The Wall Street Journal
Angelo Mozilo, former chief executive officer of Countrywide Financial Corp.
Federal investigations into Countrywide Financial Corp. are heading toward decisions that could determine the futures of former company executives as well as public officials who did business with the fallen mortgage giant.
A congressional investigation of Countrywide's controversial VIP mortgage program, which turned up 30 loans to senators or staffers, is finding a similar number of loans went to House members or employees, say people familiar with the matter.
At the same time, the Securities and Exchange Commission's civil-fraud case against three former top Countrywide executives, including longtime chief executive Angelo Mozilo, is scheduled for an October trial in federal court here. The SEC, which alleges the defendants hid increasing risks in Countrywide's loan portfolio by masking its exposure to risky subprime loans, is seeking financial penalties and injunctions.
A defense attorney for Mr. Mozilo said he didn't have any comment beyond the defendants' court filings in which they all deny any wrongdoing.
Countrywide is now part of Bank of America Corp., but rebranded as Bank of America Home Loans.
The SEC case is likely to affect a continuing criminal probe by the U.S. attorney's office here. An SEC victory would likely encourage prosecutors, who are calling witnesses before a grand jury, while a loss would have the opposite effect, said people familiar with the matter.
And "if the defendants are found culpable, the government gets momentum" in its broader search for wrongdoing out of the national financial meltdown, said Mark Biros, a former federal prosecutor, now an attorney in Washington. However, a loss would likely force the government to "re-evaluate" its broader investigative effort, he adds.
A U.S. attorney's office spokesman declined to comment.
While the financial crisis has sparked a number of federal investigations, no top executive, such as Mr. Mozilo, has been criminally charged.
One likely difficulty is finding proof that a given individual intended to defraud and wasn't simply "overwhelmed by the financial crisis," said Columbia University law professor John Coffee.
He said Countrywide "is one of the few companies that could show criminal prosecutions" if the government can prove executives hid growing problems in the loan portfolio, which ultimately damaged the company and led to its sale in 2008 to Bank of America.
In court filings in the Countrywide case, the SEC cites internal company emails where Mr. Mozilo describes some of Countrywide's mortgages as "toxic" and "the most dangerous product in existence."
Mr. Mozilo's attorneys accuse the SEC of taking "sound bites" that "plainly distorted" what their client wrote. They argue that Countrywide fully disclosed its business risks and are seeking to have the SEC charges dismissed before trial.
While the dispute might be settled before trial, it still could influence the criminal probe. Extensive depositions taken of Mr. Mozilo and others could be of great use to prosecutors, said Christopher Bebel, a former SEC attorney and federal prosecutor now in private practice in Houston. In the 2006 criminal trial of former Enron Corp. president Jeffrey Skilling, prosecutors used an alleged misleading statement from an SEC deposition he gave to attack his credibility. Mr. Skilling's fraud conviction is under court review.
A Countrywide trial presents "a gift to prosecutors," who can evaluate defense strategy and the impact of particular evidence and witnesses, said Robert Mintz, a former federal prosecutor who now is an attorney in Newark, N.J.
On the flip side, a trial gives defense attorneys a chance to question potential criminal-case witnesses and find weaknesses in their stories, said Jacob Frenkel, a former SEC attorney now in private practice in Potomac, Md. Plus, he added, losing the Countrywide case "would be a devastating blow" for the SEC, given the battering its reputation has taken because of the failure to detect such problems as Bernard Madoff's fraud.
Former SEC chairman Harvey Pitt has a less-dire view of a loss but said the case is "significant because it is a reflection of the SEC's commitment to go after people who have had involvement in the financial meltdown."
On the political front, the House Oversight and Government Reform committee investigation into Countrywide's VIP loan program could spur a new round of ethics probes. On Thursday, the Hill newspaper, citing an unnamed source, reported that the Senate Select Committee on Ethics is looking into the 30 VIP Senate loans after receiving a letter on the matter from Rep. Darrell Issa, the California Republican who is spearheading the House inquiry.
A Senate ethics committee spokesman declined to comment.
The Issa-led probe has also raised questions about an investigation by the Senate ethics panel, which last year cleared Sens. Christopher Dodd (D., Conn.) and Kent Conrad (D., N.D.) of any rule violations in the VIP loans they obtained.
In its public letter last year to Mr. Dodd, the committee said it interviewed former Countrywide employees, looked through thousands of pages of documents and examined the senator's dealings with Countrywide back to 1999. But the letter referred specifically to only two VIP loans from 2003 that were the subject of a complaint by a watchdog group. Records obtained by the House probe show that Sen. Dodd received as many as six VIP loans, including refinancings, dating back to 1999.
The Senate ethics committee spokesman declined to comment.
