Browsing Angelo Mozilo

Angelo Mozilo’s Victims

There is a seedy underbelly of the mortgage market that is being totally ignored.  It was rife with fraud and companies like Countrywide, now owned by Bank of America, knew or should have known about it.

Countrywide’s alleged participation in the Long Island fraud committed by investment advisor Peter Dawson is a perfect example.  Mr. Dawson’s now well chronicled scam was to solicit homeowners who already had their homes paid off or who had substantial equity in their homes, to take out new mortgages so that he could steal the proceeds.  He had dozens of victims which my firm represents.

In at least three instances, Countrywide gave loan proceeds directly to Mr. Dawson instead of to the homeowners.  This is obviously a major red flag that Countrywide chose to ignore.  In at least one instance, the mortgage broker, who dealt directly with Countrywide, was a convicted felon who previously served jail time for fraud.  Moreover, closings were held late at night, once even in an out of town hotel room.

As if those alarm bells weren’t loud enough, the homeowners, supposedly vying for the loans, were elderly retirees.  In other words, these folks should never have received the loans in the first place (if anything they should have received reverse mortgages), nor should money have been transferred anywhere except to their personal accounts.

Clearly, in this case,  Countrywide had no concerns for standard practices and, at a minimum, turned a blind eye while a multi-million dollar fraud ruined the lives of dozens of honest people.  In fact, in sworn testimony, Mr. Dawson said that Countrywide and its mortgage broker assisted his fraud.

It was this type of lending practice, in part,  that allowed Countrywide CEO Angelo Mozilo to award himself half a billion dollars.  And thanks to the SEC, he’s able to keep most of it while victims of his company’s gross negligence struggle to pay their heating bills.

While plenty of people bear responsibility for taking on too much debt, many were simply victims of fraud.

The Questionable Activities of For-Profit Schools

Federal prosecutors in Manhattan and Georgia last week scored a major Medicare fraud bust with the indictments of 44 members of an Armenian-American crime syndicate who billed Medicare for more than $100 million of treatments that were never performed or received. The group reportedly succeeded in stealing $35 million in Medicare reimbursements, making it the largest Medicare fraud operation conducted by a single group to result in criminal fraud charges.

“With 118 phantom clinics and over $100 million in bogus billings, this group of international gangsters allegedly ran a veritable fraud franchise,” Preet Bharara, the United States attorney in Manhattan, said in a statement announcing the charges. “As charged, they stole taxpayer dollars earmarked for the elderly and infirm and got away with it, until now.”

If Bharara and his federal colleagues are genuinely concerned about misuse of taxpayer money, it is my sincere hope that they are taking a close look at the GAO’s allegations that many of the nation’s leading for-profit schools engaged in equally deceptive practices involving taxpayer dollars.

As someone who has investigated Wall Street for more than three decades, I’ve seen an incredible amount of wrongdoing. However, the activities of for-profit education schools appears to take the cake. Most Wall Street wrongdoing involves firms or brokers simply ripping off their customers; there is considerable evidence suggesting that for-profit education companies may have systematically defrauded the Department of Education, ruined, possibly forever, the finances of already hard-pressed low-income students, and deceived investors about the true condition of their business. The extent and the magnitude of the wrongdoing could possibly rival the sub-prime mortgage debacle.

The GAO reported in August that undercover tests at 15 for-profit colleges found that all made “deceptive or otherwise questionable statements” to the agency’s undercover applicants. One admissions representative told an applicant to fraudulently remove $250,000 in savings on a financial aid form. A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value, but the GAO said the same certificate from a local community college cost $520. Recruiters at these schools also frequently engaged in aggressive marketing tactics to pressure these students, who had few options and limited financial flexibility, into enrolling. To review the extent of the alleged wrongdoing, here’s a link to the GAO report. Warning: the accompanying video will make your blood boil.

My firm represents investors who bought for-education stocks that were aggressively touted by their brokers. The clients were told that for-education stocks would prosper in the wake of the downturn because millions of people would seek vocational retraining. The investors, of course, were never told that for-education companies were boosting their financials using questionable sales and marketing practices. The stocks of these companies have plummeted.

President Obama has repeatedly been bashing Wall Street for its greed and unscrupulous practices but so far his rhetoric rings hollow. The SEC remains as ineffective as ever under his administration, merely meting out wrist slaps to alleged fraudsters like Goldman Sachs and Angelo Mozilo. I say alleged because despite agreeing to pay fines of $550 million and $67.5 million respectively, they weren’t required to admit any wrongdoing.

If President Obama truly cared about curbing Wall Street’s reckless and ruinous behavior, he’d be at the forefront calling for a public investigation of for-profit companies and criminal prosecutions for defrauding any government program, not just Medicare.

