KB Home Faces Formal SEC Probe

Stock options mess causes restatement dating back to 2003.

The Securities and Exchange Commission has reclassified its probe of the stock option granting practices at KB Home to a formal investigation. In August, officials at the home builder said the company had received an informal inquiry from the regulator.

In an SEC filing on Friday, the company assured investors that it has cooperated with the commission regarding this matter and intends to continue to do so. Last month, the company said it will restate its financials going back to its 2003 fiscal year after a board subcommittee concluded it used incorrect measurement dates for financial reporting purposes for annual stock option grants for the fiscal years 1999 to 2005. It also said that it estimates the total non-cash compensation expense will amount to about $41 million spread over several years.

The restatement also will affect financial statements for other prior fiscal periods. However, the company noted that the stock options-related restatement will not affect previously reported revenues.

In November, chairman, chief executive officer and director Bruce Karatz retired following an internal investigation that found that he and Gary A. Ray, the head of human resources, “selected grant dates under the company’s stock option plans,” according to a regulatory filing at the time. Ray was fired, and Richard B. Hirst, KB’s chief legal officer resigned.

Karatz agreed to repay the company about $13 million that he had received as a result of the mispriced options. In 2005, Karatz earned about $156 million, which included more than $118 million from gains on exercised stock options and another $28 million in restricted stock awards.

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