KB Home CEO Bruce Karatz Out Amidst Stock Options Review

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Homebuilder KB Home (KBH) announced Sunday that chairman and CEO Bruce Karatz is retiring after an internal investigation uncovered errors in the company's accounting of stock option grants.

The review found Los Angeles-based KB 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, the company expects a non-cash compensation expense of no more than $50 million.

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

Karatz's retirement is effective immediately, the company said. He is expected to return approximately $13 million to the company after accounting for the new measurement dates.

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

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."

In backdating, an option's grant date is manipulated to appear to have been made at a time when the company's share price was low. That increases a recipient's potential profit since options are usually structured to give recipients the chance to benefit from share price raises.

Karatz was one of the highest-paid executives in 2005, making $155.9 million, mostly from exercising options, according to the Wall Street Journal.

The company, one of the largest homebuilders 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.