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Updated from 1:36 p.m. EST

The homebuilding industry's first stock-option scandal has resulted in a high-profile eviction.

KB Home's

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longtime CEO Bruce Karatz stepped down after the board found evidence that he and the company's human resources chief oversaw a massive stock-option backdating scheme.

The company will revise its accounting from 1998 to 2005, adding $50 million to stock-compensation costs and possibly increasing its taxes. The Los Angeles-based homebuilder is considering a restatement.

KB Home named Jeffrey T. Mezger, its chief operating officer since 1999, CEO. The company will search for a nonexecutive chairman and named director Kenneth Jastrow lead director.

The board terminated the employment of Gary A. Ray, head of human resources. Richard B. Hirst has resigned as executive vice president and chief legal officer.

Shares of KB Home recently were up 90 cents, or 2%, to $44.72.

Karatz had served as CEO since 1986 and chairman since 1993. Under his direction, KB Home built itself into one of the country's best-performing homebuilders.

From 2001 to 2005, the company grew earnings per share at a 29% compound annual growth rate. This year, the company's earnings per share are expected to fall 15% as the U.S. housing market continues its rapid slowdown.

There's no question that Karatz screwed up a good thing.

"He's a first ballot Hall of Famer" without this scandal, says a hedge fund manager who invests in the space. "He made himself very rich and could've put a stake in the ground and said 'I win.' Instead, he had to get a little greedy," the manager says.

Karatz already ranked among the nation's highest-paid CEOs. Last year, he took home $6.1 million in salary and bonus, and he also exercised $118.4 million of stock options.

The company said Karatz agreed to pay the difference between the initial strike price and the closing price on the new measurement date for options he has exercised that were incorrectly priced. In addition, with respect to unexercised options, Karatz has agreed that each new strike price will be the closing price on the new measurement date. This is expected to involve an aggregate voluntary value transfer from Karatz to the company of approximately $13 million.

The board said it concluded that Karatz and Ray selected grant dates but the board, Mezger and the other current senior executives had no role in establishing incorrect grant dates. KB will search for new hires in the new posts of chief compliance officer and risk assessment officer.

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In a research note, Bank of America analyst Daniel Oppenheim said he believes Mezger will be able to maintain KB Home's strong operations, because he has held the operating chief position for so long and has worked at the company since 1993.

"However, we think the main challenge for Mezger will come in terms of establishing a similar leadership persona at the company," Oppenheim wrote.

KB Home is the only homebuilder to have disclosed a probe into stock-options backdating, a scandal that has hit a wide swath of industries this year.

The tech sector, which tends to more frequently use stock options as incentives, has been hit the hardest. Executives at companies including


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Monster Worldwide

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have lost their jobs.

To date, executives from

Comverse Technology



Brocade Communications


are the only ones to face criminal charges related to their companies' backdating scandals.

While it's not clear exactly which offenses led to those criminal charges, in both cases there was something more than backdating going on, says an attorney who represents other companies being investigated for backdating of options.

In both cases, the executives allegedly used false documents and lied to auditors, according to the

Securities and Exchange Commission

and prosecutors. The attorney, who requested anonymity because of the ongoing cases, says that activity is likely what led to the criminal charges.

So far, there is no mention of such criminal activity by Karatz or others at KB Home.

Backdating of options is not illegal per se. Problems arise when companies do not properly disclose their options plans or don't account for the compensation effect from them, the attorney says.

As well, some companies have gotten into trouble because they violated their own options polices. It's not clear if this occurred at KB Home.