NEW YORK -- 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 so-called 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 as well as to bail jumping. Authorities chose to detain him pending a late October sentencing.
Paul Weinstein, a partner at Emmet, Marvin & Martin LLP representing Butler, urged the jury to ignore Tzolov's testimony against his client. "He was here, and he infected this case," the lawyer argued.
Butler faces one count each of securities fraud, wire fraud and conspiracy. His trial began on July 23, and is one of the first criminal prosecutions since the credit crisis started taking hold two years ago.
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 federally guaranteed student loans, when in fact they got securities backed by collateralized debt obligations or CDOs, often tied to subprime mortgages and other risky loans.
Prosecutors contend that companies that were deceived include GlaxoSmithKline Plc (GSK.L: Quote, Profile, Research, Stock Buzz), Potash Corp of Saskatchewan Inc (POT.TO: Quote, Profile, Research, Stock Buzz), Roche Holding AG (ROG.VX: Quote, Profile, Research, Stock Buzz) and STMicroelectronics NV (STM.PA: Quote, Profile, Research, Stock Buzz).
"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 Aug. 6 that he and Butler would sometimes delete "red flag" terms, such as CDOs.
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 to buy back $550 million of auction-rate debt from retail investors and pay a $15 million fine. In July, it joined 10 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)
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