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The SEC Charges Mozilo with Insider Trading

Executive Compensation Blog

Almost one year ago, I blogged on a federal court decision finding that former Countrywide Financial Corp. Chairman and CEO Angelo Mozilo's changes to his 10b5-1 plans were "probative of scienter," which is the knowledge necessary to support a charge of insider trading.

Today, the SEC filed a complaint in the federal court in Los Angeles charging Mozilo and two other former Countrywide executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share. The SEC also charged Mozilo with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

During the course of this fraud, Mozilo engaged in insider trading in Countrywide's securities. Mozilo established four sales plans pursuant to Rule 10b5-1 of the Securities Exchange Act in October, November, and December 2006 while in possession of material, non-public information concerning Countrywide's increasing credit risk and the risk that the poor expected performance of Countrywide-originated loans would prevent Countrywide from continuing its business model of selling the majority of the loans it originated into the secondary mortgage market. From November 2006 through August 2007, Mozilo exercised over 5.1 million stock options and sold the underlying shares for total proceeds of over $139 million, pursuant to 10b5-1 plans adopted in late 2006 and amended in early 2007.

Mozilo established his original 10b5-1 plan on April 26, 2004. This original plan provided for the sale of roughly 200,000 to 250,000 shares each month, and expired in May 2006. Mozilo subsequently implemented two additional plans on October 27, 2006 and December 12, 2006. The October plan was implemented only days after the company announced a stock repurchase offer, which typically increase the price of the stock. He then amended the December plan to double the number of shares sold, on February 2, 2007, which coincided with the date on which Countrywide stock reached an all time high of $45.03 a share.

A Rule 10b5-1 plan, when correctly designed and adopted, gives executives a safe and effective way of buying or selling their companies' securities free of insider trading concerns. However, these Countrywide cases underscore the importance of proceeding with caution when adopting, modifying, or terminating a Rule 10b5-1 plan.

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This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.