SEC Charges Two Wall Street Brokers In Subprime-Related ASR Fraud

by Mike Godfrey, for LawAndTax-News.com, Washington

04 September 2008

The US Securities and Exchange Commission (SEC) announced on Thursday that it had charged two Wall Street brokers with defrauding their customers when making more than USD1bn in unauthorized purchases of subprime-related auction rate securities.

The commission'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 SEC alleged 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.

"As alleged in our complaint, these two brokers foisted more than USD1bn in subprime-related securities upon unsuspecting customers to illegally obtain higher commissions from their sales," explained Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, adding:

"As always, if you commit fraud, you can expect to be held accountable by the SEC. The Enforcement Division's vigilance extends throughout our financial markets, including the subprime lending and credit markets."

Andrew M. Calamari, Associate Director of the SEC's New York Regional Office, observed that:

"This case demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities."

The commission charged 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 investigation is ongoing.

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