On the eve of trial the SEC settled one of its most
significant market crisis cases, SEC v. Mozilo, Case No. CV 09-03994
(C.D. Cal. Filed June 4, 2009). The case is significant because it is one of
the few which pierces to the sub-prime center of the market crisis and names
senior executives as defendants.
The settlement is being trumpeted by the SEC PR machine
as a total triumph. There is no doubt that the terms of the deals with the
three individual defendants, former CEO Angelo Mozilo and his two top
lieutenants, former COO David Sambol and former CFO Eric Sieracki, are
significant. Key terms of the settlements, which have been approved by the
The complaint, discussed
here, details a series of false statements by each of the three defendants
over a period of years not just to cover up the deteriorating financial
condition of the huge sub-prime lender as the market crisis unfolded, but to
affirmatively mislead investors. Beginning as early as the first quarter of
2005, the Commission repeatedly cites quarterly and annual reports which
falsify and conceal the deteriorating financial condition of the one-time
market giant. The rosy picture painted for the public stands in stark contrast
to the internal e-mails and other documents which highlight the knowledge of
the defendants about the difficult financial straights of their company.
As the events which lead to the market crisis unfolded,
Countrywide's disclosure control committee reviewed and analyzed the
increasingly desperate financial condition of the sub-prime lender, according
to the complaint. This is precisely the process Sarbanes Oxley envisioned with
its CEO and CFO certification and other requirements. The group, which included
the defendants, knew the true, cancerous financial condition of the company.
Yet, according to the SEC, CEO Mozilo and CFO Sieracki executed certifications
attesting to the financial health of the company - precisely the opposite of
what SOX sought.
The complaint concludes with details about the securities
trading of defendants Mozilo and Sambol. The former sold shares valued at $260
million, while sales by the latter totaled $40 million. Mr. Mozilo, the
complaint claims, engaged in insider trading, "from November 2006 through
October 2007 . . . [exercising] over five million stock options and . . .
[selling] the underlying shares pursuant to the four sales plans, realizing
profits of over $139 million." (Cmplt. ¶ 124).
The complaint alleges violations of: Securities Act
Section 17(a) by each of the defendants; Exchange Act Sections 10(b) by each of
the defendants; Exchange Act Sections 13(a) by each of the defendants; and Rule
13(a)-14 by Messrs. Mozilo and Sambol.
Comparing the claims in the complaint to the settlements
Overall, the settlement in Mozilo makes good
headlines with big, at times puffed, numbers. In the end however, the results
contrast sharply with the claims. If the allegations in the Commission's
complaint depict the underlying facts - a point which has previously been
raised in, for example, the Citigroup (here) and Bank
of America (here)
settlements - the resolution in Mozilo raises significant questions.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.