Countrywide's Mozilo Loses Bid for Dismissal of SEC's Subprime Risks Suit

Countrywide Financial Corp. former Chief Executive Officer Angelo Mozilo must face trial on regulators’ claims he misled investors about risks tied to subprime lending, a judge ruled.

U.S. District Judge John F. Walter in Los Angeles yesterday denied requests by Mozilo and two other former senior Countrywide executives, David Sambol and Eric Sieracki, for a ruling that there were no genuine issues to be tried. The case is now set for a jury trial in October.

“It remains to be seen whether the Securities and Exchange Commission will be able to convince a jury that defendants’ statements were indeed misleading and material,” Walter said in his decision. “At the summary judgment stage, the judge’s function is not himself to weigh the evidence and determine the truth of the matter.”

The SEC sued Mozilo, 71, in June 2009, 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 shares.

Mozilo 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.

‘Flying Blind’

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.

The ex-CEO argued that he repeatedly made negative public statements about market conditions.

“Someone trying to benefit from inside information would have painted a rosier outlook during this time period,” his lawyers said in court papers.

“Because the alleged inside information in this case was generally known to the market, no one thought that such information could possibly constitute material nonpublic information,” they said.

Walter said in yesterday’s ruling that a jury could conclude that Countrywide’s “consistent” practice of ignoring its underwriting guidelines, which the SEC alleges the lender didn’t disclose, would be important to investors.

David Siegel, a lawyer for Mozilo, didn’t immediately return a call for comment. Walter Brown Jr., a lawyer for Sambol, former Countrywide president and chief operating officer, declined to comment on yesterday’s ruling.

“The threshold for the SEC is very low at this stage,” Shirli Fabbri Weiss, a lawyer for Sieracki, former chief financial officer, said in a telephone interview. “We don’t read too much into it. The judge is not weighing the evidence.”

Mounting loan defaults slashed the company’s stock price, prompting its sale to Bank of America Corp. in 2008.

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.

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