Angelo Mozilo, who built the largest US mortgage lender, was charged with securities fraud and insider trading on Thursday, making him the most prominent defendant so far in investigations into the US subprime mortgage crisis and housing bust.
Mozilo, 70, co-founder of Countrywide Financial Corp, was accused by the US Securities and Exchange Commission (SEC) with making more than US$139 million in profits in 2006 and 2007 from exercising 5.1 million stock options and selling the underlying shares.
The sales were under four prearranged stock trading plans Mozilo prepared during the time period, the SEC said.
The accusations were made in a civil lawsuit filed by the SEC in Los Angeles on Thursday.
The SEC said that in one instance, the day before he set up a stock trading plan on Sept. 25, 2006, Mozilo sent an e-mail to two Countrywide executives that said: “We are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”
Those executives, then Countrywide president David Sambol, 49, and chief financial officer Eric Sieracki, 52, were charged by the SEC with knowingly writing “riskier and riskier” subprime loans that they had a limited ability to sell on the secondary mortgage market.
The SEC said that all three executives failed to tell investors how dependent Countrywide had become on its ability to sell subprime mortgages on the secondary market. All three were accused of hiding from investors the risks they took to win market share.
At one stage, Countrywide was writing almost one in six US mortgages. The lawsuit said that by September 2006, Countrywide estimated that it had a 15.7 percent share of the market, up from 11.4 percent at the end of 2003.
“While Countrywide boasted to investors that its market share was increasing, company executives did not disclose that its market share increase came at the expense of prudent underwriting guidelines,” the lawsuit said
Bank of America Corp bought Countrywide last July 1 for US$2.5 billion, less than a tenth of what it had been worth in early 2007.
“This is a tale of two companies,” the SEC’s director of enforcement, Robert Khuzami, told reporters. “One that investors from the outside saw. It was allegedly characterized by prudent business practices and tightly controlled risk.”
“But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model,” Khuzami said.
Credit losses experienced by Countrywide in 2007 were foreseen as early as 2004, the SEC claimed in the lawsuit.
It said Countrywide’s senior officers were repeatedly warned that several aggressive features of Countrywide’s guidelines, such as reduced documentation loans, significantly increased the company’s risk.
The lawsuit cited an April 2006 e-mail from Mozilo that said in conversations with Sambol he called a particularly high-risk mortgage the “’milk’ of the business.” But Mozilo, in the same memo, said he considered “that product line to be the poison.”
Mozilo, who co-founded Countrywide in 1969, had publicly expressed confidence in the company’s prospects and survival, even as problems mounted.
Mozilo’s attorney, David Siegel, said in a statement that the lawsuit “does not reflect a balanced or fair consideration of the facts or the law” and that the stock trades at issue were “entirely lawful.”
Sambol’s attorney, Walter Brown, called the lawsuit “baseless.”
Through his attorney Nicolas Morgan, Sieracki also denied violating any securities laws.
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