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U.S. Securities and Exchange Commission

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


Washington, D.C., Sept. 3, 2008 — 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 SEC 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.

"As alleged in our complaint, these two brokers foisted more than $1 billion in subprime-related securities upon unsuspecting customers to illegally obtain higher commissions from their sales," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "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, added, "This case demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities."

The SEC's complaint, filed in federal court in Manhattan, alleges that Tzolov and Butler, while employed at Credit Suisse Securities (USA) LLC 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 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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Andrew M. Calamari
Associate Director, SEC's New York Regional Office

Robert J. Keyes
Assistant Director, SEC's New York Regional Office



Modified: 09/03/2008