A federal grand jury in Los Angeles has begun probing three of the nation’s largest subprime mortgage lenders in the clearest sign yet that prosecutors are investigating whether fraud and other crimes contributed to the mortgage debacle.
Grand jury subpoenas have been issued in recent weeks and months to Countrywide Financial Corp., New Century Financial Corp. and IndyMac Federal Bank seeking a wide range of information, according to sources with direct knowledge of the subpoenas.
People familiar with the situation told The Times that the subpoenas seek e-mails, phone bills and bank records and follow interviews that federal investigators have conducted with employees and others knowledgeable about the lending operations of the three Southern California institutions, which all collapsed under the weight of bad loans.
In the case of Countrywide, the sources said, investigators have also begun looking into news reports that the firm and its former chairman, Angelo Mozilo, gave mortgage breaks to members of Congress and other influential “friends of Angelo,” including Richard Aldrich, an associate justice of the California Court of Appeal.
The investigations are part of a coordinated Justice Department effort that until now has focused primarily on smaller operators suspected of defrauding homeowners and mortgage lenders.
The subpoenas, while indicating that the effort is still at an early stage, show that the government is starting to take aim at the largest lenders and their executives to determine whether they were complicit in the multibillion-dollar mortgage crisis.
The sources familiar with the subpoenas spoke on condition of anonymity because they were not allowed to discuss them publicly.
The mortgage losses have regulators and law enforcement personnel gearing up for what experts say could prove to be the biggest financial fraud case since the savings and loan crisis of the 1980s.
Officials have said they are beginning to investigate whether securities investors were defrauded about the value of subprime mortgages they purchased, as well as other possible crimes such as insider trading by corporate officials who sold stock knowing their holdings were about to deflate in value.
Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, declined to acknowledge that any of the firms were being investigated or had been issued subpoenas.
However, the office, along with the FBI in Los Angeles, has been ratcheting up its scrutiny of mortgage firms.
Last month, officials created a multi-agency task force to address mortgage crimes; it includes representatives of agencies such as the Internal Revenue Service, the U.S. Postal Inspection Service, the U.S. Department of Housing and Urban Development and the Federal Deposit Insurance Corp.
In a recent interview with The Times, Thomas P. O’Brien, the U.S. attorney in Los Angeles, cautioned that fraud cases involve complex facts and circumstances and are difficult to pursue.
But he also indicated that his office would move forward aggressively in appropriate circumstances.
“As with any white-collar case, these tend to be extremely complex and take years to investigate,” O’Brien said. “But this is a very high priority for me and this office and the Department of Justice.”
The FBI has said it is examining 21 cases against corporate and other large entities related to the subprime market collapse, a 50% increase in the number of cases in the last six months alone.
Without providing names, the bureau has said that a wide array of firms could be targeted, including securities firms, hedge fund operators, credit rating agencies, and mortgage brokers and lenders.
According to Sharon Ormsby, chief of the financial crimes section at FBI headquarters in Washington, the bureau is working closely with the Securities and Exchange Commission to identify culprits.
“It is their regulatory oversight that allows them to see the problem first. They will notify us if they see something unusual or suspicious or something of interest,” she said in an interview.
“With the [Justice Department] fraud section, we will meet and determine whether a parallel criminal case should occur.”
In one such case, federal prosecutors in Brooklyn last month indicted two Bear Stearns managers on charges of defrauding investors in hedge funds that included subprime loans.
Prosecutors said last week that they intended to bring an expanded indictment in that case by early this fall.
The subpoenas to the three big Southern California mortgage lenders were issued over a period of time and focused on a variety of issues, the sources said.
In some cases, investigators amended their requests after they apparently failed to produce information of interest.
Calabasas-based Countrywide, which grew to be the nation’s largest mortgage lender, recently was acquired by Charlotte, N.C.-based Bank of America after suffering steep losses from a disastrous foray into subprime lending.
The firm is already being sued by the attorneys general of California and Illinois for allegedly pushing borrowers into unaffordable loans and using misleading practices. Mozilo also faces questions from regulators about the exercise of stock options that allowed him to pocket millions of dollars while Countrywide’s fortunes worsened.
Irvine-based New Century, an early illustration of the mortgage boom and bust, has been operating under federal bankruptcy law protection since April 2007.
In a lengthy report last March, a court-appointed examiner concluded that the bank had engaged in improper accounting that overstated its profit and allowed top executives to reap millions in inflated or undeserved bonuses.
The most recent subpoenas, sources said, were served on IndyMac, the Pasadena-based lender that was seized by federal regulators this month. The bank specialized in what have been derisively called “liar loans” made to borrowers with little or no proof of income.
Its failure is expected to cost the federal deposit insurance fund $4 billion to $8 billion.
David Barr, a spokesman for the FDIC, which now runs IndyMac Bank, declined to comment on the subpoenas.
Shirley Norton, a Bank of America spokeswoman, said the firm as a policy does not comment on subpoenas.
Lawyers for New Century could not be reached for comment.
Despite the massive losses, legal experts said, the government faces numerous obstacles in bringing criminal cases against large firms connected to the subprime mess. The firms were operating in a highly deregulated environment during which rising home prices long appeared to validate their aggressive lending.
“I think the government will have a hard time” in bringing high-profile criminal cases, said Joshua R. Hochberg, a former chief of the Justice Department fraud section and now a partner with the McKenna Long & Aldridge law firm in Washington. “The investment vehicles were so complex, showing that people illegally manipulated them will be very difficult.”
Federal officials “are looking at ways to bring cases that are easier to make . . . where you get people on tape or on e-mails saying one thing and then misleading the investing public,” Hochberg said. “That is a lot easier than proving that the underlying transactions were knowingly and intentionally fraudulent.”
Some banking consultants said it was an open question whether shoddy loan practices rose to the level of criminal wrongdoing.
“There were a lot of bad underwriting decisions associated with those loans. A lot should not have been made,” said Bert Ely, an Alexandria, Va., banking consultant.
“What they may find is a lot of incredibly sloppy practices that are not necessarily criminal,” Ely said.