In the aftermath of the subprime mortgage meltdown of 2008, it was the tanned and silver-haired Angelo Mozilo who came to epitomize the ugliness of the U.S. housing bust.
In its first high-profile case stemming from the mortgage crisis, the U.S. Securities and Exchange Commission Thursday charged the Countrywide Financial Corp. founder and two other former top executives with securities fraud. Mr. Mozilo, 70, also faces insider trading charges.
The SEC alleges in a 53-page civil complaint that Mr. Mozilo deliberately kept investors in the dark about Countrywide's increasingly risky mortgage business in 2005 to 2007, while pocketing millions by dumping stock in the company.
"This is a tale of two companies," Robert Khuzami, director of the SEC's enforcement division, told reporters in Washington Thursday.
"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."
In 2005 and 2006, the U.S. housing market was booming, and subprime lenders such as Countrywide were becoming increasingly less discriminating about who they would lend to.
Home buyers could get financing with little or no money down, dubious credit histories, and sometimes no proof at all that they would ever be able to repay the mortgages.
These loans to shaky borrowers, which were packaged and sold as bonds to investors, were among the key triggers of the global financial collapse that has brought down banks around the world.
Mr. Mozilo hid Countrywide's disastrous gambles in subprime lending while "actively taking chips off the table," Mr. Khuzami said.
The other Countrywide executives charged in the case are former chief operating officer David Sambol, 49, and chief financial officer Eric Sieracki, 52.
The SEC alleges that Mr. Mozilo, who founded Countrywide in 1969 and built it into the largest U.S. mortgage lender, made $140-million (U.S.) in illegal stock sales.
None of the allegations have been proved in court.
"The complaint does not tell the whole story of either internal communications or the public disclosures," and the SEC's claims about the stock sales are "without merit," Mr. Mozilo's lawyer, David Siegel said in a statement. "The mix and risks of Countrywide's loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace."
Lawyers for Mr. Sambol and Mr. Sieracki issued similar statements.
In a case that legal experts said is similar to the corporate fraud against top executives of Enron Corp., the SEC is relying on e-mails and other internal documents that appear to contradict the company's rosy public statements.
"Any time the commission brings a case against an industry icon, it's a significant event," said Washington lawyer Jacob Frenkel, a former federal prosecutor and white-collar crime specialist.
Mr. Mozilo was the face of the subprime mortgage industry, Mr. Frenkel said.
A key question now is whether Mr. Mozilo will also face criminal charges, Mr. Frenkel said. Citing a person familiar with the matter, Associated Press said a criminal probe is continuing.
Mr. Mozilo privately described one Countrywide mortgage product as "toxic" and that another was so shaky the company was "flying blind," according to the SEC complaint.
In an April, 2006, e-mail to co-workers, Mr. Mozilo pointed out that another executive had characterized a line of secondary subprime mortgages as the "milk" of Countrywide's business. "Frankly, I consider that product line to be the poison of ours," Mr. Mozilo wrote.
The SEC complaint highlights what Countrywide called its "supermarket" strategy in which it would match the weakest underwriting standards of its competitors to sell more mortgages.
At the same time Mr. Mozilo was expressing concerns about some key parts of the Countrywide business, the company was telling investors that it was selling quality mortgages with prudent underwriting standards.
The SEC is seeking the return of all illegal profits, unspecified penalties and a permanent ban on the three executives ever serving as officers or directors of public companies. The case was filed in a federal court in Los Angeles, where Countrywide is based.
Mr. Sambol's attorney Walter Brown called the SEC lawsuit "baseless" and said the agency "has no case against" his client.
"The SEC wrongly asserts that Countrywide's disclosures to its investors regarding its lending criteria should have been more extensive, and that Mr. Sambol is somehow responsible for insufficient disclosure," Mr. Brown said in a statement.
"The SEC thus wholly disregards Countrywide's detailed credit risk disclosures and the incontrovertible fact that the media widely reported these disclosures and that Countrywide's investors, bondholders, rating agencies, and the financial industry were all well aware that mortgage lending practices were liberalized at Countrywide and almost all other financial institutions during the relevant time period," Mr. Brown said.
Bank of America Corp. bought the company for $2.5-billion last July 1. Bank of America had named Mr. Sambol to run its own mortgage business following the acquisition, but he opted to retire.
Mr. Sieracki's attorney Shirli Fabbri Weiss said her client bought Countrywide stock during the time when the SEC claims he was withholding information from investors. "Mr. Sieracki lost money just like all other investors in Countrywide stock when the credit markets seized up and real estate values declined," she said.
After the mortgage crisis hit, Countrywide was forced to cut thousands of jobs and saw its shares plummet. The company is the target of multiple lawsuits related to the mortgage meltdown.