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Former Countrywide Execs to Plead Guilty to Insider Trading

CNBC.com
Tuesday, 26 Jun 2007 | 6:45 PM ET

Three former Countrywide Financial executives agreed to plead guilty to charges they conducted insider trading in shares of the large U.S. mortgage lender, and each reaped tens of thousands of dollars in illegal profits, federal prosecutors said.

The company also denied market rumors that its offices had been raided by federal agents on Tuesday.

"Countrywide has become aware of reports today that federal investigators have raided one or more of our offices," the company told CNBC. "We are unaware of any such activity taking place and at this time we believe these rumors to be unfounded."

The three executives, Alan Cao, Jun Shi and Quan Zhu, admitted to betting Countrywide shares would fall after learning the company's results in the third quarter of 2004 would fall short of analysts' forecasts, according to the U.S. Attorney for the Central District of California.

The former executives used their inside information to bet Countrywide shares would decline in three different ways: selling stock they owned, buying "put" options, and "short-selling" Countrywide stock, prosecutors said.

Cao, 38, was a former vice president of financial planning; Zhu, 43, was executive vice president of portfolio risk management, and Shi, also 43, was first vice president of planning at Countrywide's banking unit, Countrywide Bank.

Each pleaded guilty to one count of securities fraud, which carries a maximum sentence of 20 years in prison.

Countrywide shares fell 11.5 percent on Oct. 20, 2004, after the Calabasas, Calif.-based company said quarterly profit fell 47 percent to $582 million, or 94 cents per share, 7 cents below the average analyst forecast. It also cut its full-year earnings outlook.

The U.S. Securities and Exchange Commission filed a civil lawsuit against Cao and Shi in 2006 in connection with the Countrywide share trades. The men settled the case by returning their profits and paying a civil penalty.

Shares of Countrywide fell 2.6 percent on Tuesday to a two-month low on market talk the company may be the target of a government probe related to subprime loans, and that the FBI was raiding the company's headquarters.

Assistant U.S. Attorney Beong-Soo Kim would not comment on whether the investigation has concluded or whether other Countrywide executives are being targeted.

"The FBI is not conducting a search warrant at the office of Countrywide Financial in Calabasas," FBI Los Angeles office spokeswoman Laura Eimiller told Reuters.

Countrywide spokesman Rick Simon confirmed the company was aware of rumors that federal investigators "raided one or more of our offices. We are unaware of any such activity taking place and at this time we believe these rumors to be unfounded."

Countrywide shares on Tuesday fell as low as $36.13, their lowest level since April 24. The shares are down 14 percent this year.

Separately, the cost to insure Countrywide's debt with credit default swaps jumped by about 10 basis points to 70 basis points, or $70,000 per year for five years to insure $10 million of debt.

Volume in Countrywide put options outpaced volume in call options, a bet they will rise. At the close, 39,172 put options and 10,229 call options traded, more than four times normal daily volume, according to Track Data.

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