Along with the redeployment of branch chiefs, Khuzami also plans to launch five new specialized units. The largest, he said, is likely to be asset management, which will focus on investment advisers, investment companies, hedge funds and private equity funds.
Another will deal with large-scale market abuses and complex manipulation schemes. The third unit covers structured and new products, such as complex derivatives. The fourth focuses on Foreign Corrupt Practices Act (FCPA) cases, and the fifth handles municipal securities and public pensions.
"These units will have a significant focus on developing expertise, through both training and hiring market specialists, toward the goal of conducting faster investigations into newly developing and less transparent problems in the markets," Khuzami said. "Specialized knowledge and greater familiarity with products and transactions and markets makes you a better investigator, and makes you better able to identify wrongdoing."
To Kenneth Winer, a Washington securities partner at Foley & Lardner, the idea "obviously has some real benefits." He said, however, that the division would have to address the danger that, if staff and supervisor training were too narrow, investigators might miss issues outside their speciality. "An investigation initially focused on FCPA anti-bribery issues might also implicate accounting and disclosure issues," said Winer, who worked at the SEC from 1984 to 1988.
ANALYZING TIPS
Another move by Khuzami is giving senior officers the authority to issue formal orders of investigation with accompanying subpoena power rather than requiring them to seek preapproval from the commission. Also, senior officers around the country will be able to independently make routine case decisions.
"These are smart and experienced people who are fully capable of making these decisions," Khuzami said. "And there will still be appropriate review, including review by the commission itself."
Robertson of Mayer Brown said the "expectation and hope is that this will streamline the process." But, he added, "It eliminates the check that is there when staff attorneys know they must get the commission's blessing to open a formal investigation." He also noted consistency could be an issue. He said, "An associate director in the home office no doubt has a different perspective than, say, the Los Angeles regional director of when opening a formal investigation is warranted."
Still another new initiative is the creation of the Office of Market Intelligence.
As SEC Inspector General Kotz noted in his 477-page report released on Aug. 31 detailing the agency's failure to detect Madoff's Ponzi scheme, one of the key problems was the fact that the SEC did not properly investigate the tips it received about Madoff's activities.
Between June 1992 and December 2008, the SEC received six substantive complaints and was aware of two articles which "should have led to questions about whether Madoff was really engaged in trading," Kotz told the Senate Banking Committee on Sept. 10. Kotz recommended the SEC implement a system that captures the nature and source of each tip, how it was vetted, what was done in response and why.
Hundreds of thousands of tips each year flow into Washington and the 11 regional offices in all forms -- phone, e-mail, fax, postal mail -- but to date have not been compiled in a central repository.
"It's an overwhelming number; we needed a better system of control and analysis," Khuzami said.
The SEC has hired the Center for Enterprise Modernization, which is operated by the nonprofit MITRE Corp., to develop a system to "track complaints from cradle to grave," Khuzami said. The system will rank the complaints, prioritizing those that are potentially the most serious, and will make connections among tips from different sources.
"We'll be able to risk-weight these complaints and then start by first addressing those at the top of the list," Khuzami said. "We'll see the entire record of complaints and information on a particular person or entity."
As Khuzami moves to establish the new tip system and implement his other initiatives as well, members of the securities bar are watching -- and waiting.
"What's happening now at the Enforcement Division really will determine whether the SEC resumes its stature as one of the elite government investigative agencies," said Paul Huey-Burns, a securities litigation partner at Dechert in Washington who worked at the SEC from 1986 to 1998, serving as assistant director in the Enforcement Division for seven years.
"The future history of the division will be written based on how these decisions play out," he said. "It's sort of like rebuilding the Redskins. It's not going to happen overnight. It's a long process, but it has to start now."
Subscribe to The National Law Journal
