U.S. Charges Brokers in Auction-Rate Probe

In one example cited by the SEC, Butler purchased $15 million worth of preferred shares in the Calamos Strategic Total Return Fund and $10 million worth of Glacier Funding CDO notes. In an e-mail to the client whose money he used to purchase those assets in February 2005, Butler allegedly characterized the purchases as $15 million in "Calamos Student Loan Authority" securities and $10 million in "Glacier Education Loan" securities.

When the credit markets seized up and ARS auctions began to fail, clients were left holding at least $817 million worth of illiquid assets, whose value has since plummeted, according to the SEC.

"The defendants' fraudulent misrepresentations and 'bait-and-switch' tactics saddled investors with unknown risks they did not bargain for," U.S. Attorney Benton Campbell said in a statement.

The SEC is seeking to permanently bar Tzolov and Butler from working in the securities industry, to pay undefined civil penalties and to "disgorge their ill-gotten gains, if any," along with interest.

State and federal authorities have cracked down on major Wall Street banks since the auction-rate market collapsed in February, accusing firms of overstating the safety of the investments relative to cash. Firms including Citigroup (C), JPMorgan Chase (JPM), Merrill Lynch (MER), Goldman Sachs (GS) and others agreed to buy back securities from investors and pay penalties.