Former Countrywide CEO Charged with Civil Fraud and Insider Trading

June 4, 2009 by Suzanne Conlon

Ex-Countrywide Chief Executive Officer Angelo Mozilo was charged with civil fraud and illegal insider trading by the Securities and Exchange Commission on Thursday in a federal court in Los Angeles. Along with Mozilo, former Chief Operating Officer David Sambol and former financial chief Eric Sieracki were charged with civil fraud. The SEC alleges that all three men failed to disclose credit risks, uncertainties about the company's future, and potential issues with the company's Pay-Option ARM loans to investors.

In an April 17, 2006 email to Sambol, Mozilo openly admitted that he had "never seen a more toxic product" than the 80/20 sub-prime loans that would allow borrowers to borrow 100% of a home's value by borrowing 80% in primary mortgage and 20% in a secondary loan. Later that year, Mozilo told insiders in a September email that the company was "flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales," as he promoted the product to the country. SEC Enforcement Division Director Robert Khuzami filed the charges under the notion that all three men understood that there were "defaults and delinquencies" associated with the product that were never exposed to investors.

Per Khuzami, "They matched any loan offered by its competitors, even sub-prime competitors, and even if those loans were outside Countrywide's underwriting guidelines as then written...All of this was concealed from investors." The Pay-Option ARM loan allowed borrowers to choose from multiple payment options, including a plan that allowed them to pay less than the interest due. Mozilo earned over $140 million in profits after selling Countrywide stock in 2006 and 2007. The sale occurred while he was publicly promoting the company as it was struggling internally.

Seventy-year old Mozilo represents the highest profile individual that has been formally charged in the lawsuit. He was the founder, chairman of the board and CEO of Los Angelesbased Countrywide Financial Corp until July 1, 2008. In July of 2008, Countrywide Financial Corp was acquired by Charlotte, North Carolina-based Bank of America Corp for $4.1 million.

After the acquisition, a number of lawsuits were filed against Countrywide. In August of 2008, Connecticut Attorney General Richard Blumenthal formally charged the mortgage lending giant with "deceptive lending practices to Connecticut borrowers." Countrywide is considered to be a contributing factor to the extension of the credit crisis from 2008 to 2009 because of the packaging and sales of various loans to prominent United States and European investors.