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United States of America v. J Ulian Tzolov

June 15, 2011

UNITED STATES OF AMERICA, APPELLEE-CROSS-APPELLANT,
v.
J ULIAN TZOLOV, DEFENDANT, ERIC BUTLER, DEFENDANT-APPELLANT-CROSS-APPELLEE.*



The opinion of the court was delivered by: Barrington D. Parker, Circuit Judge

10-562-cr

United States v. Tzolov (Butler)

Argued: December 7, 2010

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 for resentencing.

BACKGROUND

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 ARS auction.
Butler and his co-defendant Julian Tzolov worked in Credit Suisse's Corporate 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, fixed-income vehicles.
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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