SEC vs. Mozilo: Show Trial? 17 comments
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The SEC announced they are going to take on Angelo "Lee" Mozilo, former CEO of Countrywide Financial (CFC). They have charged him with insider trading and misleading shareholders. Shocking!
Several months ago the SEC sent Mozilo a Wells letter. This a very bad letter to get in the mail. The one to Mr. Mozilo read something like this:
Dear Lee,
We know you are dirty and we are coming after you. We are looking everywhere and we will find enough to indict you in the near future.
Even if the evidence is bubkiss you are going to trial. We will pick the jurisdiction and the jurors. With your tan and reputation we will get a jury to convict you. So you are looking at hard time.
Why don’t you come in with some lawyers and we can talk this over. If you are willing to write a big check, say $250mm, well, maybe we can make this go away.
Look forward to hearing from you,
Your Pal,
The SEC
It looks like Lee said no to that offer. This sets up a very interesting case. I think that the SEC is nuts to take this line. They are opening up something that should not be opened. This has potential to go in a lot of bad directions.
They are going after Lee as an insider. Well, I hope all those good lawyers at the SEC did not spend too much time on that one. One can safely assume that the Chairman/CEO is an insider. No? They say he sold stock based on that ‘insider’ information. Here again the public record says he did. So what? Lots of CEOs have programs to sell stock. So long as the details are public there is nothing wrong with that as far as I know.
It is possible that Lee did not properly register his stock sales. If so he is dead meat. I doubt that is the case. Lee was a very litigious guy. He had lawyers around him all the time. I bet that he had the necessary approvals and filings in order before the stock was sold. If that were not the case his lawyers would have told him to write the big checks after the Wells notice.
The issue of providing misleading information to shareholders is a can of worms. Earlier this year Fed Chairman Bernanke said, “There was a time in November when I was not sure the system would survive”. Well, he did not disclose his feelings to the public in the fall. Paulson and Geithner had tons of information they did not disclose either. But they are the government and are supposed to keep information from us.
Similarly there are several Freedom of Information suits outstanding against the Fed. The objective is to get the NY Fed to release a detailed list of its holdings. The Fed has resisted in court, arguing that to release this information would be injurious to the Fed and therefore the taxpayer. So far the courts have sided with the Fed. This disclosure of information issue is more complicated than it looks. It appears that there are different rules for public officials and officials of public companies. Very fine lines.
If the SEC nails Lee on providing misleading information there are at least twenty other guys who are ex financial big shots who will be looking down the barrel of the SEC’s gun. Some of them are still big shots at big banks. This is a domino problem. If they get Lee, they will go for Chuck Prince and Bob Rubin. If they go in that direction do they also go after Pandit (C) and Lewis (BAC)? Talk about a slippery slope.
A perfect example of providing misleading information to shareholders occurred last July. Here is the relevant headline:
July 8, 2008
"Mortgage financiers Fannie Mae and Freddie Mac are adequately capitalized," said James Lockhart, director of the Office of Federal Housing Enterprise, which regulates the two enterprises.
Sixty days after Mr. Lockhart made these remarks the Agencies were put into receivership. No doubt but that Mr. Lockhart was an insider at Fannie Mae (FNM) and Freddie Mac (FRE). Common and preferred shareholders who believed in the words from the chief regulator of the GSE’s lost a bundle. This example is not a case where significant information regarding the health of the Agencies was withheld from the public. This was a very deliberate effort to provide misinformation to the public. In the days that followed the comments by Mr. Lockhart, both Treasury Secretary Paulson and President Bush repeated his words. All three of them knew better. But, equity holders got crushed. I doubt the SEC is looking into that one.
It looks to me like the SEC wants show trials. I think the American people want to stone some of the folks who got us into this mess. The SEC charges against Mozilo have the potential to backfire.
Disclosure: None
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This article has 17 comments:
The very institution of lobbying guarantees corruption.
I am not a socialist, I do not begrudge a person making it big, but when they defraud shareholders and then take public money, the guilty should swing.
"The SEC announced they are going to take on Angelo "Lee" Mozilo, former CEO of Countrywide Financial (CFC). They have charged him with insider trading and misleading shareholders. "
It alleged that Lee Mozilo earned $140 million while fully aware Countrywide's business was deteriorating and facing a dismal future (misleading shareholders). Additionally, he has to face up to charges of insider trading.
I like the mythical letter you wrote - very funny.
I say let the bastard rot in jail. I wish the government would charge more of these reckless financial executives with criminal charges, including:
AIG Execs for the same reasons - taking on huge leverage (investors thought they were investing in an insurance company, not a hedge fund). They were "picking up pennies in front of a steamroller"
Moody's Exec's - For taking utter crap and rating it AAA. This despite the fact that many of Moody's own employees informed Senior Management that they were rating crap. However, those who informed Senior Management faced chances for advancement/promotion/... employment. The AIG Execs should be the hardest hit with criminal charges.
