US charges 2 Credit Suisse brokers in bln-dlr subprime fraud (AFP)

WASHINGTON (AFP) - Two Credit Suisse brokers were indicted on fraud charges Wednesday in connection with more than one billion dollars in unauthorized purchases of subprime-related securities, authorities said.

The Justice Department said an indictment was unsealed in court in Brooklyn, New York, that charges Julian Tzolov and Eric Butler, former brokers at Credit Suisse Securities, with conspiracy, securities fraud, and wire fraud.

The indictment alleges the two "schemed to obtain higher sales commissions" by selling auction rate securities (ARS) disguised as safer bonds backed by student loans.

"When the mortgage-backed ARS market failed, the clients lost their money," the Justice Department said.

The securities fraud count and the two counts of wire fraud each carry a maximum sentence of 20 years' imprisonment and a five million-dollar fine. The conspiracy count carries a maximum sentence of five years' imprisonment and a 250,000-dollar fine.

The pair were also named in a civil fraud complaint by the Securities and Exchange Commission.

The brokers "misled customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds," the SEC said.

But in fact the securities "were backed by subprime mortgages," and other debts not related to student loans.

The complaint comes amid a focus on auction rate securities, debt instruments issued by financial firms, municipalities and student loan companies, the market for which collapsed during the credit crunch.

"As alleged in our complaint, these two brokers foisted more than one billion dollars in subprime-related securities upon unsuspecting customers to illegally obtain higher commissions from their sales," said Linda Chatman Thomsen, the SEC's enforcement chief.

Andrew Calamari, associate director of the SEC's New York Regional Office, added, "This case demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities."

According to the SEC, Tzolov and Butler deceived foreign corporate customers in short-term cash management accounts by sending or directing their sales assistants to send email confirmations in which the terms "St. Loan" or "Education" were added to the names of non-student loan securities purchased for the customers.

The brokers also routinely deleted references to "CDO" or "Mortgage" from the names of the securities in these emails. As a result, the complaint alleges that customers were stuck holding more than 800 million dollars in illiquid securities after the market dried up in August 2007.