A federal judge in Los Angeles refused on Tuesday to look into whether the government committed prosecutorial misconduct in its criminal stock options backdating case against former KB Home Chief Executive Officer Bruce Karatz.
Karatz's lawyer, John Keker, founding partner of San Francisco's Keker & Van Nest, asked for an evidentiary hearing after another judge tossed out a similar case against two former executives of Broadcom Corp. In the Broadcom case, U.S. District Judge Cormac Carney of the Central District of California, who sits in Santa Ana, found numerous examples of prosecutorial misconduct, including intimidation and improper influencing of witnesses.
Calling the allegations in the KB Home case "sheer speculation," U.S. District Judge Otis D. Wright II of the Central District of California told Keker that the "little matter in Santa Ana" has "nothing to do with this case."
Of Keker's pleading Wright said, "I find it astonishing to read the argument." He said that Keker had failed to raise "anything that would approach proof of wrongdoing."
Karatz, who was KB Home's top executive between 1986 and 2006, faces 20 counts of defrauding the homebuilding company and its shareholders by awarding himself and others millions of dollars in undisclosed backdated stock options.
He is scheduled to go on trial on March 9.
In requesting the hearing, Keker cited testimony by two potential government witnesses. Specifically, he questioned why James Johnson, former chairman of the KB Home compensation committee, denied to federal prosecutors that he defended the company's option granting process in earlier statements he made to lawyers at Irell & Manella, which was conducting an internal investigation for KB Home. Keker also questioned why another witness, former human resources chief Gary Ray, pleaded guilty to obstruction of justice after insisting that the option granting process had been "lawful and proper."
Federal prosecutors called Karatz's motion a "fishing expedition" designed to attack the credibility of prosecutors who work in the same district as those in the Broadcom case.
"There's something rotten in Denmark," Keker said during Tuesday's hearing. "We'd like to get to the bottom of it."
Keker intimated during Tuesday's hearing that prosecutorial misconduct might be at the heart of why Ray suddenly agreed to a plea deal.
"They meet with him 18 times to get him to change his story," he said of the prosecutors. "Something's wrong here."
"Not necessarily," Wright concluded. He said that Keker could address concerns about misconduct during cross examination.
He granted a motion by Ray's counsel at Orrick, Herrington & Sutcliffe to quash Karatz's subpoena for documents that would shed more details about Ray's meetings with prosecutors.
