Ex-Credit Suisse brokers accused in fraud scheme

By Grant McCool

NEW YORK (Reuters) - Two former Credit Suisse brokers were charged on Wednesday with fraud and conspiracy over deceptive sales of subprime-related auction-rate debt, government officials said, part of an industrywide probe of the securities.

The U.S. Attorney's office in Brooklyn and the Securities and Exchange Commission accused the former brokers, Eric Butler and Julian Tzolov, of misleading customers into believing that auction-rate securities in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds.

Credit Suisse Group AG (CSGN.VX) said in a statement that it was cooperating with authorities over the former employees.

"In September 2007, these former employees resigned after we detected their prohibited activity and promptly suspended them," the statement said. "Credit Suisse immediately informed our regulators, and we have continued to assist the authorities."

Butler, 36, pleaded not guilty to charges of conspiracy, securities fraud and wire fraud in U.S. District Court in Brooklyn Wednesday afternoon after he was arrested by the FBI at his Manhattan apartment Wednesday morning.

Butler was released on bail by U.S. Magistrate Judge Ramon Reyes after posting a $2.5 million bond backed by his apartment.

His lawyer, Paul Weinstein, said Butler "believed he was doing the best for his clients, and they agreed until the entire auction rate securities market fell, which had nothing to do with him, and he will defend the charges."

Tzolov, 35, was believed to be out of the country, according to a person with knowledge of the investigation. Assistant U.S. Attorney Greg Andres, speaking after the court hearing, declined to comment on Tzolov's whereabouts.

Tzolov's lawyer did not immediately respond to a telephone message requesting comment.

COMMISSIONS SCHEME

When the mortgage-backed auction-rate securities market failed earlier this year, Credit Suisse clients lost their money, the U.S. Attorney's office said.

Prosecutors in several states and the SEC have reached settlements with several major investment banks in the past month over their handling of the risky debt.

Starting last week, financial industry regulators have been investigating 40 firms throughout the industry, visiting those with large amounts of auction-rate securities in accounts, sources familiar with the probe said.

They include international and U.S. companies of various sizes, affiliates of banks and insurers, and independent firms.

According to regulators, brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash.