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Countrywide Board Should Face Investor Claims, Court Told

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July 3 (Bloomberg) -- Former Countrywide Financial Corp. directors, including ex-Chief Executive Officer Angelo Mozilo, should be forced to face claims that they misled investors about the quality of the mortgage-lender’s loans, a lawyer for shareholders told an appeals court.

Delaware’s corporate laws shouldn’t allow Mozilo and other former board members to escape liability for lying to investors simply because directors rushed to sell the ailing lender in 2008 to Bank of America Corp., Stuart Grant, an attorney for shareholders, told the Delaware Supreme Court today.

A federal appeals court asked Delaware’s highest court to decide whether the state’s corporate statutes eliminate investors’ rights to sue directors for allegedly fraudulent acts when a company is acquired. More than 60 percent of Fortune 500 companies are incorporated in Delaware and its laws are widely used to decide corporate disputes.

Investors’ claims shouldn’t be “thwarted by a merger that was actuated by fraud,” Grant told the appeals court at a hearing in Dover.

Countrywide investors are hoping the Delaware court’s ruling will allow them to revive lawsuits filed in federal court in Los Angeles aimed at holding Mozilo and other Countrywide directors liable for losses tied to the U.S. economic downturn starting in 2007 and subprime mortgages.

SEC Fine

Charlotte, North Carolina-based Bank of America acquired Countrywide, once the U.S.’s largest mortgage lender, for about $4 billion in 2008. The bank agreed in 2010 to a $600 million settlement that resolved investors’ securities-fraud claims over the mortgage unit’s activities.

Mozilo agreed to a record $67.5 million settlement that same year to resolve U.S. Securities and Exchange Commission claims that he misled investors. The SEC accused Mozilo and other Countrywide officials of publicly reassuring investors about the quality of Countrywide’s loans while knowing the lender fueled its growth with lax underwriting guidelines and a portfolio filled with risky subprime loans.

An Arkansas pension fund filed a derivative suit against Mozilo and other Countrywide directors in Los Angeles federal court in 2007 alleging the officials failed to properly oversee the lender’s operations and allowed fraudulent activities.

Case Tossed

A judge threw the case out after Bank of America acquired Countrywide, saying Delaware law eliminates investors’ right to bring such suits after a buyout. She found Delaware law only allows such suits if the fraud claims are tied to the actual acquisition.

The 9th U.S. Circuit Court of Appeals later asked the Delaware Supreme Court to decide whether investors retain the right to sue under the state’s corporate laws when they can show directors perpetrated a “larger fraud” that prompted a sale.

Wiping out such suits would allow executives who “plainly abused their office for personal profit to escape liability for their malfeasance and provide perverse incentives for corporate directors seeking to protect themselves from personal liability,” Grant and other lawyers for investors said in court filings.

Lawyers for Countrywide’s former directors said investors improperly sought to expand Delaware law despite the Supreme Court’s earlier rulings the state’s “fraud exception” only applies to acts tied to a buyout.

Allowing derivative claims to survive after a company is acquired would lead to “an explosion of litigation over mergers,” Brian Pastuzenski, a Boston-based lawyer representing the lender’s former directors, told the judges.

The Delaware Supreme Court case is Arkansas Teacher Retirement System v. Countrywide Financial Corp., No. 14, 2013, Supreme Court of Delaware (Dover). The federal case is Arkansas Teacher Retirement System v. Countrywide Financial Corp., 07-cv-06923-MRP, U.S. District Court, Southern District of California (Los Angeles).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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