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Investors Allege Massive Fraud by Countrywide

A lawsuit alleges Countrywide Financial Corp. and two of its former executives misled institutional investors who were stuck with huge losses from mortgage-related investments that they say were portrayed as low-risk.

The lawsuit was filed Monday in New York State Supreme Court by investors who bought hundreds of millions of dollars in Countrywide's mortgage-backed securities from 2005 to 2007, before the housing market went bust. The list of a dozen plaintiffs includes New York Life Insurance Co., TIAA-CREF Life Insurance Co. and Dexia Holdings Inc.

The complaint names Countrywide, various subsidiaries that issued the securities, two former company executives including ex-CEO Anthony Mozilo, and Bank of America, which bought Countrywide in 2008.

Countrywide had been the nation's largest home loan originator before the housing market collapse left many of its borrowers unable to repay mortgages that in many cases required no proof of income or down payment.

The plaintiffs allege they wanted conservative investments that Countrywide portrayed as being backed by low-risk mortgages written according to strict underwriting criteria.

Materials that Countrywide subsidiaries circulated to potential investors indicated all the mortgage-backed securities had been assigned investment-grade ratings, and most had top-rung "AAA" ratings, according to the lawsuit.

But as of last month, more than 31 percent of the mortgage loans underlying those securities were over 30 days delinquent, in foreclosure, bankruptcy or repossession, the lawsuit says. The securities "are no longer marketable at or near the prices the plaintiffs paid for them," leaving them with "significant losses," the complaint says.

The lawsuit seeks unspecified damages for alleged securities fraud.

Shirley Norton, a spokeswoman for Charlotte, N.C.-based Bank of America, said her company will review the lawsuit.

"But on first glance, these sound like large, sophisticated investors who now want to blame someone for the fact that the declining economy caused their investment to lose value," Norton said.

David Siegel, a lawyer for Mozilo, said the lawsuit "has no basis in law or fact. We expect to prevail against these plaintiffs as we have against other disgruntled, sophisticated (mortgage-backed securities) investors."

The lawsuit alleges Countrywide "was an enterprise driven by only one purpose to originate and securitize as many mortgage loans as possible into (mortgage-backed securities) to generate profits for the Countrywide defendants, without regard to the investors that relied on the critical, false information provided to them."

The complaint was filed a month after insurer Allstate Corp. brought a similar lawsuit, alleging it was misled over $700 million in mortgage-backed securities that it bought beginning in 2005.

In October, Mozilo agreed to a $67.5 million settlement with the Securities and Exchange Commission to avoid trial on civil fraud and insider trading charges that alleged he profited from doling out risky mortgages while misleading investors about the risks. Under terms of the settlement, Mozilo and two other Countrywide executives did not admit wrongdoing. One of them was Countywide President David Sambol, who was named in Monday's lawsuit.

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