(AFP) – Sep 3, 2008
WASHINGTON (AFP) — Two former Credit Suisse brokers were indicted on fraud charges Wednesday for selling one billion dollars in subprime-related securities disguised as safer investments, officials said.
The Justice Department said an indictment was unsealed in federal court in Brooklyn, New York, that charges Julian Tzolov and Eric Butler, former brokers at Credit Suisse Securities, with conspiracy, securities fraud, and wire fraud.
The indictment alleges that Tzolov, 35, and Butler, 36, "schemed to obtain higher sales commissions" by selling auction rate securities (ARS) disguised as safer bonds backed by student loans.
"Investors who were told they were purchasing relatively low-risk securities backed by student loans were unwittingly purchasing high-risk mortgage-backed securities," said FBI assistant New York director Mark Sherson.
"For a nearly three-year period, what Tzolov and Butler sold their clients was a bill of goods."
Credit Suisse spokesman David Walker said that the two former employees had left the company in September 2007 after the bank uncovered improper activity.
Tzolov and Butler "resigned after we detected their prohibited activity and promptly suspended them. Credit Suisse immediately informed our regulators and we have continued to assist the authorities," he said.
Officials said clients lost their money when the market for mortgage-backed auction-rate securities froze up in 2007.
The securities fraud count and the two counts of wire fraud each carry a maximum sentence of 20 years' imprisonment and a five million-dollar fine. The conspiracy count carries a maximum sentence of five years' imprisonment and a 250,000-dollar fine.
The pair were also named in a civil fraud complaint by the Securities and Exchange Commission.
The former brokers "misled customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds," the SEC said.
But in fact the securities "were backed by subprime mortgages," and other debts not related to student loans.
The complaint comes amid a focus on auction rate securities, debt instruments issued by financial firms, municipalities and student loan companies, the market for which collapsed during the credit crunch.
According to the SEC, Tzolov and Butler deceived foreign corporate customers in short-term cash management accounts by sending or directing their sales assistants to send email confirmations in which the terms "St. Loan" or "Education" were added to the names of non-student loan securities purchased for the customers.
The former brokers also routinely deleted references to "CDO" -- collateralized debt obligations which may be backed by mortgages -- or "Mortgage" from the names of the securities in these emails. As a result, the complaint alleges that customers were stuck holding more than 800 million dollars in illiquid securities after the market dried up in August 2007.
In recent weeks, several major US banks as well as Swiss-based banking giant UBS agreed to buy back tens of millions of dollars in auction rate securities amid concerns about how they were marketed.
Some investors have claimed that the banks misrepresented how quickly the securities could be redeemed if an investor decided to cash them in.
Auction rate securities, essentially debt instruments issued by financial firms, municipalities and student loan companies, typically have a fairly lengthy maturity. But the interest rates on such securities can be volatile and change at auctions run by the banks.
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