The Securities and Exchange Commission announced on Thursday it has filed civil-fraud charges against former Countrywide Financial CEO Angelo Mozilo in what would be the highest-profile government legal action against a chief executive that has arisen so far from the financial crisis.
Mozilo was charged with “deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share,” as well as with insider trading, according to the SEC.
Former Chief Operating Officer and President David Sambol and former Chief Financial Officer Eric Sieracki were also named by the SEC, which alleges that they “misled the market by falsely assuring investors that Countrywide was primarily a prime-quality mortgage lender that had avoided the excesses of its competitors.”
The SEC released emails in which Mozilo referred to certain mortgage products as “poison” and “toxic” at the same time Countrywide was making riskier and riskier moves with its lending operations.
“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,” said SEC Enforcement Director Robert Khuzami.
The SEC particularly criticized Countrywide’s use of so-called pay-option mortgages, which let borrowers pick their monthly payments levels even if those payments don’t cover the interest charges.
Also, Mozilo was widely criticized for selling some Countrywide stock for $140 million in profits by exercising 5.1 million options and selling the underlying shares — in 2006 and 2007, just as the mortgage market topped out — under a so-called executive sales plan, which was legal under federal securities rules.
Mozilo had modified the executive sales plan in late 2006 to accelerate his stock sales. Critics say he sped up them up because he was aware of problems at Countrywide.
Mozilo’s lawyer, David Siegel, said in a statement Thursday evening that “Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide,” asserting that the stock “sales were entirely lawful, 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.”
Siegel said the allegations that Mozilo knew about problems at Countrywide and didn’t disclose them was “demonstrably false.”
He reportedly added: “The lawsuit filed today by the S.E.C. does not reflect a balanced or fair consideration of the facts or the law.”
Walter Brown, an attorney for David Sambol, said the SEC “has no case” against his client. “This baseless complaint against Dave Sambol is the result of the tremendous political pressure the SEC is facing given its well-publicized enforcement failures,” Brown said. Brown is a partner at Orrick, Herrington & Sutcliffe, LLP.
Nicolas Morgan, an attorney for Eric Sieracki, said “the lawsuit that the SEC filed today against Mr. Sieracki is completely without merit. Mr. Sieracki did not violate any securities laws and committed no fraud on anyone.”
Morgan continued, “Mr. Sieracki lost money just like all other investors in Countrywide stock when the credit markets seized up and real estate values declined. He did not sell his Countrywide stock, rather he purchased Countrywide stock during the time when the SEC wrongly alleges Mr. Sieracki believed that Countrywide was withholding information from the market… We reject the allegations of the Complaint against Mr. Sieracki and we will defend the case vigorously.”
The SEC reportedly sent Mozilo a so-called Wells notice — a precursor to a civil lawsuit in an SEC investigation — several weeks ago. The Wells notice outlines to an individual or company what charges might be filed and gives a target a chance to respond. It must be approved by SEC commissioners.
Mozilo has been in some ways a poster child of the housing boom and bust. He kept a high profile as Countrywide turned into the nation’s top mortgage lender at the height of the housing boom in the middle part of the decade. He was often in the media, and was known for his deep tan and snazzy wardrobe.
But then, he became a lightning rod for criticism when the housing bubble burst, not only for the company’s loose underwriting rules but because of his high pay levels.
Bank of America (BAC: 13.2299, 0.3489, 2.71%) purchased Countrywide for $2.5 billion, a transaction which closed in July 2008. Not long after the transaction closed, BofA agreed to a settlement of nearly $9 billion with state attorneys general regarding Countrywide’s lending practices.
Mozilo reportedly stood to gain between $80 million and $115 million in severance on the sale, according to various analyses. In January of 2008, however, Mozilo had said he would give up $37.5 million of that severance amount.