SEC seeks to introduce new evidence in upcoming trial of ex-Countrywide execs

The government is trying to introduce new evidence at the upcoming trial of former Countrywide Financial Corp. Chairman Angelo R. Mozilo and two former top executives to show that they knew about the company’s alleged misdeeds during the frenzied housing boom and its catastrophic bust.

With a civil jury trial looming mid-month, the Securities and Exchange Commission filed more evidence that it wants to use in its securities-fraud and insider-trading case against the three former executives at what once was the nation’s largest mortgage lender. Among the disclosures:

• At the peak of the easy-lending era in early 2006, Mozilo fretted over being required by law to certify Countrywide’s financial statements, saying, “I can lose my net worth or get jail for something I don’t even know,” according to his chief financial officer.

• As the subprime-lending meltdown intensified in March 2007, the Federal Reserve told Mozilo that his Calabasas firm appeared to have consistently overcharged blacks and Latinos for loans — and that the Fed had forwarded that finding to the Justice Department for investigation.


• By late 2007, then-Countrywide Chief Financial Officer Eric P. Sieracki was feeling so unsettled about his situation that he wrote — jokingly, he contends — that he could become a “magnet [for] prosecution.”

• An expert witness for the government calculates that Mozilo pocketed nearly $142 million in unwarranted profits by selling Countrywide stock at prices propped up by his alleged failure to disclose the enormous risks at the company.

The SEC wants to use such evidence to show that the three defendants in the lawsuit — Mozilo, Sieracki and former Countrywide President David Sambol — knew wrongdoing was taking place. That guilty knowledge, in legal terms, is necessary for them to be found liable in the case; errant business judgments are not enough.

Before the trial begins, U.S. District Judge John F. Walter in Los Angeles is expected to decide at a Friday hearing how much of the evidence jurors will hear.


The defense, which contends that the three executives didn’t violate any laws, asked the judge to exclude the material on grounds it would inflame the jury’s prejudices without providing much information relevant to the case.

The SEC also wants to exclude some defense evidence from the jury’s consideration. That includes testimony from Stanford University law professor Joseph Grundfest, a prominent securities law expert and former SEC commissioner who maintains in a 1,000-page report that Mozilo and the other defendants did nothing wrong.

Mozilo, 71, the ambitious son of a Bronx butcher, co-founded Countrywide in 1969 and oversaw its ascent into nationwide prominence.

But as the real estate market turned sour, the company started reeling from losses on high-risk loans and saw its financial support from Wall Street evaporating. It lost $1.6 billion during the second half of 2007 and was acquired by Bank of America Corp. early the next year.


Mozilo, Sambol and Sieracki are expected to testify at their trial, providing the high points in proceedings the judge estimated would last five or six weeks.

“While there’s a lot of witnesses in this case, it really boils down to three — Mr. Mozilo, Mr. Sambol and Mr. Sieracki,” Walter said at a hearing last week.

The SEC accuses them of representing to investors that Countrywide was mainly a maker of safe and sane loans when, in fact, it had matched every questionable twist on mortgage lending its rivals could concoct during the boom years of the mid-2000s.

Mozilo also is accused of insider trading stemming from repeated changes in late 2006 and early 2007 to his plan for regularly cashing in stock options. The changes, first reported by The Times, allowed him to unload hundreds of thousands of additional shares before Countrywide stock went into a tailspin.


The SEC doesn’t specifically accuse Sambol of insider trading, but it wants to recoup his gains on the theory that the stock price was artificially inflated.

The agency is seeking to recover allegedly inflated profits of $141.7 million from Mozilo and $18.3 million from Sambol, and has asked the court to bar all three defendants from serving as officers or directors of public companies. The court also could impose fines.

In e-mails to his father and in handwritten notes, Sieracki described high tension in the executive suites and his own resentment at Mozilo’s often disparaging comments about his work.

As Countrywide’s problems grew, Sieracki complained of toiling through 18-hour days, at one point working 47 days out of 48, yet having Mozilo shut him out of crucial meetings such as the Bank of America merger talks.


Because he, as the top financial officer, also was required to attest that Countrywide’s financial statements were accurate, Sieracki wrote in the fall of 2007 that missing such sessions could make him a “target 4 prosecution.”

Twice in e-mails to his father, Sieracki said, “I can lose my net worth or go to jail for things I don’t even know.”

Asked about the statements during a deposition, Sieracki said: “That was an inside joke between me and my dad. I had heard Angelo make that statement, and I didn’t know about the legal veracity of that since I am not an attorney, but I found that concept amusing.”

Columbia Law School securities law expert John Coffee said the e-mails and notes, while evocative of the atmosphere at Countrywide, “aren’t a smoking gun.”


Coffee added, though, that the SEC might find it “useful to show Mozilo was excluding others” from important meetings. “Excluding others may suggest you have something to hide,” he said.

Under skeptical questioning by Judge Walter at a hearing last week, Sieracki attorney Shirli Weiss said the remarks were “tongue in cheek " and reflected “some black humor.”

Weiss, along with lawyers for Mozilo and Sambol, declined to discuss the filings.

John M. McCoy III, the lead SEC attorney in the case, said the agency wouldn’t call attention to the numerous other investigations and lawsuits targeting Countrywide as part of its main case but might introduce such evidence as rebuttal testimony.


The SEC, for instance, said it might want to use a 2007 letter to Mozilo from Stanley M. Crisp, the head supervisor of large banks at the San Francisco Federal Reserve Bank.

The letter to Mozilo said regulators already had told Countrywide executives earlier that year that the lender had “a pattern or practice” of charging African Americans and Latinos more than white non-Latinos in similar financial circumstances for 30-year fixed-rate mortgages.

Crisp told Mozilo that an analysis of additional information Countrywide had provided in response to the lending bias accusation “confirmed, and in some cases strengthened, our earlier findings.”

Justice Department civil-rights spokeswoman Xochitl Hinojosa said this week that the department had an open investigation into the Fed’s finding of lending bias, but she declined to comment further.


The Fed’s findings about racial bias and the Justice Department investigation have not been disclosed previously, though allegations of racial discrimination have been made by several states and in private lawsuits filed against Countrywide on behalf of minority borrowers.

Four lawsuits seeking class-action status on behalf of minorities have been consolidated for pretrial proceedings in federal court in Louisville, Ky.

Countrywide disputes that there has been any discrimination against minorities, a Bank of America spokeswoman said.