Former Credit Suisse Group AG (CSGN) broker Eric Butler had his securities-fraud conviction overturned by a federal appeals court, which ruled that Brooklyn, New York, was the wrong venue for the trial on the charge.
The U.S. Court of Appeals in New York today upheld Butler’s conviction on two conspiracy counts. Butler was found guilty in 2009 of fraudulently selling securities that cost investors more than $1.1 billion in losses.
“No conduct that constituted the offense took place in the Eastern District” of New York, which includes Brooklyn, the court ruled.
Butler and his partner Julian Tzolov were accused of intentionally misleading clients about securities purchased on their behalf, falsely claiming they were backed by federally guaranteed student loans. The men told clients the investments, actually backed by riskier corporate debt and subprime mortgages, were a safe alternative to bank deposits or money- market funds, according to prosecutors in the office of U.S. Attorney Loretta Lynch in Brooklyn.
“We will review the Second Circuit’s decision and consider our options,” Robert Nardoza, a spokesman for Lynch, said in an e-mail.
“We’re grateful that the court reversed on the substantive count and would have preferred an outright reversal,” Steven F. Molo, a lawyer for Butler at MoloLamken LLP in Manhattan, said in a phone interview.
The appeals panel said that, because of its decision, Butler will have to be resentenced. In January 2010, U.S. District Judge Jack B. Weinstein sentenced Butler to five years in prison on each count, to be served concurrently. He has been out on bail pending his appeal.
Butler had also been fined $5 million on the securities- fraud conviction.
The appeals court rejected the government’s argument that Butler could be tried for securities fraud in the Eastern District of New York because he and Tzolov flew out of John F. Kennedy International Airport in Queens, which is part of the district, to meet with the clients they defrauded.
“All the fraudulent statements that were part of the government’s proof, whether made by Butler or Tzolov, were made in telephone calls or e-mails from Credit Suisse’s Madison Avenue offices located in the Southern District or in meetings with investors,” the court wrote.
The court agreed with prosecutors that the Eastern District was the proper venue for the conspiracy counts because “Butler’s use of Kennedy airport to attend meetings with the investors were overt acts in furtherance of the conspiracies.”
He was convicted of conspiracy to commit securities fraud and conspiracy to commit wire fraud.
The jury had ruled that Brooklyn was the proper venue for all three counts.
The appeals panel rejected Butler’s other arguments, including that Weinstein improperly allowed the jury to hear a recording of one of Butler’s customers accusing him of violating the anti-fraud laws under which he was eventually charged.
“We conclude that any error resulting from the introduction was harmless, as the remaining evidence was more than sufficient to convict,” the court wrote.
On June 7, Tzolov was sentenced to four years in prison, with 1 1/2 years of that for bail jumping.
Butler and Tzolov routinely falsified the names of the securities they put their clients in by, for example, adding “ed” or “student loan” and deleting “housing,” according to prosecutors.
The brokers earned higher commissions from selling securities backed by corporate debt and mortgages than from selling those backed by student loans.
The case is U.S. v. Tzolov, 08-cr-370, U.S. District Court, Eastern District of New York (Brooklyn). The appeal is U.S. v. Tzolov, 10-562, Second Circuit U.S. Court of Appeals (Manhattan).
To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at firstname.lastname@example.org.
To contact the editor responsible for this story: Michael Hytha at email@example.com.