The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

On November 1, 2012, in what is the first lawsuit the FDIC has filed as part of the current bank failure wave against a failed bank’s accountants, the FDIC, as receiver for the failed Colonial Bank, has filed an action in the Middle District of Alabama against Pricewaterhouse Coopers and Crowe Horwath. PwC served as the bank’s external auditor and Crowe provided internal audit services to the Bank. A copy of the FDIC’s complaint can be found here. (Very special thanks to Francine McKenna of the re: The Auditors blog for providing me with a copy of the FDIC’s complaint.).

When Colonial Bank failed in August 2009, it was the sixth largest U.S. bank failure of all time (as discussed here). In is complaint against the accountants, the FDIC alleges Colonial’s failure was triggered by the massive, multi-year fraud against the bank by the bank’s largest mortgage banking customer, Taylor Bean & Whitaker.

As I detailed in a prior post, here, In April 2011, Lee Farkas, Taylor Bean’s ex-Chairman, was convicted of wire fraud and securities fraud. Prior to Farkas’s conviction, two Colonial Bank employees pled guilty in connection with the Taylor Bean scheme. As reflected here, on March 2, 2011, Catherine Kissick, a former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division, pleaded guilty to conspiracy to commit bank, wire and securities fraud for participating in the Taylor Bean scheme. As reflected here, on March 16, 2011, Teresa Kelly, the bank’s Operations Supervisor and Collateral Analyst, pled guilty on similar charges.

In the criminal cases against the bank employees, the government alleged that the two bank employees caused the bank to purchase from Taylor Bean and hold $400 million in mortgage assets that had no value. The employees also allegedly engaged in fraudulent actions to cover up overdrafts of Taylor Bean at the bank. The employees are also alleged to have had the bank engage in the fictitious trades with Taylor Bean that had no value.

The complaint alleges that while Taylor Bean was carrying out its “increasingly brazen” fraud, PwC “repeatedly issued unqualified opinions” for Colonial’s financial statements, and Crowe “consistently overlooked serious internal control issues” – and, more the point, both failed to detect the fraud. The complaint alleges that if the firms had detected the fraud earlier, it would have prevented losses or additional losses that the bank suffered at the hands of Taylor Bean. The complaint asserts claims against the firms for professional negligence, breach of contract, and negligent misrepresentation. The complaint alleges that in the absence of the firm’s wrongful acts, the Taylor Bean fraud would have been discovered by 2007 or early 2008, and “losses currently estimated to exceed $1 billion could have been avoided.”

The FDIC does have one problem in asserting these claims. In its role as receiver, the FDIC stands in the shoes of the failed bank, and is subject to all of the defenses that could have been asserted against the bank. As Alison Frankel discusses in her On the Case blog (here), the accounting firms are likely to raise the in pari delicto defense, “which holds that one wrongdoer can't sue another for the proceeds of their joint misconduct” The FDIC has anticipated this defense in its complaint, alleging that the two bank employees that facilitated the Taylor Bean fraud were “rogue employees” who acted our of their own self-interest and not at the direction of or to the benefit of the bank, but rather to the detriment of the bank. 

In the wake of the current bank failure wave, the FDIC has filed a number of lawsuits against the directors and officers of failed banks. As of my latest tally (refer here, scroll down to second item), the FDIC has filed 35 suits against failed bank directors and officers. However, until now, the FDIC has not filed any actions against the former auditors of a failed bank. The Colonial bank suit is particularly interesting because it not only names the failed bank’s former outside auditor, but it also names the accounting firm that was performing the bank’s internal audit functions. There may be more accounting malpractice actions to come; on its website, the FDIC reports that the agency has “authorized 46 other lawsuits for fidelity bond, insurance, attorney malpractice, appraiser malpractice, accounting malpractice, and RMBS claims.”

