In all my years in the business I have never seen a more toxic product

[Cees Binkhorst]

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One down, many to go.

Groet / Cees

http://www.latimes.com/business/la-fi-mozilo5-2009jun05,0,2270688.story
Countrywide's Angelo Mozilo is target of federal lawsuit
The company's co-founder -- along with two former associates -- is accused
of failing to tell shareholders how far lending standards had declined at
the mortgage lender as the housing boom went bust.
By E. Scott Reckard and Jim Puzzanghera

June 5, 2009

Reporting from Orange County and Washington — Regulators took on the
mortgage industry's best-known figure Thursday, accusing former
Countrywide Financial Corp. Chief Executive Angelo Mozilo of hiding his
alarm about risky loans the company was making at the height of the
housing boom while he was reaping nearly $140 million in profits on stock
sales.

In a fraud and insider-trading lawsuit against Mozilo, the Securities and
Exchange Commission quotes e-mails in which the executive derided certain
Countrywide loan products as "toxic" and "poison" more than three years
ago -- well before "toxic debt" entered the popular lexicon as the cause
of the housing crash and the resulting global financial crisis and deep
recession.

"In all my years in the business I have never seen a more toxic product,"
Mozilo said in an April 2006 message, cited in the suit, about
Countrywide's loans requiring no down payments from borrowers with abysmal
credit. "Frankly, I consider that product line to be the poison of ours."

But Mozilo never advised shareholders just how lax the nation's No. 1
mortgage lender's standards had become, according to the lawsuit, filed in
federal court in Los Angeles.

The suit also accuses David Sambol, Countrywide's former president, and
Eric Sieracki, the lender's former chief financial officer, of defrauding
Countrywide shareholders.

"In the end, these former Countrywide executives made deliberate decisions
to mislead investors," Robert Khuzami, a former federal prosecutor brought
in by SEC Chairwoman Mary L. Schapiro in February to toughen the agency's
enforcement division, said at a news conference in Washington. "They made
investors their last priority."

Lawyers for Mozilo, Sambol and Sieracki vehemently denied wrongdoing by
their clients, suggested the e-mails were taken out of context and called
the suit a political response to outrage over the government's failure to
prevent the mortgage meltdown that began in late 2007 and the economic
pain that has followed.

"The lawsuit filed today by the SEC does not reflect a balanced or fair
consideration of the facts or the law," David Siegel, a lawyer for Mozilo,
said, denying that his client "knew about some undisclosed risk."

Vowing to disprove the allegations in court, Siegel added: "The mix and
risks of Countrywide's loan portfolio and its underwriting standards were
well disclosed to and understood by the marketplace."

Walter Brown, a lawyer for Sambol, said the SEC had "no case" because
Countrywide made "detailed credit risk disclosures."

"The unfortunate reality is that this baseless complaint against Dave
Sambol is the result of the tremendous political pressure the SEC is
facing given its well-publicized enforcement failures," Brown said.
"Making groundless allegations and losing in court will not help the SEC
restore its reputation."

Shirli Weiss, an attorney for Sieracki, said the former finance chief "did
not violate any securities laws and committed no fraud on anyone.
Countrywide's stock performance was intricately tied to the fortunes of
the real estate and the secondary market for loans. All investors knew
this."

"Mr. Sieracki lost money just like all other investors in Countrywide
stock when the credit markets seized up and real estate values declined,"
Weiss said.

At the heart of the SEC suit is the allegation that Countrywide, saved
from bankruptcy when it was taken over by Bank of America Corp. last year,
had portrayed itself primarily as an issuer of prime-quality mortgages
while internally acknowledging it was writing "increasingly risky loans."

Mozilo and the others "painted a mirage for investors," SEC enforcement
chief Khuzami said.

"This is a tale of two companies," he said. "One that investors from the
outside saw; it was allegedly characterized by prudent business practices
and tightly controlled risk. But the real Countrywide, which could only be
seen from the inside, was one buckling under the weight of deteriorating
mortgages, lax underwriting and an increasingly suspect business model."

The insider-trading allegations against Mozilo focus on his repeated
creation of preset stock-selling plans in 2006 -- plus a change to one of
them in early 2007 -- "while he was aware of the company's increasing
credit risk and the expected poor performance of Countrywide-originated
loans."

The plans allowed Mozilo to sell more Countrywide shares than initially
planned, exercising 5.1 million options at a profit of nearly $140
million, the suit says.

Siegel said the changes "complied with applicable laws and regulations,
and were made under the terms of a series of written sales plans which
were reviewed and approved by responsible professionals."

Countrywide's stock, which hit an all-time high of $45.03 a share in
February 2007, crashed starting in July of that year. By the end of 2007
it sold for less than $9. On its last day of trading in June 2008, before
Bank of America completed its takeover, the stock sold for $4.25.

Federal officials have told The Times that Countrywide and Mozilo are the
targets of a criminal investigation by the FBI and a grand jury in Los
Angeles.

The status of that investigation couldn't be determined Thursday. Michael
Perlis, a former SEC assistant director of enforcement now practicing at a
law firm in Century City, said criminal investigations in corporate fraud
cases tend to take far longer than the related SEC probes, in part because
proving criminal intent is difficult.

It's not unrealistic to think prosecutors might bring criminal charges
against Mozilo, with the insider trading allegations the likeliest ones,
Perlis added.

"You're in an environment where people want scalps," he said.

A longtime Mozilo acquaintance said he had never seen any evidence that
the Countrywide co-founder ever intended to mislead or cheat investors or
borrowers.

Paul Muolo, a National Mortgage News editor who interviewed Mozilo
repeatedly over 20 years, said Mozilo became fixated on competing with
subprime lenders such as Roland Arnall, the late Holmby Hills billionaire
whose now-defunct Ameriquest Mortgage Co. once sponsored Major League
Baseball and a Super Bowl half-time show.

Mozilo "was Mr. Mortgage," Muolo said. "And if he hadn't followed Roland
Arnall down the subprime path this would never have happened. It's ego and
ambition that sunk him."

scott.reckard at latimes.com

jim.puzzanghera@

latimes.com

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