Countrywide boss faces the hook

(breakingviews.com) -- The wheels of justice have ground slowly since the collapse of the credit bubble. There have been criminal indictments, such as the case against Ponzi-scamster Bernie Madoff and allegations that two former Bear Stearns hedge fund managers misled investors.

But the government hasn't pursued those at the helm of hobbled financial firms like Lehman Brothers and American International Group (AIG, Fortune 500). It may have found a candidate according to a Wall Street Journal report - Countrywide's Angelo Mozilo.

Why did it take so long? Partly because prosecuting financial crime is difficult. U.S. securities law is complex and open to interpretation. Defendants hire pricey lawyers. And only high-profile cases that capture the public's anger tend to result in convictions. Mozilo seems right for the role.

The perpetually tan and flashy Countrywide boss made a fortune by turning his company into an aggressive subprime lender. That led it to suffer high default rates later on. And while Countrywide was cashing in on the boom, Mozilo was dumping his stock.

He sold close to $500 million worth between 2004 and 2008, when Countrywide was finally forced to sell itself to Bank of America (BAC, Fortune 500). More than $140 million of these sales occurred under a pre-arranged program initiated late in 2006. In September 2007, the plan was changed to accelerate the pace. Simultaneously, the company was using precious cash to buy back huge chunks of stock.

Mozilo has been told he's at risk of being charged with insider trading and failure to disclose material information to stockholders. Convincing jurors he's guilty won't be easy. Pre-arranged, regular sales of stock are entirely legal - even if the fact they can be suspended at any point makes them look suspiciously like a fig leaf for trading on non-public information.

Also, his public comments about Countrywide's health during its downward spiral tended to sound optimistic, rather than false. And his claim that his sales were merely attempts to diversify his portfolio before incipient retirement has a modicum of plausibility.

Yet the scales of justice aren't blind to public outrage. Martha Stewart's icy perfectionist persona did her no favors when she was on trial for insider trading. Easy-to-grasp symbolism also counts. Stories of Dennis Kozlowski's extravagances didn't help him in his fraud trial. The ongoing foreclosure spectacle in the U.S., and the public furor it has stoked, probably won't help Mozilo's case.

The prosecutors have another advantage. The case against Mozilo, if filed, would be civil, rather than criminal. These have a lower burden of proof. Of course, the penalties - should any be levied - would be solely monetary. But for prosecutors seeking a relatively easy win, and a public slavering for a scapegoat, that may be enough.