Angelo Mozilo’s SEC Victory

Angelo Mozilo must be feeling pretty good these days. The guy with the perpetual tan earned well over a half billion dollars transforming Countrywide Financial into one of the nation’s leading mortgage lenders and then ran it into the ground by saddling the company with dubious mortgages that nearly led to the country’s ruin. And what is his SEC punishment for alleged insider trading and misleading shareholders?

A $67.5 million fine, of which about one-third will be paid by Countrywide’s acquirer, Bank of America, along with his legal fees. What’s more, Mozilo didn’t even have to admit any wrongdoing. In Wall Street parlance, he made one heck of a trade.

Yes, Mozilo also was banned for life from serving as an officer or director of a company, but given his track record and the fact he’s 71, his career working at public companies was pretty much over to begin with. Managing his hefty billion dollar portfolio should keep him pretty busy, particularly if Mozilo wants to judiciously avoid public companies managed by greedy executives like himself who put their interests ahead of shareholders.

By any measure, Mozilo’s penalty amounts to a wrist slap and will hardly serve as a deterrent. And the sad truth is the SEC can hardly be faulted for letting Mozilo off virtually scott free. The agency simply doesn’t have the resources to take on companies or individuals with extensive means. Prosecuting Mozilo would have been a formidable and high risk challenge; even if the agency garnered a win in court — and a victory was far from assured — he has the means to file appeals and drag the case on for years. Ditto for Goldman Sachs, which the SEC let off for a measly $550 million fine for securities fraud and no required admission of wrongdoing.

Admittedly, Mozilo still reportedly faces possible criminal charges and federal prosecutors have the talent and wherewithal to go the distance with Mozilo’s legal army. If prosecutors do bring charges, let’s hope they do a better job convincing a jury than they did prosecuting Ralph R. Cioffi and Matthew M. Tannin.

In the meantime, Mozilo can continue enjoying the good life with his Wall Street enablers. Sadly, there is no public shame being accused of wrongdoing by the SEC. Despite charges that ultimately led to a $6 million fine and a two-year ban from the securities industry for his role in a pay-to-play scandal involving New York State’s pension fund, former Quadrangle Group head Steven Rattner was feted last week at a reception attended by an impressive bevy of bold-faced names.

People with power on Wall Street don’t take the SEC all that seriously. The Goldman and Mozilo settlements give them ample reason not to.

The SEC Needs a Win Against Mozilo

As a New York Times story suggested earlier this week, Federal Judges are no longer rubber stamping the SEC’s settlements with Wall Street. This has put the SEC in an almost impossible situation: drive harder bargains and risk facing off in court against Wall Street’s limitless legal resources or bow to their wishes and risk more rejected settlements.

It all started with Judge Jed S. Rakoff’s denouncement of the SEC’s settlement with Bank of America for allegedly misleading shareholders about losses pending at Merrill Lynch, which at the time was in the process of being acquired. Judge Ellen Segal Huvelle then refused to accept a settlement with Citigroup, which also was accused of misleading shareholders about tens of billions of dollars in potential losses.

Judges are frustrated that the SEC’s settlement patterns harm shareholders who actually bear the brunt of the fines. They also want the SEC to negotiate stiffer penalties holding executives personally liable for fraudulent acts.

There are many reasons why large Wall Street firms are able to negotiate such generous terms with the SEC. One reason is the so-called “revolving door,” where former SEC officials representing Wall Street sit across from their past colleagues who themselves might be eying lucrative Wall Street jobs. But another is that Wall Street knows that the SEC is at a disadvantage if push comes to shove and a trial is scheduled.

The SEC rarely argues cases in a courtroom and even more rarely prevails against large Wall Street banks. With a track record like that, Wall Street’s legal representatives have the leverage they need to protect senior management and continue practices that exploit investors.

But that could all change in October when the trial against former Countrywide Financial CEO Angelo Mozilo is scheduled to begin.

A settlement agreement has yet to be struck between the SEC and senior executives of mortgage giant Countrywide Financial, including Mr. Mozilo. The SEC has accused them of misleading investors about their lending standards. It’s conceivable that an agreement may prevent a trial or that a judge could dismiss the charges, but considering the judicial scrutiny of late, the terms of a settlement would not be favorable to Mr. Mozilo and his former colleagues. Thus, it certainly looks like a civil fraud trial will get started this October.

The symbolic importance of the trial has been noted by several experts including former SEC chairman Harvey Pitt, who said that the case is “significant because it is a reflection of the SEC’s commitment to go after people who have been involved in the financial meltdown.”

I agree with Chairman Pitt, and I’d take it a step further: a win for the SEC would provide its enforcement team with the leverage they need to negotiate stiffer terms for settlements. Future settlements could and should include admissions of liability, as well as personal financial liability of the wrongdoer and his or her manager if applicable.

For the SEC, this is a “bet the farm” lawsuit and one that could lay the groundwork for the future of enforcement on Wall Street.

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