The former CEO and chairman of the board of KB Home, Bruce E. Karatz, is facing a prison term after being convicted of four felony county related to a stock-option backdating scheme, prosecutors said.

Karatz, 64, of Bel Air Estates, Calif., was accused of attempting to cover up the backdating of his own and other executives’ stock options for seven years. The 2006 cover-up included failures to disclose the stock-option backdating in filings with the U.S. Securities and Exchange Commission and to KB’s outside auditors, prosecutors said.

After KB Home discovered irregularities in its reporting, the company was unable to file a quarterly report with regulators as scheduled in October 2006. KB Home filed the report and the company’s 2006 annual report in February 2007. The reports recognized more than $36 million in previously undisclosed stock-based compensation expenses, and a total increase of more than $70 million in accrued liabilities arising from adjustments required to address the backdated stock options.

Karatz was found guilty Wednesday of two counts of mail fraud, one count of making false statements in a quarterly report filed with the Securities and Exchange Commission, and one count of making false statements to KB’s outside accounting firm, Ernst & Young, prosecutors said. The jury in the six-week trial acquitted him on 16 other counts.

Karatz faces a statutory maximum sentence of 80 years in federal prison when he is sentenced by U.S. District Judge Otis Wright on Sept. 8.


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