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KB Home CEO is latest ousted for backdating

The resignation of KB Home Chairman and Chief Executive Bruce Karatz in the wake of a stock options scandal leaves the company without the man who built it into one of the nation’s top homebuilders during the past two decades.
/ Source: The Associated Press

The resignation of KB Home Chairman and Chief Executive Bruce Karatz in the wake of a stock options scandal leaves the company without the man who built it into one of the nation’s top homebuilders during the past two decades.

But Wall Street analysts greeted the exit of Karatz and two other executives as positive steps while the Los Angeles-based home construction company looks to weather a steep downturn in the housing market.

“Getting the options scandal behind the company is obviously good news, as the entire management team can now start focusing on the real business at hand,” Susquehanna Financial Group analyst Stephen East wrote Monday in a note to clients.

The news of the executive shakeup at KB Home didn’t seem to faze investors. Shares climbed 96 cents, or 2.19 percent, to close at $44.78 on the New York Stock Exchange.

JP Morgan analyst Michael Rehaut upgraded his outlook for KB Home to neutral, saying in a research note that he expects the outcome of any potential fines or shareholder lawsuits to be relatively modest.

Karatz, 61, was 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 have lost their jobs at a number of companies.

KB Home said Sunday that Karatz agreed to retire immediately and repay the company $13 million after an internal report concluded the company used incorrect measurement dates for financial reporting of yearly stock option grants between 1998 and 2005.

Jeffrey T. Mezger, who joined KB Home in 1993 and had been KB’s executive vice president and chief operating officer since 1999, was named new president and CEO.

The situation also prompted the company to fire the head of its human resources department, Gary A. Ray. Richard B. Hirst, executive vice president and chief legal officer, resigned.

The inquiry revealed that Karatz and Ray had selected the grant dates for the stock options, and no other senior executives had a role in establishing incorrect grant dates.

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

The company review didn’t reach any conclusion about whether there was intentional wrongdoing. The Securities and Exchange Commission declined to comment.

KB Home refused to comment further on Monday.

KB previously said it expects a non-cash compensation expense of no more than $50 million as a result of the errors that might also require an increased tax provision.

Overall, analysts said they expect a smooth transition with Mezger, citing his tenure at the company. Rehaut said Mezger is “a strong executive and likely already part of an established succession plan.”

Still, the loss of Karatz came as KB Home and other homebuilders are struggling through a housing market slowdown.

Karatz takes with him “a tremendous amount of experience and vision that has actually served (KB Home) very well, not only during the boom but also in the early phase of the downturn,” East wrote.

Karatz joined Kaufman and Broad Inc., the precursor of KB Home, as an associate legal counsel in 1972.

He soon transitioned into the strategy side of the business and by 1976 was elevated to head of the French division. He returned to Los Angeles in 1980 and six years later was named chairman, president and CEO of newly established Kaufman and Broad Home Corp.

At the time, the company was the biggest homebuilder in California and Nevada. During Karatz’ tenure, it acquired other homebuilders and expanded its reach into 15 states spanning the U.S.

Last year under Karatz, KB Home entered into a partnership with Martha Stewart Living Omnimedia to design and build homes inspired by the homemaking maven.

Karatz also led the company through the housing boom at the outset of this decade that fueled record earnings in the industry. Last year, KB built more than 37,000 homes in the U.S. and France and posted nearly $10 billion in sales.

As income soared, so did the fortunes of Karatz, who was paid a percentage of net income. Last year alone, he earned $155.9 million, mostly from exercising options, according to the Wall Street Journal.

Lehman Brothers analyst Steven Fockens suggested KB Home’s board of directors could send a positive message to shareholders by shifting away from compensation tied to net income growth in favor of pay linked to performance of the company compared with competitors.

“Now that the leadership has changed, we strongly implore the board to rethink pay,” Fockens wrote in a client note Monday.

Fockens also called on the board to avoid giving Karatz a big exit package.