VOL. 16 ISSUE NO. 43   |  OCTOBER 27 – NOVEMBER 2, 2010


Former Countrywide CEO Angelo Mozilo to pay record SEC settlement

‘Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors …’

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angelo moziloWASHINGTON – On Oct. 15, the Securities and Exchange Commission (SEC) announced that former Countrywide Financial CEO Angelo Mozilo, 70, the brother of Cave Creek Councilman Ralph Mozilo, agreed to pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors at the onset of the subprime mortgage crisis.

Although Ralph Mozilo is a retiree from Countrywide, he left approximately a decade prior to the company engaging in its risky lending practices.

The settlement agreement permanently bars Mozilo from serving as an officer and director of a publicly traded company.

In addition to the $22.5 million penalty, the largest ever to be paid by senior executive of a publicly-traded company, Mozilo also agreed to disgorgement of $45 million in ill-gotten gains to settle the SEC’s insider trading charges against him, for a total financial settlement of $67.5 million to be returned to harmed investors.

Former Countrywide chief operating officer David Sambol, 49, agreed to a settlement of $5 million in disgorgement, a $520,000 penalty and a three-year bar from serving as an officer and director of a publicly traded company.

Countrywide’s former chief financial officer Eric Sieracki, 52, agreed to a $130,000 penalty and a one-year officer and director bar.

The penalties and disgorgement paid by Sambol and Sieracki will also be returned to harmed investors.

In settling the SEC’s charges, the former executives neither admitted to nor denied the charges against them.

SEC Enforcement Division Director Robert Khuzami stated, “Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite – a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model.”

While the settlement will provide affected shareholders with significant relief, SEC Enforcement Division Associate Director John McCoy said it also “reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”

The SEC filed the disclosure fraud charges on June 4, 2009 against the three most senior executives of the mortgage lender formerly based in Calabasas, Calif., along with insider trading charges against Mozilo.

According to the complaint, from 2005 through 2007 Mozilo, Sambol and Sieracki held Countrywide out as “primarily a maker of prime quality mortgage loans, qualitatively different from competitors who engaged primarily in riskier lending.”

However, in reality, in an effort to increase market share, the three engaged in what the SEC referred to as “an unprecedented expansion of its underwriting guidelines from 2005 and into 2007.”

Countrywide developed a “supermarket” strategy, in which it attempted to offer any product offered by any competitor.

But, even those expanded underwriting guidelines proved insufficient to support Countrywide’s desired market share, which led to Countrywide writing an increasing number of loans as “exceptions,” which had a higher default rate and failed to meet its already expanded underwriting guidelines.

Countrywide was more dependent than its competitors on selling loans it originated into the secondary mortgage market, an important fact it disclosed to investors.

Mozilo warned Sambol and Sieracki about the increased risk Countrywide was assuming and expected the deteriorating quality of the loans would ultimately limit its ability to sell those loans in the secondary mortgage market.

So, while each defendant was aware that the company’s business model was unsustainable, they failed to disclose that to investors and continued to mislead and falsely assure investors Countrywide was a prime quality mortgage lender that “avoided the excesses of its competitors.”

In forms 10-K filed with the SEC for 2005, 2006 and 2007, Countrywide falsely represented that the company managed credit risk through “credit policy, underwriting, quality control and surveillance activities.”

In 2005 and 2006, the forms falsely stated Countrywide ensured its continuing access to the mortgage backed securities market by “consistently producing quality mortgages.”

Mozilo, who found the credit risk Countrywide was taking so alarming, he subsequently issued a series of dire assessments of various Countrywide loan products and the risks to Countrywide in continuing to offer or hold those loans. At the same time, he, Sambol and Sieracki continued to make public statements obfuscating Countrywide’s risk profile as they attempted to differentiate themselves from other lenders.

In one internal e-mail, Mozilo referred to a subprime product as “toxic” and, in another, stated the company was “flying blind” and had “no way” to predict the performance of its heralded product, the “Pay-Option ARM loan.”

Mozilo believed the risk was so high and that the secondary market had so mispriced the Pay-Option ARM loans that he repeatedly urged that Countrywide sell its entire portfolio of those loans.

The complaint asserts, “Despite their awareness of and Mozilo’s severe concerns about, the increasing risk Countrywide was undertaking, Mozilo, Sambol and Sieracki hid these risks from the investing public.”

“During the course of this fraud,” the SEC complaint states, “Mozilo engaged in insider trading in Countrywide’s securities. Mozilo established four sales plans … in October, November and December 2006 while in possession of material, non-public information con-cerning Countrywide’s increasing credit risk and the risk that the poor expected performance of Countrywide-originated loans would prevent Countrywide from continuing its business model of selling the majority of the loans it originated into the secondary mortgage market. From November 2006 through August 2007, Mozilo exercised over $5.1 million stock oprtions and sold the underlying shares for total proceeds of over $139 million …”

Mozilo founded Countrywide in 1969 and was its CEO from its formation until its acquisition by Bank of America in 2008.


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