JURIST - Paper Chase: SEC charges ex-brokers with subprime securities misrepresentation

[JURIST] The US Securities and Exchange Commission (SEC) [official website; JURIST news archive] has charged [complaint, PDF] two former brokers for Credit-Suisse [corporate website; JURIST news archive] with defrauding clients of $1 billion by selling subprime securities that they represented as being backed by government-guaranteed student loans. The SEC complaint, filed Wednesday in the US District Court for the Southern District of New York [official website], accuses Tzolov and Butler of increasing their commissions by selling auction-rate securities [New York Times backgrounder] that they told clients were "low risk, highly liquid alternatives" to bank deposits and money market funds. The investments were in fact secured by subprime mortgages and other risky collateral. The former brokers are charged with violating anti-fraud provisions of the Securities Exchange Act of 1934, the Securities Act of 1933 and SEC regulations [text]. The SEC is asking the court to order injunctive relief, civil monetary penalties and disgorgement of profits, plus interest. Butler has pleaded not guilty [Reuters report]. Andrew M. Calamari, associate director of the SEC's New York Regional Office, said [press release] that the case "demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities." AFP has more. The Wall Street Journal has additional coverage.

Among other recent developments in the so-called subprime crisis [academic backgrounder], the US Court of Appeals for the Ninth Circuit ruled [JURIST report] last month that the federal Truth in Lending Act does not give borrowers a right to relief from lenders who fail to conspicuously disclose certain loan information. In July, the US Senate passed a bill [JURIST report] which would give municipalities grants to buy and redevelop foreclosed properties and would allow the federal government to provide additional financial backing to the publicly-supported Fannie Mae and Freddie Mac mortgage companies.

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