As expected, the SEC filed a civil fraud lawsuit today against Countrywide Financial CEO Angelo Mozilo. A news conference is scheduled for this afternoon in Washington. The agency has been investigating whether Mozilo and others failed to inform shareholders bbout lax lending standards. The feds are also looking into Mozilo's sale of hundreds of millions of dollars in stock in 2006 and 2007. (LAT)
*Also named in the complaint are David Sambol, chief operating officer and president, and Eric Sieracki, chief financial officer. From the press release:
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.'"
Countrywide developed what was referred to as a "supermarket" strategy, where it attempted to offer any product that was offered by any competitor. By the end of2006, Countrywide's underwriting guIdelines were as wide as they had ever been, and Countrywide was writing riskier and riskier loans. Even these expansiveunderwriting guidelines were not sufficient to support Countrywide's desired growth, so Countrywide wrote an increasing number of loans as "exceptions" that failed to meet its already wide underwriting guidelines even though exception loans had a higher rate of default.
Countrywide was more dependent than many of its competitors on selling loans it originated into the secondary mortgage market, an important fact it disclosed to investors. But Mozilo expected that the deteriorating quality of the loans that Countrywide was writing, and the poor performance over time of those loans, would ultimately curtail the company's ability to sell those loans in the secondary mortgage market. Mozilo and the company's chiefrisk officer warned Sambol and Sieracki about the increased risk that Countrywide was assuming. Thus, each ofthe defendants was aware, but failed to disclose, that Countrywide's current business model was unsustainable.