The feds yesterday charged two former Credit Suisse brokers with fraudulently swapping assets backed by safe student loans for more than $1 billion in junk mortgages as authorities continue their probe into shady sales of auction-rate securities.
Eric Butler and Julian Tzolov were indicted on charges including securities fraud and conspiracy. They face up to 65 years in prison and fines of more than $15 million.
They’re also facing civil charges from the Securities and Exchange Commission, which also unleashed its case yesterday.
Butler, 36, was arrested yesterday morning and brought to a federal court in Brooklyn, where he pleaded not guilty and was released on $2.5 million bail, secured by his TriBeCa apartment.
Tzolov, 35, wasn’t arrested because he’s not in the country, said Robert Nardoza, a spokesman for the US Attorney’s Office of New York’s Eastern District, which is bringing the case.
Tzolov is believed to be in his native Bulgaria, according to two people close to the situation. Both added, however, that he’s not yet considered a fugitive because there are indications he may return to face the music.
Butler’s attorney said “he believed he was doing the best” for his clients and “will defend the allegations.” Tzolov’s attorney declined to comment.
The charges come as federal authorities and investigators from several states look into whether investors were duped into buying auction-rate bonds that weren’t as safe as advertised. The $330 billion auction rate securities market came to a grinding halt in February as a result of the credit crunch.
The duo carried out the scheme, which involved falsifying information in e-mails, in an effort to rake in higher commissions, according to the indictment papers.
After promising clients securities backed by federally guaranteed student loans, they allegedly swapped them out for higher paying auction-rate securities backed by subprime mortgages and other risky assets.
In July 2007, for example, a client asked Tzolov to invest $35 million in “college debt,” but Tzolov ignored the request and bought securities backed by low-quality subprime loans, according to the SEC complaint.
Later that day, Tzolov assured the customer that the money was invested in “student loans” that he said were “guaranteed by the US Department of Education.”
The scheme unraveled in August 2007, when several subprime investments collapsed. The two resigned from Credit Suisse after the bank discovered their ruse and suspended them.