Free Declaration - District Court of Delaware - Delaware

Case 1:07-cv-00372-SLR

Document 44

Filed 02/27/2008

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Case 1:07-cv-00372-SLR

Document 44

Filed 02/27/2008

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BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP BLAIR A. NICHOLAS (Bar No. 178428) NIKI L. MENDOZA (Bar No. 214646) DAVID A. THORPE (Bar No. 216498) MATTHEW P. SIBEN (Bar No. 223279) 12481 High Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323 [email protected] [email protected] [email protected] [email protected]

GRANT & EISENHOFER JAY W. EISENHOFER MICHAEL J. BARRY DIANE ZILKA 1201 N. Market Street Chase Manhattan Centre Wilmington, DE 19801 Tel: (302) 622-7000 Fax: (302) 622-7100 [email protected] [email protected] [email protected]

Co-Lead Counsel for Lead Plaintiffs Arkansas Teacher Retirement System, Fire & Police Pension Association of Colorado, Louisiana Municipal Police Employees' Retirement System, Public Employees Retirement System of Mississippi, and Plaintiff Central Laborers Pension Fund [additional counsel appear on signature page] UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA In re Countrywide Financial Corp. Derivative Litigation Lead Case No. 07-CV-06923-MRP-(MANx) CONSOLIDATED SHAREHOLDER DERIVATIVE ACTION AND CLASS ACTION COMPLAINT FOR BREACHES OF FIDUCIARY DUTY, AIDING AND ABETTING BREACHES OF FIDUCIARY DUTY, AND VIOLATIONS OF THE CALIFORNIA AND FEDERAL SECURITIES LAWS DEMAND FOR JURY TRIAL

CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV -06923-MRP-(MANx)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VI. V. I. II. III. IV.

TABLE OF CONTENTS Page SHAREHOLDER DERIVATIVE AND CLASS ACTION .........................................................................................................1 NATURE AND SUMMARY OF THE ACTION .......................................2 JURISDICTION AND VENUE .................................................................17 PARTIES ......................................................................................................18 A. B. C. D. E. Plaintiffs .............................................................................................18 Nominal Defendant ...........................................................................20 Director Defendants ..........................................................................20 Non-Director Defendants..................................................................23 Bank Of America Corporation ........................................................25

FIDUCIARY DUTIES AND OBLIGATIONS OF THE INDIVIDUAL DEFENDANTS ..................................................25 A. B. Duties Of All Individual Defendants ...............................................25 Countrywide's Key Board Committees Were Specifically Required To Oversee And Monitor Credit Risk, The Company's Allowance For Loan Losses, Valuations And Hedging Activities And Access To Liquidity ...........................................................................27 1. 2. 3. 4. 5. Audit And Ethics Committee.................................................28 Compensation Committee ......................................................30 Credit Committee....................................................................32 Finance Committee .................................................................33 Operations And Public Policy Committee................................................................................35

THE INDIVIDUAL DEFENDANTS BREACHED THEIR DUTIES...................................................................36 A. B. Countrywide's Business....................................................................36 Countrywide Shifts Its Strategy To NonTraditional Loans, Increasing Exposure To Credit Risk And Liquidity Constraints.....................................38
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1.

Countrywide Significantly Increases Origination Of NonTraditional Loans....................................................................38 Countrywide's Non-Traditional Loans Posed Significantly Greater Risks Than Traditional, Conforming Loans ..................................................................44 Individual Defendants Had A Fiduciary Duty To Monitor The Company's Origination Of These Risky Loans .............................................................................48

2.

3.

Individual Defendants Allowed Countrywide To Abandon Or Ignore Loan Underwriting Standards To Pump Up Loan Volume, Capture More Market Share And Report Artificially Inflated Income Levels ....................................................................................52 Individual Defendants Allowed Countrywide To Engage In Predatory Lending Practices ..............................................................................63 Countrywide Manipulated Its Earnings By Not Taking Appropriate Allowances For Loan Losses.................................................................................68 Countrywide Carried Assets At Arbitrary Valuations And Failed To Hedge Against Impairments Of These Assets...........................................................75

E.

F.

VII. THE INDIVIDUAL DEFENDANTS' MISCONDUCT AND BREACHES OF DUTY HAVE DEVASTATED COUNTRYWIDE'S BUSINESS AND FINANCIAL CONDITION..........................................82 VIII. THE INDIVIDUAL DEFENDANTS DISSEMINATED MATERIALLY FALSE AND MISLEADING STATEMENTS TO COUNTRYWIDE'S SHAREHOLDERS..................................................97 A. The Individual Defendants Caused Countrywide To Issue False Financial Results During The Relevant Period ...............................................98 The Individual Defendants' False And Misleading Conference Calls With Analysts ............................................................................................100 The Individual Defendants Caused Countrywide To File Materially False And Misleading Reports With The SEC.......................................104
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B.

C.

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D.

Throughout 2007, The Individual Defendants Misleadingly Asserted That Countrywide Was Not At Risk From Bad Loans And Was Not Suffering A Liquidity Crisis ................................................................................109 The Individual Defendants Caused The Company's Proxy Statements To Be False And Misleading................................................................................113 1. 2. 3. The 2005 Proxy Statement ...................................................114 The 2006 Proxy Statement ...................................................115 The 2007 Proxy Statement ...................................................119

E.

