A federal judge ruled that former Countrywide CEO Angelo Mozilo must face allegations of securities fraud and insider trading in court, saying that the quality of loans that the mortgage lender was making would be of material interest to investors.
Judge John Walter of the U.S. District Court in Los Angeles denied a request by Mozilo to dismiss the Securities and Exchange Commission (SEC) lawsuit, according to news agency reports.
“The specific allegations of the complaint relied on by the SEC describe in great detail the virtual abandonment of prudent underwriting guidelines and the resulting proliferation of poor quality loans, during the same period Countrywide was touting the superior quality of its underwriting guidelines and its loan portfolio,” the judge wrote.
“Moreover, given that Countrywide’s core business, i.e., selling mortgages into the secondary market, admittedly depended upon the quality of its loan production, it is certainly not difficult for the court to conclude that the poor quality of Countrywide’s underwriting practices and loan portfolio would be material to investors,” he said.
Judge Walter also denied requests by two other former Countrywide executives, COO David Sambol and CFO Eric Sieracki, to dismiss SEC fraud charges.
Countrywide was the largest U.S. mortgage lender before the subprime mortgage crisis dried up its liquidity and forced it into the arms of Bank of America in 2008.
The SEC’s lawsuit, filed in June, accuses Mozilo and the other executives of misleading investors about the quality of Countrywide’s loans, including subprime and adjustable-rate mortgages (ARMs).
In addition, the SEC alleged insider trading against Mozilo for his exercise of more than 5.1 million stock options to yield more than $139 million in profit.
The SEC complaint cites an internal email from Mozilo in which he referred to a particularly profitable subprime product as “toxic,” and in another he stated that the company was “flying blind” with regard to the performance of Pay-Option ARM loans.
“Despite their awareness of, and Mozilo’s severe concerns about, the increasing risk Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public,” the SEC alleged in its complaint.
“The court’s order is disappointing,” Mozilo’s attorney David Siegel said in an e-mail to Bloomberg News. “But at this early stage of the case, the decision is limited to the sufficiency of the pleadings and not the merits or the factual record yet to be presented.”
Siegel told Bloomberg that he’s confident Mozilo will be vindicated once Countrywide’s thousands of filings and disclosures with the SEC and the market have been presented in court.
Tags: countrywide, investors, loans, mortgage lender, subprime mortgage