Readers of this blog may recall that in August 2012, certain former Colonial Bank directors and officers agreed to settle the securities class action lawsuit that had been filed against them in connection with allegations surrounding the bank’s collapse. The $10.5 million settlement was to be funded entirely by D&O insurance. The securities suit settlement is discussed here. Significantly, the settlement did not include the bank’s offering underwriters or its outside auditors. Among the individual defendants party to the securities suit settlement was Colonial’s colorful and controversial former Chairman and CEO, Bobby Lowder. In addition to Colonial, Lowder has long been associated with Auburn University. I discussed Lowder’s Auburn connection in a prior post, which can be found here.

As I also noted in a prior post (here), in July 2012, the FDIC as receiver for Colonial Bank, as well as the bankrupt bank holding company on its own behalf, filed an action against the bank’s bond insurer. Among other things, the complaint alleges that the losses caused by the misconduct “constitute recoverable losses under the Bonds up to the full aggregate limits of liability of the Bonds.” The complaint states that the bond insurer “has neither accepted nor denied the Plaintiffs’ claims under the Bonds.” The complaint alleges that the insurer “has failed to investigate the claims and losses in a reasonable and appropriate manner.” In September 2012, the parties jointly moved the court to revise the schedule in the case to permit them to engage in settlement discussion.  

Speaking of Failed Banks: Shareholders of yet another failed bank holding company have now initiated a securities class action lawsuit. On November 2, 2012, the shareholders of Tennessee Commerce Bancorp filed a securities class action lawsuit in the Middle District of Tennessee against the holding company and certain of its directors and officers. A copy of the complaint can be found here.

Tennessee Commerce Bank failed on January 27, 2012. According to the plaintiff’s lawyers’ November 2 press release (here), the defendant directors and officers and the holding company violated the federal securities laws by “issuing false and misleading information to investors about the Company's financial and business condition.”  The lawsuit asserts that “defendants misrepresented and failed to disclose that the Company had serious internal control deficiencies causing it to be unable to monitor its loan portfolio; obtain up to date and current appraisals of collateral; follow bank rules of procedures relating to the Company's allowance for loan losses; and remediate internal control deficiencies..” The lawsuit is filed on behalf of investors who purchased shares in the holding company during the period from April 18, 2008 through September 13, 2012.

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In its latest failed bank lawsuit, the FDIC, in its capacity as receiver of the failed County Bank of Merced, California, has filed a complaint against five former officer of the bank. The FDIC’s complaint was filed in the United States District Court for the Eastern District of California on January 27, 2012, just short of three years from the date of the bank’s closure. A copy of the FDIC’s complaint can be found here.

County Bank failed on February 6, 2009 and the FDIC was appointed as its receiver. The FDIC’s lawsuit has been filed against five former officers of the bank, each of whom served on the bank’s Executive Loan Committee. The complaint alleges claims against them for negligence and breach of fiduciary duty, in connection with 12 loans the bank made between December 2005 and June 2008, which the FDIC says caused the bank losses in excess of $42 million.

The FDIC alleges that the five defendants caused or allowed the bank to make “Imprudent real estate loans, typically for the construction and development of residences.” The complaint alleges that the bank’s real estate lending represented “significant departures from safe and sound practices.” The complaint further alleges that the bank’s management “disregarded the Bank’s credit policies and approved loans to borrowers who were not credit worthy and/or for projects that provided insufficient collateral and guarantees for repayment.”  The complaint further alleges that the bank’s management “unwisely continued risky commercial real estate lending in a deteriorating market even after becoming aware of the market decline.”

The FDIC filed its complaint only days before the third anniversary of the bank’s closure – that is, just before the expiration of the statute of limitations period within which the FDIC could bring its claims. Up until this point during the current bank failure wave, the FDIC has been proceeding very deliberately, in most cases filing lawsuits only after two years or more has elapsed since the date of bank closure.

