Jun 04, 2009

SEC Foreclosing on Mozilo

The SEC (Securities and Exchange commission) has brought civil fraud charges against Angelo Mozilo, the former CEO of Countrywide Financial Corp. The SEC seeks to penalize Mozilo for his alleged fraudulent sale of millions of dollars worth of Countrywide stock. It turns out that Mozilo sold most of his Countrywide stock just before (unknown to the public) Countrywide share prices were about to go in the toilet and the company was on its way to oblivion. The SEC also wants a court to order Mozilo to give back his allegedly ill-gotten gains.

Mozilo's defense will no doubt be that no fraud was involved because he sold his shares pursuant to a pre-arranged plan. A law hideously numbered 17 C.F.R. Sec. 240.10b-5-1(c)(1)(i)(A)(3) allows company big-wigs to insulate themselves from "insider trading" charges (charges that they sold stock based on inside information not available to the general public) by setting up plans for selling a certain number of shares on certain dates.  If Mozilo set up a stock sale plan and stuck to it, his stock sales may have been miraculously well-timed (for him) but not fraudulent.

Based on published reports, there seems little doubt that Mozilo did set up a plan to sell his Countrywide shares.  But it also seems that the plan was no more solid than many of the disastrous mortgages that Countrywide had been peddling to unsuspecting investors.  Mozilo's plan apparently accelerated as Countrywide's stock approached worthlessness. So now it's up to the courts to decide whether Mozilo was incredibly lucky, incredibly greedy, or incredibily fraudulent.  Perhaps he was all 3.