Legal News

Former Brokers Indicted on Auction-Rate Securities Fraud Charges

By Ashby Jones

The fallout from the auction-rate securities debacle continued on Wednesday morning, but this time it involved individuals in trouble rather than entire banks. Federal prosecutors in Brooklyn filed charges against two former Credit Suisse brokers, Julian Tzolov and Eric Butler, for fraud in the sale of auction-rate securities to CSFB customers. Meanwhile, the SEC followed up with its own civil suit against the duo. Click here for the DOJ’s press release; here for the indictment; and here for the SEC’s complaint.

The indictment alleges that Tzolov and Butler schemed to obtain higher sales commissions by selling auction rate securities backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by student loans. The defendants allegedly concealed their scheme by falsifying the names of the ARS the clients bought and otherwise misleading the clients into believing they had bought ARS backed by student loans. When the mortgage-backed ARS market failed, say prosecutors, the clients lost their money.

For background on the situation, click here for Amir Efrati and Randall Smith’s July article on Tzolov and Butler. Tzolov is believed to have fled to his native Bulgaria.

FBI Assistant Director-in-Charge Mark Mershon stated, “Investors who were told they were purchasing relatively low-risk securities backed by student loans were unwittingly purchasing high-risk mortgage-backed securities. For a nearly three-year period, what Tzolov and Butler sold their clients was a bill of goods. The FBI remains committed to policing the securities industry to protect investors from all forms of unscrupulous and illegal conduct.”

Kenneth Breen, a lawyer at Paul Hastings representing Tzolov, declined comment. Paul Weinstein of Emmit, Marvin & Martin, did not immediately return a call seeking comment.

Photo: Getty Images

Full post as published by Law Blog - WSJ.com on September 03, 2008 (boomark / email).