The Banks and Financial Firms used off balance sheet vehicles as a way to hide true risk and high leverage from investors. Off balance sheet items should be outlawed, and should be rolled into a companies main balance sheet immediately. Once transparency is achieved, the investor will see that the firm is "picking up pennies in front of a steam roller." If the investor still invests, it's his fault.
While I have the tar and feathers out, I would add James Lockhart, to the list, although criminal charges are very hard to tack on, since Mr. Lockhart did not profit from misleading the public. As well, his position affords him all sorts of immunity. Still he should be tarred and feathered in the court of public opinion.
Also to be added to the list are the Senior Execs of Fannie Mae (FNM) and Freddie Mac (FRE), certainly they knew that the proverbial feces was going to hit the ventilating oscillator, and they did nothing to warn shareholders. Maybe criminal charges can't be conjured up, but certainly they can be charged with violating the standards of normal, prudent lending practices. Especially a Government Sponsored bank, that is supposed to be more conservative than its commercial counterparts.
When will a bank be run like a bank?
Perhaps Mozilo will also take a trip to Snowmass before he's to be sentenced.
If the financiers get the message that their blunders and larceny will be financially bailed out by the government with no threat of charges being filed, there will be a stampede to cook books and hide information while swinging for the finances on financial bets.
On Jun 05 04:18 PM user396040 wrote:
> A big difference is that the federal officials were not selling stock
> in the organizations in which they held positions while they were
> telling the public that things were fine. Everyone has his own favorite
> target as the responsible party for this mess. If I had to rank them,
> I would start with: 1.The ratings agencies (how could they have rated
> mortgage backed securities triple A); 2. Christopher Cox - a very
> untimely liberalization of the short selling rules and a refusal
> to examine hedge fund and investment banking leverage; 3. the leaders
> of Bear Stearns and Lehman who ran their firms unto the rocks;4.
> The bankers - Mozilo, the money center bank CEOs and others 5. the
> leadership of AIG for issuing an unsustainable pile of credit default
> swaps; 6. the financial press which was asleep as the crisis mounted
> and then overreacted 7. The FDIC - the WAMU debacle was a confiscation
> of shareholder and bondholder value which pitched the market over
> the cliff.
Being a Government Official grants you all sorts of immunity.
As well, who ever heard of charging and penalizing a Government Official for "Lying To The Public." Such a move would be unprecedented.
On Jun 05 04:18 PM user396040 wrote:
> A big difference is that the federal officials were not selling stock
> in the organizations in which they held positions while they were
> telling the public that things were fine. Everyone has his own favorite
> target as the responsible party for this mess. If I had to rank
> them, I would start with: 1.The ratings agencies (how could they
> have rated mortgage backed securities triple A); 2. Christopher Cox
> - a very untimely liberalization of the short selling rules and a
> refusal to examine hedge fund and investment banking leverage; 3.
> the leaders of Bear Stearns and Lehman who ran their firms unto the
> rocks;4. The bankers - Mozilo, the money center bank CEOs and others
> 5. the leadership of AIG for issuing an unsustainable pile of credit
> default swaps; 6. the financial press which was asleep as the crisis
> mounted and then overreacted 7. The FDIC - the WAMU debacle was a
> confiscation of shareholder and bondholder value which pitched the
> market over the cliff.
I agree with you that this could turn into a can of worms. In fact, I think this, along with persistently bad loan performance, could trigger another mini-panic (or maybe not so mini) for bank investors. But at some point, we need to bite the bullet, stop perpetuating lies in an effort to soften the short-term pain, and go after the crooks. This is what separates us from despotic banana republics.
We gave the 'risk takers' too much power (money) they took too much risk, we are all paying a price as a result.
But shooting the risk takers is going to back fire. Without risk takers
we will have no growth and little prosperity.
My view is that the SEC should have settled with Mozilo. He would have paid a big fine (100mm) and would have consented to being barred as a corporate officer. My guess is that it will not be so easy to convict the Moz. He could walk away scott free. That would be the worst outcome.
The idea that prosecuting Mozilo will lead to a chain reaction that stifles economic risk taking is silly. There will be other risk takers to take advantage of legitimate opportunities regardless of what happens to Mozilo. There is little reason to be afraid of going down Mozilo's path unless you are a crook.
Executives should stand by their words. That also should include Federal officials. Lying in the public interest does no one good or justice and certainly doesn't solve anything.
I hope to see a lot more people visiting court in the future.
And somehow, I like the idea of him being tortured with the "cuts from a thousand SEC financial and legal knives".