(Bloomberg News) Julian Tzolov, a former Credit Suisse Group AG broker who pleaded guilty to securities fraud, should be granted leniency in his sentencing tomorrow because of his "substantial assistance," including testifying against his former partner, federal prosecutors said.

Tzolov, 38, fled the U.S. before returning to plead guilty to 12 counts, including securities fraud, wire fraud and bail jumping. After returning, he testified at Eric Butler's trial that the two men told clients they invested their money in auction-rate securities backed by federally guaranteed student loans when they were actually backed by riskier corporate debt and subprime mortgages.

"Tzolov detailed in a straightforward and direct manner the complexities of the auction-rate securities market, how he and Butler manipulated their clients' investment in that market through repeated lies -- in person, over the phone and by e-mail -- and how they profited from that scheme to defraud," prosecutors in the office of U.S. Attorney Loretta Lynch wrote in a court filing today.

The government estimated Tzolov's and Butler's crime cost clients including GlaxoSmithKline Plc and STMicroelectronics NV about $1.1 billion. The jury found Butler, 39, guilty in August 2009. U.S. District Judge Jack B. Weinstein sentenced Butler to five years in prison. He is free on bail while he appeals his conviction. Weinstein is scheduled to sentence Tzolov tomorrow.

In Custody

A native of Bulgaria, Tzolov was returned to New York from Spain in July 2009 after fleeing for three months. He's been in custody since then.

Robert Nardoza, a spokesman for Lynch, declined to comment. Benjamin Brafman, one of Tzolov's lawyers, didn't immediately return a call for comment.

Butler's conviction "stands as one of the most significant prosecutions since the onset of the financial crisis, and in particular the collapse of the auction-rate securities and subprime mortgage markets," prosecutors said in the filing.

The auction-rate securities market, once valued at $330 billion, collapsed in February 2008 when dealers stopped participating in the auctions. Interest on the investments reset periodically at bidding managed by the dealers.

'Consistently Reliable'

"Tzolov's cooperation, principally his testimony, was exemplary," the government wrote. "He did not shade the truth or his greed. His accounts were consistently reliable."

He also told prosecutors about $60,000 he stole from a client account for his personal use while employed at Lehman Brothers Holdings Inc. Prosecutors said they hadn't been aware of that theft.

Tzolov and Butler worked as partners in Credit Suisse's Corporate Cash Management Group, a division that helped clients manage excess corporate cash holdings, according to court papers. They routinely falsified the names of the securities they put their clients in by, for example, adding "ed" or "student loan" and deleting "housing," according to the filing.

The brokers earned higher commissions from selling securities backed by corporate debt and mortgages than from selling those backed by student loans.

"Tzolov provided substantial assistance to the government which resulted in the trial conviction of the defendant Eric Butler," prosecutors wrote.

Butler and Tzolov were allowed to keep $4.45 million in signing bonuses under a July 2010 arbitration ruling lost by their former employer, Morgan Stanley, at the Financial Industry Regulatory Authority, or Finra.

Appeals Court

The two men joined Morgan Stanley after leaving Credit Suisse.

On June 2, the federal appeals court in Manhattan ruled against Credit Suisse's appeal of a U.S. judge's order to pay STMicroelectronics, Europe's largest chipmaker, about $400 million over the securities it bought from Tzolov and Butler.

Today's filing didn't recommend a specific sentence for Tzolov. Federal guidelines carry a life term for his crimes because the fraud exceeded $400 million. The maximum for all the counts together under each statute caps his exposure at 45 years, according to the filing.

The maximum sentencing for bail-jumping is 10 years, which would run consecutively to any other sentence he receives, according to the filing. The government didn't recommend leniency on that count.

Tzolov pleaded guilty in July 2009 to one count each of securities-fraud conspiracy, wire-fraud conspiracy, securities fraud, bail jumping and visa fraud, and seven counts of wire fraud.

The case is U.S. v. Tzolov, 08-cr-370, 09-cr-475 and 10-cr- 83, U.S. District Court, Eastern District of New York (Brooklyn).