ORANGE COUNTY AND WASHINGTON — Regulators took on the mortgage industry's best-known figure Thursday, accusing former Countrywide Financial Corp. Chief Executive Angelo Mozilo of hiding his alarm about risky loans the company was making at the height of the housing boom while he was reaping nearly $140 million in profits on stock sales.
In a fraud and insider-trading lawsuit against Mozilo, the Securities and Exchange Commission quotes e-mails in which the executive derided certain Countrywide loan products as "toxic" and "poison" more than three years ago -- well before "toxic debt" entered the popular lexicon as the cause of the housing crash and the resulting global financial crisis and deep recession.
"In all my years in the business I have never seen a more toxic product," Mozilo said in an April 2006 message, cited in the suit, about Countrywide's loans requiring no down payments from borrowers with abysmal credit. "Frankly, I consider that product line to be the poison of ours."
But Mozilo never advised shareholders just how lax the nation's No. 1 mortgage lender's standards had become, according to the lawsuit, filed in federal court in Los Angeles.
The suit also accuses David Sambol, Countrywide's former president, and Eric Sieracki, the lender's former chief financial officer, of defrauding Countrywide shareholders.
"In the end, these former Countrywide executives made deliberate decisions to mislead investors," Robert Khuzami, a former federal prosecutor brought in by SEC Chairwoman Mary L. Schapiro in February to toughen the agency's enforcement division, said at a news conference in Washington. "They made investors their last priority."
Lawyers for Mozilo, Sambol and Sieracki vehemently denied wrongdoing by their clients, suggested the e-mails were taken out of context and called the suit a political response to outrage over the government's failure to prevent the mortgage meltdown that began in late 2007 and the economic pain that has followed.
"The lawsuit filed today by the SEC does not reflect a balanced or fair consideration of the facts or the law," David Siegel, a lawyer for Mozilo, said, denying that his client "knew about some undisclosed risk."
Vowing to disprove the allegations in court, Siegel added: "The mix and risks of Countrywide's loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace."
Walter Brown, a lawyer for Sambol, said the SEC had "no case" because Countrywide made "detailed credit risk disclosures."
"The unfortunate reality is that this baseless complaint against Dave Sambol is the result of the tremendous political pressure the SEC is facing given its well-publicized enforcement failures," Brown said. "Making groundless allegations and losing in court will not help the SEC restore its reputation."
Shirli Weiss, an attorney for Sieracki, said the former finance chief "did not violate any securities laws and committed no fraud on anyone. Countrywide's stock performance was intricately tied to the fortunes of the real estate and the secondary market for loans. All investors knew this."
"Mr. Sieracki lost money just like all other investors in Countrywide stock when the credit markets seized up and real estate values declined," Weiss said.
At the heart of the SEC suit is the allegation that Countrywide, saved from bankruptcy when it was taken over by Bank of America Corp. last year, had portrayed itself primarily as an issuer of prime-quality mortgages while internally acknowledging it was writing "increasingly risky loans."
Mozilo and the others "painted a mirage for investors," SEC enforcement chief Khuzami said.
"This is a tale of two companies," he said. "One that investors from the outside saw; it was allegedly characterized by prudent business practices and tightly controlled risk. But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting and an increasingly suspect business model."
The insider-trading allegations against Mozilo focus on his repeated creation of preset stock-selling plans in 2006 -- plus a change to one of them in early 2007 -- "while he was aware of the company's increasing credit risk and the expected poor performance of Countrywide-originated loans."
The plans allowed Mozilo to sell more Countrywide shares than initially planned, exercising 5.1 million options at a profit of nearly $140 million, the suit says.
Siegel said the changes "complied with applicable laws and regulations, and were made under the terms of a series of written sales plans which were reviewed and approved by responsible professionals."
Countrywide's stock, which hit an all-time high of $45.03 a share in February 2007, crashed starting in July of that year. By the end of 2007 it sold for less than $9. On its last day of trading in June 2008, before Bank of America completed its takeover, the stock sold for $4.25.