Federal officials have filed securities fraud charges against two former Credit Suisse brokers, accusing the pair of securities fraud in connection with the purchase of auction rate securities (ARS) tied to high-risk subprime debt. The charges are part of the federal government's probe of wrongdoing in the ARS market.
In criminal charges filed by the U.S. Attorney's Office and a separate civil complaint brought by the U.S. Securities Exchange Commission (SEC), Eric Butler and Julian Tzolov are accused of purchasing more than $1 billion in auction rate securities for their clients, and misrepresenting that the investments were backed by federally-guaranteed collateral like student loans. In fact, the federal government alleges, the securities were backed by subprime mortgages. And once the subprime market collapsed, the customers were "stuck with at least $817 million" in fraudulently-purchased auction rate securities "that they did not want to buy and are now unable to sell," according to the SEC complaint.
Reuters reports that federal and state officials have "reached settlements with several major investment banks" who fraudulently represented that auction-rate debt "was safe and the equivalent of cash."