THE INDIVIDUAL DEFENDANTS' INSIDER SELLING....................................................................................................121 A. B. C. Relevant Period Insider Sales ........................................................121 Countrywide's Share Repurchase Program............................................................................................123 Defendant Mozilo Frequently Amended His Automatic Stock Sale Plan To Sell Additional Shares During The Repurchase Program Period ..........................................................125

THE CURRENT COUNTRYWIDE DIRECTORS AGREED TO SELL COUNTRYWIDE TO B OF A IN A NOPREMIUM DEAL DESIGNED AND INTENDED TO ELIMINATE THEIR LIABILITY ON VALUABLE PENDING DERIVATIVE CLAIMS, AND AT A PRICE THAT FAILS TO RECOGNIZE THE VALUE OF THESE CLAIMS ................................................................................133 A. The BofA Transaction Is Being Orchestrated By Mozilo To Avoid Personal Liability And To Further Enrich Himself At The Expense Of Countrywide Shareholders ....................................................................................138 BofA Knowingly Aided And Abetted The Countrywide Directors' Breaches Of Fiduciary Duties ..............................................................................139

B.

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C.

The Preliminary Proxy Statement Filed On February 13, 2008 Confirms That Countrywide's Directors And BofA Specifically Structured The Proposed Deal To Eliminate The Personal Liability Of The Countrywide Directors On The Derivative Claims ............................................................................141

CLASS ACTION ALLEGATIONS.........................................................150

XII. DERIVATIVE ACTION ALLEGATIONS ............................................152 XIII. DEMAND EXCUSED ALLEGATIONS.................................................153 A. B. Demand Is Excused Because The Board Abdicated Its Fiduciary Duties ......................................................153 Demand Is Excused Because Board Members Face Liability For Illegal Insider Selling And Allowed Mozilo And Others To Engage In Insider Selling .............................................155 Demand Is Excused Because The Board Either Knew About Or Should Have Inquired Into The Company's Predatory Lending Practices ............................................................................161 Demand Is Excused Because The Board's Failure To Exercise Its Duty Of Oversight Over Countrywide's Business Practices Has Exposed Countrywide To Increased Risks And Has Harmed Its Financial Condition And Prospects ................................................................163 Demand Is Excused Because The Board Approved Of Improper Accounting Practices ...........................................................................................164 Demand Is Excused Because The Board Has Shown Its Lack Of Independence From Mozilo By Repeatedly Granting Him Outlandish Compensation Over The Objection Of An Independent Adviser .........................................166 Demand Is Excused Because The Board Repeatedly Has Failed To Exercise Oversight Over Compensation Of Senior Executives Generally.......................................................................170 Demand Is Excused Because The Board Members Are Interested In Retaining Their Lucrative Compensation And Prestige As Board Members...........................................................171
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C.

D.

E.

F.

G.

H.

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I.

Demand Is Excused Because The Board Already Has Exhibited Antipathy Toward Investigating Or Prosecuting Corporate Wrongdoing...................................................................173 Demand Is Excused Because The Board Has Personal Financial Interests That Conflict With The Interests Of Countrywide's Public Shareholders..............................................174 Demand Is Excused Because The Director Defendants' Suffer Additional Miscellaneous Conflicts And Constraints .....................................175

J.

K.

XIV. RELIANCE ON DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS ..........................................................................................176 XV. INAPPLICABILITY OF THE PSLRA SAFE HARBOR....................................................................................................178 XVI. APPLICATION OF GROUP PLEADING DOCTRINE TO THE INDIVIDUAL DEFENDANTS ..........................................................................................178 XVII. LOSS CAUSATION ..................................................................................179 COUNT I Derivative Claim For Breach Of Fiduciary Duties Against All Individual Defendants...............................................184 COUNT II Derivative Claim For Gross Mismanagement Against All Individual Defendants ..................................................................................................186 COUNT III Derivative Claim For Waste Of Corporate Assets Against All Individual Defendants ..................................................................................................186 COUNT IV Derivative Claim Against Defendants Mozilo, Kurland, Garcia, Sambol, Robertson, Dougherty, Snyder, Cisneros, Donato, Cunningham, Russell And Sieracki For Insider Trading (Cal. Corp. Code § 25402)..........................................................187 COUNT V Derivative Claim For Aiding And Abetting Breaches Of Fiduciary Duty Against The Director Defendants...........................................................................188 COUNT VI Derivative Claim Against All Individual Defendants For Violation Of Section 10(b) Of The Securities Exchange Act And Rule 10b-5 Promulgated Thereunder..........................................................................188

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COUNT VII Derivative Claim Against All Individual Defendants For Violation Of § 20(a) Of The Securities Exchange Act ............................................................................191 COUNT VIII Derivative Claim Against Defendants Mozilo, Cisneros, Cunningham, Dougherty, Garcia, Robertson, And Sambol For Violation Of Section 20A Of The Securities Exchange Act....................................192 COUNT IX Derivative Claim Against Director Defendants For Violation Of Section 14(a) Of The Securities Exchange Act And Rule 14a-9 ........................................194 COUNT X Class Action Claim For Breach Of Fiduciary Duty In The BofA Transaction Against The Current Countrywide Directors.........................................195 COUNT XI Class Action Claim For Breach Of Fiduciary Duty In The BofA Transaction Against The Current Countrywide Directors.........................................196 COUNT XII Class Action Claim Against BofA For Aiding And Abetting Breaches Of Fiduciary Duties...........................................................................................................197 COUNT XIII Claim Against The Individual Defendants And BofA For Constructive Trust And An Injunction.....................................................................................198 XVIII. PRAYER FOR RELIEF.........................................................................199 XIX. JURY DEMAND........................................................................................200

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I.

