Last week we had some thoughts about Countrywide Financial’s subprime corporate governance and the phenomenon of miraculously timed stock sales on the part of CEO Angelo Mozilo. For him, the miracle was in pocketing millions from the sale of his shares just months before the subprime disaster jolted the market and hammered its stock. In certain respects, Mr. Mozilo seems to share the same uncanny knack for knowing just when to sell before calamity strikes that brought Enron’s Ken Lay, WorldCom’s Bernie Ebbers, ImClone’s Sam Waksal, Nortel’s John Roth and a host of other CEOs to heightened public attention. What a shame these remarkable gifts of CEO prescience never seem to translate into a talent that helps companies steer away from impending disaster and thereby allow other investors and customers to benefit. Countrywide’s stakeholders could have used such an edge.
Now it seems that others have also noted Mr. Mozilo’s extraordinary ability but are taking a rather more skeptical view of it. North Carolina State Treasurer Richard Moore has asked the SEC to investigate Mr. Mozilo’s sale of large blocks of company stock just before the recent meltdown. Frankly, I have never understood why, when the top man begins to move into the lifeboat before the women, children and others, it is not taken as a clear sign by investors that the fatal iceberg lurks not far away.
Under the revised 105b-1 plan, Mr. Mozilo continues to sell hundreds of thousands of shares. With a strike price of just over $9, he can still make millions in profits even from the stock’s currently depressed level of about $18.80. It looks rather like a CEO who is indeed bailing out. If he had confidence that the stock would rise, conventional investing wisdom teaches that he would be more likely to hold on to what he has. What do you suppose would happen if other shareholders followed Mr. Mozilo’s lead? Or would this be one of those cases when the leader is saying ‘do what I say, not what I do’?
Mr. Moore, who gained prominence with his groundbreaking lawsuit against tobacco companies and won the largest settlement of its kind, won’t be easy for the SEC to dismiss. His state holds more than half a million shares. Here is part of what he said that strikes a particularly strong chord with us:
As an investor and a Countrywide shareholder, I was shocked to learn that C.E.O. Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off.
As we noted last week from our submission to the U.S. Senate banking committee in 2002, in the past the lure of huge stock option packages has “tempted many CEOs to artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.”
Whether or not Mr. Mozilo did anything wrong will be for regulators to determine. Investors, however, are able to make a more immediate decision from what they have read and seen about the company as to whether Countrywide has the kind of leadership and corporate governance that makes the risk worthwhile. For his part, Mr. Mozilo apparently plans to make millions more by continuing to exercise stock options and selling hundreds of thousands of shares over the next several days even though these options do not expire until 2011. Countrywide’s third-quarter earnings, however, are set to be released later this month.
Now what do you suppose they are likely to reveal?