(CN) – Angelo Mozilo, who as CEO of Countrywide Financial came to personify the subprime mortgage catastrophe, was charged on Thursday with securities fraud and taking $140 million from inside trading. The SEC cited numerous emails from Mozilo about subprime mortgage loans, such as: “In all my years in the business I have never seen a more toxic prduct [sic],” and, “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet.”
Mozilo wrote the first cited email to Sambol on April 17, 2006, the second one on Sept. 26 that year, the SEC said in its complaint in Los Angeles Federal Court.
The SEC also charged Countrywide’s former CFO Eric Sieracki. It says the three top officers defrauded investors by telling them that Countrywide was a top-quality mortgage lender, while they knew it was expanding its lending into riskier and riskier products.
In the internal emails, Mozilo repeatedly made alarming statements that showed he was aware of the risky – it would be fair to say trashy – quality of Countrywide’s subprime loans – calling them “poison.” The emails indicate that Mozilo wanted to correct the situation – but they also show him telling Sambol, in September 2006, that the “timing is right” for them to collect on their stock options.
On April 17, 2006, Mozilo sent this email to Sambol about Countrywide’s so-called 80/20 loans, the SEC said: “In all my years in the business I have never seen a more toxic prduct [sic]. It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down…the product will become increasingly worse. 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.”
And the SEC cited this Sept. 26, 2006 email from Mozilo to Sambol about Countrywide’s Pay-Option ARM loan portfolio: “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. … 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. … [The] timing is right … to … sell all newly originated pay options and begin rolling off the bank balance sheet, in an orderly manner, pay options currently in their port[folio].”
The SEC says the officers filed false and misleading annual reports for 2005, 2006 and 2007, and that the defendants knew they were false and misleading.
Mozilo set up four “executive stock sale plans” for himself in October, November and December 2006, while he knew of Countrywide’s increasing risk from its “toxic” loans, and excercised the options to take nearly $140 million in late 2006 and early 2007, the SEC says.
The 54-page federal complaint cites these problems:
“the increasingly lax underwriting guidelines used by the company in originating loans;
“the company’s pursuit of a “matching strategy” in which it matched the terms of any loan being offered in the market, even loans offered by primarily subprime originators;
“the high percentage of loans it originated that were outside its own already widened underwriting guidelines due to loans made as exceptions to guidelines;
“Countrywide’s definition of ‘prime’ loans included loans made to borrowers with FICO scores well below any industry standard definition of prime credit quality;
“the high percentage of Countrywide’s subprime originations that had a loan to value ratio of 100%, for example, 62% in the second quarter of 2006; and
“Countrywide’s subprime loans had significant additional risk factors, beyond the subprime credit history of the borrower, associated with increased default rates, including reduced documentation, stated income, piggyback second liens, and LTVs in excess of 95%.”
Mozilo, 70, lives in Thousand Oaks, Calif.; Sambol, 49, in Hidden Hills, and Sieracki, 52, in Lake Sherwood.
The SEC seeks penalties and injunctions for all three men and disgorgement, with interest, from Mozilo and Sambol.