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NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission on Thursday filed securities fraud charges against former Countrywide Chief Executive Angelo Mozilo and two other former executives.

The trio was charged with deliberately misleading investors by telling them the company was a quality lender of mostly prime mortgages and had prudent underwriting standards, while it actually was engaging in very risky lending practices in order to build and maintain market share.

Mozilo was also charged with insider trading for selling his Countrywide stock for nearly $140 million in profits while knowing that Countrywide's business model was deteriorating.

Along with Mozilo, the SEC charged former Chief Operating Officer and President David Sambol and former Chief Financial Officer Eric Sieracki with hiding the company's true practices and condition from shareholders.

"This is the tale of two companies," said Robert Khuzami, director of the SEC's Division of Enforcement. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk."

From 2005 to 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, according to the SEC. The senior executives knew that defaults and delinquencies would rise.

In particular, the SEC pointed to Countrywide's increased origination of pay-option mortgages, which allow borrowers to choose their monthly payments even if they don't cover the entire interest amount. While the lender maintained they were being prudently underwritten, the SEC says, Mozilo wrote in an email that there was evidence that borrowers were lying on their applications and many would be unable to handle the eventual higher payments.

Also, Mozilo was very concerned about the lender's 80-20 mortgage product, which allowed borrowers to take out two loans to cover the entire cost of the house. He called it "the most dangerous product in existence."

"In all my years in the business I have never seen a more toxic prduct[sic]," he wrote in an email to Sambol, according to the SEC.

By the end of 2006, Countrywide's underwriting guidelines were as wide as they had ever been, the SEC said. Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though these mortgages had a higher rate of default.

The SEC's civil action seeks financial penalties and the return of ill-gotten gains.

An attorney for Mozilo called the SEC's allegations "baseless."

"Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide," said David Siegel. "Those sales were entirely lawful, complied with applicable laws and regulations, and were made under the terms of a series of written sales plans which were reviewed and approved by responsible professionals."

Siegel said it is "demonstrably false" that Mozilo knew about risky lending practices at Countrywide and refused to disclose them. "The mix and risks of Countrywide's loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace."

Sambol's attorney said the SEC has no case against his client.

"Indeed, Dave's own statements during investor presentations and earnings calls demonstrate that he provided the detailed, accurate information the SEC now falsely asserts was absent from Countrywide's public filings," said Walter Brown.

Sieracki's attorney said her client did not violate any securities laws.

"The Company provided robust, timely information concerning the risks affecting its business and monthly information on loan delinquencies," said attorney Shirli Weiss.

Countrywide acquired by Bank of America

Mozilo, who founded the company in a New York apartment, built Countrywide into the nation's largest mortgage lender. But Countrywide buckled during the housing meltdown and was acquired last year by Bank of America (BAC, Fortune 500).

BofA came under heavy fire for originally naming Sambol to lead the combined company's mortgage operations. A few months later, the bank reversed course before the acquisition was completed, saying Sambol would retire and appointing a BofA veteran to the top mortgage post instead.

"Current economic and business conditions have highlighted the need for strong and focused executive leadership with a deep understanding of the Bank of America culture and operating model," said BofA Chief Executive Lewis said at the time.

Soon after the acquisition closed, BofA entered into an $8.7 billion settlement with a group of state attorneys general over Countrywide's lending practices. The bank agreed to modify the loans of certain Countrywide borrowers with subprime and pay-option mortgages.

In the first four months of the program, BofA contacted more than 100,000 potentially eligible borrowers, twice the requirement in the agreement, and completed modifications for more than 50,000 of them.

Bank of America referred comment to Siegel, saying the Countrywide executives were not employed at the company following the acquisition.

Mozilo became a poster boy for the subprime crisis. He reportedly stood to collect a windfall of $115 million in the $4 billion sale to BofA. But after facing heavy criticism from lawmakers, Mozilo said he would forfeit $37.5 million in payments tied to the deal.

CNN Senior Producer Scott Spoerry contributed to this report.