Monday, March 28, 2011

Mozilo Escapes Criminal Charges For Role in Mortgage Meltdown

Following the SEC’s securities fraud wrist slap of former Countrywide CEO Angelo Mozilo to the tune of $67.5 million civil fine (only $22.5 million was paid by Mozilo, who received $521.5 million in compensation from 2000 to 2008) for his prominent role in the mortgage meltdown, federal prosecutors decided last month to drop criminal charges against Mozilo without so much as an indictment.

Assistant U.S. Attorneys cited the higher burden of proof in criminal cases, the number of players involved, and the overall complexity of the case as reasons for dropping the charges. One said, “it can be worse losing a case than not bringing one at all.” Instead of hitting the corporate titans, like Angelo Mozilo and Richard Fuld, the Justice Department is focusing more on the “low-hanging fruit,” such as mortgage brokers, appraisers, loan officers, and borrowers who “directly defrauded a bank for individual gain.”

The prosecutors dropped the case notwithstanding documented communications from Mozilo describing his own company’s loan products as “toxic” and “poisonous.” Other mega-lending executives admitted to not recognizing the financial cataclysm on the horizon because they were “having too much fun” and “getting loaded on Miller Lite.”

As highlighted in the Oscar award winning Documentary "Inside Job," it appears absolutely clear now that the Department of Justice and the Obama administration are content to absolve all corporate malfeasors of any criminal culpability, or really any responsibility at all, for recklessly driving their banks and firms into near bankruptcy. If Angelo Mozilo is not to be indicted for criminal fraud, then all of the Wall Street leadership that recklessly crashed the economy must be breathing easier, celebrating their ill-gotten record gains.

*** Cross posted on the SALT Blog ***


  1. This is ridiculous. Although the litigation may be complex, the Assistant U.S. Attorneys have sent a message to the high-ranking CEOs and other "higher-ups" that they will not face criminal charges because it is "too complicated." Mozilo made Time's list of the top 25 people responsible for the market meltdown, and he should have to face criminal penalties rather than pay a civil fine that is relatively small in light of his large corporate salary and bonuses.

  2. I agree with Lara. It is very hard to believe that he was not criminally charged. The government should have gone against him with everything it has to prove to the public that such actions do not come without consequences. These high-ranking CEOs are making huge salaries and essentially giving themselves bonuses with no regard to the corporate shareholders or the public welfare (even though I know that the corporations owe no duty to the public). In my opinion, bonuses like he received should not have been given when the company was facing bankruptcy.

    He got off pretty though... if I made $521.5mil, I probably would not feel bad at all about this slap on the wrist.

    -Shana O
    Busn. Orgs

  3. As one who is often more engaged in the "off the court" drama of sports than the actual game, this article brought to mind collegiate basketball coaches that have recently been found in violation of NCAA rules. Many of these coaches (John Calipari and Jim Calhoun, for example)are among the most highly paid.

    Calipari and Calhoun are still coaching (even against each other in the NCAA tournament this weekend), and many corporate malfeasors are still firmly in place at the top of the corporate ladder. Why? It's a question of values. We are ultimately more enthralled with the benefits these individuals have to offer than we are disgusted by their lack of ethics. The NCAA, and we as fans, value winning games. Corporate America values gaining wealth. The priority placed on these values often means that we turn a blind eye to impropriety.

    The opposing argument is that firing these coaches and punishing corporate leaders with criminal sanctions would come at too high a cost. As we discussed in class, the Smith v. Van Gorkom case evoked a similar response. When the case was decided, many feared that its holding would discourage the brightest corporate minds from sitting on boards of directors for fear of liability. The result, however, seems simply to have encouraged directors to do better business.

    When we effectively ignore collegiate and corporate malfeasance by imposing "sanctions" that do little to deter conduct, we are encouraging these individuals to more fully make it their business to lie, cheat, and steal.

  4. Posted by Laura Stealey:

    I think Natalie's comment is excellent, and her point about competing values is spot-on. I'd like to add another analogy: corporate malfeasance in environmental and work safety issues. There, as in this example, the fines imposed for safety and environmental violations are often so low that it is more cost-effective for corporations to violate the rules and pay the fines than it is for corporations to improve their safety and environmental records.

    Overall, these examples bring to mind a fundamental tenet of economics: incentives matter. When the sole purpose of corporations under the law is to make profit, other considerations fall by the wayside. Right now, breaking the law is more profitable than following it for many corporations in many areas of the law. Until regulators change this perverse incentive structure, we cannot expect anything different than the status quo.

  5. I agree with all of the previous comments but would like to approach this question from a different perspective: that of the economist.

    A fundamental premise of the American economic system is that rational individuals respond to incentives in the pursuit of profit maximization. As such, economics tells us that, where certain endeavors are profitable, we can expect people to undertake them. A corollary principal is that, if our society wishes to put a stop to a certain activity, we should pass laws that ensure that the activity is no longer profitable. Otherwise, rational profit-seekers will keep doing it.

