Several news sources recently reported that the U.S. Attorney's Office for New York's Eastern District is conducting a criminal investigation into whether two former Credit Suisse brokers lied to investors in auction rate securities ("ARS") about the nature of those securities. The probe into the two Credit Suisse brokers is the first known criminal matter stemming from the troubled ARS market.
The two brokers resigned from Credit Suisse in September 2007 when their clients accused the brokers of misleading them about the nature of the ARS. According to press reports, the clients have alleged that the brokers told them that the ARS in question were backed by student loans, when those ARS were actually backed by allegedly risky collateralized debt obligations that were tied, in part, to subprime mortgages.
For an explanation of the operation of the ARS market and a discussion of the auction failures that began in February 2008, please click here.