Majestic Research

Associated Press

SEC Probes KB Home Stock Options Grants

Published: January 26, 2007

Homebuilder KB Home said Friday that the Securities and Exchange Commission has launched a formal investigation into its stock option granting practices. In a brief regulatory filing, the company said it was cooperating with the SEC probe.

Last August, KB Home (nyse: KBH - news - people ) received an informal inquiry from the SEC relating to its option practices. In November, the company’s chief executive, Bruce Karatz, and two other executives were forced to step down after it was disclosed that Karatz was the beneficiary of favorably dated option awards.

KB, one of the country’s largest homebuilders, said it expected to record additional expenses of no more than $50 million and was investigating whether it needed to restate earnings for prior periods. The company has also delayed filing financial statements as a result of its internal probe.

Karatz agreed to repay the company $13 million after an internal report concluded the company used incorrect measurement dates for financial reporting of yearly stock option grants between 1998 and 2005. The company fired the head of its human resources department after it found he was involved in the backdating.

The company’s executive vice president and chief legal officer resigned at the same time.

“This type of internal turmoil is not coming at a good time,” John Tomlinson, senior analyst at Majestic Research in New York, said Friday.

Tomlinson forecast in December that KB Home would report a decline in domestic home orders of between 45 percent and 50 percent.

Last June, the company revised its 2006 outlook downward, citing decline in new home demand and increases in the volume of unsold homes on the market.

Tomlinson said a formal SEC probe “takes away management’s time from focusing on the bigger picture issues.”

About 107 companies are currently under scrutiny by the SEC or the Department of Justice for possibly backdating stock-option grants, and at least 92 other companies not facing a federal probe have launched or completed internal reviews into their stock options practices.

KB Homes shares fell $1.14, or 2.2 percent, to close at $50.98 Friday on the New York Stock Exchange.