Two former Credit Suisse brokers have been charged with fraud and conspiracy for allegedly stuffing their clients with more than $1bn (£562m) of bonds which they claimed were safe investments, but which were in fact backed by toxic sub-prime mortgages.
Eric Butler, 36, and Julian Tzolov, 35, face up to 20 years in prison and fines of $5m if they are found guilty.
The charges announced yesterday by the US Attorney'soffice in New York and the Wall Street regulator, the Securities and Exchange Commission (SEC), represent the first criminal case brought since the market for auction-rate securities collapsed in February.
The federal indictment of Butler and Tzolov said they came up with a scheme so they could obtain higher commissions. The SEC's separate case claims that the two brokers' hundreds of retail clients had authorised them to buy only auction-rate bonds backed by government-guaranteed student loans. But, the SEC claims, the pair put their clients into a far riskier kind of investment: auction-rate securities backed by sub-prime mortgages.
When the market for these sub-prime-linked bonds failed earlier this year, the Credit Suisse clients lost their money, the US Attorney's office said.
The Swiss-owned bank said that it was cooperating with the authorities. "In September 2007, these former employees resigned after we detected their prohibited activity and promptly suspended them," it said. "Credit Suisse immediately informed our regulators."
An auction-rate security carries an interest rate that is set at a weekly or monthly auction, when existing holders can sell the bonds. For more than 20 years, the Wall Street banks which underwrote the securities also acted as "market-makers", stepping in to buy the bonds at auction if demand was weak. Since they stopped acting as buyers of last resort, almost 60 per cent of auctions have failed.
The SEC and prosecutors in several US states have reached settlements with major brokers over their handling of the market, amid claims few clients were aware of the risk these bonds could become unsellable. And from last week, regulators have been investigating 40 international and US firms, visiting those with large amounts of auction-rate securities in accounts.Reuse content