“This is the tale of two companies,” Robert Khuzami, Director of the Security and Exchange Commission’s (SEC) Division of Enforcement explained in a public statement announcing the filing of financial fraud charges against Countrywide Financial CEO Angelo Mozilo and two other former executives. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.’”
The SEC alleges that Mozillo, former chief operating officer (COO) and president David Sambol and former chief financial officer (CFO) Eric Sieracki deliberately mislead investors about the significant credit risks Countrywide was taking in an effort to build an maintain the company’s market share. The enforcement action further alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide failed to disclose these important trends to its investors in its SEC filings as required by law. The complaint, which alleges Mozilo, Sambol and Sieracki actually knew, and acknowledged internally, that defaults in the loans Countrywide serviced and loans the company packaged and sold as mortgage-backed securities, was filed in federal district court in Los Angeles.
Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares pursuant to written trading plans. Bloomberg reports that Mozilo, “the most prominent executive targeted by regulators investigating the subprime mortgage crisis, also issued internal warnings and admitted the company had no means of quantifying the risk associated with some mortgages. Mazilo’s attorney, David Siegel of Irell & Manella LLP in Los Angeles, told Bloomberg the charges were “without merit” while Sambol’s attorney, Walter Brown, maintains the complaint is the result of public and political pressure.
“Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations,” said Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office. “He knew that countrywide was gambling with increasingly risky mortgage and he kept those details from investors while he was actively taking his own chips off the table.”
He may have known it, but he certainly did not reveal his knowledge outside the company in obvious disregard for the law as well as consumers. In fact, when he left Countrywide in 2008 he said: “My primary focus today – as it has been for the past 40 years – is to do what is in the best interests of Countrywide’s employees, customers and shareholders.”
Countrywide merged with and became a wholly owned subsidiary of Bank of America (BoA) in 2008. In October, Countrywide Financial Corp., Countrywide home Loans, Inc., Countrywide Capital IV and Countrywide Capital V notified the New York Stock Exchange (NYSE) of their intention to voluntarily delist certain securities. Following the delisting the Countrywide issuers withdrew the securities from registration with the SEC and suspended their reporting obligations. Separately, Bank of America applied for the listing of trust preferred securities related to the obligations assumed under the merger agreement.
BoA, who is not named in the SEC complaint, recently announced the departure of Chief Risk Officer Amy Woods Brinkley and director Robert Tillman. Their abrupt departures again raises speculation regarding the role the federal government is playing in bank’s decisions, according to the Wall Street Journal. In addition, the San Fernando Business Journal reports BoA has offered to modify more than 100,000 mortgage loans. The modifications, according to the L.A. Times, are part of the bank’s agreement settling state cases brought by several states against Countrywide for predatory lending practices.
The SEC’s complaint against the Countrywide executives seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgement interest against Mozilo and Sambol.
Last 3 posts by Jay Hammond
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