Tzolov and Butler

On September 3, 2008 the US Securities Exchange Commission filed a Complaint in US District Court for the Southern District of New York against Julian T. Tzolov and Eric S. Butler, two former employees of Credit Suisse Securities. The Commission requested the court to restrain and enjoin the defendants from violating various sections of the securities laws; order the payment of civil penalties; order the disgorgement of "ill-gotten" gains; and anything else the SEC could want.

 

But what did these two "bad actors" really do? What was it that they did that violated the laws of the United States?

 

According to the complaint filed, there two nefarious characters had contracted with certain customers to purchase auction rate securities backed by student loans. Instead, from February of 2005 until August of 2007, these two breached the contracts and purchased auction rate securities backed by non-student loan assets. 

 

Because of the breach of contract, the customers "...were stuck with at least $817 million..." in securities. Presumably, the SEC is saying these two owe their customers the entire $817 million since no loss is claimed.

 

The SEC is claiming that the breach of contract is a violation of the securities laws which prohibit fraudulent interstate transactions [15 USC Section 77q(a)] or to employ, in connection with the purchase or sale of a security, any manipulative or deceptive device [15 USC Section 78j(b)].

 

But what does the complaint allege? Only that these two breached a contract. What the complaint does not state is:

 

1. What gives the SEC jurisdiction over contract violations;

2. What gives a federal court jurisdiction over contract violations;

3. What was the fair market value of the auction rates securities owned by the customers versus the acquisition price;

4. What was the device employed in misrepresenting the price.

 

  These are relatively simple questions that I know the Commission is reluctant to answer. [Hint to SEC: Try an ex parte proceeding in the Western District of Pa.]

 

Hopefully, defense attorneys will ask the questions.