SEC charges ex-Countrywide CEO Mozilo with fraud and insider trading

Commission also charges former COO David Sambol and former CFO Eric Sieracki

Jun 4, 2009 @ 3:25 pm

By Darla Mercado

The Securities and Exchange Commission today filed fraud charges against Angelo R. Mozilo, former chairman and chief executive of Countrywide Financial Corp.

He was charged with insider trading and securities fraud for misleading investors about the risks that Countrywide was taking in subprime loans and mortgage-backed securities while publicly representing the company as “a quality lender of mostly prime mortgages,” according to Robert Khuzami, the SEC’s enforcement director.

The SEC also charged the Calabasas, Calif., company’s former chief operating officer David Sambol and former chief financial officer Eric Sieracki.

From 2005 to 2007, the lender said in its annual statements that it “managed credit risk through credit policy, underwriting, quality control and surveillance activities” and that it ensured its access to the secondary mortgage market by producing quality mortgages.

However the veneer of prudent risk management practices hid a bleaker reality, according to the SEC. E-mails exchanged by the three executives revealed that they knew that the lender was writing risky loans and that defaults and delinquencies would occur — in both the mortgages that Countrywide wrote and in the securitized pools of loans that it sold, according to the SEC.

Among the most harmful products were a “pay-option” adjustable-rate mortgage, which not only had a floating interest rate but also allowed borrowers to choose how much they paid — even if the payment was insufficient to meet accruing interest.

“The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” Mr. Mozilo wrote in a 2006 e-mail to Mr. Sambol about the pay-option loans.

In another e-mail to Mr. Sambol, Mr. Mozilo referred to another subprime product as “toxic” and acknowledged that the Fico credit scores of the borrowers using the product were “below 600, 500 and some below 400.”

“With real estate values coming down, this product will become increasingly worse,” he wrote.

Mr. Mozilo set up four executive stock sales plans for himself in the last three months of 2006, all the while aware of the company’s impending fate and that of its loan portfolio, the SEC charged.

Between November of that year and August 2007, he exercised more than 5.1 million stock options, raking in about $140 million, bailing himself out while Countrywide and its investors crashed and burned, according to the charges.

Aside from the fraud charges, the SEC also wants the three men to pay up their ill-gotten gains, plus financial penalties, and for the trio to be barred from becoming officers or directors at publicly held companies.

Richard H. Moore, former state treasurer of North Carolina, wrote a letter in 2007 to then-SEC chairman Christopher Cox, asking him to investigate stock sales that Mr. Mozilo had made.

“As an investor and a Countrywide shareholder, I was shocked to learn that CEO Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off,” Mr. Moore wrote to Mr. Cox. “The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence.”

Bank of America Corp. of Charlotte, N.C., bought Countrywide last year.


What do you think?

View comments

Recommended next


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print