Summary
KB Home acknowledges that it is the subject of a civil investigation of possible stock option backdating violations by the U.S. Securities and Exchange Commission (“SEC”). As with similar stock option backdating investigations of other companies, the SEC’s investigation will likely trigger a corresponding investigation by the U.S. Department of Justice (“DOJ”). Thus, any stock analysts that follow KB Home must hope for the best but prepare for the worst!
Analysis
As a former Assistant Chief Accountant with the SEC’s Division of Corporation Finance in Washington, D.C., I can attest to the fact that the civil implications of the SEC investigation, as well as the criminal implications of the likely DOJ investigation, on KD Home could be significant. In this regard, I would refer any interested parties to the consequences incurred to date by Brocade, Mercury and Comverse!
If found guilty of stock option backdating by the SEC, the SEC would likely impose civil sanctions on KD Home that may include, but not necessarily be limited to, fines and penalties, temporary or permanent suspensions or disbarments (i.e. terminations) of complicit directors and/or executives, including CEO Karatz, and mandated enhancements to corporate governance and internal controls. Any related settlement with the SEC will also be accompanied by the entering into of a cease and desist order whereby any subsequent violations of the federal securities laws could result in even more severe civil, and possibly criminal, sanctions against KB Home.
If also ultimately found guilty of stock option backdating by the DOJ, the DOJ would likely seek criminal sanctions on KB Home that may include incremental fines and penalties. The DOJ would also likely pursue criminal prosecutions of any complicit directors and/or executives, including CEO Karatz, which if successful would result in their immediate terminations.
As such, any stock analysts that follow KB Home must prospectively monitor the situation closely…hoping for the best yet preparing for the worst!
