Charges of fraud loom for Mozilo

Former Countrywide Financial Corp. boss Angelo R. Mozilo, whose embrace of exotic loans helped fuel the mortgage boom and meltdown, will face Securities and Exchange Commission fraud charges unless his lawyers prevail in an eleventh-hour appeal, people familiar with the SEC’s investigation said Wednesday.

Mozilo is among several former executives of the Calabasas company whom the SEC staff wants to charge in a civil case, one of these people said. He would face accusations of insider trading and failing to disclose to shareholders the risks the company was running unless the SEC’s five commissioners overturn their investigators’ recommendation.

Mozilo made Countrywide the No. 1 home lender by pursuing all segments of the mortgage business, only to become a lightning rod for critics, not least because of his outsized compensation. His stepped-up sales of millions of Countrywide shares as the subprime lending frenzy peaked and the stock’s price tumbled are one of the areas the SEC has scrutinized, one of the people familiar with the probe said.

His attorney, David Siegel of Irell & Manella, defended the stock sales as “properly prepared and approved.”


“We do not believe there is any fair basis for allegations to be made against Mr. Mozilo,” Siegel said in a statement issued late Wednesday.

An SEC lawsuit would pit the federal government against the most visible symbol of the aggressive lending that put millions of Americans in unaffordable loans -- an executive who appeared to cash out just before the crash.

Countrywide “had a very clear strategy of churning through mortgages to sell the most esoteric kind of products it could,” said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees.

“It was only by the most optimistic and some would say more-than-optimistic projections” that such lending was justified, Ferlauto said. “And Angelo Mozilo understood this and took the money and ran.”


The SEC cannot put Mozilo in jail, but a separate federal criminal probe of Countrywide, begun last year, is continuing, one of the people familiar with the SEC case said.

Mozilo, 70, a golfing enthusiast who lives in one of a small cluster of large homes surrounded by the fairways and greens of the Sherwood Country Club in Ventura County, co-founded Countrywide in 1969.

Last year, battered by loan losses, the company sold itself at a fraction of its former market value to Bank of America Corp.

News of the SEC staff’s recommendation was first reported by the Wall Street Journal on its website.


The agency’s staff also is recommending fraud charges against other former Countrywide officials, according to one of the people familiar with the probe, who was not authorized to discuss it publicly and spoke on condition of anonymity.

The other potential defendants, this person said, include the lender’s former president, David Sambol, who earned $10.3 million in 2007 as Countrywide’s fortunes waned and was paid severance worth $28 million when he departed after BofA’s takeover.

Sambol’s attorney couldn’t be reached for comment.

The final decision on the charges must be made by the new head of the SEC, Mary L. Schapiro, and four other commissioners. Although it is rare, the commission sometimes overrules a staff recommendation in favor of filing charges -- and did so several times during the tenure of Schapiro’s predecessor, Christopher Cox, securities lawyers said.


Before filing such charges, the SEC warns the targets with what is known as a Wells letter, which was sent to Mozilo several weeks ago, the people familiar with the case said. Defense attorneys can then respond in writing or in person to make the case for no lawsuit, first to the front-line SEC staff attorneys and then, if it comes to it, the commissioners.

John Coffee, a Columbia University securities law expert, predicted the commission would follow the staff recommendation because Schapiro “wants to send a strong signal that she stands behind her enforcement staff.”

The SEC began investigating Mozilo after The Times reported in September 2007 how he had changed his stock-sale plans -- which are supposed to be immune from trading based on inside information -- to sell more stock as the mortgage market started to fall apart. Mozilo sold $145 million in Countrywide stock in late 2006 and 2007 under such plans.

As the company grew to become the nation’s biggest mortgage provider, its earnings ballooned to $2.7 billion in 2006 from less than $500 million in 2001 and its stock more than quadrupled from the end of 2001 to February 2007, when it peaked.


By selling his holdings into that price surge, Mozilo took home $160 million in 2005 and $120 million in 2006, including the value of stock he had been awarded and his profit from exercising stock options.

The issue for the SEC is whether Mozilo accelerated his stock sales because he knew something that other shareholders didn’t know -- for example, that Countrywide’s loan portfolio was a time bomb.

Siegel, his attorney, said that was not the case.

“All of Mr. Mozilo’s stock sales were made in compliance with properly prepared and approved trading plans and reflected recommendations by his financial advisor over a long period of time,” Siegel said in his statement.


“The persistent innuendo in the media and political circles that Mr. Mozilo was selling Countrywide stock because he was aware of some supposedly ‘secret’ adverse information about the company is scandalous and inconsistent with even a cursory examination of the facts surrounding the history of his stock holdings.”

Last month, a federal judge in Los Angeles dismissed a private lawsuit’s insider-trading claims against several former Countrywide executives but said the plaintiffs -- investors led by a New York state retirement fund -- could proceed with claims against Mozilo.

As to the possibility of criminal charges, Coffee said that depended on the as-yet-undisclosed evidence “and maybe also on which U.S. attorney’s office is considering the possible action.”

Andrew Stoltmann, a securities lawyer in Chicago, predicted similar SEC actions against executives at other mortgage companies.


“What Mr. Mozilo allegedly did was unfortunately not uncommon,” Stoltmann said. “I would be shocked that we didn’t see other executives face similar charges.”