CEO sold as stock dropped
As the mortgage industry swooned in late 2006 and 2007, Countrywide Financial Corp. Chief Executive Angelo Mozilo cashed in stock options valued at $138 million -- vastly expanding his wealth even as his shareholders watched their stock shrink in value.
Company executives say Mozilo did nothing wrong and that the transactions were made under trading plans that specified how many shares would be sold each month.
Similar trading plans have been used by hundreds of executives since they were greenlighted by federal regulators in 2000 as a means of fending off accusations of insider trading.
But most executives adopt a plan and stick with it, compensation and securities experts say. Mozilo didn’t.
Instead, he shifted course twice in late 2006 and early 2007, according to regulatory filings, amid mounting signs of trouble in the housing and mortgage industries. Mozilo adopted a new trading plan, added a second and then revised it, allowing him to unload hundreds of thousands of additional shares before Countrywide stock went into a tailspin.
“There is clearly no legal prohibition of altering your plan,” said David Priebe, a Bay Area attorney who has helped set up more than 50 of such plans for executives. “But the more that you modify or add to your plan over a short period of time, the more risk that someone will call it into question. I would not say that you cannot do it. I would say there is a risk if you do do it.”
Mozilo, 68, and other company executives are already the targets of shareholder suits that claim they misled investors about Countrywide’s financial condition. Hurt by rising loan defaults and the housing slump, the Calabasas-based company recently announced that it would lay off 12,000 of its 54,000 workers. Its stock closed Friday at $19.01, down from $45.03 on Feb. 2.
Sandy Samuels, Countrywide’s chief legal officer, said Mozilo’s stock sales were all “in accordance with company policy.”
“The [trading] plans were put into place in consultation with Mr. Mozilo’s financial advisor, without regard to any non-public or market information,” Samuels said in a prepared statement.
Compensation experts who reviewed Mozilo’s trading activity, however, said the changes he made could prove to be a liability as Mozilo and Countrywide defend themselves against shareholder suits.
They point to a sequence of events that began Oct. 27, when Mozilo adopted a stock trading plan that Samuels said called for selling 350,000 shares a month. That replaced a previous trading plan that had expired in May. The plan was filed three days after Countrywide reported that its earnings from mortgage banking had fallen 40% in the third quarter ended Sept. 30.
Soon, there would be more bad news.
In November, investment bank UBS reported that borrowers with sub-prime loans -- the kind made to people with weak credit -- were falling behind on their payments at a record pace.
On Dec. 6, wholesale lender Ownit Mortgage Solutions of Agoura Hills said it was shutting down because Wall Street had cut off funding for its sub-prime loans, throwing 800 people out of work.
Six days later, on Dec. 12, Mozilo filed a new stock trading plan, Samuels said. Mozilo and Countrywide declined to provide copies of this or his other trading plans, but the company confirmed that the Dec. 12 plan allowed Mozilo to sell an additional 115,000 shares each month.
“The plan was entered into on the advice of his financial advisor based on his personal financial holdings, which included new equity awards under the proposed new contract,” Samuels said in a statement.
Meanwhile, the mortgage business continued to sour. On Jan. 12, Countrywide reported that foreclosures the previous month had soared 48% over the year-earlier period.
On Feb. 2, Mozilo revised the trading plan he had adopted less than two months earlier, doubling the number of additional shares Mozilo was authorized to sell under his second plan to 230,000 a month. Between the two plans now in effect, Mozilo could sell 580,000 shares each month.
Samuels said this revision was made in response to the new terms of Mozilo’s employment agreement, struck Dec. 22.
“In consultation with his financial advisor and due to new equity awards under his new contract, Mr. Mozilo decided to increase the amount of shares to be sold under the [trading plans] to 580,000 a month,” Samuels said.
The plan was filed the same day Countrywide shares closed at an all-time high of $45.03. Samuels said the plan was put into effect on that date because it was “the time when the most current information about Countrywide was available in the marketplace.” Three days earlier, Countrywide had reported its 2006 earnings. The stock is now far from that peak, hitting a low of $16.62 on Sept. 12.
Although trading plans usually protect executives against allegations that they traded on inside information, experts say Mozilo may have weakened his defense by making changes in a relatively short period of time.
