KB Home shares drop after news of SEC probe

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NEW YORK -Shares of KB Home dropped Monday after the company said the Securities and Exchange Commission is investigating it for possible accounting and disclosure violations.

On Friday, the homebuilder said in a regulatory filing that the SEC had notified it on Oct. 2 that a "formal order of investigation had been issued regarding possible accounting and disclosure issues."

In midday trading Monday, KB Home shares dropped $1.01, or 6.1 percent, to $15.45.

KB Home said in the filing it was cooperating with the investigation. The Los Angeles company said it did not believe liabilities or costs from the probe would have a material effect on its financial position or operations.

It added that the SEC had stated that the investigation shouldn't signal that there has been a violation of federal securities laws.

There were no additional details on what the SEC was investigating.

On Monday, KB Home spokeswoman Heather Reeves said in an e-mail that the company "strives to operate its business with the utmost transparency and integrity, and in accordance with generally accepted accounting principles. While the SEC has not specified the subject matter and we cannot speculate on it at this time, we understand that part of the SEC's mandate is to conduct these sorts of investigations, which it has done with hundreds of public companies over the past few years."

Last September, KB Home's former CEO, Bruce Karatz, paid nearly $7.2 million to settle SEC charges of backdating stock options. He was forced to resign in 2006 after the company said he had been the beneficiary of favorably dated option awards. The company's executive vice president and chief legal officer resigned at the same time.

In March, Karatz pleaded not guilty in federal court in California to charges related to the backdating scheme, which allegedly lasted from at least 1999 through 2005 and from which he profited more than $6 million.

In May, the former head of human resources, Gary Ray, agreed to pay more than $540,000 to settle civil charges that he schemed to backdate stock options to make them more valuable.

Pali Capital analyst Stephen East said the company has gone through a "massive overhaul" since then. The current CEO, Jeff Mezger, has been "refreshingly forthright" and has focused on transforming the company's operations, he said in a note to investors Monday.

"Given the scrutiny this company and revamped and strengthened management team has endured, we would find it quite surprising if this investigation surrounded recent practices that were material to the financial statements," East wrote. The investigation could revolve around such issues as accounting related to inventory impairment, mortgage finance operations or joint ventures, he added.

2009-10-12 12:49:21