The FDIC’s filing of this action just before the end of the limitations period is reminder that notwithstanding the FDIC’s deliberate pace in filing these lawsuits, the FDIC does face certain absolute time deadlines. Moreover, this particular bank’s closure occurred at a time when the number of bank closures began to escalate rapidly. The FDIC took control of increasing numbers of banks as 2009 progressed and on in to early 2010, which means that the limitations period within which the FDIC will have to file lawsuits will be about to run out for a host of failed banks in the coming months.

There were a total of 140 bank failures in 2009, ten in February 2009 alone, after only 25 bank failures in all of 2008. The numbers of bank closures escalated even further after February 2009. Indeed, there 95 bank failures in the last six months of 2009. In other words, as we move through 2012, the FDIC will be approaching the statute of limitations deadline for increasing numbers of banks.

In light of the approaching limitations deadline the 2009 bank failures, it seems likely that over the next few months we will see a surge in case filings, many, like the complaint here, filed at the very end of the applicable limitations period.

In any event, the FDIC’s action in the County Bank case represents the twenty-first failed bank action the agency has filed so far as part of the current bank failure wave, and already the third so far in 2012. The FDIC’s first two actions this year, both of which were filed in Puerto Rico, are described here.

Year End Securities Litigation Review Webinar: On February 1, 2012 at 11:00 am EST, I will be participating in a year-end securities litigation review webinar sponsored by Advisen . The webinar will be moderated by Advisen’s Jim Blinn and will also include my good friend David Williams of Chubb. The webinar is free. To register and for additional information, refer here.

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An inevitable part of the current wave of bank failures has been the FDIC’s filing of lawsuits against former directors and officers of the failed institutions. And though the FDIC’s initiation of this litigation has been gradual, the lawsuits have now started to accumulate in significant numbers. And just as this FDIC litigation was perhaps inevitable once the banks started to faile, so too it was also perhaps inevitable that the FDIC lawsuits would be accompanied by D&O insurance coverage litigation.

As discussed below, the failed bank insurance coverage lawsuits are now starting to arrive. If the initial cases are any indication, one of the main coverage battlegrounds will be the typical D&O insurance policy’s Insured vs. Insured exclusion. Specifically, the question will be whether the FDIC as receiver pursuing the failed bank’s claim against the bank’s former directors and officers is acting as an “insured” under the D&O policy so as to preclude coverage under the policy.

First up in this analysis is Michigan Heritage Bank of Farmington Hills, Michigan, which failed on August 29, 2009 (about which refer here). As discussed in greater detail here, on August 8, 2011, the FDIC, as the bank’s receiver, filed a lawsuits in the Eastern District of Michigan against a single former officer of the bank.

What followed next is that on November 1, 2011, Michigan Heritage’s D&O insurer filed an action in the Eastern District of Michigan seeking a judicial declaration that there is no coverage for the underlying lawsuit or for the bank officer’s defense expenses under the bank’s D&O policy. A copy of the insurer’s declaratory judgment complaint can be found here.

Among other things, the carrier seeks a judicial declaration that the policy’s Insured vs. Insured exclusion precludes coverage for the underlying lawsuit. The insurer’s argument is that as the bank’s receiver, the FDIC is asserting the bank’s own claims and is seeking to recover the bank’s losses. Therefore, the carrier contends, the FDIC’s lawsuit is a claim “by, on behalf of, or at the behest of” the bank, and as the bank and the defendant loan officer are both insureds under the policy, the policy’s Insured vs. Insured exclusion precludes coverage.

A very similar sequence has also followed with respect to Westernbank, of Mayaguez, Puerto Rico, which failed on April 30, 2010. As reflected here, on December 17, 2010, the FDIC, through its outside counsel, sent a letter to Westernbank’s D&O insurer asserting claims against the bank’s former directors and officers.

