KB Home Chairman and Chief Executive Bruce Karatz is retiring after an internal investigation found that he personally backdated stock option grants to increase his pay.


An internal review found the Los Angeles-based homebuilder used incorrect measurement dates for financial reporting purposes on stock option grants between the years of 1998 to 2005 leading to a non-cash compensation expense of around $50 million, the company estimates. KB also said it may restate previously filed financial statements.


Karatz's exit is effective immediately. He will also have to return approximately $13 million to the company after accounting for the correct measurement dates. Jeffrey Mezger, KB's executive vice president and chief operating officer, will replace him.


Shares in KB rose 85 cents to $44.67 in trading Monday. Analysts said that Karatz's departure helped to quash speculation about the company.


In upgrading the company from a sell to a hold, J.P. Morgan Securities analyst Michael Rehaut called Karatz's departure "the removal of a potential overhang" that drove the new neutral rating. He added the "outcome of any potential fines or shareholder lawsuits will also be relatively modest."


Rehaut is in line with other analysts 10 of the 15 analysts who cover the company rate it a hold. There are four buys and one sell, according to Bloomberg News.


The company also fired Gary Ray, head of human resources, and announced the resignation of Richard Hirst, who served as executive vice president and chief legal officer. At least one analyst speculated that more KB executives could be leaving the company in the near future.


"We would not be surprised to see more turnover at the company in the near future, as we think some changes at the board level are possible following the appointment of a new chairman," said Daniel Oppenheim, an analyst with Banc of America Securities LLC.


The news comes only days after the company said it would delay its third quarter earnings because of the review. KB released preliminary third quarter results last week showing a 32 percent dip in net income to $155.3 million ($1.93 per share), compared to $227.5 million ($2.55) from the same period a year earlier.


Karatz was one of the highest-paid executives last year, making $156 million, mostly from exercising options, reports said.


"I am extremely proud of everything that the entire KB team and I have accomplished over the past 20-plus years as a public company," Karatz said in a statement released Sunday. "We have grown to be one of the leading homebuilders in the world and one of the most respected companies in the industry. I wish Jeff Mezger and the team continued success with this outstanding company."


More than 170 companies across the nation have been involved or mentioned in the Securities and Exchange Commission's stock options backdating investigation. More than six companies are here in the L.A.-area, including Hansen Natural Corp., THQ Inc., Cheesecake Factory Inc., Vitesse Semiconductor Corp. and Activision Inc.


KB declined to comment on Monday.

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