SEC Sues Countrywide Founder

Mozilo founded the California-based lender in 1969. It eventually became the largest U.S. residential lender before being acquired by Bank of America Corp. in July 2008.

Also named as defendants in the complaint are former Countrywide president David Sambol and former chief financial officer Eric Sieracki.

The defendants allegedly misled investors by painting the company to investors as a prime lender.

But, the SEC claims, Countrywide began an “unprecedented expansion of its underwriting guidelines” in 2005 that continued until 2007. Although they knew the riskier loans might not be saleable on the secondary market, senior executives did not disclose these risks in SEC filings.

“This is the tale of two companies,” said SEC Division of Enforcement Director Robert Khuzami in an announcement. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards.

“But concealed from shareholders was the true Countrywide.”

A table in the complaint indicated that prime conforming share at Countrywide dropped from 50 percent in 2001 to 32 percent by 2006. Prime non-conforming business jumped during the same period to 45 percent from 17 percent, while home-equity and subprime loans accounted for 19 percent of business, up from 15 percent.

In September 2004, senior executives were warned by risk management about the increasing risks presented by layered risk factors, the complaint said. The warnings worsened through August 2007, though the lending continued and investors were left oblivious.

The SEC presented a September 2006 e-mail from Mozilo indicating he preferred LTVs over high FICO scores — even though the company’s own portfolio was focused on credit scores. The message said “we are flying blind,” warned about the hazards of owning option ARMs and called for the immediate sale of option-ARM assets.

In an April 2006 message to Sambol, Mozilo called the subprime 80/20 loans the most “toxic” product he had seen in his career. He said the credit score requirements of the program needed to be substantially increased, and he was willing to abandon the product altogether.

“The 100 percent loan-to-value subprime product is ‘the most dangerous product in existence and there can be nothing more toxic,'” a March 2006 message read.

In the messages, Mozilo referred to Sambol’s characterization of the 100 percent LTV subprime seconds as “milk,” suggesting the two struggled over whether to continue the product.

Mozilo’s opinion was impacted by a first-quarter 2006 decision from HSBC that Countrywide would have to agree to buy back defective 80/20 loans.

Another April 2006 e-mail to multiple recipients criticized “a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan.”

Mozilo is additionally charged with insider trading for selling Countrywide stock based on non-public information and earning nearly $140 million in profits.

“Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations,” SEC regional director Rosalind Tyson stated in the news release. “He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table.”

Securities and Exchange Commission, Plaintiff, vs. Angelo Mozilo, David Sambol, and Eric Sieracki, Defendants.
CV09-03994 V8F AJWx, June 4, 2009 (U.S. District Court for the Central District of California)