Now that the SEC has made its move against former Countrywide Financial CEO Angelo Mozilo and the company’s former COO and CFO, I find myself wondering, based on the evidence the SEC is offering up in its complaint, whether the agency is poised to come after many other firms that failed to alert their shareholders to the risks they were taking in the mortgage market.
In addition to its charge of insider trading against Mozilo, the SEC contends that he, along with coo David Sambol and cfo Eric Sieracki, failed to adequately disclose the relaxed lending standards that would eventually lead to large losses at the company and a sinking stock price.
That would be securities fraud if proved. In support of this contention the SEC has released a series of 2006 emails from Mozilo to Sambol and Sieracki in which Mozilo raises troubling questions about the poor quality of the mortgages Countrywide was doling out in record numbers.
The SEC contends that the company’s annual report for that year makes no mention of such concerns or the lax lending standards that led to them.
Mozilo and his cohorts, who if convicted face fines and possible bans from being officers or directors of public companies, will no doubt rebut these charges vigorously. But if the SEC proves victorious here, I know plenty of other companies that could be similarly charged with a failure to disclose just how big they were in the mortgage market and just how much risk they were taking in that market.
Did shareholders of Merrill Lynch understand the size of its mortgage backed securities operation and the risk inherent in that business (a subject I deal with at length in my upcoming book)? The same question can be asked on shareholders of Lehman Brothers, whose former ceo Richard Fuld is still being investigated by the SEC amongst others. Was it clear from that company’s annual reports that it was an enormous player in a mortgage market in which long time lending standards has been all but abandoned?
And what about Fannie Mae and Freddie Mac ? Congressional investigations have unearthed plenty of emails that show similar concern amongst some employees for the decline in standards taking place at those companies, yet I have yet to hear of any SEC investigation.
I have no idea if there are internal emails from Dick Fuld or Stan O’Neal (Merrill’s former ceo) expressing concern over their firm’s declining lending standards or the increasing amount of risk they were taking on, but I’ve got to believe that with its actions today, the SEC has got their attention.
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