In the Courts

Second Circuit Overturns Securities Fraud Conviction Of Former Credit Suisse Broker

On June 15, in United States v. Tzolov, No. 10-561-cr, the United States Court of Appeals for the Second Circuit, in an opinion authored by Circuit Judge Barrington D. Parker, reversed the substantive securities fraud conviction of former Credit Suisse Securities (USA) LLC (Credit Suisse) broker Eric Butler, on the grounds that Butler's passage through John F. Kennedy International Airport (JFK Airport) ' on his way to meet with investors ' was insufficient to establish proper venue in the Eastern District of New York, where he had previously been tried and convicted.

In connection with the failure of the auction rate securities (ARS) market in 2007-2008, Butler, along with his co-defendant Julian Tzolov, had been convicted of both securities fraud and conspiracy to commit securities and wire fraud. While the two had worked in the Manhattan offices of Credit Suisse's Corporate Investment Management group, located in the Southern District of New York, they regularly flew in and out of JFK Airport, located in the Eastern District, to meet with non New York-based investors.

The government tried Butler in the Eastern District, proving along the way that Butler and Tzolov, who pled guilty and testified against his former colleague, had made false statements to their investors regarding the securities that they had purchased on investors' behalf.

Specifically, witnesses for the government testified that they had authorized the pair only to purchase government-backed student loan ARS; nonetheless, Butler and Tzolov allegedly purchased non government-backed debt ARS. After making these purchases, Butler and Tzolov then e-mailed falsified purchase confirmations and sent falsified monthly Credit Suisse account statements that created the appearance that the ARS that had been purchased was indeed comprised of government-backed debt. Finally, Butler also made false statements to investors indicating the same.

As part of his pre-trial motions and motion for judgment of acquittal, Butler moved to dismiss all counts for lack of proper venue. Upon denial by the district court, he appealed to the Second Circuit for relief.

The court assessed the counts separately. In assessing Butler's venue challenge for his substantive securities fraud count, the Second Circuit noted that the statute contained its own unique venue provision, stating that “[a]ny criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred.” 15 U.S.C. ' 78aa.

In evaluating this standard, the Second Circuit noted that the government's position ' that venue was proper in the Eastern District ' relied entirely on the fact that Butler and Tzolov had passed through JFK Airport in their travels to meet with their ARS investors. Under United States v. Svoboda, 347 F.3d 471 (2d Cir. 2003), the government argued that venue was proper because the flights constituted “an important part of furthering the [fraudulent] scheme.”

The court disagreed with the government's rationale, noting that “Butler did not transmit any false or misleading information into or out of the Eastern District. All the fraudulent statements that were part of the government's proof, whether made by Butler or Tzolov, were made in telephone calls or emails from Credit Suisse's Madison Avenue offices located in the Southern District or in meetings with investors. None of this activity occurred in the Eastern District.” The Second Circuit also found that, “[a]t most, catching flights from the Eastern District to meetings where Butler made fraudulent statements were preparatory acts. They were not acts 'constituting' the violation.”

Distinguishing Svoboda, the Second Circuit noted that the case did not disturb the general notion that preparatory acts alone are insufficient to establish venue. In contrast, the court noted that in Svoboda, the act that established venue and that occurred “in furtherance” of the crime charged ' the execution of a trade ' was an essential element of the crime. See Id. at 485. Based on this analysis, the court reversed Butler's conviction for the substantive securities fraud count.

Noting that the conspiracy charges required a different analysis, specifically that “venue is proper in any district in which 'an overt act in furtherance of the conspiracy was committed,'” the court upheld Butler's conviction on these counts. United States v. Royer, 549 F.3d 886, 896 (2d Cir. 2008) (quoting United States v. Naranjo, 14 F.3d 145, 147 (2d Cir. 1994)). The court held that a reasonable jury could have found that Butler's and Tzolov's travel through the Eastern District furthered their conspiracy, as the transit was necessary to facilitate their face-to-face investor meetings that comprised a part of the scheme.

