Countrywide CEO Stock Sales Investigated

Countywide Financial Corp. calls itself “America’s #1 Home Loan Lender,” and it got that way by getting involved in subprime mortgages. So naturally, it’s stock is down about 60% since February. Chief Executive Angelo R. Mozilo, who co-founded Countrywide in 1969, has been selling stock under a trading plan adopted in October 2006, just when the subprime crisis first hit the market’s attention. The SEC has launched an informal investigation.

Part of the problem is inherent in being a CEO, CFO, or other officer of a publicly traded company. A big amount of compensation is in the form of stock or options, and in such a role, one has ready and necessary access to insider information. How does one cash out a portion of one’s stock without raising suspicions that something unsavory is going on?

The answer is a stock trading plan, under SEC Rule 10b5-1. This allows an officer to set up sales of stock in advance and then execute any sale whether he acquires insider knowledge. Such an execution is made public knowledge through the required filing of a Form 4 with the SEC. It isn’t a perfect system, but it is reasonable. Once a plan is set up, executives tend to leave them alone, and the longer the plan goes without amendment, the less likely any investigation is warranted.

Mr. Mozilo, though, set his plan up in October 2006. The Los Angeles Times notes, “That plan allowed him to sell 350,000 Countrywide shares per month. Less than two months later, he adopted a second plan, allowing him to sell an additional 115,000 shares. He revised the second plan less than two months later to double the number of shares sold. By February, Mozilo was unloading 580,000 Countrywide shares each month. Since Feb. 2, Countrywide’s stock price has tumbled 61 percent.”

The Associate Press reports, “Mozilo has sold company shares through prior arrangements since 2004; the pace of his sales began to quicken last October when he put a new plan into effect. Mozilo, who is 68, said recently that he did so to reduce his stake in Countrywide and diversify his personal investments in an orderly fashion in advance of his retirement, slated for December 2009.” So, there may well be a legitimate reason for the sudden increase in sales. The internal communications at Countrywide that the SEC will likely be looking at will prove it one way or another.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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