In an unusual twist to a Federal criminal probe relating to February's auction-rate securities ("ARS") meltdown, a former Credit Suisse broker facing charges has fled to Bulgaria, the Wall Street Journal reported today. It appears that the broker, Julian Tzolov, made misrepresentations to a number of corporate clients pertaining to various ARS issues. Tzolov allegedly told these clients that the ARS were backed by student loans when they were actually backed by mortgages. The corporate clients have recorded paper losses in the millions and are obviously unhappy. Under a new extradition treaty between the United States and Bulgaria slated to go into effect in September, it appears likely that Tzolov will face extradition.
Tzolov was hardly alone: thousands of securities brokers appear to have misrepresented ARS (wittingly or unwittingly) and each of the major broker-dealer firms appear to have systematically defrauded investors for years in connection with ARS. These Federal prosecutors had many targets to choose from.
So why have the Federal prosecutors chosen to focus on Tzolov? And is criminal prosecution really appropriate in this context? Why are the Feds so sure that Tzolov understood that mortgage-backed securities are riskier than those backed by student loans?
Posted by Paul Malmfeldt on July 31, 2008.
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