(Reuters) - Former Countrywide chief Angelo Mozilo agreed to a settlement of $67.5 million to resolve charges of duping the home lender's investors while lining his own pockets, but Bank of America Corp will pick up two-thirds of the tab.
The flamboyant poster boy of the subprime mortgage market's boom and bust struck a last-minute deal with the U.S. Securities and Exchange Commission before his trial on civil fraud charges was to start next week.
The most prominent executive charged by regulators with wrongdoing linked to the housing market collapse, Mozilo on Friday became the recipient of the highest fine ever dished out to an executive of a public corporation.
Some would argue Mozilo -- accused of hiding risks in Countrywide's portfolio, then selling off stock before it became public -- is getting off lightly, amid outrage over the financial industry's role in bringing about the crisis.
In July, Goldman Sachs agreed to pay $550 million to settle charges related to how it marketed a subprime mortgage product. At the same time, the SEC has been under fire for how it handled probes into Ponzi-schemers Allen Stanford and Bernard Madoff.
Mozilo settled without admitting or denying any wrongdoing. Bank of America, which bought Countrywide in 2008, said it will advance $45 million to Mozilo for the settlement, as required by indemnification provisions.
"He's got a nice pile of cash and he can live the rest of his life, assuming he's not indicted, pretty well," said Michael Perlis, a former SEC attorney.
Robert Khuzami, director of enforcement at the SEC, pointed out that a $22.5 million civil penalty will still come out of Mozilo's pocket. But state law permits companies to indemnify corporate officers in different circumstances, he said.
"We have in the past attempted to challenge that," Khuzami said, adding that those efforts had failed.
Mark Seifert, executive director of the East Side Organizing Project -- a Cleveland, Ohio, group that fights foreclosure -- said that it's "amazing to me that this guy is allowed to simply pay a fine and crawl under his rock again."
Mozilo's attorneys were not available for comment. The $45 million disgorgement relates to gains from Mozilo's sales of Countrywide stock.
FROM BRONX TO CALIFORNIA
The SEC brought the fraud case in June 2009. Mozilo and two other former executives were accused of failing to disclose the true state of Countrywide's deteriorating mortgage portfolio. Regulators also contend Mozilo made nearly $140 million by dumping Countrywide stock before the truth emerged.
In 2007, Mozilo took in $121.5 million from exercising stock options and was awarded another $22.1 million of compensation, according to the industry-backed Leaders of the Center on Executive Compensation.
Former Countrywide President David Sambol and Chief Financial Officer Eric Sieracki also settled charges Friday.
The son of a Bronx butcher who embodied a rags-to-riches success story, Mozilo became the burned face of the mortgage meltdown when the subprime crisis surfaced in 2007.
The former Countrywide CEO also faces potential criminal charges, but that investigation had taken a back seat to the SEC case. Mozilo, Sambol and Sieracki all elected to answer pre-trial questions from SEC lawyers about their conduct, instead of invoking their Fifth Amendment right to remain silent.
Some legal observers say this indicates Mozilo's camp did not think there was a high likelihood of criminal indictment.
Once the largest U.S. mortgage lender, Countrywide and Mozilo became synonymous with risky lending practices.
Countrywide extended no-down-payment, adjustable-rate mortgages and interest-only loans to borrowers. The loans often appealed to aspiring home buyers who would otherwise be unable to obtain a traditional mortgage, but the amount they owed each month often ballooned beyond their ability to pay.
At the height of its success in 2006, Calabasas, California-based Countrywide originated $461 billion worth of loans -- close to $41 billion of which were subprime.
But subprime mortgages ultimately poisoned the U.S. mortgage market. As the mortgage crisis spread in 2007 and early 2008, Countrywide acknowledged about one in 11 borrowers overall and more than one in three subprime borrowers had fallen behind on home loan payments.
Bank of America bought Countrywide for $2.5 billion in 2008, less than 10 percent of what the company was worth in early 2007.
The settlements, announced in Los Angeles federal court, resolve SEC charges that Mozilo, Sambol and Sieracki hid the risks of the company's teetering mortgage portfolio as the real estate market soured.
Mozilo, who was 70 when the SEC brought the charges in June 2009, agreed that he would not serve as an executive or director at a publicly traded company, according to court documents. The SEC said that is a permanent ban.
"In my view the proposed settlement is very reasonable in light of the significant hurdles that both sides would have faced in proving their case at trial," U.S. District Judge John Walter said in court on Friday.
Like Mozilo, Sambol and Sieracki neither admitted nor denied guilt and did not appear at the court hearing.
Sambol agreed to pay a $520,000 civil penalty, and to disgorge $5 million, according to court documents. Bank of America will cover Sambol's disgorgement too.
Sieracki will pay a $130,000 civil penalty.
The SEC generally seeks civil penalties to match any disgorgement amount, said former federal prosecutor Michael Shepard, who is not involved in the SEC case. But the defense lawyers were able to avoid that in the Countrywide case.
"The art of the deal is convincing them to get off the number they started at, and on to a much better number," Shepard said.
The son of a Bronx butcher who embodied a rags-to-riches success story, Mozilo became the burned face of the mortgage meltdown when the subprime crisis surfaced in 2007.
The former Countrywide CEO also faces potential criminal charges, but that investigation had taken a back seat to the SEC case. Mozilo, Sambol and Sieracki all elected to answer pre-trial questions from SEC lawyers about their conduct, instead of invoking their Fifth Amendment right to remain silent.
Some legal observers say this indicates Mozilo's camp did not think there was a high likelihood of criminal indictment.
Once the largest U.S. mortgage lender, Countrywide and Mozilo became synonymous with risky lending practices.
Countrywide extended no-down-payment, adjustable-rate mortgages and interest-only loans to borrowers. The loans often appealed to aspiring home buyers who would otherwise be unable to obtain a traditional mortgage, but the amount they owed each month often ballooned beyond their ability to pay.
At the height of its success in 2006, Calabasas, California-based Countrywide originated $461 billion worth of loans -- close to $41 billion of which were subprime.
But subprime mortgages ultimately poisoned the U.S. mortgage market. As the mortgage crisis spread in 2007 and early 2008, Countrywide acknowledged about one in 11 borrowers overall and more than one in three subprime borrowers had fallen behind on home loan payments.
Bank of America bought Countrywide for $2.5 billion in 2008, less than 10 percent of what the company was worth in early 2007.
The settlements, announced in Los Angeles federal court, resolve SEC charges that Mozilo, Sambol and Sieracki hid the risks of the company's teetering mortgage portfolio as the real estate market soured.
Mozilo, who was 70 when the SEC brought the charges in June 2009, agreed that he would not serve as an executive or director at a publicly traded company, according to court documents. The SEC said that is a permanent ban.
"In my view the proposed settlement is very reasonable in light of the significant hurdles that both sides would have faced in proving their case at trial," U.S. District Judge John Walter said in court on Friday.
Like Mozilo, Sambol and Sieracki neither admitted nor denied guilt and did not appear at the court hearing.
Sambol agreed to pay a $520,000 civil penalty, and to disgorge $5 million, according to court documents. Bank of America will cover Sambol's disgorgement too.
Sieracki will pay a $130,000 civil penalty.
The SEC generally seeks civil penalties to match any disgorgement amount, said former federal prosecutor Michael Shepard, who is not involved in the SEC case. But the defense lawyers were able to avoid that in the Countrywide case.
"The art of the deal is convincing them to get off the number they started at, and on to a much better number," Shepard said.
by Alex Dobuzinskis and Dan Levine Reuters October 15, 2010
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