    The point I am driving at is this: Mozilo, though punished, still turned close to $500M in profit from his fraudulent actions. The point bears repeating: dude literally made money by defrauding the government and the American people. If that is the case, what is to stop others from retracing his steps in the future?

    If the government were really serious about putting a stop to these practices, it would have thrown the book at Mozilo and sent the message that widespread corporate malfeasance neither acceptable nor profitable. Absent that, I see nothing to prevent a similar crisis in the future.


  6. I agree with Stark and Stealey that a proper punishment would eliminate the cost-effectiveness of this entire (detrimental) business model.

    I also disagree with the Justice department focusing on the "low-hanging fruit: mortgage brokers, appraisers, loan officers, and borrowers who 'directly defrauded a bank for individual gain.'” CEOs should be held responsible for this type of activity occurring in their company. This is simply a price to pay when leading a corporation. The leader at the top must bear ultimate responsibility, even if he had no direct knowledge of exact fraudulent business practices. This encourages greater internal controls and more accountability throughout the entire corporation.

    S. Andrew Stonestreet
    Bus. Org.

  7. Unfortunately, the law often lags behind the cunning criminal minds in the white-collar world. Prosecutors and many government agencies do not understand the laws and regulations as well major corporate attorneys who spend their time building up defense walls in case the government pursues these crimes. The comment that “it can be worse losing a case than not bringing one at all” has some merit, but there is a huge unfairness in the law when people stealing millions of dollars are punished less than those stealing thousands. Maybe prosecutors would like to have a better set of tools in going after other executives, and at the same time once it is revealed how these executives are prosecuted it allows for the other executives to start covering up, or changing tactics, to avoid future prosecution. Based on the past executive wrist slapping it appears the corporate world has the upper hand.

    Ms. Atkinson’s point about Smith v. Gorkam is interesting because so many people seem to believe that the brightest corporate minds are irreplaceable. The field of candidates for corporate boards may be limited, and filled with greedy criminals, but capable individuals exist that could fill director positions with success and integrity. These individuals may be potentially inferior, but I do not believe this to be the case, and they can make good business decisions while maintaining integrity and honesty. Ultimately an honest and smart businessperson will take your corporation to a better place than a greedy genius. I think that that criminal punishment, jail/prison and not fines, will achieve greater results in upholding the integrity of the corporate board.

    John S

  8. While this case may have been a hard one to win, there is something to be said for setting an example that the SEC won't take a scheme like this lying down. I agree with Natalie's comment above that by doing so little to deter this sort of conduct, the SEC is in fact encouraging more illegality.

  9. For the most part I echo the comments above- when punishment isn't in proportion to potential gains, there is not effective deterrence.

    Initially, my read of the quote that “it can be worse losing a case than not bringing one at all” was that the attorney was referring to the costs of litigation. My reaction to that is that even if the case is likely to lose, bringing it would at least put other corporate directors on notice that the SEC would aggressively pursue these kind of infractions.

    However, it occurs to me that he or she more likely was referring to the risk of creating precedent that makes it that much harder to prevail in future actions involving similar fact patterns. Provided this is the case, I can understand why they would be reluctant to pursue; its difficult to balance the desire to punish Mozilo with the long term policy interests of the government.

    David B.- UC

  10. David B, the fear in the quote you mentioned could also reference the costs in prosecuting a case you're not going to win. The DOJ is not prosecuting Mozilo because they cannot prove their case against him - if they spend time and finances in discovery on Mozilo, this will preclude them from going after the "mortgage brokers, loan officers, appraisers." In the long run, it may be just as profitable to pursue charges against the "low offenders" as it is Mozilo.

    KMW - UC

  11. The end of such a prosecution might be regrettable in the short term, but it may also represent the improper allocation of government resources before the crisis begins. Criminal statutes are necessarily difficult to prosecute, particularly when the targeted parties as a result of their crime have ample funds to hire the best available lawyers. Even success is limited under this approach. A successful prosecution may result in a fine that is utterly insignificant in comparison to the compensation already received. The harshest monetary penalty or the threat of a jail sentence cannot make whole the individuals already damaged: the mortgagors on bad mortgages and the individual investors whose retirements took a serious detour when their misgraded investments failed.

    If the goal is to protect consumers rather than chase the latest executive to profit through means that weren’t yet illegal, the focus has to be on prevention at the front end. A more vigorous system of monitoring, even at the expense of some after the fact enforcement efforts, is the better strategy for real victories. The mortgages are all public records, and many of them were approved by HUD. The widely traded funds incorporating them included more information about the kind of risk involved, and the SEC or Office of the Comptroller would have had plenty of information to intervene and get the banks to discontinue the riskiest of their practices. The nation would have benefitted more from cutting off the illgotten 525 million early on then from allowing the practices to continue until the bubble bursts and following it up with a decade of hollow, self-back-patting prosecutions that don't benefit the injured.