Countrywide facing shareholder lawsuit

Jillayne Schlicke on 05 14, 2008

Directors and officers of Countrywide Financial will have to defend themselves against “shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse” per the New York Times tonight.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Will this lawsuit set a precedence for further legal action?

Hundreds of mortgage companies have failed in the last year or so, but few executives or directors have taken responsibility. That makes the ruling significant

Looks like the lead plantiff is the Arkansas Teacher Retirement System. I wonder how many other plantiffs are out there if we look at the hundreds of bankrupt companies. Probably thousands if we count all the individual employees who held stock in their companies.

For the next decade, we should all expect underwriting guidelines to further tighten until defaults start to subside. With 1000 foreclosures happening each day in California, a slowdown doesn’t seem to be in sight any time soon.

Frivolous lawsuit or corporate officer accountability 101, or ?

If you were a stockholder of BOA, would you vote to continue to move forward and purchase Countrywide?

Some of us will argue that lawsuits will lead to increased costs. With or without this lawsuit, borrowing costs will rise, and they should. Countrywide and all lenders severly underpriced risk. I believe this lawsuit has the potential to impact mortgage lending business practices for years to come.

About the Author: Jillayne Schlicke

Jillayne Schlicke researches, writes, and instructs continuing education courses, convention workshops and keynote presentations for the real estate and mortgage industries on a wide variety of topics as CEO of CE Forward, Inc. Jillayne is also the Founder and Executive Director for The National Association of Mortgage Fiduciaries, which serves the mortgage lending industry by raising ethical standards, creating a framework for industry self regulation, providing continuing education classes, and helping the industry prepare for the emergence of fiduciary duties. Jillayne received an M.A. in Psych from Antioch University in Seattle where she studied moral psychology, philosophy, and business ethics and received a B.S. in Business and Systems from the University of Phoenix. Jillayne presents hundreds of classes and workshops each year, has published numerous articles for various publications, is a contributing author and editor on Rain City Guide, has been appointed to 38 professional association chair positions or committees and has received 13 industry awards including "2008 Instructor of the Year" from the Seattle King County Association of Realtors. Contact Jillayne at 206-931-2241 Read Jillayne's stuff on Rain City Guide...

7 Responses to “Countrywide facing shareholder lawsuit”

  1. Deborah Burns
    May 14, 2008 at 10:16 pm

    Wow, this is an interesting development, a shareholder lawsuit to hold some Countrywide executives accountable, THAT is interesting!

    There are some good points in the article about why the court is pursuing the complaint…I hope that the plaintiffs are sucessful in their lawsuit.

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  2. Q-diddy
    May 15, 2008 at 8:08 am

    There are a lot of interesting things happening in the banking world. You probably already heard it, but the SEC and FASB is trying to change Rule 140 and basically force all loans back on balance sheet. Effectively killing the securitization market.

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  3. Jillayne Schlicke
    May 15, 2008 at 12:21 pm

    Q-diddy,

    Can you help me out: Where do the loans show now on a corporation’s balance sheet?

    What about fannie and freddie; since they’re government-sponsored entities that do basically nothing but loans, do they get special rules that are different from banks?

    Thanks.

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  4. Jillayne Schlicke
    May 15, 2008 at 12:28 pm

    Hi Debra,

    I wonder what their (countrywide’s board of directors) defense will be? “We didn’t know…”

    The judge in this case seems to think that there’s enough evidence to the contrary to let the case move forward.

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  5. Deborah Burns
    May 15, 2008 at 2:21 pm

    Hi Jillayne,

    Well, they could try that as a defense, but that certainly would make them look to be not very competent leaders to testify that they “did not know”. Of course they knew, it was corporate wide and as leaders they set the tone for their company’s business practices.

    These are educated, experienced business people who made bad, and perhaps criminal decisions as leaders and as such should suffer the consequences of those decisions. This will be interesting to follow.

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  6. Apella
    May 15, 2008 at 7:10 pm

    Jillayne,

    Well if this isn’t just one more lump of sugar to the cup for BOA. :) I wonder if this and 30 some billion in liabilities that BOA wants to walk away from has anything to do with the rumors that BOA might get out of the Countrywide deal?

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  7. Jillayne Schlicke
    May 15, 2008 at 10:09 pm

    Hi Shane,

    Well, BOA wrote themselves a big giant way out of the deal. I believe way back when, BOA said that if market conditions change dramatically, they reserve their right to revise the deal.

    I’ve been skeptical from the beginning, however, maybe it’s not an either/or. Instead of walking away from CWide, maybe BOA will renegotiate.

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