Ex-Credit Suisse brokers charged with fraud
NEW YORK - Two former Credit Suisse Group AG brokers were charged with violating securities laws by fraudulently selling corporate clients subprime mortgages linked to auction-rate securities.
Julian Tzolov, 35, and Eric Butler, 36, falsely told clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds, said Robert Nardoza, a spokesman for Brooklyn US Attorney Benton Campbell. The scheme "foisted more than $1 billion in subprime-related securities" upon customers, the Securities and Exchange Commission said yesterday.
"The defendants' fraudulent misrepresentations and 'bait and switch' tactics saddled investors with unknown risks they did not bargain for," Campbell said in a statement.
State and federal securities regulators have been probing the collapse of the $330 billion market for auction-rate securities, typically bonds with interest rates set at weekly or monthly auctions. For more than two decades, the market allowed municipalities, student-loan agencies, and closed-end mutual funds to borrow for the long-term at rates similar to short-term debt.
Tzolov and Butler were also charged with conspiracy and wire fraud. The two were originally named in a sealed indictment filed June 3. An amended, or superseding, indictment was unsealed yesterday, Nardoza said. Prosecutors declined to describe the differences between the two indictments.
Butler, who has been in federal custody, pleaded not guilty through his lawyer, Paul Weinstein. He was released on $2.5 million bond.
Bulgarian-born Tzolov isn't in custody, Nardoza said.
"I can confirm that he's out of the country," Nardoza said, adding that Tzolov hadn't been declared a fugitive.
A lawyer representing Tzolov declined to comment.
Assistant US Attorney Greg Andres said the government was seeking a substantial bond package for Butler "because the losses can be as high as $500 million."
"This is not the defense's view of the losses" in the case, said Weinstein.
The case shows how "turmoil in the subprime market has affected even investors who had no intention of buying subprime securities," said Andrew Calamari, an SEC enforcement official in New York, who is overseeing the agency's case.
Tzolov and Butler were, until September 2007, brokers who ran Credit Suisse's group that helped corporate clients manage their cash.
"These former employees resigned after we detected their prohibited activity and promptly suspended them," said Credit Suisse spokesman David Walker, in an e-mailed statement.
Tzolov and Butler told clients that auction-rate securities were low risk or that the risk of their failing was minimal because they were guaranteed by the federal government, prosecutors said.
Without telling customers, Tzolov and Butler used client funds to purchase higher-yield, mortgage-backed collateralized-debt obligations, known as CDOs, according to the indictment.
To conceal the scheme, the defendants sent clients e-mails that falsified the names of the products bought, sold, or held to create the appearance that they were backed by student loans, prosecutors said.
The scheme was discovered when the mortgage-backed securities purchased by the companies collapsed, according to the indictment.
"Eric Butler is an excellent broker who believed in the AAA securities that he sold," his attorney, said after the arraignment. 