NY Judge Blasts Wall Street's "Corrupt" Culture
 in Sentencing Billion Dollar Subprime Scammer

By Mark Fass
New York Law Journal
New York Lawyer
January 26, 2010

In sentencing former Credit Suisse securities dealer Eric Butler to five years in prison, Eastern District Judge Jack B. Weinstein has condemned "the pernicious and pervasive culture of corruption" on Wall Street.

"The blame for this condition is shared not only by individual defendants like Butler, but also by the institutions that employ them, those who carelessly invest, and those who fail to regulate," Judge Weinstein wrote in the Statement of Reasons for the sentencing he issued on Friday in United States v. Butler, 08-cr-370.

"Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others' rights and of ethics almost encourage criminal activities such as defendant's," he said.

In addition to the five-year sentence and three years of supervised release, Judge Weinstein fined Mr. Butler $5 million, about $1 million more than Mr. Butler's estimated assets.

United States v. Butler marked perhaps the first major criminal action stemming directly from the subprime crisis.

Following a three-week trial, Mr. Butler was convicted in August of securities fraud, conspiracy to commit securities fraud and conspiracy to commit wire fraud for his role in a scheme to trick investors into purchasing high-risk-and-high-commission—subprime securities.

Mr. Butler and a second defendant, co-worker Julian Tzolov, misled investors into believing the securities being purchased in their accounts were backed by federally guaranteed loans.

In fact, the securities were backed by subprime mortgages and collateralized debt obligations, which ultimately cost the investors more than $1.1 billion in losses.

Judge Weinstein dedicated a significant portion of Friday's eight-page statement to excoriating the culture of Wall Street.

"The staggering sums involved in this case reflect more than the magnitude of the defendant's fraud. They also evince an industry beset by avarice that has been allowed to run rampant by regulators and negligent supervisors alike," the judge wrote. "The most compelling aspect of this case may be its illumination of the need to reconsider how compensation is calculated and investment products are marketed by the financial industry. Systemic reform is needed; mere '[c]ompetition in product and capital markets can't be counted on to solve the problem.'"

Advisory Panel

The sentencing was also notable for Judge Weinstein's use of an advisory panel of fellow Eastern District judges, an increasingly common practice in Brooklyn federal court since 2005 when the U.S. Supreme Court determined in United States v. Booker, 543 U.S. 220, that sentencing guidelines should be treated as advisory rather than mandatory.

Although Judge Weinstein declined to name the judges he consulted, the panel did include the Eastern District's chief judge, Raymond Dearie.

Judge Dearie said in an interview yesterday that he expects the use of advisory panels to become "fairly standard" in the Eastern District in the near future for difficult cases, such as those with broad or long guidelines, and as the imperatives of the pre-Booker guidelines recede.

In the present case, Judge Weinstein wrote that he convened the advisory panel because "of the severe impact of defendant's frauds on the international short- and long-term securities markets, and other complexities presented by this sentencing."

In addition to the unspecified number of judges, the panel included "an expert on sentencing guidelines from the court's Probation Department," Judge Weinstein wrote.

In pre-sentencing arguments, the prosecution contended that Mr. Butler faced a statutory maximum of 45 years and a guidelines recommendation of up to life in prison.

The advisory panel recommended six to 10 years.

Mr. Butler requested probation.

Judge Weinstein settled on a five-year sentence.

"I have imposed a lesser sentence [along] with loss of all defendant's assets and a heavy fine, for two primary reasons," he wrote. "[F]irst, defendant's young child and loving wife suggest the desirability of defendant's early presence at home, working and supporting his family economically and psychologically; second, a strong supportive network of extended family, friends, teachers, and potential employers, as well as defendant's positive reaction to supervision since his arrest, indicate a high probability of rehabilitation."

Judge Dearie said he knew of no other district court that regularly uses advisory panels, but that when he testified before the U.S. Sentencing Commission last year, the Massachusetts District Court seemed "very" interested in the concept.

Mr. Butler faces additional wire fraud charges in the Eastern District.

After initially fleeing to Spain, Mr. Tzolov pleaded guilty and cooperated in Mr. Butler's trial. Mr. Tzolov has yet to be sentenced.

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