Risk & Compliance

Risk Manager Settles Insider Charges

Ex-Countrywide executive knew of an impending poor earnings report and sold short company stock in his wife’s brokerage account, the SEC says.
Stephen TaubOctober 30, 2007

The Securities and Exchange Commission has settled insider trading charges against the former executive vice president of Countrywide Financial Corp.’s Portfolio Risk Management group.

The commission alleged that Quan Zhu, who worked for the financial services firm from 1998 until he was fired in June 2007, traded in Countrywide stock while aware of confidential negative earnings information.

Zhu agreed to settle the charges, without admitting or denying the allegations, by repaying more than $35,000 in illegal trading profits and paying prejudgment interest of $2,196.33 and a civil money penalty of more than $71,000.

The SEC previously settled an insider trading case against Alan Cao, a vice president of financial planning, which it said was the tipper, and Jun Shi, another Countrywide vice president that Cao allegedly tipped.

According to the SEC, on October 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 percent on a 307 percent increase in trading volume.

The commission’s complaint alleged that by mid-October 2004, Cao tipped Zhu with material, nonpublic information that Countrywide would fall short of Wall Street analysts’ consensus earnings estimate for the third quarter.

Beginning October 15, 2004, Zhu sold shares of Countrywide stock already owned, purchased Countrywide put options, and sold short Countrywide stock in his wife’s brokerage account, according to the complaint.

A few hours after the October 20 earnings announcement, after Countrywide’s stock price had declined, Zhu purchased Countrywide stock to cover the shares he sold short and sold the put options he had purchased. Zhu’s insider trading resulted in total profit and losses avoided of $35,547.93, according to the SEC.