UPDATE 1-Ex-CS broker pleads not guilty to ARS charges

(Adds details and quotes from arraignment)

By Grant McCool

NEW YORK, Sept 5 (Reuters) - A former Credit Suisse (CSGN.VX) broker pleaded not guilty on Friday to an indictment accusing him of fraud in unauthorized dealings of auction-rate debt, securities that are the focus of an industrywide probe.

U.S. Magistrate Judge Ramon Reyes in U.S. District Court in Brooklyn released Julian Tzolov, 35, on a $3 million bail package that also restricts Tzolov to his Manhattan apartment and requires him to wear an electronic tracking anklet.

Tzolov, a citizen of Bulgaria, was arrested by the FBI at New York's John F. Kennedy airport on his return from Europe on Thursday, officials said.

Tzolov was accused in an indictment unsealed on Wednesday along with a former colleague, Eric Butler, of defrauding corporate clients through deceptive sales of auction-rate securities. Butler, 36, pleaded not guilty to the charges on Wednesday and was released on $2.5 million bail.

Tzolov's attorney, Ken Breen, told the court Tzolov "returned fully knowing of these charges and expects to return to court to ask for a lessened bail package."

Breen entered a plea of not guilty to the charges of conspiracy, securities fraud and wire fraud.

The attorney told reporters after the arraignment that Tzolov had been "taking care of family matters" in Bulgaria, but declined to provide further details.

"He is looking forward to trial where he will clear his name," Breen said. "We are going to show that sophisticated investors who are Mr Tzolov's clients knew exactly what their investments were."

In court on Friday, Assistant U.S. Attorney Greg Andres said the government asked for the series of bail conditions because they were "necessary to reduce the flight of risk."

The prosecutor said Tzolov had substantial ties to Bulgaria and that he had transferred $2.3 million outside of the United States.

In a separate civil complaint, the Securities and Exchange Commission said the two men made unauthorized purchases of more than $1 billion in auction-rate securities for corporate customers' accounts.

Regulators nationwide are investigating the auction-rate debt market. They say brokerages misled investors into believing auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash.

Much of the $330 billion market has been frozen since February, when brokerages abandoned their traditional role as buyers of last resort. (Editing by Andre Grenon)