SEC Begins Formal Probe
Of KB Home Stock Options

KB Home Inc. disclosed Friday that the Securities and Exchange Commission has begun a formal investigation into the company's stock-option grants.

The Los Angeles-based home builder said in a filing with the SEC that it has cooperated with the agency regarding this matter and intends to continue doing so.

Last August, The Wall Street Journal reported that several past stock-option grants to Bruce Karatz, who resigned as KB Home's chief executive in November, were dated at unusually low points in the company's stock price.

At the time, the SEC began an informal inquiry of the company's option-grant practices.

KB Home board's audit and compliance committee undertook a review of the awards, which found evidence of options backdating. The company has said it plans to restate its financial results for the past three fiscal years and the first two quarters of 2006 as a result of additional compensation expenses stemming from incorrect option grants.

In question were four grants to Mr. Karatz between 1998 and 2001. One was dated at the stock's lowest closing of the year, another at a quarterly low, and the remaining two at monthly lows.

Mr. Karatz was one of the highest-paid executive in the U.S. in 2005, according to a Wall Street Journal survey of executive compensation. His total direct compensation in 2005 was $155.9 million, the bulk of which came from exercising options. (See the survey.)

The former chief executive agreed to retire Nov. 12 and repay KB Home $13 million after an internal report concluded the company had incorrectly reported option grants.

As of December, KB Home was still evaluating the impact of these matters on its internal controls over financial reporting.

The company's shares closed Thursday at $52.12.

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