New Revelations Surface In Auction-Rate Probe
The net continues to widen in the auction-rate securities probe. Now, federal prosecutors are investigating whether two former brokers from Switzerland’s second-largest bank lied to investors about how they placed their money into the short-term securities.
The investigation focuses on two New York-based brokers, Eric Butler and Julian Tzolov, who resigned from Credit Suisse Group on Sept. 7, 2007, following accusations from clients that they had been misled about the risks of auction-rate securities, which turned out to be backed by risky collateralized debt obligations (CDOs).
Both men later took jobs with Morgan Stanley, and were reportedly fired on July 7. They also had been employed with Lehman Brothers Holdings and CIBC World Markets Corp.
First reported July 9 in the Wall Street Journal, the investigation, which doesn’t target the Swiss bank, is the first criminal probe stemming from the collapse of the auction-rate market in February.
The probe into the former Credit Suisse brokers comes only weeks after Massachusetts Secretary of State William Galvin filed a civil suit against UBS for fraud and misconduct over auction-rate securities. Among the charges, Galvin alleges UBS knowingly informed investors that auction securities were “safe, liquid cash alternatives†when it knew, in fact, they were not.
In addition, Galvin charged UBS with ramping up its marketing efforts to sell auction-rate securities to various individual investors at a time when the firm’s brokers had prior knowledge that the auction market was headed for failure.
Investor problems involving the two former Credit Suisse brokers were first reported by the Wall Street Journal last fall. At the time, the two men helped run a $15 billion cash-management service for corporate clients. The service offered slightly higher yields than money funds, reaching 5% in some cases, according to the paper.
The commissions that brokers receive on auction-rate securities are typically three to four times as large as for other short-term fixed-income securities. According to the July 9 Wall Street Journal article, Credit Suisse brokers typically received a portion of 0.1% to 0.25% for auction-rate purchases, but received no commission for putting clients into money market funds. When the men left Credit Suisse last October, “their total fees and commissions for a 12-month time period reportedly were $6.4 million and prior assets under management were about $2.3 billion.â€
To date, client complaints against Eric Butler and Julian Tzolov have resulted in at least two civil settlements. Records from the Financial Industry Regulatory Authority (FINRA), the non-governmental watchdog group of U.S. securities firms, show civil settlements of $7 million and $3.6 million were reached last fall. When the auction-rate market seized up in February of this year, additional complaints were filed.
Until now, the fallout from the frozen state of the auction-rate market has been civil lawsuits and individual arbitration claims. The appearance of criminal charges against two former Credit Suisse Group brokers, however, may mean the auction-rate securities debacle is headed down a new path, one in which Wall Street is forced to pay up or come up with a plan to appease investors who’ve been financially burned in the auction-rate ordeal.
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