Judge rejects Countrywide's arguments: report

NEW YORK (Reuters) - Directors and officers of mortgage lender Countrywide Financial CFC.N must answer shareholder accusations of insider trading and failure to monitor lending practices that led to the company's collapse, a federal judge in California has ruled, the New York Times reported.

The New York Times said on Wednesday that Judge Mariana Pfaelzer of U.S. District Court in Los Angeles rejected arguments made for Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults.

The judge ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested "a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards," the Times said citing documents not yet publicly available.

The plaintiffs also identified "numerous red flags" that would have warned directors of increasingly risky loans made by Countrywide, the Times said, citing the judge.

"It defies reason, given the entirety of the allegations," Judge Pfaelzer wrote, "that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action."

Countrywide shareholders have lost billions of dollars since 2007 when its shares hit a high of $45.03. They closed Wednesday at $4.85.

"It is a critical step enabling Countrywide and its shareholders to hold accountable the officers and directors who looted the company and were responsible for its devastating collapse," Blair Nicholas, one of two lawyers at Bernstein Litowitz Berger & Grossmann representing the plaintiffs, told the Times.

A Countrywide spokesman declined to comment on the ruling, the Times said. A representative did not immediately return phone calls from Reuters later Wednesday.

The plaintiffs in the case told the New York Times they hoped to recover money for shareholders from Countrywide officials named in the case who sold $850 million in stock from 2004 to 2007.

The plaintiffs said the directors and officers dumped shares even as the company spent $2.4 billion to repurchase its own stock in late 2006 and early 2007.

(Reporting by Ilaina Jonas, Editing by Ian Geoghegan)