Westernbank’s directors and officers , in turn, on October 6, 2011, filed an action in local Puerto Rico court seeking judicial declaration that the FDIC’s claim is covered under the bank’s D&O policy. The complaint, which is in Spanish, can be found here. According to an October 14, 2011 press release from the direcrors and officers' counsel, the complaint seeks a judicial declaration with respect to “the controversial and critical question whether the FDIC-R can be deemed an insured under the Policy so as to excuse [the carrier] from providing coverage.”

Though these declaratory judgment actions have only just been filed, they are in many ways a vestige of an earlier time. As I discussed in a blog post way back in August 2008, when the current bank wave was only just starting to unfold, the question whether the Insured vs. Insured exclusion precluded coverage for claims by the FDIC as receiver against former directors and officers of failed banks was hotly contested during the S&L crisis. As I said in my earlier post, and as appears likely now, the Insured vs. Insured exclusion could be a critical part of the failed bank insurance coverage litigation during the current round of bank failures as well.  

During the S&L crisis, where the FDIC had its greatest success in overcoming the Insured vs. Insured exclusion was where it was able to argue successfully that the Insured vs. Insured exclusion precluded coverage only with respect to collusive lawsuits. Because it was able to show that its claims and lawsuits were fully adversarial, it was able to establish that the exclusion did not apply.

The FDIC was not uniformly successful in arguing that the exclusion only precluded collusive claims, and there has in fact been some intervening case law to the effect that the Insured vs. Insured exclusion applies even when the underlying claim is not collusive.

It will in any event be interesting to see how these coverage cases develop. The one thing that seems certain is that as the FDIC failed bank litigation continues to accumulate, so too will the related coverage litigations. Many of the related coverage suits likely will also involve these same Insured vs. Insured issues.

Another issue that is likely to be litigated in coverage cases arising out of FDIC failed bank litigation is the enforceabilty of the so-called Regulatory Exclusion, which when present in the D&O policy precludes coverage for claims brought by the FDIC and other regulators. Not all policies implicated in the bank failures have these exclusions, but where they are present they are likely to be relied upon by the carriers to contest coverage. It is probably worth noting that these issues were fully litigated during the S&L crisis and the courts generally found that the regulatory exclusion precluded coverge for FDIC claims. My prior blog post about the regulatory exclusion can be found here.

A good summary of the D&O insurance coverage issues involved in FDIC failed bank litigation can be found here.

Special thanks to the several loyal readers who sent me links to ths source documents referenced above.

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More banks have failed in Georgia than any other state as part of the current bank failure wave, but the FDIC had not yet filed a civil action against the former officials of a failed Georgia bank – that is, until now. On January 14, 2011, in what is the third FDIC lawsuit overall against former officials of a failed bank as part of the current round of bank failures, the FDIC filed a lawsuit against eight former officials of the failed Integrity Bank of Alpharetta, Georgia. The FDIC’s complaint can be found here.

UPDATE: As discussed further below, in addition to the Integrity Bank case, the FDIC also filed a separate lawsuit on January 14, 2011 in the Central District of California against former directors and officers of the failed 1st Centennial Bank of Redlands, California.

Including one bank closed already in 2011, there have been 52 bank failures in Georgia since January 1, 2008. Integrity Bank was one of the first in Georgia to fail when it was closed on August 28, 2008.  

In some ways, it may come as no surprise that the FDIC filed its first failed bank lawsuit in Georgia against officials from Integrity Bank. As noted here, the FDIC had successfully intervened in a derivative lawsuit brought by the trustee of the bank’s bankrupt holding company. In moving to intervene in the trustee’s lawsuit, the FDIC had said that it intended to file its own lawsuit against former Integrity bank officials.

In addition, two former Integrity officials have already drawn criminal charges involving activities at the bank, as discussed here. One of the two indicted Integrity officials, Douglas Ballard, is also named as a defendant in the FDIC’s civil lawsuit. As noted here, in July 2010, the two individuals entered criminal guilty pleas in the case.

