- The Washington Times - Friday, June 5, 2009

Angelo Mozilo, a friend of high-ranking politicians and the former chief executive of Countrywide Financial, was charged Thursday with insider trading in the latest blow to the firm that had dominated the subprime-mortgage market — a sector whose collapse helped put world financial markets into a tailspin.

Mr. Mozilo, 70, was accused in a lawsuit filed Thursday by the Securities and Exchange Commission of illegally making $140 million by selling off company stock at a time when investors were misled about the overall health of the company.

According to the SEC, Countrywide told investors that it dealt mostly in stable mortgages, to people considered good credit risks, when it actually dealt mainly in risky “subprime” mortgages to people judged to be likelier to default. SEC said the Countrywide executives knew the company’s reliance on the subprime market was a business model likely to fail.

“These trends and these concerns were never revealed to Countrywide investors,” SEC Enforcement Director Robert Khuzami said during a news conference announcing the charges.

Countrywide Financial has ties to prominent lawmakers including Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, and Senate Budget Committee Chairman Kent Conrad, North Dakota Democrat. It was the nation’s largest mortgage lender and the leader in the subprime market before the housing crash nudged the economy into recession.

In one company e-mail, according to the SEC, Mr. Mozilo wrote that subprime mortgages, while profitable, ultimately would prove “toxic.”

“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,” Mr. Mozilo wrote in another internal e-mail.

Mr. Mozilo is the highest-ranking corporate official involved in the nation’s housing crisis to face legal action from U.S. authorities. Former Chief Operating Officer and President David Sambol, 49, and former Chief Financial Officer Eric Sieracki, 52, also were named in the lawsuit and accused of misleading investors.

David Siegel, Mr. Mozilo’s attorney, called the SEC’s accusations “baseless” and said the lawsuit against his client “does not reflect a balanced or fair consideration of the facts or the law.”

“Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide,” Mr. Siegel said. “Those sales were entirely lawful, complied with applicable laws and regulations and were made under the terms of a series of written sales plans which were reviewed and approved by responsible professionals.”

As for the SEC’s accusations that Mr. Mozilo knew that some loans were highly risky, Mr. Siegel called them “demonstrably false.”

“The complaint does not tell the whole story of either internal communications or the public disclosures,” he said.

Democrats were roiled a year ago by revelations that Mr. Dodd and Mr. Conrad got mortgages at favorable rates through a “VIP” program dispensed by Countrywide for so-called “friends of Angelo.”

The senators have said they were unaware they were getting preferred treatment. Mr. Dodd has insisted that the questions regarding the two Countrywide loans he received didn’t compromise his ability to lead Congress’ efforts to address the effects of the subprime mortgage meltdown.

“As [Mr. Dodd] has said many times before, he does not know the man and has never known him,” Dodd spokesman Bryan DeAngelis said Thursday. “He truly hopes justice is done in this case.”

A spokesman for Mr. Conrad said Thursday that it was “too early to comment.”

But the National Republican Senatorial Committee (NRSC), the fundraising arm for Senate Republicans, circulated an e-mail to the media shortly after the SEC’s announcement to remind reporters of the link between Countrywide and the Democrats.

“After insisting that his sweetheart mortgage loan from Countrywide Financial did not compromise his position as the Senate’s powerful Banking Committee Chairman, Connecticut voters deserve to know: will Senator Chris Dodd finally repudiate and distance himself from his friend Angelo Mozilo?” NRSC spokeswoman Amber Wilkerson said.

The SEC filed its lawsuit in Los Angeles; Countrywide Financial had been based in California. The commission does not bring criminal charges and has no power to jail. Instead, the SEC can impose financial penalties and bar people from working in the field it oversees — publicly traded companies.

The Justice Department began investigating Countrywide on suspected criminal violations last year but has not acted. The department declined to comment Thursday.

To win its case, the SEC needs to prove wrongdoing only by a preponderance of evidence, unlike criminal charges that have to be proved beyond a reasonable doubt.

Attorneys for Mr. Sambol and Mr. Sieracki also denied their clients did anything wrong and vowed to fight the charges.

“The unfortunate reality is that this baseless complaint against Dave Sambol is the result of the tremendous political pressure the SEC is facing given its well-publicized enforcement failures,” defense attorney Walter Brown said. “Making groundless allegations and losing in court will not help the SEC restore its reputation.”

Mr. Brown added that “when the facts are fully aired before an impartial fact-finder immune from political pressure, I am confident that Mr. Sambol will be vindicated completely.”

Mr. Sieracki’s attorney, Shirli Weiss, said Countrywide dealt honestly with investors and no one could have predicted how weak the economy would become.

“Mr. Sieracki lost money just like all other investors in Countrywide stock when the credit markets seized up and real estate values declined,” she said.

Countrywide’s respected history helped legitimize the subprime mortgage market, previously viewed as unworthy of serious bankers and financiers.

This newfound respectability encouraged creative ways of repackaging these assets as securities, with which every form of financial institution got involved in the 1990s and 2000s. A dip in the subprime lending market therefore quickly spread through the banking system, caused the world’s credit markets to seize up, and dealt the global economy a blow from which it is still reeling.

Bank of America bought Countrywide last year, and the acquisition of toxic assets is one reason the company is still a $45 billion burden on taxpayers.

• Patrice Hill contributed to this report.

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