatz said in a statement.

KB Homes, one of the largest home construction companies and land developers in the nation, said in September that revenue increased 6 percent during its fiscal third quarter but noted that net home orders fell 43 percent during the period, in part due to cancellations.

Last year, KB built more than 37,000 homes in the U.S. and France and posted nearly $10 billion in sales. It has 6,700 employees.

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