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Yesterday, at the federal courthouse in Brooklyn, United States District Judge Jack B. Weinstein sentenced Eric Butler, a former Credit Suisse broker, to five years’ imprisonment, three years of supervised release, $5 million fine, and forfeiture of $250,000 for securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud. Butler was convicted following a three-week jury trial in August 2009.
The sentencing proceeding was announced by Benton J. Campbell, United States Attorney for the Eastern District of New York.
The evidence at trial established that Butler and Julian Tzolov, another former Credit Suisse Broker, defrauded their clients in order to obtain higher sales commissions.
Butler and Tzolov sold auction rate securities (“ARS”) backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by government-guaranteed student loans. Butler and Tzolov told their clients that student loan-backed ARS were very low-risk investments guaranteed by the United States government and that the market for the securities was very liquid. As a result, a number of the companies agreed to invest money in these ARS. However, without the knowledge or consent of the companies, Butler and Tzolov began to use the companies’ funds to purchase riskier higher-yield, mortgage-backed collateralized debt obligations, or “CDOs,” which paid Butler and Tzolov higher commissions. CDOs are asset-backed products built from a portfolio of fixed-income assets, including mortgages, subprime mortgages, and second mortgages, many of which were not guaranteed by the government. Butler and Tzolov concealed their scheme by falsifying the names of the ARS the clients bought and otherwise misleading the clients into believing they had bought ARS backed by student loans. In approximately August 2007, the scheme was discovered when the market for the mortgage-backed CDOs purchased by the companies collapsed and various auctions for CDO-ARS began to fail.
“The defendant’s fraud scheme aimed at enriching himself at the expense of his investors, who suffered staggering losses,” stated United States Attorney Campbell. “Those who engage in these schemes will be investigated and prosecuted to the full extent of the law.” Mr. Campbell expressed his grateful appreciation to the Federal Bureau of Investigation and the United States Securities & Exchange Commission for their assistance during the trial.