A spokesman for Mr. Dodd said that the ethics committee letter was "clear" that the investigation "examined all of Dodd's loans from Countrywide since he first became a customer in 1999" when it concluded that the senator hadn't sought or knowingly received any special favors.
A congressional investigation of Countrywide's controversial VIP mortgage program, which turned up 30 loans to senators or staffers, is finding a similar number of loans went to House members or employees, say people familiar with the matter.
At the same time, the Securities and Exchange Commission's civil-fraud case against three former top Countrywide executives, including longtime chief executive Angelo Mozilo, is scheduled for an October trial in federal court here. The SEC, which alleges the defendants hid increasing risks in Countrywide's loan portfolio by masking its exposure to risky subprime loans, is seeking financial penalties and injunctions.
A defense attorney for Mr. Mozilo said he didn't have any comment beyond the defendants' court filings in which they all deny any wrongdoing.
Countrywide is now part of Bank of America Corp., but rebranded as Bank of America Home Loans.
The SEC case is likely to affect a continuing criminal probe by the U.S. attorney's office here. An SEC victory would likely encourage prosecutors, who are calling witnesses before a grand jury, while a loss would have the opposite effect, said people familiar with the matter.
And "if the defendants are found culpable, the government gets momentum" in its broader search for wrongdoing out of the national financial meltdown, said Mark Biros, a former federal prosecutor, now an attorney in Washington. However, a loss would likely force the government to "re-evaluate" its broader investigative effort, he adds.
A U.S. attorney's office spokesman declined to comment.
While the financial crisis has sparked a number of federal investigations, no top executive, such as Mr. Mozilo, has been criminally charged.
One likely difficulty is finding proof that a given individual intended to defraud and wasn't simply "overwhelmed by the financial crisis," said Columbia University law professor John Coffee.
He said Countrywide "is one of the few companies that could show criminal prosecutions" if the government can prove executives hid growing problems in the loan portfolio, which ultimately damaged the company and led to its sale in 2008 to Bank of America.
In court filings in the Countrywide case, the SEC cites internal company emails where Mr. Mozilo describes some of Countrywide's mortgages as "toxic" and "the most dangerous product in existence."
Mr. Mozilo's attorneys accuse the SEC of taking "sound bites" that "plainly distorted" what their client wrote. They argue that Countrywide fully disclosed its business risks and are seeking to have the SEC charges dismissed before trial.
While the dispute might be settled before trial, it still could influence the criminal probe. Extensive depositions taken of Mr. Mozilo and others could be of great use to prosecutors, said Christopher Bebel, a former SEC attorney and federal prosecutor now in private practice in Houston. In the 2006 criminal trial of former Enron Corp. president Jeffrey Skilling, prosecutors used an alleged misleading statement from an SEC deposition he gave to attack his credibility. Mr. Skilling's fraud conviction is under court review.
A Countrywide trial presents "a gift to prosecutors," who can evaluate defense strategy and the impact of particular evidence and witnesses, said Robert Mintz, a former federal prosecutor who now is an attorney in Newark, N.J.
On the flip side, a trial gives defense attorneys a chance to question potential criminal-case witnesses and find weaknesses in their stories, said Jacob Frenkel, a former SEC attorney now in private practice in Potomac, Md. Plus, he added, losing the Countrywide case "would be a devastating blow" for the SEC, given the battering its reputation has taken because of the failure to detect such problems as Bernard Madoff's fraud.
Former SEC chairman Harvey Pitt has a less-dire view of a loss but said the case is "significant because it is a reflection of the SEC's commitment to go after people who have had involvement in the financial meltdown."
On the political front, the House Oversight and Government Reform committee investigation into Countrywide's VIP loan program could spur a new round of ethics probes. On Thursday, the Hill newspaper, citing an unnamed source, reported that the Senate Select Committee on Ethics is looking into the 30 VIP Senate loans after receiving a letter on the matter from Rep. Darrell Issa, the California Republican who is spearheading the House inquiry.
A Senate ethics committee spokesman declined to comment.
The Issa-led probe has also raised questions about an investigation by the Senate ethics panel, which last year cleared Sens. Christopher Dodd (D., Conn.) and Kent Conrad (D., N.D.) of any rule violations in the VIP loans they obtained.
In its public letter last year to Mr. Dodd, the committee said it interviewed former Countrywide employees, looked through thousands of pages of documents and examined the senator's dealings with Countrywide back to 1999. But the letter referred specifically to only two VIP loans from 2003 that were the subject of a complaint by a watchdog group. Records obtained by the House probe show that Sen. Dodd received as many as six VIP loans, including refinancings, dating back to 1999.
The Senate ethics committee spokesman declined to comment.
A spokesman for Mr. Dodd said that the ethics committee letter was "clear" that the investigation "examined all of Dodd's loans from Countrywide since he first became a customer in 1999" when it concluded that the senator hadn't sought or knowingly received any special favors.
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