ARS Boys Under The Hammer

The auction-rate securities farce continues at a pace with more indictments, but this time it involves individuals in trouble rather than entire banks.

Federal prosecutors in Brooklyn filed charges against two former Credit Suisse brokers, Julian Tzolov and Eric Butler, for fraud in the sale of auction-rate securities to CSFB customers. Meanwhile, the SEC followed up with its own civil suit against the duo. Click here for the DOJ’s press release; here for the indictment; and here for the SEC’s complaint.

The indictment alleges that Tzolov and Butler schemed to obtain higher sales commissions by selling auction rate securities backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by student loans.

The defendant are said to have lied to clients and their employer 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. When the mortgage-backed ARS market failed, say prosecutors, the clients lost their money.

Looks like Tzolov, however, is not hanging around for the result as he is suspected of fleeing back to his native Bulgaria.

FBI Assistant Director-in-Charge Mark Mershon stated, “Investors who were told they were purchasing relatively low-risk securities backed by student loans were unwittingly purchasing high-risk mortgage-backed securities. For a nearly three-year period, what Tzolov and Butler sold their clients was a bill of goods. The FBI remains committed to policing the securities industry to protect investors from all forms of unscrupulous and illegal conduct.”

No comment has come from the defendants or their lawyers at this stage.

This, we are sure, is not the last we will have heard on the whole ARS thing nor on the hedge fund blow ups.

We wrote previously here about hedge fund rules and how they do not represent sanity when approaching this market. Although the ARS situation is a little different we do believe that reforms on hedge fund advertising and access rules could go a long way to preventing fraudulent situations occurring.

If hedge funds were able to advertise (therefore have informative web sites and information) clients would be able to evaluate those funds that perform well, those that don’t and those that are a scam. In 2007 hedge fund manager Phillip Goldstein sent the performance of his fund to a client who never actually invested. He was indicted under the hedge fund advertising rules but won his case against the SEC.

We hope the regulators will look at the various frauds and misleading situations that have happened over the last few years and look inward to assess whether the rules now need to be overhauled and brought into some semblance of sanity.