US market regulator Securities and Exchange Commission has charged Countrywide Financial founder Angelo Mozilo and two former executives with securities fraud.
Mozilo, who is the former chief executive of financial services entity Countrywide along with David Sambol and Eric Sieracki, have been charged with fraud for misleading investors about the significant credit risk taken by the company.
Sambol was the former chief operating officer and president while Sieracki was formerly the chief financial officer at Countrywide.
The SEC said on Thursday that Mozilo and two other former executives have been charged with 'securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share'.
Moreover, Mozilo, who built Countrywide into the nation's leading mortgage lender, is also charged with insider trading for selling his company Countrywide stock based on non-public information for nearly $140 million in profits.
Bank of America snapped up Countrywide in 2008 for about $2.5 billion, after the latter was severely hit by the financial turmoil.
"Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors," it said.
In its complaint with the federal court in Los Angeles, the SEC has pointed out that Countrywide's annual reports for 2005, 2006 and 2007 misled investors in claiming that the firm 'managed credit risk through credit policy, underwriting, quality control and surveillance activities.'
According to the market regulator, the three executives knew and even acknowledged internally that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result.
Countrywide developed a strategy internally referred to as 'supermarket' that widened underwriting guidelines to match any product offered by its competitors, the complaint said.
The SEC has alleged that Mozilo engaged in insider trading of the company's shares owned by him. He even established four executive stock sale plans for himself in October, November and December 2006 while he was aware of material, non-public information concerning the firm's increasing credit risk and the expected poor performance of Countrywide-originated loans.
"From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007," the statement said.
Rosalind Tyson, who is the Director of SEC's Los Angeles Regional Office said that Mozilo had access to detailed and 'alarming' information about Countrywide's operations.
"He (Mozilo) knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table," Tyson added.