Country Wide's CEO In Big Trouble With SEC

Countrywide’s Former Chief Mozilo Targeted by U.S. Regulators
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By David Scheer and Ari Levy


May 13 (Bloomberg) -- Countrywide Financial Corp.’s former Chief Executive Officer Angelo Mozilo may become the highest ranking executive to be targeted by U.S. regulators investigating the subprime mortgage crisis.

Securities and Exchange Commission attorneys notified Mozilo weeks ago that they plan to recommend the agency file civil-fraud claims against him, the Wall Street Journal reported today, citing unidentified people. The agency may claim he violated insider-trading laws or withheld material information from investors, the newspaper said.

Mozilo, who co-founded Calabasas, California-based Countrywide in 1969, built the company into the nation’s biggest mortgage lender and helped trigger the subprime bubble by offering loans to customers with below-average credit scores. After Countrywide shares peaked at $45.26 in January 2007, the company lost more than 90 percent of its market value over 17 months and was purchased by Bank of America Corp.

In October, Countrywide, as a Bank of America unit, agreed to settle fraud complaints in 11 states by cutting the amount borrowers owed in principal and interest at a cost of $8.4 billion. The accord included relocation assistance for 400,000 homeowners in or near foreclosure and resolved lawsuits filed by attorneys general in states from California to Connecticut.

The SEC sent Mozilo a so-called Wells notice, the Journal said. The notifications typically give recipients an opportunity to respond to investigators’ claims before the agency’s five- member commission approves legal action. The regulator may decide not to pursue a case.

Securities Lawsuit

Attorneys for Mozilo didn’t immediately return phone calls seeking comment. SEC spokesman John Nester and Bank of America spokesman Scott Silvestri declined to comment.

Last month, Countrywide, some former executives, its underwriters and an auditor failed to win dismissal of a securities lawsuit brought by investors. The New York State Common Retirement Fund claimed Mozilo and other executives hid from them that the company was fueling growth by letting underwriting standards deteriorate. U.S. District Judge Marian Pfaelzer in Los Angeles, in an April 6 order, said investors can proceed with their insider-trading claims against Mozilo.

Profit at Countrywide more than tripled from 2002 through 2006 as Mozilo, 70, orchestrated acquisitions and hired brokers, creating a workforce of more than 61,000. From the third quarter of 2007 to the middle of 2008, Countrywide lost more than $4.8 billion as defaults soared. By the end of 2007, more than 7 percent of payments in the company’s $1.5 trillion servicing portfolio were at least 60 days overdue.

Florida Allegations

Mozilo also faces a lawsuit in Florida over allegations of deceptive business practices. A U.S. judge in San Diego sent the case back to Florida Circuit Court in an April 28 order, saying there was no basis for federal jurisdiction.

The SEC has opened more than 50 inquiries and brought at least 10 cases linked to subprime loans since rising defaults triggered the global credit crisis in 2007. In March SEC Commissioner Elisse Walter said it is still investigating instances of misleading disclosures, insider trading before lenders released negative news, and faulty accounting for loan losses and asset values.

Among its biggest cases, the agency reached a $2.45 million settlement last month with Michael Strauss, the former CEO of American Home Mortgage Investment Corp., over claims he understated loss reserves before the Melville, New York-based lender’s bankruptcy.

Last year, the regulator sued former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin for allegedly misleading clients about pending losses and redemptions. They have pleaded not guilty to criminal charges.

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.