Former Countrywide Financial CEO Angelo Mozilo and two other former officials of the mortgage giant were charged with fraud by federal regulators Thursday in the first government lawsuit against top corporate executives for actions related to the financial crisis.
The Securities and Exchange Commission accused Mozilo, 70; former Countrywide CFO Eric Sieracki, 52; and David Sambol, 49, former president, of falsely leading investors to believe the mortgage giant had avoided subprime-lending mistakes, even as Countrywide issued "riskier and riskier" loans.
Those loans generated billions in profits for Countrywide, a major player in the national subprime mortgage market that collapsed in 2007, helping start a global financial meltdown. Bank of AmericaBAC acquired Countrywide last year in a much-criticized deal.
Mozilo, a Countrywide co-founder renowned for his high salary and other corporate perks, was also charged with inside trading that allegedly produced profits of nearly $140 million on sales of the stock in the nation's largest mortgage lender.
Defense lawyers denied any wrongdoing by the former executives and vowed to fight the Los Angeles federal civil court lawsuit that accused the three of failing to tell investors Countrywide was:
• Matching any mortgage offered in the marketplace, even risky loans offered by subprime specialists.
• Approving a high percentage of loans with risks above the firm's "increasingly lax" guidelines.
• Defining "prime" loans as mortgages approved for borrowers whose credit scores were "well below" any definition of prime credit quality.
SEC enforcement director Robert Khuzami said evidence shows the three painted a cheerful "mirage" that falsely characterized Countrywide as operating under "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," Khuzami said.
As proof the executives knew of Countrywide's increasingly risky financial condition, the SEC lawsuit cited a corporate e-mail in which Mozilo allegedly told Sambol the firm was "flying blind" on how some risky loans would perform amid rising unemployment and slowing home sales.
In a separate e-mail to Sambol, Sieracki and others, Mozilo allegedly wrote that subprime mortgages had been originated "through our channels with disregard for process (and) compliance with guidelines."
The SEC charged that Mozilo, while aware of non-public red flags in the firm's operations, established four stock sales plans, exercised more than 5.1 million Countrywide options and sold the underlying shares for nearly $140 million.
The SEC seeks unspecified fines against the three. It also seeks repayment of allegedly improper stock gains by Mozilo and Sambol, who allegedly got at least $40 million in profits.
Calling the charges "baseless," Mozilo attorney David Siegel said Countrywide's underwriting standards and loan portfolio "were well disclosed to and understood by the marketplace." He described Mozilo's stock sales as "entirely lawful."
Sambol's lawyer, Walter Brown, said the lawsuit "wholly disregards" Countrywide's credit risk disclosures and media accounts about them.
Defense attorney Nicolas Morgan said Sieracki did nothing wrong and "lost money just like all other investors in Countrywide stock" when the financial crisis erupted with little warning.