Mozilo defense options abound

In the court of public opinion, Countrywide Financial Corp. co-founder Angelo Mozilo is the chief villain in the mortgage crisis that has crippled the economy.

But, even with arrows in his back from politicians and pundits and an outraged public, he could still ride into the sunset mostly unscathed, several prosecutors and other legal experts say.

The sheer volume and complexity of the cases against Mozilo open opportunities for shrewd legal maneuvering. He could use the federal and state courts against each other to stall the cases that could be the most damaging and to gain information about a looming criminal case.

“There are so many moving pieces it’s like playing three or four chess games at once,” said David Douglass, a former federal prosecutor now with the firm Shook, Hardy & Bacon in Washington, D.C. “They are balancing every move in one case against the consequences it might have in another case.”


Among the arsenal Mozilo faces: The U.S. Securities and Exchange Commission is on the verge of filing a civil lawsuit against him alleging fraud and insider trading. Several states already have sued him. He is a defendant in actions in which investors and borrowers across the country allege he helped inflate home appraisals, lent money to borrowers on bad terms and then resold those risky loans to investors under false pretenses. And an FBI investigation includes a probe of his company’s role in an influence-peddling scandal involving U.S. Sen. Christopher J. Dodd (D-Conn.).

For his part, Mozilo probably will build a “Nobody saw this coming” defense, Douglass and others said, rallying the accountants, attorneys and staff members who were involved in his stock trades and other business dealings to sell the idea that he was just another chief executive caught unaware by a once-in-a-lifetime economic downturn.

“There’s not a lot of love for a guy who’s making $200 million a year,” said former Assistant U.S. Atty. Laurie Levenson, now a professor at Loyola Law School. “But if you’re him, you say in a capitalist country you cannot convict someone for being too wealthy or even greedy. It may not be popular, but it’s not a crime.”

He also has chips to play. As the man allegedly behind an unofficial effort to provide discounted loans to favored borrowers, which is now under federal scrutiny, he knows which politicians and others may have received special treatment. He could use that information to bargain with prosecutors.


And, even if he does lose multiple cases and end up paying fines, the money probably won’t be his. Countrywide is paying his legal fees, and, as a company director, he is insured against most legal claims.

Many of the legal cases contend that Mozilo, as head of what once was the largest U.S. mortgage lender, victimized borrowers and betrayed Countrywide investors during the housing boom by foisting increasingly risky adjustable-rate loans on customers who could not afford them.

The intent, as alleged by California Atty. Gen. Jerry Brown and others, was to maximize immediate profit, because the market for bonds backed by the risky loans was booming. As the loans increasingly went bad, Mozilo masked the problem by permitting employees and brokers to make still riskier loans, Illinois Atty. Gen. Lisa Madigan alleged in her lawsuit.

Such charges are a rude challenge to Mozilo, 70, who speaks proudly of a lifetime spent helping people achieve their dreams of homeownership. One of his attorneys, David Siegel of Irell & Manella in Century City, contended in a recent filing that the suits filed by Brown and other state officials were “motivated primarily for political ends.”

The civil actions naming Mozilo as a defendant fall mainly into several broad groups: state suits in California, Illinois, Florida and West Virginia; combined consumer suits in U.S. District Court in San Diego; lawsuits by holders of Countrywide stock and bonds in U.S. District Court in Los Angeles; and claims by employees whose retirement funds held shares of the company.

Countrywide, now part of Bank of America Corp., settled the state lawsuits by agreeing to modify nearly 400,000 high-risk adjustable mortgages across the country -- an action that could shave some $8 billion off customers’ loan payments. But Mozilo remains a defendant in the state attorneys general cases.

Mozilo could argue in many of these cases that the focus on him is misplaced, said Dennis Torres, who sits on the mediation and arbitration panel for the Financial Industry Regulatory Authority, which settles disputes involving the New York Stock Exchange and NASDAQ.

Torres said that if he were representing Mozilo, he would argue that the former executive was a victim, not a perpetrator.


“I would argue that Mozilo and Countrywide also relied on the many state licensed real estate brokers who acted as loan originators to vet the veracity of the representations made on the loan applications they procured,” Torres said.

One advantage Mozilo has with multiple court cases, legal experts said, is the ability to concentrate his resources where the potential downside is relatively low and the upside could be high. He might throw up legal roadblocks to the cases where he stands a chance of paying heavy fines or going to prison. At the same time, he could hurry forward on cases where he thinks he has a good chance to win.

“Generally in a civil case it’s open discovery, so he can start to find out what sort of evidence is out there against him, what witnesses might be called to testify in other cases, especially any criminal case,” said Dan Small, a former federal prosecutor who now works at law firm Holland & Knight in Boston.

SEC officials told The Times this month that the agency’s staff attorneys had recommended that fraud and insider trading charges be brought against Mozilo, who made hundreds of millions of dollars selling Countrywide shares.

Like many executives, Mozilo established a program to regularly sell stock. Unlike most executives, he repeatedly changed the terms of the program, increasing his stock sales in 2006 and 2007 as mounting loan losses and intense competition worsened the company’s fortunes.

Mozilo maintains that the sales complied with properly prepared and approved trading plans and reflected recommendations by his financial advisor.

His best chance against the looming SEC case, legal experts said, is to argue that he was caught off guard by the crumbling economy just like everyone else and was in no way acting on privileged information when making his stock sales.

“He could say that for a long time tremendous value was provided to shareholders and to society, and we don’t want to scapegoat people just because the market went down,” Douglass said. “In hindsight we all would have done things differently.”


Another tactic would be for Mozilo’s lawyers to use witness lists in the civil cases to start investigating anyone with information against him.

“His law firm is going to interview as many witnesses as they can and plow through all the records,” Levenson said. “They want to know what these people are getting out of the deal, how their stories have changed over time and whether are they trying to cover up their own sins.”

Federal officials told The Times last year that Mozilo and Countrywide were among the subjects of a Justice Department probe of lenders whose collapse triggered the credit crisis and recession. They said the focus of the investigation included a Countrywide VIP program that gave white-glove treatment and lower rates to members of Congress and other influential people, including Dodd, the head of the Senate Banking Committee.

Although details of the criminal probe were murky, a lawyer for one Countrywide whistle-blower provided a window into one aspect of it.

Anthony Salerno said attorneys from the Justice Department in Washington joined FBI agents and federal prosecutors from Los Angeles last fall in interviewing his client, Robert Feinberg, about what was known at the company as “Friends of Angelo.”

Feinberg, a 12-year Countrywide employee who processed the VIP loans, told investigators that it was standard practice to tell borrowers, “Your loan was specially priced by Angelo,” according to a congressional report.

Salerno said the Justice Department appeared to be investigating whether the program amounted to improper influence peddling by Countrywide and whether the politicians had failed to publicly report favors from Mozilo.

And that, legal experts said, could give Mozilo another strategy: a chance to cut a deal with prosecutors in exchange for his testimony.

“He’s in a position, potentially, to say who else Congress had their hands out to,” Levenson said.