A former Credit Suisse Group AG broker used bait-and-switch tactics in fraudulently steering corporate clients into risky mortgage investments they did not want, federal prosecutors said on Friday.
In closing arguments of a roughly three-week trial, the government portrayed Eric Butler as having taken advantage of his employer's reputation and the trust his clients put in him to buy complex debt that become illiquid, rather than the safe federally guaranteed student loans his clients had wanted.
Prosecutors last September had accused Butler and his one-time colleague Julian Tzolov of lying to clients about their purchases of close to $1 billion of auction-rate securities from 2004 to 2007.
It was a bait-and-switch scheme, Assistant U.S. Attorney John Nowak told the jury in federal court in New York's borough of Brooklyn. They deceived clients who had trusted them, and that's why the scheme worked.
Tzolov testified against his former colleague as a government witness after pleading guilty on July 22 to fraud charges in the case and to bail jumping. Authorities caught him in Marbella, Spain shortly before the trial began, and chose to detain him pending a late October sentencing.
Prosecutors contend that companies that were deceived include Potash Corp of Saskatchewan Inc, Roche Holding AG and STMicroelectronics NV.
Paul Weinstein, a partner at Emmet, Marvin & Martin LLP representing Butler, pinned blame for wrongdoing on Tzolov, whom he said lied to prosecutors and in testimony about Butler's role.
He's the most unreliable person any of us have seen with our own eyes, Weinstein said about Tzolov. His testimony should be completely rejected.
Weinstein also argued that purchasers of the riskier debt understood what they were buying. These are some of the most sophisticated investors in the world, he contended.
Butler faces one count each of securities fraud, wire fraud and conspiracy. His case is one of the first criminal prosecutions stemming from the credit crisis that started taking hold two years ago.
AUCTION FAILURES RESULT IN LOSSES
Regulators say many brokers in the industry represented auction-rate debt as being as safe as cash.
Yet auctions began to fail in August 2007, and the $330 billion market collapsed in February 2008 when dealers stopped taking part in auctions. This left many investors unable to sell the debt or able to sell it only at a loss.
The government accused Butler and Tzolov of misleading clients into believing they were getting securities backed by the student loans, when in fact they got securities backed by collateralized debt obligations, or CDOs, often tied to subprime mortgages and other risky loans.
Whether the clients were gullible or sophisticated, it doesn't matter, Nowak told the jury. The law protects all kinds of victims.
Tzolov had testified on August 6 that he and Butler would sometimes delete red flag terms, such as CDOs, to cover up the fraud to clients.
He said they misled clients so as to win higher commissions, and because they could not gather enough of the student loan securities that clients wanted.
Last September, Credit Suisse agreed with regulators to buy back $550 million of auction-rate debt from retail investors and pay a $15 million fine.
In July it joined 10 other firms that together agreed to buy back more than $61 billion of the debt in final settlements with New York Attorney General Andrew Cuomo.
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 Gerald E. McCormick, Phil Berlowitz)