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New Wave of Prosecutions Connected to the Housing Downfall

Credit SuisseA series of arrests is on the way for deceived homeowners seeking reprisal.

This time, the authorities are taking the housing slump seriously.

Julian Tzolov, a Bulgarian broker based in New York, had allegedly assured investors that their investments were sure gains in the money market. Together with his colleague Eric Butler, the two ex-Credit Suisse bankers misled people into believing that the auction-rate securities in their accounts were backed by student loans.

Under the law, student loans are guaranteed by the U.S. Department of Education, so at any time, they can be liquid. However, no such backup was proven. The Securities and Exchange Commission reported last September 3 that Tzolov and Butler used subprime mortgages, collaterized debt obligations (unregulated asset-backed securities) and other non-student loan collateral instead.

Also, the two men purchased subprime-related auction-rate securities worth $1 billion over a three-year period without the authority of the investors. The two were charged with conspiracy, wire fraud and securities fraud, according to The New York Times.

In another Times report, prosecutors last June successfully recovered a series of email exchanges between Bear Sterns officials who were accused of securities fraud. Ralph Cioffi and Matthew Tannin advertently hoodwinked investors that their funds were still valuable even though performance of the investments were slowly degenerating. They even managed to haul in more money by personally assuring their investors that nothing could go wrong with their funds.

The results? When the subprime mortgage-backed investment collapsed, the investors were vehemently seeking for answers from the investment bank.

It’s no surprise how money – or in this case commissions – can ruin the careers of greedy financial pundits. To be fair, maybe we should give them the benefit of the doubt. Could it be that they were just too optimistic to avert the crisis that they sensed no reason for disclosure? Or that they were just too bombarded with paperwork that they lacked time to reveal the financial status of the hedge funds? Well, the evidence doesn’t seem to agree anymore.

Now there are other directions where we can point our fingers while trying to place blame for the housing slump and the collapsing mortgage market. We can trace it back to a horde of investment bankers who managed to pull of a scam to unsuspecting customers who now possess useless, invaluable holdings. Of course, that’s aside from the risk-taking homeowners who still insisted on taking that mortgage even if they were completely aware of their dire finances.

This is a good start, and there are plenty of insidious know-it-alls ready for indictment in the years ahead.

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