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Brokers Convicted of Fraud Can Keep Bonuses

Morgan Stanley, owner of the world’s largest brokerage, lost an arbitration ruling that will allow two brokers convicted of securities fraud to each keep $4.45 million in signing bonuses.

A Financial Industry Regulatory Authority arbitration board denied the New York-based firm’s request to have Eric Butler and Julian Tzolov repay the bonuses paid when they were hired in 2007, according the ruling. The board also denied Butler and Tzolov’s counterclaims seeking damages, said the ruling, dated July 22.

“Eric is pleased with the result, and it was the right result,” Zachary Johnson, a lawyer for Butler at the firm Galluzzo & Johnson LLP, said in a phone interview. Tzolov, who represented himself, couldn’t be reached.

The arbitration board didn’t provide a reason for its decision.

“We are obviously disappointed with the result, but the fact of the matter is that once the arbitration panel rules, there are not many other options for us to pursue,” said Morgan Stanley spokeswoman Christine Pollak.

Morgan Stanley filed its claim in August 2008, the same year Butler and Tzolov were indicted. Prosecutors said that the men, working at Credit Suisse Group AG before joining Morgan Stanley, falsely told clients their securities were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money-market funds.

The products were actually linked to auction-rate securities and generated high commissions for the pair, witnesses testified during Butler’s three-week trial.

Butler Appeals Conviction

Tzolov, who was returned to New York from Spain in July 2009 after fleeing prosecution, pleaded guilty that month to conspiracy, wire fraud and securities fraud. He testified as a prosecution witness against Butler, his former partner.

Butler was found guilty in August 2009 of securities fraud, conspiracy to commit securities fraud and conspiracy to commit wire fraud. U.S. District Judge Jack B. Weinstein sentenced him to five years imprisonment in January. Weinstein placed Butler on home detention with electronic monitoring while he appeals the conviction.

Dow Jones Newswires reported the arbitration ruling earlier today.

By Michael J. Moore – Bloomberg

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