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United States of America v. J Ulian Tzolov
June 15, 2011
UNITED STATES OF AMERICA, APPELLEE-CROSS-APPELLANT,
J ULIAN TZOLOV, DEFENDANT, ERIC BUTLER, DEFENDANT-APPELLANT-CROSS-APPELLEE.*
The opinion of the court was delivered by: Barrington D. Parker, Circuit Judge
United States v. Tzolov (Butler)
Before: FEINBERG, B.D. PARKER, and WESLEY, Circuit Judges.
Defendant-Appellant Eric Butler appeals from a judgment of
conviction in the United
States District Court for the Eastern District of New York
(Weinstein, J.) for securities fraud and
conspiracy to commit securities and wire fraud. See 15 U.S.C. §§
78j(b), 78ff; 18 U.S.C. §§ 371,
1349. Butler argues, among other things, that venue was not
proper in the Eastern District of
New York. We conclude that venue in the Eastern District was
proper for the conspiracy counts,
but not for the substantive securities fraud count.
AFFIRMED in part and REVERSED and REMANDED in part.
* Docket Number 10-754 was closed by stipulation filed on September 24, 2010.
Eric Butler appeals from a judgment of conviction in the United
States District Court for
the Eastern District of New York (Weinstein, J.). Butler was
convicted of securities fraud and
conspiracy to commit securities and wire fraud and was sentenced
principally to five years'
incarceration.*fn1 Butler argues, among other things, that venue
was not proper in the Eastern
District of New York.*fn2 For the reasons discussed below, we
conclude that venue as to the
substantive securities fraud count was improper. Accordingly, we
vacate Butler's conviction as
to that count. We affirm as to the remaining counts and remand
This case arises out of the failure of the auction rate securities ("ARS") market.
At the relevant time, ARS were securities composed of long-term,
typically high-grade, debt
obligations, such as student loans, mortgages, municipal bonds,
corporate debt and preferred
stock issued by closed-end mutual funds. Although ARS are
structured as long-term fixed
income securities and usually issued with maturities of thirty
years, ARS were traded through
auctions on short-term cycles, generally every 7, 14, 28 or 35
days. At the end of the cycle, an
ARS holder could either sell the security for new paper through an
auction or hold the security
for another cycle. Thus, under normal market conditions, an
investor could exchange his
security for cash potentially every week or month. Because ARS
auctions provided short-term
liquidity to asset-backed securities with long-term maturity dates,
they effectively transformed
long-term bonds into investment vehicles akin to, but paying more
than, money market funds or
similar short-term instruments and, consequently, attracted
investors interested in additional
basis points and liquidity.
In the unlikely possibility that an investor decided simply to
hold his ARS, he would
receive a return of principal when the underlying security
matured, often many years later. The
federal government guaranteed against default up to 98 percent of
the underlying principal of
ARS that were backed by student loans. However, the guarantee did
not protect investors
against failures in the auction market. The other types of ARS
had no such government
guarantee. All the ARS at issue in this case had AAA credit
ratings and were considered "safe"
in that prior to 2007 there had not been a failure of a AAA-rated
Butler and his co-defendant Julian Tzolov worked in Credit
Investment Management group and worked from its Manhattan offices.
The clients they
serviced included large, sophisticated corporate clients, such as
Glaxo Smith Kline, Roche
International and ST Microelectronics, who invested in short-term,
Among other investment vehicles, Butler and Tzolov offered their
clients ARS. In doing
so, Butler and Tzolov would initially make email and telephone
presentations to prospective
clients. If a prospective client expressed an interest, Butler and
Tzolov would typically follow
up with in-person meetings at that client's office. Because most
of the investors were located
outside New York, Butler and Tzolov frequently ...
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