A former Credit Suisse Group AG 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, accusing the discount brokerage of civil fraud for misleading investors about auction-rate debt.
Prosecutors have said companies harmed by Butler and Tzolov included fertilizer maker Potash Corp of Saskatchewan Inc, drugmaker Roche Holding AG and semiconductor company STMicroelectronics NV, 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.