“This raises a slew of red flags,” said Andrew Stoltmann, a Chicago-based securities lawyer. “Anytime you have revisions or modified plans. . . it is extremely suspicious.”
Priebe said he advises his clients to set up the agreements several months before they’re used and then try not to deviate from them for years.
Thom F. Carroll, a financial planner with the Baltimore wealth management firm Carroll, Frank & Plotkin, said revising such a plan puts an executive “on a slippery slope.”
“There are circumstances where the plans could be amended, but you better have a good reason because it’s defeating the basis of the rule,” Carroll said. “If a guy is changing his plan around, I would think that would send up a red flag. I wouldn’t allow my clients to do it.”
Countrywide has already been named in several securities suits, including one brought by members of the company’s 401(k) plan this month. They allege that Mozilo and other Countrywide executives “misleadingly concealed material adverse information” that caused members of the retirement plan to buy company shares at “artificially inflated” prices.
Countrywide has not yet filed responses to the suits but says it “does not believe the suits have merit and plans to aggressively defend against the allegations.”
Mozilo declined to comment directly for this article.
The son of a butcher who grew up in the Bronx, Mozilo began working for a mortgage company at age 15, continuing there while he attended Fordham University and after graduation.
In 1969, he teamed up with a former boss, David Loeb, to launch Countrywide. Since then, Mozilo has been inducted into the National Assn. of Home Builders’ Hall of Fame and has been listed as one of the 30 most respected CEOs in the world by Barron’s magazine, according to the biography that Countrywide posts on its website.
Along the way, Mozilo became one of the highest-paid executives in America, taking home $160 million in 2005 between pay and stock gains and $120 million in 2006, including pay and profit on exercised stock options, public filings show.
Nell Minow, editor of the Corporate Library -- which conducts extensive research on executive pay -- said that Mozilo’s decision to adopt two trading plans in late 2006, and then to change the December plan in February 2007, stands in sharp contrast to what her organization typically sees.
“We are used to seeing these plans set up like the phases of the moon, where it is very, very predictable,” Minow said. “We know exactly what is going to happen and when.”
Samuels said there were good reasons for the changes Mozilo made.
“As we explained previously, he made the one amendment in accordance with the advice of his financial advisor for legitimate, financial planning reasons and at a time when the most current information about Countrywide was available in the marketplace,” Samuels said in a statement to The Times.
Officials with the Securities and Exchange Commission declined to discuss Mozilo’s revisions to his trading plan.
Executives are not required to publicly disclose trading plans. However, the plans sometimes become public when executives disclose them in court as a defense against accusations of insider trading.
In addition, executives often make references to trading plans in the documents they file after making stock sales.
Mozilo adopted his first trading plan in October 2003, according to securities filings. In the three years that followed, he adopted two new plans -- in April 2004 and December 2004.
Hilton Foster, a retired SEC enforcement attorney who specialized in insider trading cases, said there was nothing unusual about those plans because there were significant periods between the adoption of new plans, and Countrywide’s stock price was rising.
What sets off alarms is when insiders step up their stock purchases in advance of a run-up, Foster said, or accelerate their sales before the stock tanks.
Overall, between November 2006 and August 2007, Mozilo sold 4.9 million Countrywide shares, most of which he’d purchased by exercising stock options. That netted him $138 million in gains, according to regulatory filings.
He abruptly stopped trading in mid-August. In an interview that month with financial news cable channel CNBC, Mozilo said his trading plan prevented him from selling Countrywide shares for less than $28.
The last day the company’s stock was at that level was Aug. 13 -- the final day that Mozilo reported a trade.
Times researcher Scott Wilson contributed to this report.
(BEGIN TEXT OF INFOBOX)
Title: Chairman and chief executive officer, Countrywide Financial
Education: Fordham University
2006 pay: $48.1 million
2006 profit from stock options exercised: $72.2 million
Quote: “The reason I’m selling [stock] is that it’s the majority of my net worth, and I have a big family -- nine grandchildren, five children. I have a lot of education to pay for.” (Interview with CNBC’s Maria Bartiromo, Aug. 24)
Source: Countrywide, regulatory filings, CNBC