For the first time, we have substantial criminal allegations in the auction rate securities mess. Federal prosecutors in Brooklyn have filed criminal fraud charges against two former Credit Suisse brokers, Julian Tzolov and Eric Butler. The SEC has filed a civil suit against the duo.

Ordinarily, we're skeptical about the use of criminal charges to regulate Wall Street. But these allegation, if true, make out a good case for criminal fraud. According to the FBI, the duo sold securities back by mortgages to investors who were told they were
purchasing relatively low-risk securities backed by student loans. The motive allegedly higher commissions that the brokers earned from the mortgage back securities. In other words, this goes far beyond giving clients misleading information about the risks involved in auction rate securities. These guys were telling clients they were buying one thing while selling them another altogether.

Former Brokers Indicted on Auction-Rate Securities Fraud Charges [Law Blog]