The Securities & Exchange Commission announced today it will charge former Countrywide CEO Angelo Mozilo and two others with civil fraud and insider trading, making Mozilo the most high-profile individual to face federal charges in the wake of the financial crisis.
Countrywide, once the nation's largest home mortgage lender, was blamed by many for its role in the subprime mortgage meltdown that kicked off the ongoing financial crisis. The company collapsed last year and was acquired by Bank of America.
Mozilo, who co-founded the company, became synonymous with predatory lending as many Americans fell into foreclosures after they took out risky loans through Countrywide and other lenders that they were unable to afford.
Mozilo is accused of selling his Countrywide stock based on insider information for nearly $140 million in profits.
"This is the tale of two companies," Robert Khuzami, director of the SEC's Division of Enforcement said at a press conference announcing the charges.
"Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as 'toxic,' and said another's performance was so uncertain that Countrywide was 'flying blind,'" Khuzami said.
Mozilo's lawyer called the charges "baseless" and said, "all of the SEC's allegations will be answered completely in court and disproved with the full facts and evidence."
"The lawsuit filed today by the SEC does not reflect a balanced or fair consideration of the facts or the law," attorney David Siegel said in a statement. " The SEC's allegations are baseless; Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide."
Civil fraud charges also were filed against Countrywide's former chief operating officer David Sambol and ex-chief financial officer Eric Sieracki.
In addition to the federal government's civil case, there is also an active FBI investigation into whether the government will proceed with a criminal case against Mozilo. Sources said it could be weeks or months before the government decides to press criminal charges.
Risky Loans, Big Gambles
Countrywide built much of its growth on risky home loans, such as subprime and option adjustable-rate mortgages that often left borrowers owing more than their homes were worth.
"Angelo Mozilo had access to detailed and alarming information about Countrywide's operations," Rosalind Tyson, director of the SEC's Los Angeles regional office, said in a press release. "He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table."
For many, the perpetually tan Mozilo and his company Countrywide quickly became the face of everything that was wrong with the housing market -- the company profiting from writing volumes of mortgages that later came to haunt the homeowners who thought they were making their dream purchases.
That outrage grew when it became apparent that from November 2006 through August 2007 -- just as the housing downturn was becoming widely evident -- Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million.
During a March 7, 2008, hearing before Congress, Rep. Elijah Cummings, D-Md., summed up what many were thinking, saying, "Mr. Mozilo, you run the largest originator of home mortgages in the country, so if you don't bear personal responsibility I don't know who does."
Mozilo Still on the Payroll
Throughout that congressional hearing, Mozilo said he took pride in what he and Countrywide did and never once took any personal blame for the housing crisis.
"I am proud of the homeownership opportunities Countrywide has provided for more than 20 million Americans," Mozilo said.
Mozilo placed blame for what many now see as a recession on "an unprecedented series of economic shocks to the housing and capital markets."
"Much blame has been leveled lately at the variety of products, such as adjustable rate mortgages," Mozilo said at the time. "Before the onset of the current housing crisis, these products were widely offered by industry because they made homes more affordable for more people and helped homeowners consolidate other, more expensive debt.
"In fact," he continued, "adjustable rate mortgages had been popular with both borrowers and lenders for many years. From my perspective, then, the issue is not so much the products, but the housing market."
At the end of 2008, Countrywide was acquired by Bank of America in a deal worth some $2.5 billion. Bank of America had already pumped $2 billion into the mortgage lender before the deal was completed, and the acquisition was seen as a way to protect that investment.
Although Mozilo's company is now part of Bank of America, he is still profiting. As part of the acquisition, Bank of America agreed to retain Mozilo as a consultant. Mozilo is obligated to make himself available for a specified period of time each month through December 2011 and at the rate of $400,000 per year.
He is also entitled to receive other benefits, including office space, secretarial support, use of the company's aircraft, financial consulting services and payment of annual country club dues.
For three years, he gets continuing health, life insurance and financial planning benefits for himself and his beneficiaries. After those three years, he and his spouse will continue to get health benefits for their lifetimes.