UPDATE 3-Ex-Credit Suisse broker convicted of fraud

* Conviction could lead to 45 years in prison

* Former colleague testified against ex-broker

* Investors lost nearly $1 billion, prosecutors say
(Recasts several paragraphs, adds prosecutor's comment)

By Jonathan Stempel

NEW YORK, Aug 17 (Reuters) - A former Credit Suisse Group
AG (CSGN.VX) (CS.N) broker was convicted by a federal jury of
fraud for steering corporate clients into risky auction-rate
securities, causing nearly $1 billion of losses.

The Brooklyn, New York, jury on Monday found Eric Butler
guilty of securities fraud and two counts of conspiracy after
less than a day of deliberation, following a three-week trial.

Prosecutors accused Butler and co-defendant Julian Tzolov
of buying securities backed by subprime mortgages and other
risky debt in order to generate higher commissions, while
misleading clients into believing they were getting securities
backed by federally guaranteed student loans.

The scheme unraveled in August 2007 when the market for
mortgage-backed collateralized debt obligations stalled and
auctions for debt backed by those securities began to fail,
prosecutors said.

"The defendants' fraudulent misrepresentations saddled
investors with unknown risks they did not bargain for," said
Benton Campbell, the U.S. Attorney for the Eastern District of
New York, in a statement.

Butler, 36, faces up to 45 years in prison, the U.S.
Attorney's office said. Tzolov pleaded guilty on July 22 to
fraud charges and to bail jumping, and later testified against
Butler. He is awaiting sentencing.

Paul Weinstein, a partner at Emmet, Marvin & Martin LLP who
represents Butler, did not immediately return a call seeking
comment.

The case is one of the first criminal prosecutions stemming
from the credit crisis that started taking hold two years ago.

Also on Monday, New York Attorney General Andrew Cuomo sued
Charles Schwab Corp SCHW.O, accusing the discount brokerage
of civil fraud for misleading investors about auction-rate
debt. [ID:nN17307188]

Prosecutors have said companies harmed by Butler and Tzolov
included fertilizer maker Potash Corp of Saskatchewan Inc
(POT.TO), drugmaker Roche Holding AG (ROG.VX) and semiconductor
company STMicroelectronics NV (STM.PA), among others.

"It was a bait-and-switch scheme," Assistant U.S. Attorney
John Nowak said in closing arguments on Friday. "They deceived
clients who had trusted them."

Many investors were stuck holding illiquid auction-rate
debt after the $330 billion market began to seize up in 2007
and collapsed in February 2008. Regulators say many brokers in
the industry misrepresented the debt as being as safe as cash.

Last September, Credit Suisse agreed with regulators to buy
back $550 million of auction-rate debt from retail investors.

The case is U.S. vs. Tzolov et al, U.S. District Court,
Eastern District of New York (Brooklyn), No. 08-370.
(Reporting by Jonathan Stempel. Editing by Robert MacMillan,
Gerald E. McCormick and Matthew Lewis)