Insider Trading Isn’t The Only Kind Of Securities Fraud
As Marcy reported, Los Angeles federal prosecutors have decided not to bring charges against Angelo Mozillo, former CEO of Countrywide, for the events that led to his settlement with the SEC. The LA Times quoted experts who think that the problem was that responsibility for the crimes was too diffuse, that so many people were involved that no one person bears criminal culpability. I think the article confuses the civil charges the SEC settled and criminal fraud in the sale of securities. Let’s try to untangle the mess.
According to the LA Times
The SEC accused Mozilo and former Countrywide executives David Sambol and Eric P. Sieracki of downplaying the risks of subprime and other high-risk mortgages they were writing to homeowners and selling to investors.
E-mails released by the SEC quoted Mozilo denigrating various risky loans that Countrywide and other lenders provided, especially subprime mortgages that didn’t require down payments from borrowers who had abysmal credit.
This might be read to say that the SEC’s charges arose from the sour loans packaged into real estate mortgage-backed securities (RMBS), and that they related to fraud in the sale of securities. This inference is backed by the citation to inflammatory e-mails in which Mozilo describes some of the loans as “toxic”. It doesn’t mean that at all. Instead, the SEC’s civil charges related to Mozilo’s statements about the soundness of Countrywide as an ongoing company, and to insider trading. The SEC alleged that Mozilo knew the company was in trouble, made public statements to the contrary, and sold his stock for a profit based on his insider knowledge.
The Christian Science Monitor gets it right:
The SEC accused the men of misleading shareholders about the quality of the loans on Countrywide’s books. The civil complaint also accused Mozilo of acting on his inside knowledge of the company’s precarious state when he sold shares between November 2006 and October 2007 ahead of its collapse, reaping more than $139 million.
The settlement was only indirectly related to the sale of sour loans. it covered allegations that Mozilo misled shareholders and profited from his actual knowledge that the loans he was churning out were garbage.
The LA Times could not get federal prosecutors to explain themselves, rightly, because of their professional responsibilities. One experienced lawyer speculates that the prosecutors were concerned that could not prove criminal intent beyond a reasonable doubt. That’s possible, but it leaves me wondering why Martha Stewart was charged with insider trading, while Mozilo wasn’t. Maybe Preet Bharara, the US Attorney for the Southern District of New York would have taken a different view; he loves those insider trading cases.
So here’s a story I heard years ago from a lawyer in the town where it happened, possibly apocryphal, but it’s too good not to repeat. An athlete was accused of stealing from the college, and the case came on for a hearing in state court. The athlete showed up with two lawyers and three coaches. First the cop testifies about finding the guy with the stolen property. Then the coaches plead for their guy, kids make mistakes, it wasn’t as bad as it looked, etc. Then the lawyers argue that it would ruin the guy’s career and he didn’t mean anything, blah blah. The judge obviously feels a lot of pressure, and he has to get elected in the town. He lets the guy off with a warning.
A couple of cases go by, and then another college kid comes up, charged with shoplifting at a grocery store. The judge says to the kid, so where’s the athletic department? The kid, who hadn’t seen the earlier case, looks confused, and says they aren’t here. So where are your lawyers, asks the judge. Again the kid looks confused. The judge says, well, we aren’t convicting college kids for stealing today, you’re free to go.
And here’s my question: is the US Attorney for LA going to let a bunch of pot dealers off with a small fine?