NEW YORK (Reuters) - Opening one of the first fraud trials arising from the credit crunch, a U.S. prosecutor on Thursday accused a former Credit Suisse broker of lying to clients about auction rate securities deals, while the defense emphasized the collapse of the market.

Wall Street broker Eric Butler, 37, and colleague Julian Tzolov were indicted in September on charges of fraudulently dealing in $1 billion of subprime mortgage-backed auction rate securities (ARS) for corporate clients who had ordered safer investments.

Prosecutors said they were trying to earn millions of dollars more in commissions than they would have buying securities backed by government-guaranteed student loans.

Tzolov, 36, pleaded guilty to a series of charges in Brooklyn federal court on Wednesday and only Butler is on trial in the same court. He pleaded not guilty.

"The defendant and his partner promised something better, a better opportunity," U.S. prosecutor Greg Andres said in opening arguments to the jury.

"They did not honor that promise. They invested in securities the clients didn't ask for and didn't want."

The $330 billion market for mortgage-backed ARS -- debt reset at periodic auctions by Wall Street firms that had touted it as a safe, cash equivalent -- collapsed in February 2008.

There have been several investigations nationwide leading to settlements in which firms paid back investors.

Butler's lawyer, Paul Weinstein, said in his opening argument that Credit Suisse's corporate clients had made a lot of money for years from their investments.

"Then something happened, the market failed," Weinstein told the jury. "One thing is for certain, the failure in the market had nothing to do with Eric Butler or anyone in his company."

Butler is being tried on charges of securities fraud and wire fraud and conspiracy charges. The broker faces a possible prison sentence of up to 20 years if the jury convicts him.

The first witness called was Victor Matfield, a finance manager for corporate investor Randgold Resources Ltd, who said he was surprised when Butler told him in August 2007 that two auctions had failed.

Matfield said that when he told Butler he thought the securities were supposed to be backed by student loans, the broker's reaction was "cold."

"He had no reaction, he was very unemotional," said Matfield. He said his company lost $49 million.

The trial, which prosecutors say is expected to last two weeks, was adjourned until Monday.

ARRESTED IN SPAIN

Tzolov, who fled house arrest in his Manhattan apartment in May and was arrested in Spain on July 15, pleaded guilty on Wednesday to fraud charges and bail jumping in the case before Judge Jack Weinstein.

Tzolov told the judge he and Butler HAD sent emails to six companies in Canada, Britain, Switzerland, Bermuda and Panama, falsifying the names and nature of the securities to mislead Credit Suisse clients.

Credit Suisse has said Tzolov and Butler resigned in 2007 after the firm suspended them for "prohibited activity." The firm said it cooperated with authorities in the matter.

The two were accused of fraudulently trying to earn higher commissions by buying ARS collateralized by subprime mortgages, collateralized debt obligations, mobile home contracts and other non-federally guaranteed nonstudent loan collateral.

The case is USA v Tzolov and Butler 08-370 in U.S. District Court for the Eastern District of New York (Brooklyn)

(Reporting by Grant McCool; editing by Andre Grenon and Ted Kerr)