Three former Countrywide Financial Corp. (NYSE: CFC) executives agreed to plead guilty to charges they conducted insider trading in the mortgage lender's shares in the week leading up to a disappointing earnings report, federal prosecutors said.
Alan Cao, Quan Zhu and Jun Shi admitted to betting that Countrywide shares would decline after learning the Calabasas, California-based company's results in the third quarter of 2004 would fall short of analysts' forecasts, according to the U.S. Attorney for the Central District of California.
Each defendant pleaded guilty to one count of securities fraud, which carries a maximum 20-year prison sentence. The case stemmed from a probe by the FBI, with the assistance of the U.S. Securities and Exchange Commission, prosecutors said.
Cao, 38, was a former vice president of financial planning; Zhu, 43, was executive vice president of portfolio risk management; and Shi, also 43, was first vice president of planning at Countrywide's banking unit, Countrywide Bank.
Donald Etra, a lawyer for Cao, said his client fully acknowledges his responsibility, was cooperating with prosecutors, and hoped for a probation sentence. Lawyers for Zhu and Shi did not immediately return calls seeking comment.
The pleas were announced after Countrywide shares had fallen 2.6 percent on Tuesday on speculation the company might be the target of a government probe related to subprime loans, and that the FBI was raiding its headquarters.
Assistant U.S. Attorney Beong-Soo Kim would not comment on whether the U.S. Attorney's investigation has concluded, or whether other Countrywide executives are being targeted.
Laura Eimiller, a spokeswoman for the FBI's office in Los Angeles, said the FBI is not conducting a search warrant at the office of Countrywide Financial in Calabasas.
Countrywide spokesman Rick Simon said the company was aware of rumors of raids, but was unaware of such activity and believed the rumors unfounded. He was not immediately available to discuss the pleas.
The insider trading case stemmed from an 11.5 percent decline in Countrywide shares on October 20, 2004.
Countrywide that morning had reported a 47 percent decline in quarterly profit to $582 million, or 94 cents per share, 7 cents below the average analyst forecast. The company also cut its full-year earnings outlook.
Prosecutors said Cao learned in advance of the shortfall, and told Zhu and Shi. The former executives then conducted a variety of transactions between October 14 and 19, prosecutors said. As a result, Cao realized $47,668 of illegal profits, Zhu realized $35,547, and Shi realized $19,995, prosecutors said.
Prosecutors said the former executives profited by selling shares they owned, buying put options on Countrywide stock, and short-selling the stock. Cao and Zhu worked at Countrywide's headquarters, and Shi at Countrywide Bank's offices in Thousand Oaks, California, prosecutors said.
Cao and Shi last year settled related SEC civil allegations. Each returned their improper profits and paid a fine, the agency said.
Countrywide shares closed Tuesday down 96 cents at $36.31, after earlier falling to a two-month low. The shares are down 14 percent this year.
The cost to insure Countrywide debt with credit default swaps jumped about 10 basis points to 70 basis points, or $70,000 per year for five years to insure $10 million of debt.
Meanwhile, at the close, 39,172 put options and 10,229 call options had traded in Countrywide, more than four times normal daily volume, according to Track Data.