Countrywide Control Fraud, but Inch Deep Prosecutions

(cross-posted with Benzinga.com)

I write to contrast four recent stories about Countrywide. Here are their headlines and brief synopses provided in the initial paragraphs of the stories.

U.S. drops criminal probe of former Countrywide chief Angelo Mozilo

Mozilo’s actions in the mortgage meltdown — which led to $67.5-million settlement against him — did not amount to criminal wrongdoing, federal prosecutors have determined.

By E. Scott Reckard, Los Angeles Times
4:11 PM PST, February 18, 2011

Federal prosecutors have shelved a criminal investigation of Angelo R. Mozilo after determining that his actions in the mortgage meltdown — which led to $67.5-million settlement against him — did not amount to criminal wrongdoing.

Judge OKs Countrywide settlement but big investors opt out

Institutional investors including CalPERS say the Countrywide settlement amount is too little.

By E. Scott Reckard, Los Angeles Times
February 26, 2011

Major investors opting out of a $624-million class-action settlement with Countrywide Financial Corp. said they would have recouped less than 5% of their losses on the mortgage lender’s stock had they accepted the agreement.

“A settlement on behalf of my clients would have to be a material multiple of that amount,” said Blair Nicholas of San Diego, a lawyer for the California Public Employees’ Retirement System and 15 other institutional investors. Altogether, 33 institutional investors have opted out.

The agreement was approved Friday by U.S. District Judge Mariana Pfaelzer in Los Angeles, who described the settlement as reasonable and substantial given the complexities of the case and the uncertainties of what a jury might decide.

It requires Countrywide and its parent company, Bank of America Corp., to provide $600 million for former Countrywide shareholders remaining in the case. The lender’s outside accounting firm, KPMG, added $24 million.

Countrywide and Bank of America, which bought the Calabasas mortgage lender as it skirted bankruptcy in 2008, contended the near-collapse and the investors’ losses were the unforeseeable result of the broader financial crisis. BofA acquired Countrywide, whose stock was once valued at $25 billion, for $2.5 billion in BofA stock.

The lawsuits contended that Countrywide, once America’s biggest home lender, fraudulently concealed its mounting risks as it loosened lending standards to build its market share during the housing boom.

How a Whistle-Blower Conquered Countrywide

By GRETCHEN MORGENSON

Michael G. Winston, a former executive at the Countrywide Financial Corporation. Mr. Winston spent three years in a legal battle against Countrywide, the once-mighty mortgage giant, and its current owner, Bank of America, contending that he was punished and pushed out for not toeing the company line. On Feb. 4, he won: a jury in California awarded him $3.8 million in damages.

Mr. Winston’s story provides a glimpse into how business was done at Countrywide at the height of the subprime craziness — and how assiduously Angelo R. Mozilo, the company’s fallen leader, worked to quash dissent in the ranks. Mr. Winston had the audacity to question Countrywide practices. Mr. Mozilo was not pleased and, before long, Mr. Winston was marginalized and later dismissed.

Lending Magnate Settles Fraud Case

By GRETCHEN MORGENSON
October 15, 2010

Angelo R. Mozilo, the former chief executive of Countrywide Financial, once the nation’s largest mortgage lender, agreed to pay $67.5 million on Friday to settle a civil fraud case brought by the Securities and Exchange Commission last year.

Countrywide itself is paying $20 million of Mr. Mozilo’s $67.5 million payment as part of an indemnification agreement he has with the company.

Here are the key analytical points that emerge from these articles:

The SEC and a host of institutional investors and States have sued Countrywide’s senior officials, Countrywide, and its successor (Bank of America) alleging civil fraud. The burden of persuasion is greater in a criminal fraud case (“beyond a reasonable doubt” instead of a “preponderance of the evidence”), but the factual elements that the civil litigants and the prosecutor must prove are the same (e.g., deceit). Indeed, civil fraud must be pleaded with particularity and supporting evidence to survive a motion to dismiss.
It is inconceivable that Countrywide engaged in widespread accounting and securities fraud without Angelo Mozilo’s knowledge and acquiescence – which would make him criminally liable for the fraud.
Therefore, if the news reports are correct that the Justice Department concluded that Mozilo’s conduct was not fraudulent, then the Justice Department has purportedly found after investigation that Countrywide did not engage in accounting or securities fraud and the SEC suit and related civil suits are baseless.
The SEC, States, and institutional investors have conducted their own investigations and believe that they have documented widespread accounting and securities fraud by Countrywide’s senior managers.
The successful action by the whistleblower, Michael G. Winston, is consistent with the existence of control fraud at Countrywide.
The Department of Justice should either explain to the SEC and the other civil plaintiffs why their civil suits against Mozilo, Countrywide, and Bank of America are baseless because of some unique facts known only to the Department of Justice that establish that the senior managers did not act fraudulently or, if there are no such unique facts known to the Department of Justice but not to the plaintiffs, the Department should prosecute the frauds of Countrywide’s senior managers based on the widespread fraud documented by multiple investigations by the plaintiffs.