Thu Jun 4, 2009 7:41pm EDT
By Gina Keating and Rachelle Younglai
LOS ANGELES/WASHINGTON (Reuters) – Angelo Mozilo, who built the largest U.S. mortgage lender, was charged with securities fraud and insider trading on Thursday, making him the most prominent defendant so far in investigations into the U.S. subprime mortgage crisis and housing bust.
Mozilo, 70, co-founder of Countrywide Financial Corp (CFC), was accused by the U.S. Securities and Exchange Commission with making more than $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 September 25, 2006, Mozilo sent an email 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 1 in 6 of American 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 (BAC) bought Countrywide last July 1 for $2.5 billion, less than a tenth of what it had been worth in early 2007.
“TWO COMPANIES”, EARLY WARNING SIGNS
“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 email 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.”
“The SEC’s allegations that Mr. Mozilo supposedly knew about some undisclosed risk to certain loans made by Countrywide also is demonstrably false,” Siegel said.
“The mix and risks of Countrywide’s loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace.”
Sambol’s attorney, Walter Brown, called the lawsuit “baseless”.
“The SEC wrongly asserts that Countrywide’s disclosures to its investors regarding its lending criteria should have been more extensive, and that Mr. Sambol is somehow responsible for insufficient disclosure,” Brown said in a statement.
Through his attorney Nicolas Morgan, Sieracki also denied violating any securities laws.
“Mr. Sieracki unequivocally demonstrated his belief in the accuracy of Countrywide’s disclosures with his own money, and ultimately lost millions like other investors,” Morgan said in a statement.
(Additional reporting by Karey Wutkowski; Editing by Toni Reinhold)