Grabbing ahold of recent findings of prosecutorial misconduct in stock options backdating cases, lawyers for the former head of KB Home have asked for a hearing into whether misconduct has tainted a similar backdating case against their client.
Bruce Karatz, who was chief executive of KB Home from 1986 to 2006, faces 20 counts of defrauding the Los Angeles homebuilder and its shareholders by awarding himself and others millions of dollars in undisclosed backdated stock options. He was accused of concealing the backdated options from KB Home's board of directors, compensation committee and shareholders for seven years.
His trial is scheduled for Feb. 23.
On Jan. 4, Karatz's lawyers filed a motion requesting that U.S. District Judge Otis D. Wright II of the Central District of California hold a pretrial evidentiary hearing regarding the testimony of two government witnesses.
Both "firmly believed that the stock options grant practice was lawful, and they were willing to say so," Karatz's lawyers wrote. "Once the prosecutors got ahold of them, that changed."
Specifically, Karatz's lawyers want to question James Johnson, former chairman of the board's compensation committee, about why he denied to federal prosecutors that he had defended the company's option granting process in previous statements made to KB Home's outside counsel, Irell & Manella, which was conducting an internal investigation of options backdating.
"How and why Mr. Johnson made two such distinct set of statements, going so far as to falsely deny having made the first set, is an issue of the utmost importance, which implicates Mr. Karatz's due process right to a fair trial," the motion reads.
The defense team also wants to find out how Gary Ray, KB Home's former vice president for human resources, became a cooperating government witness after pleading guilty to obstruction of justice. Before and after the plea agreement, according to the motion, Ray had maintained that the option granting process had been "lawful and proper," the motion says.
The motion cites a Dec. 15 ruling in the backdating case against William Ruehle, the former chief financial officer of Broadcom Corp. U.S. District Judge Cormac Carney blasted federal prosecutors for "distorting the truth-finding process" in that case. Carney, who threw out the government's indictment against Ruehle and Broadcom co-founder Henry Nicholas, found that federal prosecutors had intimidated and improperly influenced key witnesses.
The motion also cites the government's backdating case against Gregory Reyes, the former chief executive of Brocade Communications Systems Inc.. A federal appeals court overturned his conviction last year after finding that prosecutors had incorrectly claimed during closing arguments that Brocade's finance department didn't know about backdating.
A hearing on the Karatz motion is scheduled for Feb. 8.
Karatz's lawyers -- John Keker of Keker & Van Nest in San Francisco and Michael J. Proctor of Caldwell Leslie & Proctor in Los Angeles -- did not return calls for comment.
Thom Mrozek, a spokesman for the U.S. Attorney's Office for the Central District of California, which is prosecuting the case, said: "We'll respond to the allegations when we respond to the motion with the court."
