A federal judge sentenced former Credit Suisse broker Eric Butler on Friday to five years in prison and a fine of $5 million after he was convicted of fraudulently selling subprime securities to corporate clients. A jury in Brooklyn, New York, found Butler guilty in August of securities fraud and two counts of conspiracy over the sale of risky, so-called auction-rate securities, which prosecutors said caused $1.12 billion of losses. “The defendant disregarded his responsibility” to his clients in the pursuit of higher commissions,” Judge Jack Weinstein said. Prosecutors had sought a prison sentence of at least 15 years and the forfeiture of $4.77 million.
The defense argued that Butler deserved no prison time because it was impossible to predict the complete collapse in February 2008 of the $330 billion auction-rate market.
Butler, 38, broke down in the courtroom as he told the judge of the “devastating” impact the case has had and the prospect of being separated from his wife and two-year-old.
He maintained he did not intend to hurt clients and could not have foreseen the collapse of the auction-rate market.
“I was a bond salesman and I purchased triple-A rated securities, and my belief was that those securities were infallible,” he said. “I had faith in that market.”
Butler’s case is one of the first criminal prosecutions stemming from the credit crisis that began in 2007.
Julian Tzolov, a co-defendant, cooperated with prosecutors and testified against Butler in the three-week trial. Prosecutors accused Butler and Tzolov of trying to win higher commissions by misleading clients into believing they were getting safe securities backed by federally guaranteed student loans.
The government said the scheme unraveled in August 2007 when auctions for debt backed by the riskier securities began to fail.
It said companies harmed by Butler and Tzolov included fertilizer maker Potash of Saskatchewan , drugmaker Roche Holding and semiconductor company STMicroelectronics .
Credit Suisse agreed with regulators in September 2008 to buy back $550 million of auction-rate debt from retail investors.
Tzolov pleaded guilty on July 22 to fraud and conspiracy charges and to bail-jumping for having fled to Spain. His sentencing is scheduled for April 27, court records show.
At Friday’s sentencing hearing, Judge Weinstein said it was difficult for him to assess the actual losses caused by Butler’s conduct. He said he would base a sentence on the defendants’ having received at least $250,000 of commissions that would not otherwise have been obtained.
“Butler would have been an idiot if he intended for his clients to lose money,” the judge said. But he added, “he put this money at risk by fraud, causing loss.”
Butler’s lawyer tried throughout the hearing to play down the significance of his client’s actions.
“There’s a deficit of proof,” the lawyer, Paul Weinstein, said at one point.
The case is U.S. vs. Tzolov et al, U.S. District Court, Eastern District of New York, No. 08-00370.
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