SHAREHOLDER DERIVATIVE AND CLASS ACTION Lead Plaintiffs Arkansas Teacher Retirement System ("ATRS"), Fire &

Police Pension Association of Colorado ("FPPAC"), Public Employees Retirement System of Mississippi ("MS PERS") and Louisiana Municipal Police Employees Retirement System ("LAMPERS"), and Plaintiff Central Laborers Pension Fund (collectively, "Plaintiffs") bring this action derivatively on behalf of Nominal Defendant Countrywide Financial Corporation ("Countrywide" or "CFC" or the "Company"), and on behalf of a Class of Countrywide shareholders (as defined herein), against certain Countrywide officers and members of its Board of Directors (the "Board") (collectively, the "Individual Defendants") and Bank of America Corporation ("BofA"). As detailed herein, the Individual Defendants engaged in an extensive pattern of misconduct and complete abandonment of regard for their fiduciary duties, including lack of good faith and lack of due care and oversight of Countrywide's lending practices, financial reporting, and internal controls. The Individual Defendants issued false and misleading statements and caused the Company to expend billions of dollars on stock repurchases to maintain the Company's artificially inflated stock price ­ to facilitate their own illegal insider selling of Countrywide stock. While the Individual Defendants created the false appearance the Company was conservatively managed and poised for long-term success, the Individual Defendants were looting the Company through massive insider sales and oversized compensation for their own benefit. Indeed, the Individual Defendants sold over $848 million of Countrywide stock between 2004 and January 2, 2008 (the "Relevant Period") ­ much of it when the Individual Defendants knew the Company was on the brink of an economic collapse resulting from the Individual Defendants' conduct. After having looted the Company for their own personal gain and standing by as the Company's stock price collapsed due to shocking disclosures about the
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Company's accounting and lending practices, the Individual Defendants now seek to extinguish the Company's ability to hold them accountable for the substantial harm inflicted on Countrywide. The Individual Defendants have essentially negotiated a sweetheart deal for themselves and Defendant BofA by selling the Company to BofA without properly valuing the Company's derivative claims against the Individual Defendants, in return for BofA agreeing to indemnify the Individual Defendants for all of their prior misconduct. Accordingly, Plaintiffs bring this action derivatively on behalf of the Company to recoup damages resulting from the Individual Defendants' conduct, and Plaintiffs bring this action on behalf of a Class of Countrywide shareholders to enjoin the sale of the Company to BofA under the terms negotiated by the Individual Defendants to avoid liability for their wrongdoing. The allegations of the Complaint are based on the personal knowledge of Plaintiffs as to themselves and on information and belief (including the extensive investigation of counsel and review of publicly available information) as to all other matters stated herein. II. NATURE AND SUMMARY OF THE ACTION 1. The Individual Defendants have all but destroyed Countrywide's

once-valuable business. What was a strong and profitable Company, is now poised to be sold for a mere 15% of its former worth. Neither the vicissitudes of the marketplace, nor unforeseen exigencies, ought be mistaken for the precariousness of the condition the Individual Defendants created for their own personal gain. In stark violation of their fiduciary duties to the Company, the Individual Defendants caused Countrywide to originate increasingly risky, non-traditional loans to unqualified borrowers in violation of the Company's underwriting standards, while at the same time not properly setting aside reserves/allowances for inevitable loan losses that Individual Defendants knew the Company would incur, and failing to properly hedge against the likelihood of such massive loan losses, as the Individual
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Defendants asserted the Company was doing. The Individual Defendants caused the Company to engage in this extremely risky scheme to artificially inflate shortterm revenues and earnings, while creating the long-term precarious condition that has befallen the Company, so that the Individual Defendants could themselves reap over $848 million in illegal insider trading proceeds, and other ill-gotten compensation and perquisites. 2. While Countrywide's share prices traded under $20 through most of However, the Company's 2003, Countrywide began to take off. By 2004, the stock was in the mid-$20 range and steadily climbing to $45 in February 2007. remarkable growth has been wiped-out by an even more devastating collapse. Countrywide's share prices have fallen from over $40 in May 2007 to less than $5 in January 2008. The United States Securities and Exchange Commission (the "SEC") is investigating the Company's accounting and Chief Executive Officer Angelo R. Mozilo's sales of Countrywide stock. The Attorneys General of Illinois, California and Florida are also investigating the Company's lending practices. The Company's collapse has been sudden and severe, prompting comparisons to some of the worst corporate scandals of the past decade, and prompting The New York Times to pose the query: Is Countrywide "Enron's Second Coming?" 3. The Company's sudden collapse has been the result of a number of shocking disclosures specifically concerning Countrywide. Beginning no later than July 2007, the Individual Defendants were forced to disclose that the Company was facing increasing delinquency rates in its loan portfolios causing the Company's allowances for loan losses to be inadequate and its hedges against such losses to be ineffective. As the Company revealed in its disclosures during the period between July 2007 and January 2008, the problems could be linked

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primarily to two types of loans: home equity lines of credit ("HELOCs") 1 and payoption adjustable rate mortgages ("pay-option ARMs"). 2 4. For example, Countrywide announced a net loss of $1.2 billion for the third quarter 2007 (3Q07), compared to net income of $648 million for the third quarter of 2006. This loss was attributable to, among other things: the Company taking a loan loss provision of $934 million to offset increasing delinquencies on its HELOCs and pay-option ARMs. In addition, the Company suffered a huge loss in 3Q07 due to the change in the fair market value of its mortgage servicing rights ("MSRs") ($1.1 billion) and retained interests ($717 million), 3 which was only partially offset by the Company's ineffective hedging activities. The Company's 3Q07 loss resulting from declines in retained interests was primarily due to HELOCs ­ the Company had recorded a decline of over $1 billion in the fair value of its HELOC-related residual in the nine months ending September 30, 2007. 5. The Company's 3Q07 results were on top of similarly poor 2Q07 results revealing HELOC and pay-option ARM delinquencies. The Company's disclosures of credit problems in its HELOCs and pay-option ARMs, as well as the Company's huge losses in the valuations of its MSRs and retained interests, came as a surprise to investors and analysts who were covering the Company. Indeed, some analysts questioned whether Countrywide "made serious miscalculations

1 2

At times, the Company referred to HELOCs as "prime home equity loans."

