Video: Fmr. Countrywide execs face fraud charges

updated 6/4/2009 8:29:54 PM ET 2009-06-05T00:29:54

Federal regulators on Thursday charged Angelo Mozilo, the former chief executive of mortgage lender Countrywide Financial Corp., and two other company executives with civil fraud.

The Securities and Exchange Commission’s civil lawsuit, filed in federal district court in Los Angeles, also accuses Mozilo of illegal insider trading.

Countrywide was a major player in the subprime mortgage market, the collapse of which in 2007 touched off the financial crisis that has gripped the U.S. and global economies.

Mozilo, 70, is the most high-profile individual to face formal charges from the federal government in the aftermath of the crisis. He has denied any wrongdoing and Mozilo’s attorney on Thursday called the SEC’s allegations “baseless.”

Civil fraud charges also were filed against Countrywide’s former chief operating officer David Sambol, 49, and ex-chief financial officer Eric Sieracki, 52.

The trio “deliberately misled” Countrywide shareholders, SEC enforcement director Robert Khuzami said at a news conference at agency headquarters. While they painted a picture of robust performance, the real Countrywide was “buckling under the weight” of soured mortgage loans, he added.

Mozilo “was actively taking his own chips off the table” by selling his shares to reap nearly $140 million in illicit profits, Khuzami said.

The SEC is seeking injunctions and unspecified civil fines against Mozilo, Sambol and Sieracki and wants them to be barred from serving as officers or directors of any public company. The agency also is seeking unspecified restitution of allegedly ill-gotten profits from Mozilo and Sambol.

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.

Attorneys for Sambol and Sieracki also said their clients will fight the charges.

“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, and “lost money just like all other investors in Countrywide stock.”

The SEC and federal prosecutors have undertaken wide-ranging investigations of companies across the financial services industry, touching on mortgage lenders, the Wall Street investment banks that bundled home mortgages into securities sold to investors, and other market players.

“We are very closely looking at a number of cases,” Khuzami said.

The SEC’s scrutiny of Mozilo’s stock sales began in the fall of 2007 with an informal inquiry.

The filing of the agency’s lawsuit is a striking turn for Mozilo, the man who 40 years ago co-founded what grew into the nation’s largest mortgage lender. He moved the company in 1969 from New York to the housing hotbed of suburban Los Angeles, guiding Countrywide through numerous boom-and-bust housing cycles.

After the mortgage crisis hit, Calabasas, Calif.-based Countrywide was forced to cut thousands of jobs and saw its shares plummet. Its downward spiral ended in it being bought by titan Bank of America Corp. in July 2008 for about $2.5 billion. Countrywide itself is the target of multiple lawsuits related to the mortgage meltdown.

Khuzami declined to say whether the SEC had made a referral in the case to the Justice Department for possible criminal prosecution.

But a person familiar with the matter said a criminal probe into Countrywide’s lending practices continues in Los Angeles. The person requested anonymity because of the ongoing probe and said no charges were imminent.

It was the first major case led by Khuzami, who joined the agency in March. SEC Chairman Mary Schapiro brought him in at a time when the agency was being assailed by lawmakers over its failure to detect the massive pyramid scheme run by fallen money manager Bernard Madoff despite red flags raised to its staff by outsiders over the course of a decade.

Mozilo’s influence stretched from the California real estate market through the corridors of power in Washington.

The Democrats were roiled a year ago by revelations that Sens. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, and Kent Conrad, D-N.D., head of the Budget Committee, got mortgages through a VIP program dispensed by Countrywide for so-called “friends of Angelo.”

Dodd insisted that the controversy over the two loans he received did not compromise his ability to lead Congress’ efforts to address the effects of the subprime mortgage meltdown. He said he thought the VIP program referred to upgraded customer service and not reduced rates.

Mozilo sold about $130 million in Countrywide stock in the first half of 2007 through a prearranged 10b5-1 trading plan. These plans, popular among corporate executives, allow a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of significant nonpublic information.

North Carolina’s state treasurer, who asked the SEC in 2007 to investigate Mozilo’s stock sales, raised questions about changes made to Mozilo’s plan in the months before the company’s stock plunged, which allowed Mozilo to significantly increase his sales of Countrywide shares.

Mozilo had sold company shares through prior arrangements since 2004; the pace of his sales began to quicken in October 2006 when he put a new plan into effect. Mozilo has said that he did so to reduce his stake in Countrywide and diversify his personal investments in an orderly fashion before his retirement, which was slated for December.

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