Judge Rules Mozilo and Countrywide Execs Must Face Multi-Million Dollar Federal Lawsuit

Angelo R. Mozilo, the perennially smiling and suntanned CEO of subprime giant Countrywide Financial Corp., may have finessed the recent Congressional hearingson the millions in compensation given to the executives of financially devastated subprime lenders even as their investors lost billions, but he hasn’t been able to escape a multi-million dollar shareholder lawsuit filed against him in federal court.

The shareholder derivative action was filed on behalf of Countrywide by the Arkansas Teacher Retirement System, the Fire & Police Pension Association of Colorado, the Louisiana Municipal Police Employees Retirement System, the Central Laborers Pension Fund, and the Mississippi Public Employees Retirement System, against Mozilo and other senior Countrywide officers and the members of Countrywide’s board of directors.

The lawsuit alleges misconduct by the defendants and disregard for their fiduciary duties, including lack of good faith and lack of oversight of Countrywide’s lending practices, improper financial reporting and internal controls, as well as the unlawful sale by Citywide’s officers and directors of over $848 million of Countrywide stock between 2004 and 2008 at inflated prices while in possession of material inside information.

You can read the complaint here

Last week, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles rejected the attempt by Mozilo and other defendants to dismiss the case and ruled that the case could go forward.

Judge Pfaelzer didn’t buy the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults.  Instead, she found that confidential witness accounts in the shareholder complaint were credible and suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

The judge found that the plaintiffs identified “numerous red flags” that should have warned directors of increasingly risky loans made by Countrywide.  “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

In fact, rather than taking corrective action, the judge found that Countrywide executives made numerous public statements, proxy statements, and SEC filings that falsely stated both the financial condition of the company and the efforts being made to control potential loses.

The judge concluded that the evidence presented by the plaintiffs “create a cogent and compelling inference that the Individual Defendants misled the public with regard to the rigor of Countrywide’s loan origination process, the quality of its loans, and the Company’s financial situation – even as they realized that Countrywide had virtually abandoned its own loan underwriting practices.”

“During the relevant period, Plaintiffs assert that Countrywide began to approve even more risky loans that departed significantly from its established underwriting guidelines. While this increased the volume of loans originated by Countrywide and inflated its market share, this strategy also drastically lowered the quality of the loans and retained interests that Countrywide held for investment, as well as the quality of the mortgage-backed securities it sold into the secondary market. Plaintiffs contend that these low quality mortgages, many of which were approved with low or no documentation from the borrower, exposed Countrywide to a vast amount of undisclosed risk because loan quality is essential to virtually every facet of Countrywide’s business operations. Plaintiffs further assert that the Individual Defendants, due to their roles as members of certain Committees, proceeded with actual knowledge of these problems, or at least deliberate recklessness.”

It is expected that Mozilo’s $474 million in stock sales between 2004 and 2007 will get particular attention because he repeatedly changed the terms of his 10b5-1 prearranged stock-sale program to allow more shares to be sold. “Mozilo’s actions,” the judge wrote, “appear to defeat the very purpose of 10b5-1 plans.”

In addition to Mozilo, the defendants include David Sambol (Countrywide Director since Sept. 2007, President and Chief Operating Officer, and various other executive positions), Jeffrey M. Cunningham Director since 1998), Robert J. Donato (Director since 1993), Martin R. Melone (Director since 2003), Robert T. Parry (Director since 2004), Oscar P. Robertson (Director since 2000), Keith P. Russell Director since 2003), Harley W. Snyder (Director since 1991), Henry G. Cisneros (Director from 2001-Oct. 2007), Michael E. Dougherty (Director from 1998-Jun. 2007), Stanford M. Kurland (President and Chief Operating Officer until 2006, and various other executive positions), Carlos M. Garcia (several executive positions and former Chief Financial Officer), and Eric P. Sieracki (Chief Financial Officer and Executive Managing Director).

One of the defendants, Countrywide Director Henry G. Cisneros, has had a particularly shaddy record since being forced to resign as President Clinton’s Secretary of Housing and Urban Development in 1997. Cisneros pled guilty to making false statements to federal officials in an investigation of illegal payments he made to his mistress. He was pardoned by Clinton in January 2001.

You can read the judge’s decision here.

UPDATE:

Read about Bank of America’s firing of David Sambol, Countrywide’s president and COO (and a principal defendant in the shareholder lawsuit).

 

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