As defined further herein, HELOCs are second loans secured only by the difference between the value of a home and the amount due on a first mortgage. Pay-option ARMs give the borrower the "option" whether to pay down loan principal, to make the monthly interest payment, or to make a "minimum" payment that is less than the interest accruing that month. If a borrower makes only the "minimum" payment, the difference between that amount and the monthly interest payment is added to the remaining loan principal. The terms "retained interests" and "residual interests" are used interchangeably herein.
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(and possibly misrepresentations) about the quality of [its] loans" and noted the Company's purported prime loans were "performing roughly in line with [a competitor's] sub-prime deals." This was a surprising comparison, given that subprime loans are made to inherently less creditworthy individuals and are expected to perform far worse than prime loans. 6. The Company's 2Q07 and 3Q07 financial results were not an anomaly. For 4Q07, the Company again reported a huge loss of $422 million, attributable to taking a loan loss provision for credit losses of $924 million and impairment of retained interests of $831 million. The loss was, again, primarily related to credit problems in the Company's HELOCs and pay-option ARMs. 7. By the end of 2007, the Company had been forced to increase its allowance for loan losses to $1.84 billion ­ an increase of over 700% versus the $261 million allowance for loan losses at the end of 2006. 8. Countrywide was also forced to recognize that its retained interests had been impaired (primarily because of declining valuations of its retained interests in HELOCs) by $831 million for the three month period ended December 31, 2007, as compared to impairment of $690 million for the three months ended September 30, 2007, and only $30 million for the three months ended December 31, 2006. 9. The primary cause of the Company's collapse was huge losses resulting from its pay-option ARMs and HELOCs. Defendants had caused the Company to focus on these types of loans beginning in 2004. Prior to 2004, HELOCs and pay-option ARMs were only a small fraction of the Company's loans (less than 5% of loan production). But, by 2005 these loans were approximately 28% of the Company's loan production. Defendants pushed these loans because they were, as The New York Times put it, "especially lucrative." 10. As the Individual Defendants knew, these non-traditional loans were
CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

inherently more risky than normal prime loans. HELOCs are only protected by a
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second lien, and are likely worthless in a default because the first-lien holder oftentimes takes all of the proceeds of the sale of the collateral. Pay-option ARMs are even worse. Pay-option ARMs allow borrowers to skip payments without penalties, enabling borrowers to create larger debts that they cannot repay. 11. Not only did the Company originate these more risky loans, the When the Company retained interests in the most risky part of these loans.

Company securitized its HELOCs and pay-option ARMs, the Company retained interests in the loans and took a first loss on any failure to pay. Ultimately, this would cost the Company substantially. 12. The problem, however, was not just that the Company was originating First, the (and retaining) more risky loans ­ but that it was, in the words of The Wall Street Journal, "giving these loans to riskier and riskier borrowers." 4 Company originated a large percentage of these risky loans to persons who could not (or would not) even document their income. According to The Wall Street Journal, 91% of the pay-option ARMs originated by Countrywide in 2006 "were `low-doc' mortgages in which the borrower didn't fully document income or assets." As the Individual Defendants must have known from their years of experience in the industry, people who do not document their income are prone to falsify it. According to one industry sampling, 90% of stated income loans contain "exaggerated" income levels. 13. Second, despite the fact that the Company was originating riskier loans, the Company increasingly deviated from its own underwriting standards to originate more loans to reach Wall Street's earnings projections for the Company. The Company's underwriting polices were, according to the Company's SEC filings, "designed to produce high quality loans." Defendant Mozilo told investors that the Company's underwriting standards were disciplined, and that "maintaining
4

