SEC Drops Hammer on Mozilo (Update4)

Updated from 10:28 a.m. EDT

Former Countrywide Financial CEO Angelo Mozilo was charged with insider trading, the SEC announced Thursday. Mozilo is also facing civil fraud charges, along with two other former executives of the company.

The Securities and Exchange Commission held a press conference in Washington detailing its complaint against Mozilo, former President and COO David Sambol, and former CFO Eric Sieracki. The SEC's fraud allegations center on a scheme to conceal credit problems and financial instability of the mortgage lender from investors.

Countrywide has become the poster child for the subprime mortgage debacle. Before the housing crisis, Countrywide was the country's largest mortgage lender. Beginning as a conventional lender when it was founded by Mozilo in 1969, in recent years the company is known more for its role in profiting by liberalizing lending standards and making risky subprime loans to even riskier borrowers.

Subprime mortgages were bundled into securities and sold to investors around the world. They were later blamed as a root of the economic meltdown. According to the Center for Public Integrity, Countrywide was the largest subprime lender.

During the press conference yesterday, Robert Khuzami, the director of the SEC's division of enforcement, said that the suit, filed in federal district court in Los Angeles, is really a tale of two companies -- the one investors saw from the outside and the other, which could only be seen from within.

The SEC alleges that the executives knew how bad many of their mortgages -- including zero-down loans and pay-option ARMS to risky borrowers -- and other products were. Instead of warning investors about the reality in public filings and statements, the company continued to present a front of financial stability.