By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, October 15, 2010; 10:33 PM
Former Countrywide Financial chief Angelo Mozilo, the most high-profile executive to face federal charges in connection with the financial crisis, agreed Friday to pay $23 million to settle allegations by the Securities and Exchange Commission that he committed fraud and insider trading while sowing the seeds of the mortgage meltdown.
Mozilo transformed Countrywide into one of the dominant mortgage companies of the housing boom, competing aggressively to offer new types of home loans that allowed borrowers to buy bigger homes that they often couldn't afford.
The company became the largest mortgage lender in the country, generating hundreds of millions of dollars in wealth for Mozilo, the perpetually tanned son of a Bronx butcher. In mid-2008, as Countrywide's subprime losses threatened its survival, Bank of America swooped in to buy the firm.
Two years later, Countrywide's legacy still hangs over the housing market as it struggles to recover amid revelations that many banks, including Bank of America, may have evicted struggling homeowners without regard for their legal rights.
Mozilo's lawyer declined to comment. As part of the settlement, Mozilo neither admitted nor denied wrongdoing.
Under the terms of the SEC settlement, Mozilo must pay a total of $67.5 million. Most of that amount is designed to return to former Countrywide investors profits Mozilo earned in the alleged wrongdoing, and will be paid by Bank of America under a Countrywide indemnification agreement with Mozilo. Mozilo is paying about $23 million out of his own pocket as a penalty.
Mozilo also will never be able to serve as a top executive or board member at a public company.
Robert Khuzami, director of the SEC's enforcement division, said in a statement that the penalty "is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite - a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model."
For all the landmark cases to grow out of the financial crisis - Goldman Sachs this year and Bear Stearns in 2008 - none had nabbed a high-profile senior executive, certainly not in the same way that Worldcom chief executive Bernard Ebbers was held liable after the corporate accounting scandals of the early 2000s, or junk bond king Michael Milken was held to account after the Wall Street scandals of the late 1980s.
Unlike Ebbers and Milken, Mozilo's settlement with the SEC is civil and he faces no jail time. Whether he'll ultimately face criminal charges is up in the air. The U.S. attorney in Los Angeles is investigating, according to a person familiar with the matter.
The SEC announced the charges against Mozilo in June 2009, and the settlement comes days before a trial was to begin in Los Angeles. Mozilo was accused of misleading shareholders and selling $140 million of company shares based on inside information.
A trial would have had high stakes for both parties. For the SEC, it would have been a test of whether the regulator, trying to mend a reputation bruised during the financial meltdown, could win a high-profile case against a central player in the crisis. For Mozilo, it would have been an early evaluation of the evidence that could be used by prosecutors in a potential criminal trial.
The SEC case concerned disclosures that Countrywide made in 2005 through 2007 as the housing bubble inflated. The company made loans, then bundled and sold them to Wall Street. Over time, it moved into riskier parts of the market, ultimately becoming the top originator of all types of loans, from the safest to the riskiest.
The SEC charged that Mozilo and two other executives told Countrywide's shareholders that the firm wasn't partaking in the risky mortgage lending practices of competitors, when in fact it was radically reducing the standards it used to make loans. While touting the firm's financial health to investors, Mozilo in private e-mails referred to loans the company was making as "toxic" and acknowledged the firm was "flying blind," the SEC alleged.
The SEC also alleged that the company's annual reports in 2005 and 2006 falsely claimed that Countrywide could continue to sell loans it made to Wall Street "by consistently producing quality mortgages."
In its case, the SEC also charged former Countrywide chief operating officer David Sambol and former chief financial officer Eric Sieracki. Sambol will pay a $520,000 penalty ($5 million more will be paid by Bank of America) and Sieracki will pay a $130,000 penalty. Sambol will not be able to serve as a top executive or director for three years, and Sieracki will not be able to serve as a finance officer for one year.
A lawyer for Sambol said his client had agreed to settle the case "to put the matter behind him for the benefit of his family and loved ones." A lawyer for Sieracki noted that the SEC did not pursue its most expansive fraud charges against him and settled for a lesser charge. Sambol and Sieracki neither admitted nor denied the charges against them.
A Bank of America spokesman said: "Neither Bank of America nor Countrywide were sued by the SEC. We are not a party to the lawsuit. All of the factual allegations in the SEC's complaint concern events prior to Bank of America's acquisition of Countrywide in 2008."