Sep 3, 2008 11:00 am US/Pacific
SEC Accuses 2 Brokers Of $1B Subprime Fraud
WASHINGTON (AP) ―
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Traders work on the floor of the New York Stock Exchange in New York City. (File)
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Federal regulators on Wednesday accused two former Wall Street brokers of defrauding their customers by making more than $1 billion in unauthorized purchases of securities tied to subprime mortgages.
The Securities and Exchange Commission alleged in a civil lawsuit that two former Credit Suisse Securities brokers led corporate customers to believe that auction-rate securities being purchased in their accounts were backed by federally-guaranteed student loans and were safe like cash.
The SEC said the securities were backed by subprime mortgages, collateralized debt obligations and other high-risk investments. The agency is seeking unspecified restitution and civil fines against the brokers, Julian Tzolov and Eric Butler, who were suspended by Credit Suisse last year.
Attorneys representing Tzolov and Butler didn't immediately return telephone calls seeking comment Wednesday afternoon.
Credit Suisse said the two resigned last September "after we detected their prohibited activity and promptly suspended them."
The New York investment firm said it immediately informed the SEC of their activities and has continued to assist the agency in its investigation.
Andrew Calamari, associate director of the SEC's New York regional office, said the case shows "how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities."
In its suit filed in federal court in Manhattan, the SEC said Tzolov and Butler deceived foreign corporate customers by sending them e-mail confirmations in which the terms "St. Loan" or "Education" were added to names of other types of securities purchased for the customers.
The two brokers also frequently deleted references in the e-mails to "CDO," for collateralized debt obligations, or "mortgage" from the names of the securities purchased, the agency said. CDOs are complex financial instruments that combine various slices of debt.
As a result, customers were stuck holding more than $800 million in securities that lost their liquidity and value when the market for auction-rate securities began to collapse in August 2007, according to the SEC.
In recent months at least eight major investment banks, including Merrill Lynch & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, have signed deals with federal and state regulators to buy back more than $50 billion worth of auction-rate securities. The regulators alleged that the banks misled customers into believing that the investments were safe.
(© 2009 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)
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