Ex-Credit Suisse Brokers Charged with ARS Fraud

The SEC sued two former brokers for selling auction-rate securities backed by subprime assets despite telling customers otherwise.


Regulators charged two former Credit Suisse brokers on Wednesday with conspiracy and securities fraud in a $1 billion scheme involving the purchase of unauthorized auction-rate securities for international corporate customers.

The Securities and Exchange Commission alleged that Julian Tzolov and Eric Butler, both vice presidents and directors at Credit Suisse until September 2007, fraudulently bought auction-rate securities for customers while telling them that the assets were backed by federally guaranteed student loans —a low-risk cash equivalent. Instead, according to the SEC, Tzolov and Butler bought risky versions of ARS that were backed by collateralized subprime mortgages, collateralized debt obligations, mobile home contracts, and loans that were not government-backed.

Tzolov and Butler bilked mainly foreign corporate customers with short-term cash management accounts, the SEC said. The scheme involved customers from places such as Canada, Panama, and Switzerland.

“These two brokers foisted more than $1 billion in subprime-related securities upon unsuspecting customers to illegally obtain higher commissions from their sales,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.

The SEC said that the scheme went on for two-and-a-half years and involved a cover-up. According to the lawsuit, Tzolov and Butler sent e-mails that falsely identified or concealed the securities they were buying. As subprime securities lost value during the credit crisis, the market for auction-rate securities froze and customers of Tzolog and Butler were stuck with $817 million in securities that they did not intend to buy and could not sell, according to the SEC.

“This case demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities,” said Andrew M. Calamari, associate director of the SEC’s New York regional office.

Attorneys representing Tzolov and Butler did not immediately return calls for comment.

Auction-rate securities are long-term bonds and preferred stocks that resemble short-term instruments because their interest rates are reset periodically—usually every 7, 28, 35, or 49 days. The rate is reset by a modified Dutch-auction process, and because investors are supposed to be able to buy and sell the securities so frequently, they have been generally regarded as equivalent to cash. The $330 billion market has been largely frozen since February as a result of the credit crisis but several banks have agreed to repurchase the securities after facing pressure from regulators.

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