KB Home said Thursday that the Securities and Exchange Commission has started a formal investigation into the company's backdating of stock options.

The Los Angeles-based homebuilder said it is cooperating with the probe, which opened Jan. 19 and was disclosed in a company filing.

The SEC initiated an informal investigation last summer when KB Home announced it was internally reviewing options granted to former Chief Executive Bruce Karatz.

In question are four grants to Karatz between 1998 and 2001; one of which was dated at the stock's lowest closing of the year, another at a quarterly low and the remaining at monthly lows, the company said in a filing.

The company also said the options may result in a non-cash compensation-related expense of as much as $50 million. Karatz agreed to retire Nov. 12 and said he would repay the company $13 million.

Karatz received $43 million in compensation in 2005, including option grants, making him the highest paid homebuilding industry executive in the U.S. KB Home is the nation's fifth-largest homebuilder.

Shares of KB Home were down $1.07 to $51.05 in midday trading Friday.

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