Options scandal claims chairman

25 April 2008

US: Bruce Karatz has resigned as chairman of KB Home, one of the largest house builders in the US, following an investigation into the company’s past stock option scheme. Richard Hirst, the company’s chief legal officer has also resigned, while its head of human resources, Gary Ray has been fired.

Jeffrey Mezger, KB Home’s chief operating officer since 1999 will take over from Mr Karatz as president and CEO. The company is also looking for an independent non-exec chairman.

The departures came after KB Home’s own investigation found that incorrect dates had been used in financial reports relating to its stock option programme. The revised dates coincided with share price lows, so the gains were maximised when options were exercised and converted to shares. While this ‘backdating’ is not illegal, it has to be disclosed and requires special treatment for tax purposes.

According to KB Home’s investigation incorrect dates were used in its stock option programme between 1998 and 2005. These errors could cost it US$ 50 million in charges and accounting adjustments, and it is taking advice as to whether it will need to restate any accounts. Mr Karatz has also agreed to repay some US$ 13 million to the company. This equates to the extra amount he profited by due to the manipulation of dates.

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