Securities Law Blog

On April 21, 2010, Bruce Karatz, former chief executive of one of the nation’s most successful home builders, was convicted on four felony counts of fraud related to his alleged manipulation of executive stock options. The former KB Home executive was found guilty by a jury in Los Angeles, California of two counts of mail fraud, making false statements in a regulatory filing and lying to company accountants.

Back in 2006 KB Home hired an outside law firm to investigate its options policies in response to the Securities and Exchange Commission’s (SEC) and Justice Department’s increased scrutiny of stock option grants at the time. Following the investigation Karatz retired after being with the company for two decades and settled a lawsuit with the SEC for $7 million in fines and restitution to KB Home.

In March 2009, a federal grand jury indicted Karatz on 20 felony charges. The charges claimed that from 1999 until 2006 Karatz backdated his own stock options and those of other executives. The jury acquitted Karatz of 16 of the charges stating that there was no evidence of intent to defraud investors, but that he did lie about backdating to KB Home accountants in a 2006 quarterly report, according to court documents.

According to prosecutors, the alleged scheme enabled Karatz to make more than $6 million in “secret pay.”

Following the conviction, Karatz’s lawyers attested that Karatz never thought he was committing a crime, and they are looking to appeal.

On April 23, 2010 the Denver District Court issued a temporary restraining order, freezing the assets of Sean Michael Mueller and his companies, Mueller Capital Management LLC and Mueller Over Under Fund LP. The Greenwood Village, Colorado hedge fund manager has been under investigation by the Colorado State Securities Division for the past month for his alleged involvement in a multi-million dollar Ponzi scheme.

The court order to freeze Mueller’s assets came after Colorado State Securities Commissioner Fred Joseph filed for the order following the receipt of a complaint from an anonymous investor, and learned of Mueller’s failed suicide attempt on April 22, 2010. According to the state securities division, the anonymous investor also “expressed concern that Mueller was effectively operating the fund as a Ponzi scheme, representing that he has never lost money in any monthly period and providing investors with inflated expectations of returns.”

According to court documents, before attempting to jump off of a 19 story building, Mueller sent an email to investors stating, “I don’t know where to begin, so I will start with, I’m sorry. The stress of life has overwhelmed everything else. Please realize that I didn’t set out to end this way, I always thought I could pull it out in the end but events sped up to end that dream.”

According to Joseph, Mueller claimed to have a complicated investment strategy to make it sound like investors could make a lot of money. In a memorandum for the Fund filed in 2002, Mueller allegedly asked for a minimum investment of $500,000 into the Over Under Fund, claiming the fund would attempt to raise $100 million. He allegedly stated that the Fund would engage in short-term trading of stocks and would borrow money in order to leverage investors’ funds, according to court documents.