Brokers Charged With Baiting Customers Into High-Risk Buys

Two brokers who worked at Credit Suisse have been indicted on charges that they defrauded clients in a mortgage-backed securities scheme.

Julian Tzolov and Eric Butler are accused of running a bait-and-switch operation that boosted their commissions. Separately, Morgan Stanley filed a lawsuit against Mr. Tzolov seeking to recoup $4.45 million it loaned him before it knew of the allegations.

According to the indictment, the brokers sold what their clients thought were low-risk securities backed by student loans, but were actually volatile securities backed by mortgages. When the mortgage market tanked, the clients lost their money.

"The defendants' fraudulent misrepresentations and 'bait-and-switch' tactics saddled investors with unknown risks they did not bargain for," the Eastern District Attorney, Benton Campbell, said in a press release.

An attorney for Mr. Butler, Paul Weinstein, called Mr. Butler "an excellent broker" who believed in the investments that he sold, which are known as auction-rate securities.

"He believed he was doing the best for his clients, and they agreed, until the entire auction-rate security market failed, which had nothing to do with him," Mr. Weinstein said. Mr. Tzolov's attorney could not be reached for comment yesterday evening.

In a statement, Credit Suisse said both brokers left the company in September 2007 after it detected their scam.

They briefly joined Morgan Stanley that same month, according to a lawsuit filed in the Southern District court yesterday. Morgan Stanley fronted Mr. Tzolov $4.45 million, the suit states, but soon fired him and never got its money back.