SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud
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SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud

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September 3, 2008 – (RealEstateRama) — The Securities and Exchange Commission today charged two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities. The SEC’s Division of Enforcement in 2007 formed a subprime working group, which is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.

The complaint, filed today in federal court in Manhattan, alleges that Julian Tzolov and Eric Butler 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. Instead, the securities that Tzolov and Butler purchased for their customers were backed by subprime mortgages, collateralized debt obligations (CDOs), and other non-student loan collateral.

The complaint also alleges that Tzolov and Butler, while employed at Credit Suisse in New York, deceived foreign corporate customers in short-term cash management accounts by sending or directing their sales assistants to send e-mail confirmations in which the terms “St. Loan” or “Education” were added to the names of non-student loan securities purchased for the customers. Tzolov and Butler also routinely deleted references to “CDO” or “Mortgage” from the names of the securities in these e-mails. As a result, the complaint alleges that customers were stuck holding more than $800 million in illiquid securities after auctions for auction rate securities began to fail in August 2007. Those holdings have since significantly declined in value.

The Commission’s complaint charges Tzolov and Butler with securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest on a joint and several basis, and civil money penalties.

The Commission acknowledges assistance provided by the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter.

The Commission’s investigation is continuing.

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