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CEO sold as stock dropped

Countrywide's Mozilo made changes to trading plan that raise red flags, experts say. Firm says sales followed policy.

September 29, 2007|Kathy M. Kristof | Times Staff Writer

As the mortgage industry swooned in late 2006 and 2007, Countrywide Financial Corp. Chief Executive Angelo Mozilo cashed in stock options valued at $138 million -- vastly expanding his wealth even as his shareholders watched their stock shrink in value.

Company executives say Mozilo did nothing wrong and that the transactions were made under trading plans that specified how many shares would be sold each month.

Similar trading plans have been used by hundreds of executives since they were greenlighted by federal regulators in 2000 as a means of fending off accusations of insider trading.

But most executives adopt a plan and stick with it, compensation and securities experts say. Mozilo didn't.

Instead, he 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."

Mozilo, 68, and other company executives are already the targets of shareholder suits that claim they misled investors about Countrywide's financial condition. Hurt by rising loan defaults and the housing slump, the Calabasas-based company recently announced that it would lay off 12,000 of its 54,000 workers. Its stock closed Friday at $19.01, down from $45.03 on Feb. 2.

Sandy Samuels, Countrywide's chief legal officer, said Mozilo's stock sales were all "in accordance with company policy."

"The [trading] plans were put into place in consultation with Mr. Mozilo's financial advisor, without regard to any non-public or market information," Samuels said in a prepared statement.

Compensation experts who reviewed Mozilo's trading activity, however, said the changes he made could prove to be a liability as Mozilo and Countrywide defend themselves against shareholder suits.

They point to a sequence of events that began Oct. 27, when Mozilo adopted a stock trading plan that Samuels said called for selling 350,000 shares a month. That replaced a previous trading plan that had expired in May. The plan was filed three days after Countrywide reported that its earnings from mortgage banking had fallen 40% in the third quarter ended Sept. 30.

Soon, there would be more bad news.

In November, investment bank UBS reported that borrowers with sub-prime loans -- the kind made to people with weak credit -- were falling behind on their payments at a record pace.

On Dec. 6, wholesale lender Ownit Mortgage Solutions of Agoura Hills said it was shutting down because Wall Street had cut off funding for its sub-prime loans, throwing 800 people out of work.

Six days later, on Dec. 12, Mozilo filed a new stock trading plan, Samuels said. Mozilo and Countrywide declined to provide copies of this or his other trading plans, but the company confirmed that the Dec. 12 plan allowed Mozilo to sell an additional 115,000 shares each month.

"The plan was entered into on the advice of his financial advisor based on his personal financial holdings, which included new equity awards under the proposed new contract," Samuels said in a statement.

Meanwhile, the mortgage business continued to sour. On Jan. 12, Countrywide reported that foreclosures the previous month had soared 48% over the year-earlier period.

On Feb. 2, Mozilo revised the trading plan he had adopted less than two months earlier, doubling the number of additional shares Mozilo was authorized to sell under his second plan to 230,000 a month. Between the two plans now in effect, Mozilo could sell 580,000 shares each month.

Samuels said this revision was made in response to the new terms of Mozilo's employment agreement, struck Dec. 22.

"In consultation with his financial advisor and due to new equity awards under his new contract, Mr. Mozilo decided to increase the amount of shares to be sold under the [trading plans] to 580,000 a month," Samuels said.

The plan was filed the same day Countrywide shares closed at an all-time high of $45.03. Samuels said the plan was put into effect on that date because it was "the time when the most current information about Countrywide was available in the marketplace." Three days earlier, Countrywide had reported its 2006 earnings. The stock is now far from that peak, hitting a low of $16.62 on Sept. 12.

Although trading plans usually protect executives against allegations that they traded on inside information, experts say Mozilo may have weakened his defense by making changes in a relatively short period of time.

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