All emphasis added unless otherwise noted.
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that discipline is critically important to us." Yet, according to numerous former employees of the Company who personally witnessed these matters and who are detailed herein, underwriting policies were irrelevant when the Company needed to book a loan to report earnings. According to a former Senior Regional Vice President at Countrywide: "The fiduciary responsibility of making sure whether the loan should truly be done was not as important as getting the deal done." Indeed, according to other former CFC employees, as set forth in greater detail herein, Countrywide executives encouraged the Company to falsify appraisals to push loans through, and the Company classified loans as "prime" that clearly were not. The Individual Defendants were keenly aware of these transgressions. For instance, according to a former Executive Vice President of Process Improvement who worked at Countrywide for 17 years, Defendant Sambol and this former employee created a computer system (or "rules engine") called the Exception Processing System to monitor loans that did not comply with the Company's underwriting policies ­ but not for the purpose of rejecting such loans. The Exception Processing System was designed so that the Company could charge such risky borrowers additional points and fees, not reject their loan applications. 14. Predictably, the Company's push to book loans that purportedly enabled the Company to report (false) earnings to Wall Street spiraled out of control and led to Countrywide engaging in abusive lending practices. As a result, according to The New York Times, "Countrywide was willing to underwrite loans that left little disposable income for borrowers' food, clothing and other living expenses." The Company's incentive compensation system encouraged such loans ­ regardless of the inevitability that the borrower would default and the Company (and the borrower) would be severely harmed. As a result of these predatory lending practices, the Company is now under investigation by the State Attorneys General for Florida, Illinois and California. 15. Even though the Company was extending HELOCs and pay-option
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ARMs to persons who could not document their income ­ inherently risky types of loans ­ in violation of the Company's own underwriting policies and procedures, the Individual Defendants refused to increase the Company's allowance for loan losses during the Relevant Period. At the risk of oversimplifying, the allowance for loan losses is an amount of money set aside to absorb the estimated amount of probable losses in Countrywide's loan portfolio. To increase the allowance for loan losses (called a provision) would cause a dollar-for-dollar decrease in the amount of earnings Countrywide could report. Because of this earnings offset, the Individual Defendants refused to properly increase the Company's allowance for losses during the Relevant Period. 16. From 2003 through the end of 2006, the Company's allowance for Countrywide's allowance for loan losses was loan losses was approximately 0.3% of the total amount of the Company's loan portfolio held for investment. dramatically lower than that of comparable competitors, including Washington Mutual and Wachovia Bank. The Individual Defendants maintained the allowance for loan losses at a constant rate even though the Company's loan portfolio had drastically changed from conservative, traditional loans to risky, non-traditional loans ­ and despite the fact that the number of delinquencies in the Company's new, non-traditional loans was growing dramatically each year. 17. The Individual Defendants refused to increase the Company's allowance for loan losses even though they knew no later than September 2006 that 66% of borrowers elected to make less than full interest payments on the Company's pay-option ARMs. When borrowers did not pay down the interest owed on pay-option ARMs, the Company booked the additional debt owed as negative amortization (ultimately recorded as income on the Company's financial statements). As a result, Countrywide misleadingly reported phantom ­ or noncash income ­ created solely from a borrower's failure to pay interest on an outstanding loan. By year-end 2006, the Company carried $654 million of this
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accumulated negative amortization, up from only $74.7 million at year-end 2005 and only $29 thousand in 2004. This alarming growth in accumulated negative amortization, created when borrowers did not pay down their pay-option ARMs, was an early warning sign of a ticking time-bomb. 18. By the end of the first quarter of 2007, accumulated negative amortization from unpaid debt on pay-option ARMs had grown to $815.8 million. Yet, still the Individual Defendants did not properly increase Countrywide's allowance for loan losses. 19. The problem was significant and known to Defendants. Defendant He personally ordered the Mozilo publicly acknowledged the issue in 2006. October 2007: Mr. Mozilo told investors in September 2006 that he was "shocked" so many people were making the minimum payment. He called a sampling of borrowers to find out why. The "general answer . . . was that the value of my home is going up at a faster rate than the negative amortization," he said. "I realized I was talking to a group . . . that had never seen in their adult life real-estate values go down." 20. As Defendant Mozilo (like the other Individual Defendants) knew, however, real estate values were then poised to substantially decline. By 2006, if not much earlier, all indicators suggested real estate values would decline as interest rates increased. Indeed, Defendant Mozilo stated in an interview with Maria Bartiromo published on March 6, 2006 that housing prices would substantially decline within the coming year and a half: "I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%." Despite believing that housing prices would substantially decline, and knowing the other problems with the Company's loan portfolio as detailed herein, the Individual Defendants
-9CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

