Khuzami said his top substantive priorities are cases related to the subprime credit crisis, Ponzi schemes and cross-market misconduct, plus accounting and financial statement fraud and insider trading.
As examples, he points to the accounting fraud charges against two former executives at American Home Investment Corp. filed by the SEC in late April, the fraud and insider trading charges brought against the ex-chief executive of Countrywide Financial Corp. in June, and an insider-trading case against a bond salesman at his old employer, Deutsche Bank, and a hedge fund manager at Millennium Partners in connection with credit default swaps.
But amid the flurry of new cases, the rejected Bank of America settlement stands as an embarrassing slap in the face to Khuzami and the division.
In September, U.S. District Judge Jed Rakoff of the Southern District of New York refused to approve a $33 million settlement between the SEC and Bank of America. The SEC alleged in August that the bank had lied to its shareholders prior to its takeover of Merrill Lynch by failing to disclose billions in bonuses owed to Merrill employees. In his order, Rakoff questioned why bank executives or their lawyers weren't sued and said the proposed settlement was "neither fair, nor reasonable, nor adequate." The case is set for trial in March.
Rather grimly, Khuzami noted, "The number of corporate-only penalty cases is quite low." But he said, "I don't think the [Rakoff] decision will change our way of thinking when it comes to negotiating future settlements."
He explained, "Corporate penalties send the important deterrent message to managers and executives that their organizations will suffer financially and reputationally if they are not operated in a lawful manner." Khuzami said, "We also recognize that shareholders will indirectly absorb the cost of those penalties. So there is a balancing that occurs in these cases, one that we always engage in and will continue to engage in."
REWARDING COOPERATION
Securities lawyers seem most intrigued by Khuzami's initiative to lay out standards for rewarding people for cooperating with the agency in investigations -- in securities lawyer parlance, creating a "Seaboard" for individuals.
In 2001, the SEC released the Seaboard report (named after Seaboard Corp., which was under investigation) that detailed how it would credit corporations for self-policing, self-reporting, cooperation and remediation when making enforcement decisions. But no comparable standards exist for individuals. Khuzami aims to change that.
"I think it's a wonderful idea," said Treazure Johnson, a Washington-based Venable partner who until 2005 was senior assistant chief litigation counsel at the SEC. "If someone wants to cooperate, they should be rewarded. And it will be more productive for the investigation."
Khuzami said his intention is "to secure higher-value evidence. There's no substitute for witnesses who are on the inside of various schemes or who have first-hand knowledge, and we need to incentivize those persons to come forward."
Individuals could face lesser charges or lighter sanctions in return for cooperation or, in extraordinary circumstances, get a free pass entirely.
The standards are almost finalized, and Khuzami said a policy statement will be published in the Federal Register in the near future.
"It has the potential to change the landscape," said Jeff Robertson, a SEC enforcement partner in the Washington office of Mayer Brown. "Right now there is absolutely no incentive for individuals to come forward. Of course, the devil is in the details of what the policy says and how it's implemented."
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