As noted in Scott Trubey’s January 18, 2011 Atlanta Journal-Constitution article about the FDIC’s civil suit (here), among the former Integrity Bank officials names as defendants in the FDIC’s lawsuit is Georgia State Senator Jack S. Murphy,   who was only recently named as Chairman of the Georgia Senate Banking Committee. Another defendant, Clinton M. Day, a former bank chairman, previously was a state senator and was at one time the Republican Candidate for lieutenant governor, and also once served on the Senate Banking Committee

The FDIC, which filed the lawsuit in its capacity as Integrity Bank’s receiver, seeks to recover “over $70 million in losses” that the FDIC alleges the bank suffered on 21 commercial and residential acquisition, development and construction loans between February 4, 2005 and May 2, 2007.

The 56-page complaint, which names as defendants eight former directors of the company who also served on the bank’s director loan committee, alleges one count of negligence and gross negligence, and one count of breach of fiduciary duties.

The complaint alleges that the 21 loans at issue were “concentrated in a small number of preferred individual borrowers,” in violation both of the bank’s own lending policies and applicable statutory lending limits. The loans are alleged to have been made without appropriate documentation and with inadequate collateral. The complaint alleges that state and federal regulators “repeatedly warned” the bank about its heavily concentrated loan portfolio and lax oversight and control of its lending function.

The complaint concludes that “the years of excess risk taking and lack of oversight by the Defendants that fueled Integrity’s astronomical growth ultimately led to its failure on August 29, 2008.” The complaint also quotes the bank’s founder as admitting that “Our overwhelming success up to [mid-2006] became intoxicating and we shifted some of our focus from asset quality to earnings and growth which was a mistake …[t]his shift in our focus also created gaps in the enforcement of Bank policies and procedures. In other words, we became lax on having our checker checking the checker.”

Though a total of 325 banks have failed since January 1, 2008 (through Friday January 14, 2011), the Integrity Bank lawsuit is only the FDIC’s third lawsuit against former officials of failed banks filed as part of the current wave of bank failures. There undoubtedly are more lawsuits to come, as the FDIC’s website indicates (here) that through December 2010 the FDIC has authorized lawsuits against a total of 109 former bank officials. The website clearly shows that lawsuits against additional officials are being authorized each month.  

With the likelihood of many more lawsuits to come, I have started a list of the FDIC’s lawsuits, which can be accessed on accompanying blog post, here.

Special thanks to alert loyal readers who alerted me to this new lawsuit.

UPDATE: FDIC Also FIles Suit Against 1st Centennial Bank: After I first published this blog post, I learned that that in addition to the Integrity Bank lawsuit, the FDIC also filed a lawsuit on January 14, 2011 against 12 former directors and officers of the failed 1st Centennial Bank of Redlands, California. A copy of the FDIC's 1st Centennial complaint can be found here.

1st Centennial failed on January 23, 2009, so the FDIC's lawsuit arrived about two years after the bank first failed.

The complaint alleges that after a period of rapid growth, and at a time when it was apparent that the Southern California real estate market was already in decilne, the bank increased its exposure to the riskiest loans, in excess of regulatory limits. The complaint alleges that by concentrating the bank's activities in these riskiest loans, the bank suffered capital and liquidity problems. The complaint specifically alleges that the defendants 16 specific loans that caused the bank at least $26.8 million in losses. The complaint alleges that the bank's failure caused the FDIC insurance fund losses of about $163 million.

I have added the 1st Centennial bank complaint to my list of bank lawsuits, which as a result of this latest suit now shows that the FDIC has launched a total of four lawsuits so far as part of the current wave of bank failures.

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In a recent post, I discussed several recent decisions in which securities cases involving failed or troubled banking institutions survived dismissal motions. By contrast, however, in an August 16, 2010 ruling (here), Southern District of New York Judge Robert Patterson, Jr. granted the defendants’ motion to dismiss without prejudice in the securities class action lawsuit filed against Raymond James Financial and certain of its directors and officers alleging inadequate disclosures regarding the company’s banking subsidiary’s loan loss reserves.

