Bruce Karatz could not have relied on advice about stock-options backdating from KB Home's general counsel because he lied during an internal investigation into the practices, federal prosecutors argued in attempting to quash the former chief executive's motion for a new trial.
"Rather than establishing defendant's good faith reliance on an attorney, the record readily establishes that defendant used Hirst to perpetrate a fraud," prosecutors wrote in papers filed with the court on Monday, referring to General Counsel Ben Hirst.
A federal jury in Los Angeles found Karatz guilty on April 21 of depriving shareholders of his honest services through two counts of mail fraud, one count of making false statements in a quarterly report to the U.S. Securities and Exchange Commission and one count of making false statements to KB Home's accountants. Jurors acquitted him on 16 other counts.
Karatz, who faces up to 80 years in prison, is scheduled to be sentenced on Sept. 15.
In his motion for new trial, Keker of San Francisco's Keker & Van Nest argued that Karatz was erroneously denied an instruction to the jury declaring that his client could not have fraudulently concealed KB Home's options practices if there was proof that he had relied on Hirst's advice.
Prosecutors replied that an advice-of-counsel instruction to the jury would have had no effect on the verdict, because Karatz lied to company lawyers and auditors about backdating.
"There is no evidence in the record that Hirst advised defendant to conceal prior backdating activities from KB's shareholders and independent auditors," they wrote. "If anything, the evidence established that defendant, who had previously worked as a securities lawyer, made his own decisions in the compensation and disclosure areas and that he was not interested in seeking or following the advice of attorneys."
Keker also argued that he should have been allowed to introduce some of his client's statements to provide context to testimony by Daniel Lefler, an outside lawyer at Los Angeles-based Irell & Manella who interviewed Karatz in October 2006 about KB Home's options-granting practices.
Moreover, Keker wrote, Hirst's internal report about the company's options practices and related testimony of the company's accountant at Ernst & Young should have been considered inadmissible hearsay.
In reply, federal prosecutors insisted the Hirst report and related testimony were not hearsay, but rather demonstrated intent.
"Generally speaking, under the rules of evidence, statements a defendant makes which are essentially admissions are not hearsay," Assistant U.S. Attorney Paul Stern said in an interview. "But statements that a defendant makes that are exculpatory are hearsay and are not admissible."
In his motion for acquittal, Keker wrote that there was insufficient evidence to support the mail fraud convictions because the government failed to present evidence that the two documents at issue had been mailed. Prosecutors argued that they could introduce routine practices to establish proof that something had been mailed.
Finally, Keker cited Skilling v. U.S. (pdf), in which the U.S. Supreme Court addressed one of the legal theories on which the mail fraud counts are based -- that Karatz deprived KB Home of his honest services.
Prosecutors acknowledged that they hadn't charged Karatz with kickbacks or bribery -- the standard for claims of honest services fraud established in Skilling. But they added that Karatz nevertheless committed fraud in the form of millions of unexercised and backdated stock options.
"The jury found specifically in its verdict that he was guilty on both the money and property theory and the honest services theory," Stern said.
Keker did not return a call for comment.
A hearing on the motions is scheduled for Sept. 8.