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SEC-Countrywide case headed to trial

September 17, 2010

The biggest subprime fraud defendant will have his day in court next month.

A federal judge ruled Thursday that the Securities and Exchange Commission’s suit against Angelo Mozilo and two other former Countrywide executives can proceed. A trial is set for Oct. 19 in Los Angeles, Reuters reported, following the ruling by U.S. District Judge John Walter.

Will have his day in court

The case hinges on the degree to which Mozilo and his co-defendants, former Countrywide President David Sambol and ex-financial chief Eric Sieracki, hid the truth of the company’s deteriorating financial conditions from investors.

The SEC says the company’s quarterly and annual filings made no mention of Countrywide’s expanding appetite for risky loans to borrowers with lousy credit histories. This kept investors buying the stock long after the company was doomed, they charge, and conveniently gave Mozilo time to ring up a nine-digit fortune by selling stock.

The defense contends the details were aptly disclosed in places such as filings tied to Countrywide debt sales, but Walter rejected a bid to have the case thrown out.

“A reasonable investor is not required to pore through all prior transcripts of earnings calls, review hundreds of prospectus supplements filed by indirect subsidiaries, or ‘connect the dots’ in a company’s various SEC filings,” Walter wrote.

Countrywide was long a Wall Street favorite for its strong growth and expanding market share. Investors kept their faith even as the housing bubble collapsed: The stock traded above $40 in 2007, as Mozilo pledged that the shakeup of the mortgage industry would be good for the company, allowing it to consolidate its gains.

But fear that the company would be swamped by legal liability tied to its sale of low-quality mortgages prompted lenders to pull back from Countrywide at the end of 2007, resulting in the company’s fire sale to Bank of America at $8 a share the next year.

Since then, Countrywide has been viewed as one of the primary culprits in the mortgage bubble, via its plunge into subprime lending when the pool of more able borrowers dried up. BofA last month agreed to pay $600 million to settle a suit that makes similar allegations to the SEC’s suit.

While that settlement ranks as the biggest subprime case so far, Mozilo and the other individuals named in the case got off scot-free. They may not be so lucky when the SEC’s case comes to trial.