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AppraiserLoft Blog I Appraisal Industry News |
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Recent PostsBlogroll« Press Release : Wells Fargo Appraisers | Home | Parent Company of AMC Faces Financial Challenges » Countrywide Exec Charged with Fraud and Insider TradingBy AppraiserLoft Team | June 10, 2009 The former CEO from Countrywide has been charged with fraud and insider trading by the SEC. Angelo Mozilo, together with two former executives, is alleged to have deliberately mislead investors about the significant credit risks involved in building the company’s market share. In emails seized by the SEC, Mozilo called subprime loans “toxic†and “dangerousâ€. (6/9/2009) The U.S. Securities and Exchange Commission alleges the former Countrywide executives deliberately mislead investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits. The SEC alleges that Mozilo along with former chief operating officer and President David Sambol and former Chief Financial Officer Eric 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. In a statement, Mozilo’s lawyer, David Siegel, an attorney for Mozilo at Irell & Manella LLP in Los Angeles, called the SEC’s allegations “baseless.†“Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide,†he said in a statement. “The SEC’s allegations that Mr. Mozilo supposedly knew about some undisclosed risk to certain loans made by Countrywide also is demonstrably false. The complaint does not tell the whole story of either internal communications or the public disclosures.†The SEC’s enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so. “This is the tale of two companies,†said Robert Khuzami, director of the SEC’s Division of Enforcement. “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.’†Rosalind Tyson, director of the SEC’s Los Angeles Regional Office, said Mozilo had access to detailed and alarming information about Countrywide’s operations. “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,†she said. The SEC obtained a chain of e-mails Mozilo had sent to Sambol and other former Countrywide executives warning of the dire consequences subprime loans could bring the company. Mozilo became concerned about the loans in the first quarter of 2006, when HSBC, a purchaser of Countrywide’s 80/20 loans, began to contractually force Countrywide to “buy back†certain of these loans that HSBC contended were defective. He then directed Sambol and Sieracki to implement a series of corrective measures to “avoid the errors of both judgment and protocol that have led to the issues that we face today caused by the buybacks mandated by HSBC.†“The 100 percent loan-to-value subprime product is the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from guidelines be permitted irrespective of the circumstances,†Mozilo said in an e-mail to Sambol and Sieracki on March 28, 2006. According to an April 17, 2006 e-mail, Mozilo once again reiterated to Sambol that “in all my years in the business, I have never seen a more toxic†product than the 80/20 subprime loans Countrywide was originating. Mozilo said the FICO scores associated with these loans were below 600 and 500, with some below 400. “With real estate values coming down … the product will become increasingly worse,†he said. “There has [sic] to be major changes in this program, including substantial increases in the minimum FICO. Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.†According to the SEC, both Mozilo and Sambol were aware as early as June 2006 that a significant percentage of borrowers who were taking out stated income loans were engaged in mortgage fraud. On June 1, 2006, Mozilo advised Sambol in an e-mail that he had become aware that the pay-option ARM portfolio was largely underwritten on a reduced documentation basis and that there was evidence that borrowers were lying about their income in the application process. On June 2, 2006, Sambol received an email reporting on the results of a quality control audit at Countrywide Bank that showed that 50 percent of the stated income loans audited by the bank showed a variance in income from the borrowers’ IRS filings of greater than 10 percent. Of those, 69 percent had an income variance of greater than 50 percent. These material facts were never disclosed to investors. On Sept. 26, 2006, following up on a meeting with Sambol regarding Countrywide’s pay-option ARM loan, Mozilo wrote to Sambol in an e-mail stating “we have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is FICO. In my judgement [sic], as a long time lender, I would always trade off FICO for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.†In the same e-mail, Mozilo warned that pay-options were mispriced in the secondary market and that spread could disappear quickly if another lender got into trouble with the produce or if investors soured on the product. He continued by saying the time was right to sell all newly originated pay-options and begin rolling the loans off the bank’s balance sheet. Mozilo is the most prominent executive targeted by U.S. regulators examining the subprime mortgage crisis. In April, the SEC reached a $2.45 million settlement 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. The agency also sued former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin last year for allegedly misleading clients about pending losses and redemptions. They have pleaded not guilty to criminal charges. Topics: Lawsuits | No Comments » CommentsYou must be logged in to post a comment. |
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