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Former KB Home CEO was sentenced to house arrest

Jaclyn Giovis Nov 11, 2010

Former CEO of KB Home is going to be stuck at home for eight months.

A federal judge is making sure Bruce Karatz doesn’t leave his 24-room Bel Air mansion.

Karatz was convicted of fraud in a stock backdating scandal. On Wednesday, U.S. District Judge Otis Wright II ordered him to home confinement – a much lighter punishment than the one the government sought. Prosecutors had pushed for a minimum sentence of six years in prison.

The former CEO also was sentenced to serve five years probation, pay a $1 million fine and put in 2,000 hours of community service.

Karatz was among the highest-paid executives in the U.S. before resigning from KB Home in 2006 amid the backdating scandal.

Companies backdate by retroactively pricing option grants on days when a company’s stock price is low. This increases the value of the options and secures financial gains for employees.

The practice is legal, so long as companies record the options as a non-cash compensation expense. Still, the U.S. Department of Justice has charged some executives for failing to disclose the practice.

Prosecutors say Karantz cost KB Home and its shareholders about $11 million. But there was question about how much his crime hurt anybody, which prompted some to propose the lesser sentence.

Joshua Fershee, a law professor at the University of North Dakota, said the case represents a much bigger issue: whether sentencing guidelines are unfairly harsh to low-level criminals like drug dealers. And whether they’re too light for white-collar criminals like Karatz.

Prosecutors argued that house arrest for Karatz would amount to a two-tiered criminal justice system, considering his house spans a one-acre property.

Marketplace Reporter Alisa Roth contributed to this report.

Reuters also contributed to this report.

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