If there's one thing Robert Khuzami learned from his experience prosecuting the first World Trade Center bombers in 1995, it's this: "Whether you're dealing with terrorism or securities fraud, it's better to be in the prevention business than the cleanup business."
As the top cop at the U.S. Securities and Exchange Commission, Khuzami has spent his first six months as the director of the Division of Enforcement tackling a cleanup of major proportions. He's undertaken what many call the most sweeping changes of the division in 30 years, a top-to-bottom overhaul of how the agency detects and prosecutes wrongdoing in the financial marketplace.
He figures he's succeeding, he said, if the SEC starts bringing cases that aren't front-page news and involve small sums of money. "It means the conspiracies aren't as far along," he said in a lengthy interview. "We want to be better able to detect wrongdoing earlier in the cycle and minimize harm to investors."
But the SEC isn't there yet. The agency has faced sharp criticism over the collapse of the subprime-mortgage market, the demise of several major investment banks and, most of all, Bernard Madoff's $50 billion Ponzi scheme.
For the thousands of people who lost their life savings as a result of Madoff's scheme, the SEC's failure has triggered profound anger and disappointment -- not to mention a $2.4 million lawsuit against the agency for negligence filed by two victims last week. Now, under intense scrutiny from members of Congress and the SEC's own inspector general, the agency has come to a watershed moment.
"There's no denying the fact that the Madoff tragedy was a terrible event, a situation where we should have performed better," Khuzami said. "We did not, and the best way to put meaning into our failure is to study the case and the outcome and determine how we can do better."
Still, as a newcomer, it's easy to apologize for something that clearly isn't your fault. More crucial for Khuzami will be how the Enforcement Division performs going forward. Already he's had one significant setback, when a New York judge issued a scathing decision rejecting the SEC's proposed settlement with Bank of America Corp.
Nor is change easy within the agency, with staff reporting insecurity and doubt as they struggle to find their place in the new regime.
ENFORCEMENT REFORM
With the backing of SEC Chairman Mary Shapiro, Khuzami in the past two months has announced a series of initiatives to reorganize the 1,100-person division, which includes about 640 lawyers. He's drawn on his experience as chief of the securities and commodities fraud task force in the U.S. Attorney's Office for the Southern District of New York and, more recently, as general counsel for the Americas for Deutsche Bank A.G., to come up with the plans.
He's formulating the first-ever standards for offering deals to individuals in return for cooperation and moving 10 percent to 20 percent of division staff into five new specialized units dedicated to specific areas of securities law.
Khuzami is also giving senior agency officials independent authority to open formal investigations and issue subpoenas and establishing an Office of Market Intelligence to handle the 700,000 tips and complaints the SEC receives annually.
There has also been a sharp uptick in the number of new cases being filed. According to an analysis by Gibson, Dunn & Crutcher for its clients, SEC lawyers brought 45 percent more enforcement actions in the first six months of 2009 compared to 2008, increasing to 167 cases from 114. More defendants were also charged -- 527 compared to 317 a year earlier.
"The agency is filing many more cases at a much quicker pace, charging more individuals and filing more cases without settlements," said Gibson Dunn partner Mark Schonfeld, who until 2008 was director of the SEC's New York regional office and remains based in the city. "The more important test now will be whether the agency wins the cases it is filing."
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