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Former Countrywide Execs Settle SEC Charges

Alan Cao, Jun Shi sold shares short ahead of announcement

April 18, 2006

By LISA D. BURDEN
Washington, D.C., correspondent for MortgageDaily.com


Two former Countrywide Financial Corp. executives have settled insider trading charges with the Securities and Exchange Commission.

The SEC alleged in a Los Angeles federal court that Alan Cao and Jun Shi used confidential negative information about the California company's stock in 2004 to make a profit.

Cao, a former vice president of financial planning, and Shi, a former first vice president of finance, agreed to settle the charges, without admitting or denying the allegations, by repaying their profit and paying a penalty. Cao paid $100,000 and Shi paid $40,000.

The duo used a procedure called short selling.

Although it sounds counterintuitive to making a profit, a "short" occurs when an investor borrows shares of a stock from a shareholder and immediately sells them on the market. The investor then waits, hoping that when the time comes to buy back the shares in order to replace them or "cover the short," they're available at a cheaper price and he can pocket the difference, thus netting a profit on the transaction. However, if the share price goes up, the investor buys back the shares at a higher price and takes a loss.

Cao could not be reached for comment. Shi, reached by telephone, declined to comment on the charges and the settlement.

In an e-mailed statement, Rick Simon, Countrywide's first vice president for corporate communications wrote, "Countrywide Financial Corporation is committed to the highest ethical standards. The company's policies prohibiting illegal insider trading are strictly enforced. The two employees involved in the SEC matter were mid-level managers who are no longer with the company. Countrywide has fully cooperated with regulators in their investigation of these matters."

On Oct. 20, 2004, Countrywide issued a press release announcing that its third quarter earnings per share were $0.94, compared to $1.93 the year before. That day, Countrywide's stock price fell 11.5% and trading volume increased 307%.

The commission's complaint alleges that by mid-October 2004, Cao had learned that Countrywide's third quarter earnings results were negative and that Countrywide would announce revised downward earnings guidance. The complaint further alleges that on October 19, Cao, betting that Countrywide's stock price would decline after the company's negative earnings announcement, "shorted" 15,000 Countrywide shares. A few hours after the October 20 earnings announcement, when Countrywide's stock price had indeed declined, Cao purchased 15,000 Countrywide shares to cover the borrowed shares, for an illegal profit of $48,352.

The SEC's complaint further alleges that Cao twice tipped Shi with Countrywide's nonpublic negative earnings information. After the first tip, Shi sold 2,300 Countrywide shares, avoiding losses of $11,567 that he otherwise would have incurred. After the second tip, Shi sold short 2,000 Countrywide shares, which he covered a few hours after the October 20 announcement, for a profit of $8,461.

By engaging in such trading, Cao and Shi breached their duty to Countrywide not to trade on the basis of confidential corporate information and violated federal law, the SEC said.


Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]


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