Two former Credit Suisse brokers each face a $5 million fine and up to 20 years in jail after being charged with fraudulently selling complex US securities to clients in order to boost their commissions.

Julian Tzolov, 35, and Eric Butler, 36, were indicted in a federal court in Brooklyn and stand accused of secretly switching clients investments’ from bonds backed by student loans to bonds backed by pools of mortgage securities, known as collateralised debt obligations (CDOs). Between November 2004 and August 2007, the two allegedly made more than $1 billion worth of unauthorised purchased of securities backed by homeloans.

The bonds backed by the mortgage-backed CDOs were much higher risk than those backed by student loans. As a result, they offered a higher yield, or interest rate, and, in turn, a greater commission for Mr Tzolov and Mr Butler for arranging them, the lawsuit alleges.

Benton Campbell, the United States Attorney for the Eastern District of New York, who is working for the prosecution, said: "The defendants’ fraudulent misrepresentations and ‘bait and switch’ tactics saddled investors with unknown risks they did not bargain for. Those who engage in such schemes will be aggressively investigated, prosecuted and held to account for their criminal activity."

Both the mortgage and student loan backed bonds in which the two brokers invested were of a type known as auction-rate securities (ARS). These can only be traded at auctions, which are typically held at weekly or monthly intervals.

The clients discovered the alleged fraud around August 2007 when the market for mortgage-backed CDOs collapsed amid concerns about the US housing market. The market for these kind of ARS promptly seized up, meaning that Mr Tzolov and Mr Butler were unable to liquidate the holdings and return money to investors. To conceal their scheme, they sent clients emails which falsified the names of the securities they bought, sold, or held to create the impression that they were backed by student loans, rather than mortgages, the suit alleges.

The Brooklyn lawsuit is part of a united front that US authorities are putting up against suspected fraud in relation to the US housing crisis and the financial meltdown it has precipitated.

The Securities and Exchange Commission (SEC) sued Mr Tzolov and Mr Butler, who ran Credit Suisse’s Corporate Cash Management Group until they left in September last year, for fraudulently selling subprime mortgage-related assets. The watchdog is seeking unspecified restitution and fines.

Kenneth Breen, a lawyer representing Mr Tzolov, and Paul Weinstein, who represents Mr Butler, declined to comment on the SEC and Brooklyn lawsuits.

Credit Suisse issued a statement saying: "In September, 2007, these former employees resigned after we detected their prohibited activity and promptly suspended them. Credit Suisse immediately informed our regulators and we have continued to assist the authorities."

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