Statement at News Conference Announcing Fraud Charges Against Former Countrywide Executives
by Robert Khuzami
Director of the Division of Enforcement at the U.S. Securities and Exchange Commission
Washington, D.C.
Good afternoon. Thank you for coming.
My name is Robert Khuzami, and I am the Director of the SEC's Division of Enforcement.
I am joined by my colleagues up here on the dais. It is their skill and hard work that have brought us here today. I will introduce them at the conclusion of my remarks.
Since I came to this job on March 30, we have made it a priority to pursue cases at the root of the financial crisis.
Today, we are doing just that.
Moments ago, the SEC charged the former CEO of Countrywide Financial – Angelo Mozilo – and two other former executives David Sambol and Eric Sieracki with securities fraud. We allege that they deliberately misled investors, and concealed from investors, disturbing trends in Countrywide business practices, including the deteriorating standards in their underwriting process, their increased risk of defaults and delinquencies, and their increasingly dark prospects for the future.
In addition, we are charging Mr. Mozilo with insider trading. According to our complaint, Mozilo raked in nearly $140 million while fully aware that Countrywide’s business model was deteriorating and faced a bleak future.
This is a tale of two companies. There was the one that investors saw from the outside, allegedly characterized by prudent business practices and tightly-controlled risk. But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model.
As detailed in our complaint, Mozilo, Sambol, and Sieracki painted this mirage, this false picture of Countrywide.
They portrayed the company as a quality lender mostly of prime mortgages, and one that had prudently managed its credit risk.
In Mozilo’s words, Countrywide was “a role model to others in terms of responsible lending.”
They claimed in Countrywide annual reports, for example:
• Countrywide ensured its “access to the secondary mortgage market by consistently producing quality mortgages.”
• And that Countrywide had “prudently underwritten” its Pay-Option ARM loans.
An investor reading these filings would also conclude that close to 80 percent of Countrywide mortgages, in 2006 e.g., were prime.
But the real Countrywide was very different. We allege it was a company:
• That underwrote loans in a manner that layered risk factor upon risk factor, such as reduced documentation, borrowers with little or no equity, subprime FICO scores, and “piggyback” second mortgages that enabled borrowers to put nothing down.
• It was a company that had adopted a “supermarket” or “matching” strategy in which they matched any loan offered by its competitors, even primarily subprime lenders, and even if outside Countrywide underwriting guidelines as then written.
Also concealed from investors were concerns voiced by Countrywide’s own Chief Credit Risk Officer, who warned that this “supermarket” strategy reduced Countrywide’s underwriting guidelines to a “composite of the riskiest products being offered by all of their competitors combined.”
Another chapter in this “tale of two companies” was PayOption ARMs. In addition to having an adjustable interest rate, these are loans that allow the borrowers to choose the amount they want to pay, even if that payment did not cover the accruing interest.
While Countrywide told the world that they were “prudently underwritten,” the fact is that Mozilo himself wrote in an email that Countrywide was “flying blind” when it came to how these mortgages would perform in the future.
Mozilo believed that the risk was so high that he urged Countrywide to sell its entire portfolio of PayOption ARM loans.
Mozilo also spoke at a May 6 Sanford Bernstein Conference. Mozilo said that PayOption ARM was a “sound investment” and the performance profile of the product was “well understood.”
The day after the conference, Mozilo told Sambol in an e-mail that he knew that PayOption ARMs were written on a reduced documentation basis; evidence that borrowers were lying on the applications; that borrowers would reach the 115 percent cap sooner than expected; that will suffer shock that will be difficult if not impossible for many to handle, and “we can’t predict what’s going to happen in the next couple of years.” Those concerns and trends were not disclosed to investors.
What these three men also concealed from investors was their view on the so-called 80-20 loans offered by Countrywide.
This is where one borrower gets two loans to finance 100% of the purchase price of a home.
Mozilo described this product as “toxic” “poison,” and “the most dangerous product in existence.”
But this view was concealed from investors, who were told that Countrywide “consistently produced quality mortgages.”
All in all, the defendants knew, and acknowledged internally, what was happening at Countrywide. They understood that defaults and delinquencies would rise as a result of their aggressive tactics.
Indeed, requests by Countrywide’s Chief Risk Officer that investors be warned about the increasingly lax underwriting guidelines were rejected by Sambol and Sirecki.
But investors were left with only the mirage.
They were left with this mirage even though the company is required to disclose to investors the trends and uncertainties facing the business, in a section of the public filings known as Management Discussion and Analysis. That is where investors get to learn what management sees for the company in the future. That is a view that these defendants concealed from Countrywide investors.
Meanwhile, while hiding their hand from investors, Mozilo was actively taking his own chips off the table.
We allege that Mr. Mozilo engaged in insider trading by establishing four stock sales plans while he was aware of the company’s increasing credit risk and the expected poor performance of Countrywide-originated loans.
Then, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million.
Our complaint asks the court for an order requiring these defendants to repay the profits from their stock sales and pay financial penalties for the harm they caused and other remedies.
We also seek to have them barred from serving as officers or directors of public companies.
These former Countrywide executives made deliberate decisions to mislead shareholders.
They made investors their last priority.
Here at the SEC, investors are always the top priority.
We will aggressively pursue those who put their own selfish priorities ahead of the needs of investors, as we have done today with these former Countrywide executives.
Before I take questions, I’d like to thank the staff responsible for putting the case together: Los Angeles Regional Director Rosalind Tyson as well as Michele Wein Layne, John M. McCoy, III, Spencer Bendell, Lynn Dean, Paris Wynn, and Sam Puathasnanon.
