Julian Tzolov and Eric Butler told their customers the ARS were backed by student loans, which carry a government guarantee. In fact, they were based on much riskier underlying assets such as subprime mortgages and collateralised debt obligations, the SEC said. Such a deception would have paid off for the brokers, as student loan ARS deals carry only relatively small commissions compared with the riskier subprime ARS.
The SEC quoted emails from the two brokers to their customers in which the names of the securities had apparently been altered: for example, a security issued by Greenpoint Credit, backed by mobile home loans, was described as being issued by "Greenpoint Student Assistance", and securities issued by Calamos Strategic Total Return Fund and Glacier Funding CDO were in turn described as "Calamos Student Loan Authority" and "Glacier Education Loan" notes.
When the ARS market became illiquid in mid-2007, their corporate customers "were stuck with at least $817 million in such securities that they did not want to buy and are now unable to sell," the SEC added.
The case will be heard by the district court for the Southern District of New York. If convicted, the two men face fines and restitution orders.
See also: Banks' latest ARS settlement falls short
New York sues UBS for alleged auction rate securities fraud
Investors caught short by auction rate meltdown
Auction rates securities investigations gathering steam
The week on Risk.net, November 25-December 1, 2016Receive this by email