The Securities and Exchange Commission (SEC) announced fraud charges Thursday against Angelo Mozilo and two other former Countrywide Financial Corp. executives, alleging they hid from investors the severe credit risks the lender was taking.

The complaint — the highest-profile action against individuals since the start of the crisis — seeks more than $140 million of damages and charges Mozilo, the former chief executive, with insider trading for alleged stock sales before the lender's collapse.

The SEC said Mozilo, along with David Sambol, former chief operating officer and president, and Eric Sieracki, the former chief financial officer, knew Countrywide was originating poorly underwritten loans but still represented to investors that they were safe products.

"This is a tale of two companies," Robert Khuzami, the SEC's director of enforcement, said at a press conference. "One that investors from the outside saw was allegedly characterized by prudent business practices and tightly controlled risk. But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting and an increasingly suspect business model."

Khuzami cited business practices that allegedly were not communicated to investors, such as a "supermarket, or matched, strategy" — in which Countrywide would issue loans similar to those made by competitors that violated its standard risk criteria.

"We allege that they deliberately misled investors and concealed from investors disturbing trends in Countrywide's business practices, including the deteriorating standards in their underwriting," Khuzami said.

In addition, Khuzami said, Mozilo warned other executives about the safety of the lender's payment option ARMs, but he described them as a "sound investment" the next day at a conference.

"The fact is that Mozilo himself wrote in an e-mail that Countrywide was 'flying blind' when it came to how these mortgages would perform in the future," Khuzami said. "In the end, … [he] said we can't predict what's going to happen in the next couple of years with these products. These trends and these concerns were never revealed to Countrywide investors."

As part of the announcement, the SEC distributed portions of emails Mozilo wrote to other Countrywide principals, sounding alarm about the products they were offering. In one, sent in September 2006, he said of option ARMs, "We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."

Five months earlier he told Sambol, referring to a type of subprime loan, "In all my years in the business I have never seen a more toxic" product.

In another email sent in April 2006, Mozilo appears to disagree with Sambol over the value of certain subprime loans. Loans had been originated "through our channels with disregard for process [and] compliance with guidelines," Mozilo wrote. "In my conversations with Sambol he calls the 100% subprime seconds as the 'milk' of the business. Frankly, I consider that product line to be the poison of ours."

In a later email to Sambol, Mozilo wrote: "Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production."

The SEC charges also allege that Mozilo unloaded his stock while knowing of the risks facing the company, resulting in proceeds of nearly $140 million. "While hiding their own hand from investors, Mozilo was actively taking his own chips off the table," Khuzami said.

The SEC filed the civil charges in the U.S. District Court for the Central District of California.
Khuzami said the agency was asking the court to make the executives payback proceeds from stock sales, as well as to pay other financial penalties for harms they allegedly caused. The complaint asks the court to prohibit them from serving as officers or directors at public companies.

Mozilo and his defense counsel did not immediately respond to requests for comment.

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