SEC Files Securities Fraud Charges Against Former Countrywide Executives

On June 4, 2009, the Securities and Exchange Commission announced the filing of securities fraud charges against former Countrywide Financial CEO Angelo Mozilo, former chief operating officer and president David Sambol, and former chief financial officer Eric Sieracki. They are charged with deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share.

The Commission has additionally charged Mozilo with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

In its complaint filed in federal district court in Los Angeles, the SEC alleges that Mozilo, Sambol, and Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.

According to the SEC’s complaint, Countrywide’s credit risks were so alarming that Mozilo internally issued a series of increasingly dire assessments of various Countrywide loan products and the resulting risks to the company. In one internal e-mail, Mozilo referred to a profitable subprime product as “toxic.” In another internal e-mail regarding the performance of its heralded Pay-Option ARM loan, he acknowledged that the company was “flying blind.”

The SEC’s complaint alleges that Countrywide’s annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide “manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities.” Its annual reports for 2005 and 2006 falsely stated that the company ensured its “access to the secondary mortgage market by consistently producing quality mortgages.” The annual report for 2006 also falsely claimed that Countrywide had “prudently underwritten” its Pay-Option ARM loans.

The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.