As discussed in greater detail here, plaintiffs first filed their action against Raymond James Financial in June 2009. The plaintiffs’ allegations center on the loan portfolio and loan loss reserves at the company’s banking subsidiary, Raymond James Bank. Judge Patterson stated in his August 16 opinion that, despite the length of the complaint (which "extreme length," Judge Patterson noted, provides "an independent ground for dismissal"), the plaintiff’s allegations "boil down to one proposition: that the Defendants purposefully underfunded their loan loss reserves and then made material misrepresentations about het adequacy of those loan loss reserves during the class period."

With one small exception, Judge Patterson concluded that the misrepresentations and omissions on which plaintiff seeks to rely are not actionable. For example, he concluded that the alleged misrepresentations about the bank’s loan loss reserves "are, without exception, general statements of optimism" which "in and of itself renders these statements inactionable."

Similarly, Judge Patterson concluded that the statements about the quality of the bank’s loan portfolio "were, similarly, very general and not sufficiently detailed to have misled investors" and "for the most part" represent "classic puffery."

The one exception to his conclusion that the statements on which the plaintiff sought to rely are not actionable were two paragraphs in the Amended Complaint relating to the quality of the loan portfolio. These statements included representations that the bank "independently underwrote" all loans, including loans "sourced from agent or syndicate banks." The Amended Complaint reference the testimony of a confidential witness who avers that many loans that were later charged off were not independently underwritten.

However, Judge Patterson also concluded that the plaintiff had not sufficiently alleged scienter. He concluded with respect to the plaintiffs’ scienter allegations that:

None of the allegations of scienter are sufficiently specific that they allow the Court to determine whether the Defendants knew (or even likely knew) that their statements were false when made. For the most part, the scienter allegations are of the sort that could be made about nearly any company operating in the United States, namely that the executives were motivated to create profit, that the executives received a near-constant stream of information about economic trends, and that the executives made mistakes in some of their forward-looking projections.

These allegations, Judge Patterson concluded, were insufficient to give rise to a strong inference that the defendants acted with the requisite state of mind.

Accordingly, Judge Patterson granted the defendants’ motions to dismiss, but he did so without prejudice.

I have added Judge Patterson’s opinion to my running tally of subprime and credit crisis-related dismissal motion rulings, which can be accessed here.

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In its most significant enforcement action yet related to the subprime meltdown, on June 4, 2009, the SEC filed a civil securities fraud complaint (here) in the Central District of California against Angelo Mozilo, the former CEO of Countrywide Financial Corp., as well as the company’s former COO and CFO. The complaint alleges that the defendants mislead investors by misrepresenting the company’s loan origination standards and practices and by hiding the company’s deteriorating financial condition. The complaint also contains allegations of improper inside trading against Mozilo for initiating Rule 10b5-1 trading plans to sell shares while he was aware of material nonpublic information about the company’s deteriorating loan practices.

As discussed in its June 4, 2009 press release (here), the SEC’s complaint charges that from 2004 through 2007, Countrywide engaged in "an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might curtail the company’s ability to sell them" to investment bankers and other mortgage buyers.

The complaint alleges that while the company was issuing reassuring statements to investors, Mozilo "internally issued a series of increasingly dire assessments of the various Countrywide loan products and the risks to Countrywide in continuing to offer or hold these loans."

One of the more interesting aspects of the SEC’s press release about the suit is the accompanying document (here) in which the SEC summarizes email messages from Mozilo in which he delivered some of his "increasingly dire assessments." Among other things, an email attributed to Mozilo is quoted as saying that "we are flying blind on how these loans will perform in a stressed environment." Another email is also quoted as saying, with respect to the company’s subprime 80/20 loans, that "in all my years in the business I have never seen a more toxic prduct [sic]."

