Countrywide's Mozilo: The epitome of boom-era excess
Angelo Mozilo has come to symbolize the wretched excess of mortgage lending during the housing boom.
He also became a symbol of excess on another level: executive compensation.
The case the Securities and Exchange Commission has been pursuing against the Countrywide Financial Corp. founder ties into both of those emotionally charged issues: Countrywide's aggressive lending generated Mozilo's fabulous wealth.
The SEC’s job is to protect investors, not subprime mortgage borrowers. So it isn’t directly concerned with whether Countrywide made loans to people who had little chance of repaying them.
Rather, the SEC cares whether Countrywide’s shareholders were misled about the company’s finances as the mortgage market deteriorated, and whether Mozilo’s heavy personal stock sales violated federal rules against insider trading.
Indirectly, of course, the SEC’s case is about Countrywide’s voracious lending. As the company grew to become the nation’s biggest mortgage provider, its earnings ballooned to $2.7 billion in 2006 from less than $500 million in 2001.
The company’s stock soared to a record high of $45.03 in February 2007 from $10.24 at the end of 2001, a 340% gain. In the same period the average financial-services stock in the Standard & Poor’s 500 index rose a modest 41%.
Mozilo reaped huge sums by selling personal stock into that price surge. He took home $160 million in 2005 and $120 million in 2006, including pay and profit on exercised stock options.
The SEC has been investigating whether Mozilo accelerated his stock sales because he knew something that other shareholders didn’t know -- for example, that Countrywide’s loan portfolio was a time bomb.
In a statement today, Mozilo’s attorney, David Siegel, had this to say:
"All of Mr. Mozilo's stock sales were made in compliance with properly prepared and approved trading plans and reflected recommendations by his financial advisor over a long period of time.
"The persistent innuendo in the media and political circles that Mr. Mozilo was selling Countrywide stock because he was aware of some supposedly ‘secret’ adverse information about the company is scandalous and inconsistent with even a cursory examination of the facts surrounding the history of his stock holdings."
Mozilo sold stock regularly under trading plans that were commonly used by many executives during the bull market as a way to avoid the appearance of selling on inside information. The plans entailed a commitment to sell a set amount of stock at regular intervals – say, monthly.
But as a Los Angeles Times story noted in September 2007, "Most executives adopt a plan and stick with it, compensation and securities experts say. Mozilo didn't."
From the story (and I urge reading the entire piece):
Mozilo shifted course twice in late 2006 and early 2007, according to regulatory filings, amid mounting signs of trouble in the housing and mortgage industries.
Mozilo adopted a new trading plan, added a second and then revised it, allowing him to unload hundreds of thousands of additional shares before Countrywide stock went into a tailspin.
"There is clearly no legal prohibition of altering your plan," said David Priebe, a Bay Area attorney who has helped set up more than 50 of such plans for executives. "But the more that you modify or add to your plan over a short period of time, the more risk that someone will call it into question. I would not say that you cannot do it. I would say there is a risk if you do do it."
By January 2008 Countrywide's stock had crashed to $5 and the loss-ridden company was forced into the arms of Bank of America Corp.
The SEC staff believes there is enough evidence of wrongdoing by Mozilo to charge him with fraud. His lawyers now have the task of talking the SEC out of it, against the post-financial-crash backdrop of the public's desire for vengeance against those who they believe perpetrated the debacle.
At most, however, a successful SEC civil case (i.e., a settlement) would involve a steep fine. The far greater risk for Mozilo would be a federal criminal case, and that is still a much bigger legal question mark.
-- Tom Petruno
Photo: Angelo Mozilo in 2007. Credit: Anne Cusack / Los Angeles Times