Keker declined to comment, but in court papers filed last week he wrote: "In 2006, in the face of considerable confusion about what was and what was not 'backdating' as the term began to be used, Bruce Karatz made plain that he favored a thorough investigation by independent counsel of past practices. At no time did he 'scheme to defraud' or act with criminal intent."
NEW OPTIONS
Karatz was indicted last year on seven counts of mail fraud, five counts of wire fraud, three counts of securities fraud, four counts of making false statements in filings with the U.S. Securities and Exchange Commission and one count of lying to accountants. If convicted of all the charges, he faces a maximum sentence of 415 years in federal prison. In its March 2 trial memorandum, the government puts the profit motive up front. "Defendant was himself the principal beneficiary of this fraud, typically receiving between 250,000 to 600,000 stock options annually, which was roughly one-half of the total number of annual options awarded to KB's corporate officers," the memo states.
Barr, who represented Monster executive Treacy, said prosecutors pushed the profit motive in the case against his client. Treacy was alleged to have made more than $13 million in compensation from backdated options, a large chunk of the $23 million he received during his four years as an executive at the company.
"That was a big, big part of their case," Barr said. "Obviously, it was an important reason why they prevailed."
During Reyes' retrial last month, prosecutors told the judge that they plan to introduce -- for the first time -- evidence of options that the defendant personally received.
In the first trial of Reyes, prosecutors attempted to prove criminal intent by telling the jury that the finance department didn't know about the backdating -- a statement that landed the government in hot water before the 9th Circuit.
"The fact that prosecutors were pushed to make those representations to the jury indicates how important the prosecutors recognized they were to suggest there was evidence of mens rea," or a guilty state of mind, said Larry Ribstein, a professor at the University of Illinois College of Law.
Alleging personal profit also steers the government's case away from a debate about the accounting rule at issue, which has served as a common defense in many backdating cases, Barr said. In general, the accounting rule, referred to as Accounting Principles Board Opinion No. 25, required that companies disclose in public filings the expenses they incurred when granting options that were "in the money," or below the current market value. Option grants that were "at the money," meaning at the current share price, didn't need to be disclosed. In the KB Home indictment, the government avoided all mention of the accounting rule.
But prosecutors must still prove that the backdating was knowing and intentional, Barr said. In his trial memorandum, filed on March 3, Karatz said that the evidence in trial will show that he never thought he had committed a crime when he set grant dates. Instead, he and KB Home's former human resources chief, Gary Ray, who pleaded guilty to obstruction of justice and is serving as a government witness, "believed they were playing by the rules as they existed then. Ray thought the stock option process was proper and legal, as did Karatz, as did the legal staff who were informed of it, as did the accountants who looked at it." In the KB Home indictment, the government doesn't even specify the amount of compensation Karatz allegedly earned from the backdating, simply stating "millions."
And then there's the elephant in the room: prosecutorial misconduct. Last month, U.S. District Court Judge Otis Wright of the Central District of California rejected Keker's request to hold an evidentiary hearing regarding potential misconduct in the case. Keker had questioned the reliability of two government witnesses, drawing parallels to the Broadcom case. Wright denied the motion, calling Keker's argument "astonishing," given that he had no evidence beyond that "little matter in Santa Ana" to assert misconduct.
For prosecutors, it's a small but significant victory. "Basically, almost nothing has worked for the government," Ribstein said. "Prosecutors are going to face these problems, these troubles, in almost every backdating case."
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