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NY broker trial focus is on failed ARS market
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(July 23, 2009 - Thursday) - http://www.reuters.com/article/domesticNews/idUSTRE56M69I20090723
By Grant McCool
NEW YORK (Reuters) - In the opening of one of the first fraud trials arising from the credit crunch, a U.S. prosecutor accused a former Credit Suisse Group AG broker of lying to clients about auction rate securities deals and the defense emphasized the collapse of the market.
Wall Street broker Eric Butler, 37, and a colleague Julian Tzolov were indicted last September on charges of fraudulently dealing in $1 billion worth of subprime mortgage-backed auction rate securities (ARS) for corporate clients who had ordered safer investments.
Prosecutors said they were trying to earn millions of dollars more in commissions than they would buying securities backed by government-guaranteed student loans.
Tzolov, 36, pleaded guilty to a series of charges in Brooklyn federal court on Wednesday and only Butler is on trial in the same court. He pleaded not guilty to the indictment.
"The defendant and his partner promised something better, a better opportunity," U.S. prosecutor Greg Andres said in opening arguments to the jury. "They did not honor that promise. They invested in securities the clients didn't ask for and didn't want."
The $330 billion market for mortgage-backed ARS, debt reset at periodic auctions by Wall Street firms who touted it as a safe, cash equivalent, collapsed in February 2008. There have been several investigations nationwide leading to settlements in which firms paid back investors.
Butler's lawyer Paul Weinstein said in his opening argument that Credit Suisse's corporate clients made a lot of money for years from their investments.
"Then something happened, the market failed," Weinstein told the jury. "One thing is for certain, the failure in the market had nothing to do with Eric Butler or anyone in his company."
Butler is being tried on charges of securities fraud and wire fraud and conspiracy charges. The broker faces a possible prison sentence of up to 20 years if the jury convicts him.
Tzolov, who fled house arrest in his Manhattan apartment in May and was arrested in Spain on July 15, pleaded guilty on Wednesday to fraud charges and bail jumping in the case before Judge Jack Weinstein.
Tzolov told the judge he and Butler sent emails to six companies in Canada, Britain, Switzerland, Bermuda and Panama, falsifying the names and nature of the securities to mislead Credit Suisse clients.
Credit Suisse has said Tzolov and Butler resigned in 2007 after the firm suspended them for "prohibited activity." The firm said it cooperated with authorities in the matter.
They were accused of fraudulently trying to earn higher commissions by purchasing ARS collateralized by subprime mortgages, collateralized debt obligations, mobile home contracts and other nonfederally guaranteed nonstudent loan collateral.
Tzolov could get up to 20 years in prison for pleading guilty to each of the charges of securities fraud, wire fraud and conspiracy. He could be sentenced to up to 10 more years for bail jumping. Sentencing is set for October 27.
Tzolov, a Bulgarian national, also pleaded guilty to a charge of visa fraud for illegally obtaining and using a U.S. permanent residence card from October 2005 until his indictment in September 2008.
The case is USA v Tzolov and Butler 08-370 in U.S. District Court for the Eastern District of New York (Brooklyn)
(Reporting by Grant McCool; editing by Andre Grenon)
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