In one of the highest profile prosecutions to date of major players in the subprime mortgage fiasco, the Securities and Exchange Commission has charged three former top executives of Countrywide Financial Corp. with deliberately deceiving investors about the shaky nature of its lending practices.
Facing civil fraud charges are Countrywide’s co-founder and former CEO Angelo Mozilo, former COO and president David Sambol, and former CFO Eric Sieracki. Mozilo is also charged with illegal insider trading for using non-public information to unload his Countrywide stock at a profit of almost $140 million.
“This is the tale of two companies,” said Robert Khuzami, head of the SEC’s enforcement division. “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.’”
Rosalind Tyson, director of the commission’s regional office in Los Angeles – where the lawsuit was filed – added, “Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations. He knew that Countrywide was gambling with increasingly risky mortgages, and he kept those details from investors while he was actively taking his own chips off the table” from 2005-07.
Among the evidence cited by the feds is an April 17, 2006 email from Mozilo to Sambol about Countrywide subprime loans. “In all my years in the business I have never seen a more toxic product,” he wrote. “With real estate values coming down…the product will become increasingly worse. There has to be major changes in this program, including substantial increases in the minimum FICO…Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.”
As part of the civil case, which carries a much lower burden of proof than criminal prosecution, the SEC wants the three former executives barred from working as officers or directors of any public company, unspecified fines, and “disgorgement of ill-gotten gains” with interest from Mozilo and Sambol.
After Mozilo, 70, co-founded Countrywide in 1969, it eventually became the largest mortgage company in the U.S. When the sub-prime mortgage crisis blew up and sparked today’s global financial crisis and multibillion-dollar government bailouts, Countrywide stock nosedived and, last July, Bank of America bought the company for $2.5 billion.
Lawyers for all three defendants denied the allegations – which one called “groundless” and politically motivated – saying their clients acted responsibly and will fight the charges in court.
“Making groundless allegations and losing in court,” said Sambol’s attorney, Walter Brown, “will not help the SEC restore its reputation.”
View the SEC complaint (pdf).
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