Nov. 4 (Bloomberg) -- Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo must face a lawsuit by the U.S. Securities and Exchange Commission alleging he misled investors about the homelender’s deteriorating finances.

U.S. District Judge John F. Walter, in an order filed yesterday, denied Mozilo’s request to dismiss the SEC’s securities fraud claims. Walter also rejected similar requests by former Countrywide Chief Operating Officer David Sambol and former Chief Financial Officer Eric Sieracki.

“Given that Countrywide’s core business, i.e., selling mortgages into the secondary market, admittedly depended upon the quality of its loan production, it is certainly not difficult for the court to conclude that the poor quality of Countrywide’s underwriting practices and loan portfolio would be material to investors,” Walter said.

The SEC sued Mozilo in June, saying he publicly reassured investors about the quality of Countrywide’s loans while he issued “dire” internal warnings and sold about $140 million of his own Countrywide shares. He wrote in an e-mail that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, according to the SEC complaint.

Subprime Bubble

Mozilo, 70, is the most prominent executive targeted by U.S. regulators examining the subprime mortgage crisis. He co- founded Countrywide in 1969 and built it into the nation’s biggest mortgage lender, helping trigger the subprime bubble by offering loans to customers with below-average credit scores.

Mounting loan defaults slashed the company’s stock price, prompting its sale to Bank of America Corp. last year.

“The court’s order is disappointing,” David Siegel, an attorney for Mozilo, said in an e-mailed statement. “But at this early stage of the case, the decision is limited to the sufficiency of the pleadings and not the merits or the factual record yet to be presented.”

Siegel said he’s confident Mozilo will be vindicated once Countrywide’s thousands of filings and disclosures with the SEC and the market have been presented in court.

Walter Brown, Sambol’s lawyer, declined to comment on Walter’s ruling, and Shirli Weiss, who represents Sieracki, didn’t immediately return a call for comment.

The case is SEC v. Mozilo, 09-3994, U.S. District Court, Central District of California (Los Angeles.)

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

Last Updated: November 4, 2009 18:39 EST