Aug. 18 (Bloomberg) -- Former Credit Suisse Group AG broker Eric Butler was convicted of fraudulently selling millions of dollars in subprime securities to corporate clients that allowed him to generate higher commissions.

Butler, 37, was found guilty on all three counts after two hours of jury deliberations in federal court in Brooklyn, New York. Co-defendant Julian Tzolov, 36, who was returned to New York from Spain on July 20 after fleeing prosecution, pleaded guilty to conspiracy, wire fraud and securities fraud July 22. He testified as a prosecution witness against Butler, his former partner, during the three-week trial.

Butler and Tzolov were indicted last year, charged with conducting what prosecutors said was an illegal scheme in which they falsely told clients their products were backed by federally-guaranteed student loans and a safe alternative to bank deposits or money market funds. The products were actually linked to auction-rate securities.

Butler, convicted of conspiracy to commit securities fraud, securities fraud and conspiracy to commit wire fraud, faces a maximum sentence of 45 years in prison, prosecutors said. U.S. District Judge Jack Weinstein said yesterday he probably won’t impose the term sought by prosecutors when he sentences both men on Oct. 27, saying he believed they operated in a “culture of corruption.”

‘Pernicious’

The judge asked lawyers for both Butler and the government, when they file sentencing papers, to put Butler’s acts in the context of “how pernicious and pervasive was the culture of corruption, lack of regulation” and “serious negligence in the financial services industry in supervising people like this.”

The fraud “foisted more than $1 billion in subprime- related securities” on customers, the Securities and Exchange Commission said when Butler and Tzolov were first accused.

Assistant U.S. Attorney John Nowak told jurors in closing arguments that Butler and Tzolov ran a high-stakes “bait and switch,” promising clients one product and delivering another to get higher commissions for themselves.

Tzolov, who is awaiting sentencing, was a fugitive for three months after fleeing in May while free on $3 million bond.

Higher Commissions

He was arrested July 15, just outside Marbella, Spain, accompanied by a bodyguard and carrying false documents, Spanish authorities said.

The two men were employed from November 2003 to September 2007 as managing directors in Credit Suisse’s private banking division. Butler ran Credit Suisse’s corporate cash management group, a division that helped clients manage excess corporate cash holdings.

The men sold $900 million in unwanted subprime-related securities to customers, said Tzolov, who spent almost two full days on the witness stand implicating Butler under questioning by the government.

Under questioning from prosecutors, Tzolov testified that he and Butler worked together to defraud investors including GlaxoSmithKline Plc, Roche Holding AG and Potash Corp. of Saskatchewan.

He told jurors that he and Butler were good friends who worked closely together, sharing clients, commissions and work responsibilities.

Falsified Names

Without telling customers, they used client funds to purchase higher-yielding, mortgage-backed collateralized debt obligations, or “CDOs,” according to the indictment. These securities are asset-backed products built from a portfolio of fixed-income assets, including mortgages, subprime mortgages and second mortgages.

The CDO auction-rate securities provided a higher yield, posed a greater risk and paid Tzolov and Butler higher commissions, prosecutors said. Tzolov said it the allure of the commissions that prompted him and Butler to sell their clients riskier securities than they wanted.

To conceal their scheme, the defendants sent clients e- mails that falsified the names of the products bought, sold or held to create a false appearance that the auction-rate securities were backed by student loans, prosecutors said.

Butler’s lawyer, Paul Weinstein, told jurors that his client’s customers were “some of the most sophisticated investors in the world” who knew what they were buying.

Butler Will Appeal

Weinstein and his co-counsel, Robert Henoch, questioned corporate clients about how closely they monitored Credit Suisse documents that Butler and Tzolov sent them about the securities they were buying. He argued that the companies made a lot of money in auction-rate securities and only complained after the market failed.

Paul Weinstein said yesterday after the verdict that Butler’s conviction will be appealed.

“We respectfully disagree with the verdict,” he said in an e-mailed statement. “Everybody in the financial community believed that the bonds sold in this case were of the highest quality and were safe short--term investments, before the market failed in August 2007. This market failure had nothing to do with Eric Butler.”

‘Unknown Risks’

“This defendant’s fraudulent misrepresentations saddled investors with unknown risks they did not bargain for,” Brooklyn U.S. Attorney Benton Campbell said in an e-mailed statement. “This case shows that those who engage in such schemes will be held accountable for their criminal activities,” he said.

David Walker, a spokesman for Zurich-based Credit Suisse, said the bank informed regulators of the fraud in 2007 and has been cooperating with authorities.

Butler remains free on bond under orders to wear an ankle bracelet for electronic monitoring.

Tzolov, a native of Bulgaria, faces a potential life prison term when he is sentenced Oct. 27, Assistant U.S. Attorney Greg Andres said. The prosecutor said the term could be substantial because Tzolov’s fraud exceeded $400 million. The judge may impose a lesser term.

The case is U.S. v. Tzolov, 08-CR-370, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporters on this story: Thom Weidlich in U.S. District Court for the Eastern District of New York in Brooklyn at tweidlich@bloomberg.net; Patricia Hurtado in U.S. District Court for the Eastern District of New York in Brooklyn at pathurtado@bloomberg.net; Bob Van Voris in federal court in Brooklyn, New York, at tweidlich@bloomberg.net.

Last Updated: August 18, 2009 00:01 EDT