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SEC charges former Countrywide officials with securities fraud, insider trading

[JURIST] The US Securities and Exchange Commission (SEC) [official website] on Thursday charged [complaint, PDF] former Countrywide Financial Corporation officials with securities fraud arising from misleading investors. Former CEO Angelo Mozilo [BusinessWeek profile] was additionally charged with insider trading for selling his stock in the company based on inside information, profiting almost $140 million. The SEC alleges that Mozilo, former president David Sambol and former CFO Eric Sieracki falsely assured investors about credit risks involved in the company's efforts to build and maintain their market share, claiming that they avoided the mistakes made by their competitors. The complaint alleges that the officials knew the company was issuing risky loans and that defaults and delinquencies would rise as a result. Additionally, the SEC claims that, despite severe internal concerns about the high-risk options, crucial information was hidden [press release] from investors and potential investors who were assured that the company "consistently produced quality mortgages." SEC Enforcement Director Robert Khuzami [official profile] addressed [speech text] the fraud charges:

Since I came to this job on March 30, we have made it a priority to pursue cases at the root of the financial crisis.

This is a tale of two companies. There was the one that investors saw from the outside, 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.
Khuzami stressed that the SEC considers investors to always be the top priority for companies, maintaining that he will aggressively pursue those who put their own priorities above those of investors. Countrywide was acquired [AP report] by Bank of America [corporate website] in July 2008, making the bank the nation's leading mortgage originator.

In October, Countrywide settled [JURIST report] a dispute over state lending practices for $8.4 billion. The suit claimed that the company and its officers encouraged people to purchase risky loans so that the company could sell the loans for a profit. The Federal Reserve Board approved new rules [JURIST report] for home mortgage loans in July that were designed to reduce unfair lending practices and reduce consumer protection. In June, the US Attorney's Office for the Eastern District of New York [official website] announced the indictments [text, PDF] of two senior hedge fund managers at Bear Stearns [corporate website] for allegedly misleading investors after they knew their mortgage-related funds were at serious risk of collapse. In March 2008, the Department of Justice (DOJ) [official website] and the FBI launched a criminal investigation [JURIST report] into Countrywide.

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Paper Chase is JURIST's real-time legal news service, powered by a team of 30 law student reporters and editors led by law professor Bernard Hibbitts at the University of Pittsburgh School of Law. As an educational service, Paper Chase is dedicated to presenting important legal news and materials rapidly, objectively and intelligibly in an accessible format.

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