[Corp. Watch] Wall Street is a Ponzi scheme based on appearance, misrepresentation

[Corporation Watch]

Countrywide's Mozilo Accused of Fraud

  SEC: Countrywide founder and 2 others misled investors about mort-
  gage lender's health, Mozilo pocketed $140 million from insider trades

By Tami Luhby

(CNN, June 5) -- The Securities and Exchange Commission (SEC) on  
Thursday filed securities fraud charges against former Countrywide  
Chief Executive Angelo Mozilo and two other former executives.

	The trio was charged with deliberately misleading investors by  
telling them the company was a quality lender of mostly prime  
mortgages and had prudent underwriting standards, while it actually  
was engaging in very risky lending practices in order to build and  
maintain marketshare.

	Mozilo was also charged with insider trading for selling his  
Countrywide stock for nearly $140 million in profits, while knowing  
that Countrywide's business model was deteriorating.

	Along with Mozilo, the SEC charged former Chief Operating Officer and  
President David Sambol and former Chief Financial Officer Eric  
Sieracki with hiding the company's true practices and condition from  
shareholders.

	"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."

	From 2005 to 2007, Countrywide engaged in an unprecedented expansion  
of its underwriting guidelines and was writing riskier and riskier  
loans, according to the SEC. The senior executives knew that defaults  
and delinquencies would rise.

	In particular, the SEC pointed to Countrywide's increased origination  
of pay-option mortgages, which allow borrowers to choose the amount of  
their monthly payments, even if they didn't cover the entire interest  
amount.

	While the lender maintained they were being prudently underwritten,  
the SEC says, Mozilo wrote in an email that there was evidence that  
borrowers were lying on their applications and many would be unable to  
handle the eventual higher payments.

	Also, Mozilo was very concerned about the lender's 80-20 mortgage  
product, which allowed borrowers to take out two loans to cover the  
entire cost of the house. He called it "the most dangerous product in  
existence."

	"In all my years in the business, I have never seen a more toxic  
prduct [sic]," he wrote in an email to Sambol, according to the SEC.

	By the end of 2006, Countrywide's underwriting guidelines were as  
wide as they had ever been, the SEC said. Countrywide made an  
increasing number of loans based on exceptions to those already wide  
guidelines, even though these mortgages had a higher rate of default.

	The SEC's civil action seeks financial penalties and the return of  
ill-gotten gains. An attorney for Mozilo called the SEC's allegations  
"baseless."

	"Mr. Mozilo acted properly and lawfully at all times as the CEO of  
Countrywide," said David Siegel. "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."

	Siegel said it is "demonstrably false" that Mozilo knew about risky  
lending practices at Countrywide and refused to disclose them. "The  
mix and risks of Countrywide's loan portfolio and its underwriting  
standards were well disclosed to and understood by the marketplace."

	Sambol's attorney said the SEC has no case against his client.  
"Indeed, Dave's own statements during investor presentations and  
earnings calls demonstrate that he provided the detailed, accurate  
information the SEC now falsely asserts was absent from Countrywide's  
public filings," said Walter Brown.

	Sieracki's attorney said her client did not violate any securities  
laws. "The company provided robust, timely information concerning the  
risks affecting its business and monthly information on loan  
delinquencies," said attorney Shirli Weiss.

Countrywide acquired by Bank of America

	Mozilo, who founded the company in a New York apartment, built  
Countrywide into the nation's largest mortgage lender. But Countrywide  
buckled during the housing melt-down and was acquired last year by  
Bank of America (B of A).

	B of A came under heavy fire for originally naming Sambol to lead the  
combined company's mortgage operations. A few months later, the bank  
reversed course before the acquisition was completed, saying Sambol  
would retire and appointing a B of A veteran to the top mortgage post  
instead.

	"Current economic and business conditions have highlighted the need  
for strong and focused executive leadership with a deep understanding  
of the Bank of America culture and operating model," said B of A Chief  
Executive Lewis said at the time.

	Soon after the acquisition closed, B of A entered into an $8.7  
billion settlement with a group of state attorneys general over  
Countrywide's lending practices. The bank agreed to modify the loans  
of certain Countrywide borrowers with sub-prime and pay-option  
mortgages.

	In the first four months of the program, B o fA contacted more than  
100,000 potentially eligible borrowers, twice the requirement in the  
agreement, and completed modifications for more than 50,000 of them.

	Bank of America referred comment to Siegel, saying the Countrywide  
executives were not employed at the company following the acquisition.

	Mozilo became a poster boy for the sub-prime crisis. He reportedly  
stood to collect a windfall of $115 million in the $4 billion sale to  
B of A. But after facing heavy criticism from lawmakers, Mozilo said  
he would forfeit $37.5 million in payments tied to the deal.