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 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 and Lewis? 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 FNM and 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 America people want to stone some of the folks who got us into this mess. The SEC charges against Mozilo have the potential to backfire.
Why do they not go for the lack of Due Diligence on a few houndred thousand fraudulent loan files. Would that open an even bigger can of worms ? Or is this the FBI´s job ?
ReplyDeleteBruce,
ReplyDeleteIf you can make any comparisons to Joe Nacchio of Qwest and how they got a conviction on him, that would be good to hear.
http://en.wikipedia.org/wiki/Joseph_Nacchio
I have been saying for months that the Feds wanted to do a Ken Lay on Mozilo and now they have. Whether they have enough evidence for conviction is another story altogether.
The apparent mortgage fraud at CFC is the activity for which he should be answering questions and that is part of the charges.
Having read most of the court filing at this point I would say they have a pretty good case if it stands up. They make a pretty strong case that CFC was knowingly misrepresenting the strength of their loan portfolio and played faced and loss with the definition of prime versus-prime loans. With Mozila making worried comments throughout the time period in internal discussions.
ReplyDeleteBut Mozila at times was a pretty straight shooter as well, so time lines and looking at all that he said at the varying times will make a difference.
CFC filings tended to put a lot of information out their. They were very large. The negative points were often buried very deep in the documents and often in rather odd places. And of course this whole time Mozila is busy dumping stock. If you really read what the documents said , versus what they said they said, all that would have made you rather skeptical.
Note that it's a civil case, not a criminal one. That means the Feds don't think they could win a criminal case right now, even with all the advantages you mentioned. I suspect they'll be using this civil case as a way to try to turn up more dirt (or stuff that looks like dirt, anyway) that they can take to grand jury.
ReplyDeleteJohn from C: there is already talk that the FBI is looking at this for criminal charges.
ReplyDeletePersonally as a CPA and CFO for four public companies I believe there could be a case made for accounting fraud. The type of loans being made were declining in quality. Probably in all likelyhood a bad debt reserve should have been booked (or increased if a reserve was being booked) as a percent of these loans when the loans were made. Disclosures do not make up for poor accounting!
ReplyDelete"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 and Lewis?"
ReplyDeleteWe can only hope, but will be likely disappointed . Too bad it's only civil cases; what a great chain gang that would be to see on the side of a highway somewhere! Yes, Lockhart, Geithner, Bernanke, etc., are all scum too, but they don't fall under the SEC's jurisdiction. Those guys we'll have to get the old-fashioned way: up against the wall when the revolution comes.
I agree. They are show trials indeed. But . . . we're in bread-and-circuses territory now.
ReplyDeleteThey're going after Lee Mozila for failure to disclose, but not the gov't-strong-armed Lewis? Give me a break. I've always thought selective prosecution is just as egregious as prosecutorial misconduct.
Okay, maybe I'm being a little harsh.
ReplyDeleteIn fact, just delete my comments, please. I'm feeling sorry I said anything.
ReplyDelete