SEC enforcement chief describes “most profound reorganization” in division’s history

Brad Allen (left) of MinnPost.com questions SEC enforcement chief Robert Khuzami after his keynote speech at SABEW.

When Robert Khuzami joined the Securities and Exchange Commission as its director of enforcement 354 days ago, Bernie Madoff’s $50 billion Ponzi scheme had revealed problems with the agency’s oversight functions.

Since then, he said in a keynote speech at the SABEW Conference today, he’s led the “most profound reorganization” in the division’s history.  Khuzami  joined the Obama administration at age 52 from a position as general counsel for the Americas at Deutsche Bank. He is also a former prosecutor, with 11 years of experience in the U.S. Attorney’s Office for the Southern District of New York.

First, he said, the division needed more specialized knowledge, so he established five specialized units. “The products are complicated….Transactions are global in scope,” he said of today’s investments.

Those units are:

• Asset management. “Hedge funds, in particular, are challenging,” he said.
• Market abuse. It will focus on large-scale, insider-trading networks and rings. “A particular focus of this group will be on technology,” he said.
• Structured and new products. It will include derivatives, as well as new twists on old products.
• Foreign corrupt practices. It looks into bribery, for example, of corporations by foreigners.
• Municipal securities and pay-to-play. With $400 billion in securities issued last year, he said, “It’s a thinly regulated market.”

These units will be operational by April and be national in scope, he said, “increasing the cartilage” across the division, which has traditionally operated regionally.

“Those who organize, devise or manage the wrongdoing are smart….They’re often planning their defense at the same time they’re planning their crime,” he said. “The only way to catch these people is to be smart in the areas they operate.”

The SEC received 700,000 complaints in 2009, and “even suggestions from the articles you write and edit,” he said. “By definition, tips, referrals, headlines are often lagging indicators of fraud.”

He said he was surprised at the amount of time he spent in his first year on improving process. “I was surprised that an organization of 1,200 people didn’t have some of these tools. First, we flattened management….We were way too top-heavy.”

He said he delegated authority back to senior officers to issue subpoenas, instead of requiring a vote by the commissioners, cutting the time to get those writs that require people to testify under oath. “We hired the first-ever COO (chief operating officer),” he said.

“We created an office of market intelligence,” to handle the 700,000 tips coming into multiple offices. It will “harvest that information in a way that allows you to look at trends and patterns and leads,” he said. It will also risk-weight the tips to focus first on the ones that are most promising.

“Now, we’re developing metrics to look much more at productivity…and the use of litigation resources,” he said. “What I’d love to be able to measure is the deterrent impact of what we do….I haven’t yet figured out how to do it.”

“We’ve been extremely fortunate  in the talent we’ve been able to attract,” he said. That may be, in part, because of both unemployment in the financial sector and the desire to be part of the solution.

“Insider trading continues to be a priority as well,” he said. He said that the 30 individuals involved in the Galleon Group case “had essentially adopted insider trading as a business model,” netting $70 million in illegal profits.

After 354 days on the job, “I see an arc of great progress,” he said.