Second Circuit Overturns Securities Fraud Conviction Of Former Credit Suisse Broker

On June 15, in United States v. Tzolov, No. 10-561-cr, the United States Court of Appeals for the Second Circuit, in an opinion authored by Circuit Judge Barrington D. Parker, reversed the substantive securities fraud conviction of former Credit Suisse Securities (USA) LLC (Credit Suisse) broker Eric Butler, on the grounds that Butler's passage through John F. Kennedy International Airport (JFK Airport) ' on his way to meet with investors ' was insufficient to establish proper venue in the Eastern District of New York, where he had previously been tried and convicted.

In connection with the failure of the auction rate securities (ARS) market in 2007-2008, Butler, along with his co-defendant Julian Tzolov, had been convicted of both securities fraud and conspiracy to commit securities and wire fraud. While the two had worked in the Manhattan offices of Credit Suisse's Corporate Investment Management group, located in the Southern District of New York, they regularly flew in and out of JFK Airport, located in the Eastern District, to meet with non New York-based investors.

The government tried Butler in the Eastern District, proving along the way that Butler and Tzolov, who pled guilty and testified against his former colleague, had made false statements to their investors regarding the securities that they had purchased on investors' behalf.

Specifically, witnesses for the government testified that they had authorized the pair only to purchase government-backed student loan ARS; nonetheless, Butler and Tzolov allegedly purchased non government-backed debt ARS. After making these purchases, Butler and Tzolov then e-mailed falsified purchase confirmations and sent falsified monthly Credit Suisse account statements that created the appearance that the ARS that had been purchased was indeed comprised of government-backed debt. Finally, Butler also made false statements to investors indicating the same.

As part of his pre-trial motions and motion for judgment of acquittal, Butler moved to dismiss all counts for lack of proper venue. Upon denial by the district court, he appealed to the Second Circuit for relief.

The court assessed the counts separately. In assessing Butler's venue challenge for his substantive securities fraud count, the Second Circuit noted that the statute contained its own unique venue provision, stating that “[a]ny criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred.” 15 U.S.C. ' 78aa.

In evaluating this standard, the Second Circuit noted that the government's position ' that venue was proper in the Eastern District ' relied entirely on the fact that Butler and Tzolov had passed through JFK Airport in their travels to meet with their ARS investors. Under United States v. Svoboda , 347 F.3d 471 (2d Cir. 2003), the government argued that venue was proper because the flights constituted “an important part of furthering the [fraudulent] scheme.”

The court disagreed with the government's rationale, noting that “Butler did not transmit any false or misleading information into or out of the Eastern District. All the fraudulent statements that were part of the government's proof, whether made by Butler or Tzolov, were made in telephone calls or emails from Credit Suisse's Madison Avenue offices located in the Southern District or in meetings with investors. None of this activity occurred in the Eastern District.” The Second Circuit also found that, “[a]t most, catching flights from the Eastern District to meetings where Butler made fraudulent statements were preparatory acts. They were not acts 'constituting' the violation.”

Distinguishing Svoboda, the Second Circuit noted that the case did not disturb the general notion that preparatory acts alone are insufficient to establish venue. In contrast, the court noted that in Svoboda, the act that established venue and that occurred “in furtherance” of the crime charged ' the execution of a trade ' was an essential element of the crime. See Id. at 485. Based on this analysis, the court reversed Butler's conviction for the substantive securities fraud count.

Noting that the conspiracy charges required a different analysis, specifically that “venue is proper in any district in which 'an overt act in furtherance of the conspiracy was committed,'” the court upheld Butler's conviction on these counts. United States v. Royer , 549 F.3d 886, 896 (2d Cir. 2008) (quoting United States v. Naranjo , 14 F.3d 145, 147 (2d Cir. 1994)). The court held that a reasonable jury could have found that Butler's and Tzolov's travel through the Eastern District furthered their conspiracy, as the transit was necessary to facilitate their face-to-face investor meetings that comprised a part of the scheme.