Countrywide Sued Over 401K Performance

Countrywide, its Chief Executive Officer Angelo Mozilo and other managers handling the retirement plan violated the Employee Retirement Income Security Act by intentionally concealing information from employees participating in the plan, according to the suit filed by Hagens Berman Sobol Shapiro yesterday in the U.S. District Court in Santa Ana, Calif. Countrywide allegedly failed to warn employees of its precarious financial health and continued to offer stock as investment option and match even when it was no longer a prudent investment for participants’ retirement savings.

“Countrywide has not yet seen this lawsuit, and does not generally comment on specific points of pending litigation,” the company said in a statement. “From what we can discern from the news release put out by the public relations firm for plaintiffs’ counsel, we do not believe the case has merit, and we will defend it vigorously.”

The class action complaint represents all employees who participated in Countrywide’s company-matched 401(k) savings and investment plan from Oct. 27, 2005, through Aug. 9, 2007, and recently saw the value of their accounts plummet along with the company’s stock, Hagens Berman said.

“The plan has suffered substantial losses, resulting in the depletion of hundreds of millions of dollars of the retirement savings and anticipated retirement income of the plan’s participants,” the suit read.

Losses resulting from fiduciary breaches in ERISA require losses to be restored to the plan, which reportedly held close to $350 million in Countrywide stock as of Dec. 31, 2006, about 33 percent of the plan’s total assets, the complaint said.

Among the outcomes sought are compensation for money lost, a trust on any amounts that benefited the company, and the appointment of one or more independent trustees to help manage Countrywide stock, according to the complaint.

Countrywide’s 401(k) plan consists of a participant contribution plan, where employees can make voluntary pre-tax contributions out of their base pay, and a company-match plan where Countrywide matches up to a pre-determined percentage, according to an announcement from Hagens Berman. During the class period, Countrywide provided the match through company stock.

While the Calabasas, Calif.-based lender regularly communicated with employees about its financial performance and stock, “the largest single investment in the plan,” during the class period, it “fostered a positive attitude toward Countrywide’s stock as an investment for the plan, and/or allowed the plan’s participants to follow their natural bias towards investment in the stock of their employer by not disclosing negative material information concerning investment in Countrywide stock,” the complaint read.

Mozilo repeatedly certified financial statements he knew were misleading to cover the high-risk loans the company was selling while telling a different story to investors, including employees, and ignoring analyst recommendations to compile a reserve, the law firm alleges.

The lender “failed to provide participants with complete and accurate information regarding Countrywide stock sufficient to advise participants of the true risks of investing their retirement savings in Countrywide stock,” and “failed to prudently and loyally manage the plan’s investment,” among other wrongdoings, the complaint read.

“Most of these employees weren’t risk takers, rather claims processors and line staff who go to work every morning, putting a little away every month for retirement, or to finance a child’s education,” Steve Berman, the attorney representing the employees, said in the announcement. “With Countrywide’s demise, they’ve seen their retirement funds decimated.”

But Countrywide says it did nothing improper.

“We believe our 401(k) program is properly structured and provides competitive benefits to employee participants,” Countrywide said in its statement. “Countrywide values its work force, which we believe is among the most dedicated and talented in our industry.’

Marc Cruz, the plaintiff employee named in the lawsuit, invested a portion of his salary in the 401(k) plan, which Countrywide augmented with a 50 percent match, up to 6 percent, paid entirely in company stock during 2005 and 2006, the law firm reported.

An Aug. 9 announcement containing “shocking and new risk disclosure” that raised questions about the short-term sufficiency and reliability of a reserve, the complaint read, was followed by a series of other financial disclosures that caused a series of price declines in stock.

Among the disclosures have been charges of $417 million and a loan-loss provision of $292.2 million at the end of June, which prompted shares to fall more than 10 percent to $30 per share. Then an Aug. 16 announcement that Countrywide was using all of an $11.5 billion credit line due dropped stock 30 percent to $15 per share, the law firm reported.

Shares of Countrywide, traded on the New York Stock Exchange under the symbol CFC, closed at $16.62 today, down from as high as $45.26 in January.

Countrywide also faces two lawsuits by investors accusing the company of misleading financials. One was filed by Scott & Scott LLP on behalf of common stock purchasers between Oct. 24, 2006 and Aug. 9, 2007, and the other by Lerach Coughlin Stoia Geller Rudman & Robbins LLP for shareholders going back to Jan. 2006.