Company to investigate the problem; as reported by The Wall Street Journal in

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breached their fiduciary duties to the Company by not increasing the Company's allowance for loan losses in violation of Generally Accepted Accounting Principles ("GAAP"). 21. In addition to refusing to increase the Company's allowance for loan losses, the Individual Defendants failed to properly ascertain the reasonableness of the assumptions underlying the valuation of the Company's MSRs, retained interests and loans held for sale, and to properly hedge against likely losses in those portfolios. 22. Indeed, according to a former First Vice President and Director of CFC in Countrywide's Capital Markets Accounting Department (as set forth in great detail herein), by 2006 it was clear that the Company's assumptions concerning the valuation of the Company's loan portfolios and the effectiveness of the Company's hedges to offset losses in those portfolios was fundamentally flawed. According to this former employee, the Company tested the effectiveness of its hedges on a daily basis. In 2006, as the loan portfolio he tested experienced increasing devaluation, he was instructed to retroactively alter the loans in the portfolio so as to remove "bad" loans and make it appear the Company's hedging strategies were working. This was a clear violation of GAAP, and obviously improper. According to this former employee, his conclusions about the ineffectiveness of the Company's hedging was reported to Countrywide's CFO, and would have been told to Defendant Mozilo. 23. Throughout the Relevant Period, the Individual Defendants were obligated by their fiduciary duties to understand and monitor the Company's valuation of its MSRs, retained interests and loans held for sale ­ and to understand and monitor the Company's hedging for likely losses in those portfolios. As a result of the Individual Defendants' failure to do so, the Company has lost over $2.6 billion. 24. As a result of the Individual Defendants' improper conduct and failure
-10CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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to perform their fiduciary duties, the Company was shut out of the credit markets and suffered a debilitating liquidity crisis. Access to capital markets was a very important part of the Company's business operations; such capital made it possible for the Company to fund the loans it originated. The Company's inability to adhere to its own underwriting standards, coupled with the Company's mounting losses from bad loans, caused the national credit rating agencies (Moody's, Standard & Poor's and Fitch) to raise significant concerns about the Company's creditworthiness. As a result, the Company's credit facilities dried up and the Company's ongoing business operations were put in jeopardy. 25. While the Company's collapse came as a shock to investors, with an 87.5% decline in the Company's stock price from $40 to $5 in less than eight months, the Individual Defendants were well aware of and responsible for all of the significant factors contributing to Countrywide's downfall. Indeed, certain of the Individual Defendants, particularly the Company's senior officers, actively endorsed and encouraged the Company's risky lending activities and resulting falsification of the Company's financial statements. 26. Moreover, throughout the Relevant Period, Countrywide and its shareholders specifically relied on the Board's numerous committees to play an active role in controlling and monitoring the very aspects of Countrywide's business that shareholders have now learned were abused for personal profit and to the Company's detriment: (a) The Board's Credit and Audit Committees were required to assess Countrywide's exposure to credit risk, underwriting standards and the reliability of its allowances for loan losses, valuations and hedging activities. Since virtually all of Countrywide's business stemmed from the quality of the loans it originated, monitoring these functions and accounting items was essential to maintaining the Company's stability. (b) The Board's Finance Committee was required to oversee and protect
-11CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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the Company's access to liquidity ­ the lifeblood of a business like Countrywide. If credit and secondary markets thought that Countrywide's loans were not as safe as represented, the lifeblood would quickly dry up. (c) The Board's Compensation Committee was obliged to consider appropriate rewards for executives and assess whether incentives created by Countrywide's compensation system were appropriate. If mortgage brokers made more money by matching more risky loans to less capable borrowers, and executives made more money by hiding risk than confronting it, Countrywide's shareholders were sure to suffer. 27. Instead of ensuring that Countrywide's rapid growth was tempered with acceptable business practices and honest financial reporting, the Directors of Countrywide, the gatekeepers upon whom shareholders and customers rely, allowed the Company's senior management to violate the Company's lending practices and underwriting disciplines, as well as state and federal financial reporting, disclosure and consumer lending laws. 28. Despite the Individual Defendants' critical roles in monitoring the very issues that caused Countrywide's collapse, and the Individual Defendants' knowledge of the underlying problems and risks that ultimately materialized to the detriment of the Company and its shareholders, the Individual Defendants chose not to protect the Company by taking the difficult, but necessary, steps to right the ship ­ rather, the Individual Defendants chose to enrich themselves at the Company's expense. 29. Throughout the Relevant Period, the Individual Defendants were some of the most highly paid corporate executives and directors in the country, yet the Individual Defendants sold over $848 million in Countrywide stock in illegal, insider sales (much of which at the same time the Company was repurchasing its stock on the open market). Almost all of the Individual Defendants' sales during the Relevant Period were at prices above $30 and shortly before the Director
-12CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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Defendants agreed to sell the Company for only approximately $7 per share to BofA. Experts have dubbed Defendants' insider selling "extremely suspicious" and have noted that it raises "red flags." 30. Throughout the Relevant Period and to the detriment of the Company, the Individual Defendants artificially inflated the Company's share price to facilitate their own illegal, insider sales at higher prices to enrich themselves. For instance, as a result of the Individual Defendants' push to have Countrywide originate riskier and riskier loans, the Company was able to report escalating loan volume and appear more profitable (when, in fact, had the Company properly taken allowances for loan losses and hedged against likely losses, it would have been apparent these loans were not profitable). As detailed herein, the Individual Defendants made a whole host of associated false and misleading statements, all related to deceiving investors as to the true financial condition of the Company. By doing so, the Individual Defendants inflated the Company's stock price in the short-term to aid their selling of their own personal stock for proceeds of hundreds of millions of dollars. 31. In addition, the Individual Defendants furthered their own insider selling by inflating the Company's stock price through a $2.4 billion stock repurchase program in which the Company purchased its own shares on the open market. Ostensibly, a stock repurchase plan is implemented because the company's directors believe the company's stock price is below its true value. Here, the Director Defendants caused the Company to repurchase stock while the Director Defendants sold their personal stock in massive amounts. 32. While the stock repurchase ordered by the Company's Directors may have propped up the Company's share price for a short while, thereby enabling the Individual Defendants to profit from their own insider sales, the repurchase severely damaged the Company. Countrywide could ill-afford such a massive stock repurchase. The Company did not have $2.4 billion in cash to spend
-13CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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(Countrywide funded the buyback with debt) without placing itself at great risk of suffering a liquidity crisis, which ultimately occurred. The Director Defendants' authorization of the stock repurchase plan was an improper scheme to enrich themselves at the expense of the Company, and a breach of the Director Defendants' fiduciary duties. 33. After the filing of this derivative action against the Countrywide Board and other current and former officers and directors, Countrywide announced that it had entered into a definitive agreement to be acquired by Bank of America Corporation ("BofA") in an all stock deal that valued the Company at slightly over $4 billion. 34. The BofA deal was approved by the Board at a price that offers no Indeed, despite the fact control premium at all. The deal price was actually well below the market price of Countrywide securities when the deal was announced. that Countrywide's stock was trading near an all-time low, the purchase price announced was at a 7.6% discount to Countrywide's already-depressed market price. BofA's Chief Financial Officer, Joe Price, frankly stated that BofA's purchase of Countrywide is for less than a third of the Company's book value (the mortgage company's assets minus its liabilities) and roughly 2.9 times forecast 2009 earnings. Companies like Countrywide typically sell for at least book value and seven times estimated future earnings. 35. In violation of their fiduciary duties to the Company, the Director Defendants approved the BofA deal even though it does not properly value the Company's derivative claims against the Individual Defendants. These claims against the Individual Defendants, which Plaintiffs are litigating on behalf of the Company, are of substantial value to the Company. There is no indication that the Board properly valued this substantial asset in determining the adequacy of the BofA proposal. Indeed, according to the registration statement filed with the SEC by BofA and Countrywide, Goldman Sachs and Sandler O'Neill ­ the Company's
-14CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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financial advisors with regard to the BofA deal ­ did not consider the value of the Company's derivative claims against the Individual Defendants. 36. The Countrywide Board's eagerness to accept this low-ball deal is obvious: the Individual Defendants' are attempting to rid themselves of exposure to hundreds of millions (if not billions) of dollars of personal liability in this, and other, derivative claims, which seek to remedy the grave harm that they caused the Company over the past five years. 37. Should Countrywide's deal with BofA be allowed to proceed as currently announced, the Individual Defendants in this action undoubtedly will argue that as a matter of law their liability on pending derivative claims has been transferred to BofA and Plaintiffs no longer have standing to assert such claims. Indeed, the registration statement filed with the SEC by BofA and Countrywide specifically states "if the merger is consummated, plaintiffs in pending shareholder actions against certain Countrywide officers and directors may lose standing to assert derivative claims on behalf of Countrywide because the plaintiffs will no longer be stockholders of Countrywide." Moreover, the terms of the merger agreement make clear that the Defendants colluded to ensure that the Individual Defendants are not held accountable to the Company for the harm that they have caused the Company. BofA has expressly agreed to indemnify the Individual Defendants for their breaches of fiduciary duties and other transgressions against the Company, as well as any other liability arising from their roles as Directors of the Company. 38. The Director Defendants have clearly put their own interests ahead of the Company's interests in negotiating a sweetheart deal for themselves and BofA, which improperly gives away the Company at an unfair price that does not properly value the Company's claims against the Individual Defendants (which are being litigated here by Plaintiffs). 39. In addition, the terms of the BofA deal will award the Individual
-15CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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Defendants further financial windfall in the form of severance and/or retirement compensation, and "change in control" payments. According to The Los Angeles Times, for example, Countrywide's Mozilo stands to get a pay package valued at more than $110 million as a result of the BofA deal ­ a particularly ironic result for the man who represents the face of the mortgage market collapse. Although Mozilo has recently agreed to forgo collecting $37.5 million, amidst public outcry and a broadening Congressional and SEC investigation into his recent pay, he still stands to pocket as much as $70 million dollars for agreeing to the deal, and this is in addition to the extinguishment of his personal liability for hundreds of millions of dollars more in connection with this action and other actions. 40. The proposed sale of Countrywide to BofA is further flawed in that it significantly prevents additional suitors from attempting to offer a better deal for the Company ­ including any new acquirer that would not let the Individual Defendants off the hook. The Individual Defendants have provided BofA a right of first refusal and a $160 million termination fee if Countrywide doesn't go through with the deal with BofA. By doing this, the Individual Defendants have all but assured that no other acquirer will emerge to challenge BofA's offer. 41. Through this shareholder derivative action, Countrywide's shareholders stand to recoup significant sums of money for the Company that Defendants unscrupulously obtained from the Company's coffers through their repeated violations of their fiduciary duties. Unless those valuable claims are carved out of the BofA transaction, and placed in a constructive trust, Defendants will ­ once again ­ reward themselves by placing their personal interests over those of Countrywide's public shareholders. By this action, therefore, the pending derivative claims should be carved out of the BofA transaction and Plaintiffs should be able to proceed to judgment for the benefit of Countrywide's present shareholders. 42. This action seeks to make Countrywide whole by obtaining
-16CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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disgorgement of the illicit trading profits of Countrywide's officers and directors who cashed out their shares before the Company's stock price collapsed, and by obtaining damages from the Board members whose abdication of duty caused so much harm to the Company that it enabled a distress sale at a grossly depressed price. As detailed herein, the Board severely damaged the Company by causing it to expend $2.4 billion on artificially inflated Countrywide stock. The Board's abandonment of its fiduciary obligations also caused, inter alia, the Company to become the target of government investigation and several class action and derivative lawsuits, which have caused reputational harm and significant damages. Plaintiffs also seek to remedy the harm to Countrywide caused by Individual Defendants' violations of federal securities laws, including Section 10(b) and Section 14(a) and Section 20A of the Securities Exchange Act of 1934. III. JURISDICTION AND VENUE 43. Counts VI-IX asserted herein arise under Section 10(b) of the

Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and the rules and regulations promulgated thereunder, including SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and Section 20A of the Exchange Act, 15 U.S.C. § 78t(a), and Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and the rules promulgated thereunder, including SEC Rule 14a-9, 17 C.F.R. § 240.14a9. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331, because this is a civil action arising under the laws of the United States, and principles of supplemental jurisdiction in accordance with 28 U.S.C. § 1367. 44. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa. Countrywide maintained its headquarters and principal place of business in this District. Many of the acts and transactions that constitute the violations of law complained of herein, including the dissemination to the public of untrue statements of material facts, occurred in this District.
-17CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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45.

Countrywide is headquartered in California. Allegations contained

herein are brought derivatively on behalf of Nominal Defendant Countrywide, and Defendants' conduct was purposefully directed at California. As such, jurisdiction over any non-resident Defendant is reasonable under these circumstances. 46. Venue is also proper in this District pursuant to 28 U.S.C. § 1391(b), (c) and (d). One or more of the Defendants either resides in or maintains executive offices in this District, a substantial portion of the transactions and wrongs complained of herein, including the Defendants' primary participation in the wrongful acts detailed herein in violation of fiduciary duties owed to Countrywide, occurred in this District, and Defendants have received substantial compensation and income by doing business here and engaging in numerous activities that had an effect in this District. 47. The claims asserted herein are not the product of any collusive conduct designed to confer jurisdiction on this Court that it otherwise would not PARTIES A. 48. Plaintiffs Plaintiff ATRS is a pension system under the laws of the State of

