SEC Files Securities Fraud Charges Against Former Countrywide Executives
Aug 3, 2009
U.S. Securities and Exchange Commission
Litigation Release No. 21068A / June 4, 2009
Accounting and Auditing Enforcement Release No. 3023 / June 4, 2009
Securities and Exchange Commission v. Angelo Mozilo, David Sambol, and Eric Sieracki, (C.D. Cal.), Civil Action No. CV 09-03994 (VBF)
On June 4, 2009, the Securities and Exchange Commission announced the filing of securities fraud charges against former Countrywide Financial CEO Angelo Mozilo, former chief operating officer and president David Sambol, and former chief financial officer Eric Sieracki. They are charged with deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share.
The Commission has additionally charged Mozilo with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.
In its complaint filed in federal district court in Los Angeles, the SEC alleges that Mozilo, Sambol, and Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.
According to the SEC’s complaint, Countrywide’s credit risks were so alarming that Mozilo internally issued a series of increasingly dire assessments of various Countrywide loan products and the resulting risks to the company. In one internal e-mail, Mozilo referred to a profitable subprime product as “toxic.” In another internal e-mail regarding the performance of its heralded Pay-Option ARM loan, he acknowledged that the company was “flying blind.”
The SEC’s complaint alleges that Countrywide’s annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide “manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities.” Its annual reports for 2005 and 2006 falsely stated that the company ensured its “access to the secondary mortgage market by consistently producing quality mortgages.” The annual report for 2006 also falsely claimed that Countrywide had “prudently underwritten” its Pay-Option ARM loans.
The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.
According to the SEC’s complaint, Countrywide developed what was internally referred to as a “supermarket” strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, Countrywide’s underwriting guidelines were as wide as they had ever been, and Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.
The SEC’s complaint alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public.
The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.
The SEC’s complaint alleges that each of the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint further alleges that Mozilo and Sieracki violated Rule 13a-14 under the Exchange Act. The SEC’s complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.