In other emails, Mozilo refers to the company’s 100% subprime second mortgages as "poison" and says that the 100% loan-to-value subprime mortgage is "the most dangerous product in existence and there can be nothing more toxic."

All of these statements attributed to Mozilo allegedly were made before Mozilo established several Rule 10b5-1 trading plans during the period October through December 2006. In December 2006 and February 2007, as the company’s share price was rising to record highs, he adjusted several previously established plans to allow him to sell even more shares. Pursuant to these plans and during the period November 2006 through August 2007, Mozilo exercised over 51 million stock options and sold the underlying shares for total proceeds of over $139 million.

Among other things, the complaint alleges that Mozilo approved his October 2006 trading plan one day after sending the email quoted above about "flying blind" on how the loans would perform. The complaint also alleges that five days before executing his December 2006 trading plan he circulated a memorandum to all managing directors and to the company’s board of directors noting a number of substantial concerns about the company’s subprime loan origination processes and noting that Countrywide expected its 2006 subprime loans to be the worst performing on record.

While many of these same kinds of allegations also appear in the pending Countrywide securities class action litigation (about which refer here), the SEC’s allegations nonetheless represent a significant development. SEC officials have been saying for over two years (as noted here, for example) that the agency would be cracking down on alleged Rule 10b5-1 trading plan abuses. Indeed, as discussed here, in an October 8, 2007 letter (here) to then-SEC Chairman Christopher Cox, North Carolina Treasurer Richard Moore had specifically asked the SEC to examine Mozilo’s stock trading pursuant to his Rule 10b5-1 plans.

With the SEC’s public commitment to cracking down on Rule 10b5-1 abuses and with the bull’s-eye drawn so specifically on Mozilo’s trading, it may have simply been a matter of time before some version of this complaint was filed. (Indeed, Alison Frankel’s June 4, 2009 American Lawyer article about the SEC’s complaint, which can be found here, is entitled "SEC (Finally) Charges Former Countrywide CEO Angelo Mozilo.") The SEC’s action nevertheless is a significant development, if for no other reason than the prominence of the company and of Angelo Mozilo and because of the nature and specifics of the allegations.

The more interesting question is the extent to which the SEC will be targeting other officials, whether for Rule 10b5-1 plan abuses or for disclosures relating to subprime loans and other lending practices. Given the continuing current public need to assign blame for the current crisis, the prospect for further enforcement activity in these areas seems likely.

Indeed, according to a June 4, 2009 Washington Post article (here), new SEC Chairman Mary Schapiro has specifically said that as part of her plan to try to rebuild the SEC’s tarnished reputation, she intends to step up enforcement efforts and to push cases related to the financial crisis. As a result, the Countrywide complaint may be only the first in a series of SEC enforcement actions designed to assign blame for the meltdown while also demonstrating that the SEC is "tough" again.

The World Was So Much Nicer Before Aggrieved Homeowners Had Access to Counseling Services:  Mozilo’s email practices got him in hot water even while he was still CEO of the company. In May 2008, Mozilo drew media attention (refer for example here) when he accidentally hit the "Reply" button rather than "Forward" after calling a homeowner’s plea for help "disgusting."

The borrower’s email had come from Daniel Bailey, a homeowner who was trying to stay in his home of 16 years. Bailey signed an adjustable rate mortgage and was told at the time that he could refinance after one year, before the payments became unaffordable. In drafting his note, Bailey had relied on suggested language from an Internet website that provided coaching services for troubled borrowers.

The email response Mozilo inadvertently sent Bailey said "Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the Internet. Disgusting."

Mozilo seems to have had a deep commitment to ensuring that he would later look like a cartoon villain. I mean, here’s a guy who had just made a cool $140 million, yet when one of the suckers stuck with one of the loans that Mozilo himself described as "toxic" has the audacity to ask for relief, all Mozilo can think about is how "disgusting" it is that all of the losers stuck with these loans have the same grievances.

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