Arkansas, established by Act 266 of 1937, to provide retirement benefits to the employees of the State of Arkansas' education community. ATRS has total assets of approximately $11.85 billion under investment for its beneficiaries. ATRS is a stockholder of Countrywide, currently holding 693,000 shares, has been a stockholder of Countrywide at all material times alleged in this Complaint, and will continue to be a stockholder of Countrywide through the conclusion of this litigation. ATRS maintains its principal place of business in Pulaski County, Arkansas. 49. Plaintiff FPPAC is a retirement system under the laws of Colorado,
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established pursuant to Title 31, Article 31, Part 3 of the Colorado Revised
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Statutes, created to provide retirement benefits for fire station and police employees of the State of Colorado. FPPAC has total assets of approximately $3.5 billion under investment for its beneficiaries. FPPAC is a stockholder of Countrywide, currently holding 331,900 shares, has been a stockholder of Countrywide at all material times alleged in this Complaint, and will continue to be a stockholder of Countrywide through the conclusion of this litigation. FPPAC maintains its principal place of business in Arapahoe County, Colorado. 50. Plaintiff MS PERS is a governmental defined benefit pension plan qualified under Section 401(a) of the Internal Revenue Code, established under the laws of Mississippi by the Mississippi Legislature in 1952, to provide retirement benefits to the employees of the state of Mississippi. MS PERS has total assets of approximately $21.8 billion under investment for its beneficiaries. MS PERS is a stockholder of Countrywide, currently holding approximately 360,000 shares, has been a stockholder of Countrywide at all material times alleged in this Complaint, and will continue to be a stockholder of Countrywide through the conclusion of this litigation. MS PERS maintains its principal place of business in Hinds County, Mississippi. 51. Plaintiff LAMPERS is a retirement system under the laws of the state of State of Louisiana, established by Act 189 of 1973, enabling legislation for the purpose of investing and providing retirement allowances and other benefits for full-time municipal police officers and employees in the State of Louisiana, secretaries to chiefs of police and employees of LAMPERS. LAMPERS has total assets of approximately $1.18 billion under investment for its beneficiaries. LAMPERS is a stockholder of Countrywide, currently holding 4,900 shares, has been a stockholder of Countrywide at all material times alleged in this Complaint, and will continue to be a stockholder of Countrywide through the conclusion of this litigation. LAMPERS maintains its principal place of business in East Baton Rouge Parish, Louisiana.
-19CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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52.

Plaintiff Central Laborers Pension Fund is a Taft-Hartley Trust Fund

headquartered in Jacksonville, Illinois. The Fund provides benefits for approximately 14,000 active and inactive vested union laborers. The Pension Fund was established in 1965 to help provide financial security to laborers during retirement. The Fund currently has more than 5,300 pensioners and beneficiaries receiving over $54 million each year in pension benefits, and is financed entirely by employer contributions negotiated through the collective bargaining process and investment income. Central Laborers is a stockholder of Countrywide, has been a stockholder of Countrywide at all material times alleged in this Complaint, and will continue to be a stockholder of Countrywide through the conclusion of this litigation. B. 53. Nominal Defendant Nominal Defendant Countrywide is a corporation organized and

existing under the laws of the State of Delaware, with its principal executive offices at 4500 Park Granada, Calabasas, California 91302. As detailed below, Countrywide is a holding company that, through its five segments ­ Mortgage Banking, Banking, Capital Markets, Insurance, and Global Operations ­ engages in mortgage lending and other finance-related operations. C. 54. Director Defendants Defendant Angelo R. Mozilo ("Mozilo") is a Countrywide director

and has been since 1969. Defendant Mozilo is a co-founder of the Company and has been Chairman of the Board of the Company since March 1999 and Chief Executive Officer of the Company since February 1998. Defendant Mozilo was also President of the Company from March 2000 through December 2003 and served in other executive capacities since the Company's formation in March 1969. During the Relevant Period, Defendant Mozilo sold over 12.8 million shares of Company stock for proceeds in excess of $474 million. Defendant Mozilo resides in the County of Ventura, California.
-20CONSOLIDATED SHAREHOLDER DERIVATIVE AND CLASS COMPLAINT Lead Case No. 07-CV-06923-MRP-(MANx)

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55.

Defendant David Sambol ("Sambol") is a Countrywide director and

has been since September 2007. Defendant Sambol joined Countrywide in 1985. Defendant Sambol served as Executive Managing Director of Business Segment Operations, leading all revenue generating functions of the Company, as well as the corporate operational and support units comprised of Administration, Marketing and Corporate Communications and Enterprise Operations and Technology. Defendant Sambol is currently President and Chief Operating Officer ("COO") for Countrywide Financial Corporation. Defendant Sambol also serves as Chairman and CEO of Countrywide's main subsidiary, Countrywide Home Loans, Inc. Defendant Sambol admittedly "leads all operations of the Company" and has "oversight responsibility" for Countrywide Home Loans, as well as Countrywide Bank, Countrywide Insurance Group, Countrywide Capital Markets and Countrywide's Global Operations. During the Relevant Period, Defendant Sambol sold over 1.4 million shares of Company stock for proceeds in excess of $54 million. Defendant Sambol resides in the County of Los Angeles, California. 56. Defendant Jeffrey M. Cunningham ("Cunningham") is a Countrywide director and has been since 1998. Defendant Cunningham is a member of the Credit and Operations and Public Policy Committees of the Company's Board. During the Relevant Period, Defendant Cunningham sold 75,000 shares of Company stock for proceeds in excess of $3 million. Defendant Cunningham resides in the County of Essex, Massachusetts. 57. Defendant Robert J. Donato ("Donato") is a Countrywide director and has been since 1993. Defendant Donato serves as chair of the Finance Committee and is a member of the Compensation and Corporate Governance and Nominating Committees of the Company's Board. Defendant Donato previously served on the board of directors of Countrywide Mortgage Investments, Inc. (now IndyMac Bancorp, Inc.). During the Relevant Period, Defendant Donato sold over 114,000
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shares of Company stock for proceeds in excess of $4.3 million. De