Updated from 10:28 a.m. EDT
CEO Angelo Mozilo was charged with insider trading, the
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.
In private, though, Khuzami said
internal communications between the executives showed that they knew the truth. Instead of disclosing the seedy financial realities and heeding the repeated warnings from the company's own credit risk officer, the execs hid the information.
Attorneys for both Sambol and Sieracki refuted the allegations. "Making groundless allegations and losing in court will not help the SEC restore its reputation," said Sambol's attorney Walter Brown.
Sieracki's attorney Shirli Fabbri Weiss said her client bought Countrywide stock during the time when the SEC claims he was withholding information from investors.
"Mr. Sieracki lost money just like all other investors in Countrywide stock when the credit markets seized up and real estate values declined," she said.
The SEC cites several communications between the three execs. The complaint refers to one internal email where Mozilo said the company was "flying blind" and had "no way" to predict the performance of its pay-option ARM loan program. That message was kept under wraps.
In one exchange in April 2006, Mozilo expressed concern to Sambol about Countrywide's subprime 80/20 loans, despite the fact that the company was saying nothing of the sort in public. These loans allowed borrowers to finance 100% of a home's value by borrowing 80% in a primary mortgage and 20% in a secondary. "In all my years in the business I have never seen a more toxic prduct
sic," Mozilo is alleged to have said to Sambol. "It's not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400." ' ''' '
In another exchange that Khuzami discussed during the press conference, Mozilo said that he knew that borrowers would suffer "payment shock" to pay back loans. "These trends and these concerns were never revealed to Countrywide investors," Khuzami said.
Khuzami was named the SEC's enforcement director in February, following five years as the General Counsel for the Americas at
. Before that, he served as chief of the Securities and Commodities Fraud Task Force in the Southern District of New York. "All investors were left with was the mirage," Khuzami said during the press conference.
The insider trading charge against Mozilo centers on four 10b5-1 stock-sales plans that the former CEO used. The plans are pre-set systems meant to trigger buy and sell orders according to predetermined decisions. This, in turn, is supposed to insulate executives from insider trading charges.
But the SEC alleges that Mozilo set up the plans while in possession of inside information in order to exercise more than 5.1 million stock options and other sales just before Countrywide's collapse. At the time, Mozilo was in possession of private information showing Countrywide's increasing credit risk and expected poor loan performance.
Between 2006 and 2007, the SEC said that Mozilo sold shares and made off with close to $140 million.
Mozilo "was actively taking his own chips off the table," Khuzami said. "They made investors the last priority."
Mozilo's attorney David Siegel said the stock sales "complied with applicable laws and regulations, and were made under the terms of a series of written sales plans which were reviewed and approved by responsible professionals."
"All of the SEC's allegations will be answered completely in court and disproved with the full facts and evidence," Siegel said in a statement.
The SEC is seeking to claw back all of the trading profit made, including the $140 million, along with other penalties. Khuzami said the case should send a strong message to corporate executives.
Back in May, it was reported that Mozilo received a Wells notice from the SEC informing him of possible charges.
A Wells notice provides an opportunity for the accused to rebut the potential charges before formal charges are commenced.
Seigel rebutted the accusations then. "We do not believe there is any fair basis for allegations to be made against Mr. Mozilo," Siegel said in a statement that was e-mailed to
The Associated Press
and other news organizations.
"All of Mr. Mozilo's stock sales were made in compliance with properly prepared and approved trading plans, and reflected recommendations by his financial adviser over a long period of time," Siegel said in the statement.
"The persistent innuendo in the media and political circles that Mr. Mozilo was selling Countrywide stock because he was aware of some supposedly 'secret' adverse information about the company is scandalous and inconsistent with even a cursory examination of the facts surrounding the history of his stock holdings."
The SEC began investigating Mozilo in the fall of 2007. The North Carolina state treasurer, where Countrywide is home-based, asked the SEC to look into changes made in Mozilo's trading plans.
Mozilo is the most high-profile individual to face formal charges from the federal government in the aftermath of the crisis.
Countrywide was bought by Bank of America back in July 2008 for $2.5 billion after loan defaults and losses brought Countrywide to near collapse. Bank of America later renamed it Bank of America Home Loans. BAC shares were changing hands up 2% in morning trading.
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