Securities Regulation

The SEC Speeds Up Its Enforcement Arm


It has been a big week so far for the market cops at the Securities & Exchange Commission: Each day brought a new multimillion-dollar settlement, most involving high-profile people or companies—Bank of America (BAC), General Electric (GE), and two former executives of American International Group (AIG), plus two smaller trading firms.

That kind of change has been welcome at the agency—in particular, its Enforcement Div.—following months of pummeling by politicians and pundits alike for missing Ponzi schemes, standing by as the investment banks gorged on debt, and doing too little (or too much) to rein in controversial market practices. But many securities lawyers suspect the shift is also a sign of things to come—especially when combined with other changes at the SEC's Enforcement Div. and comments by its chief. The likely result: An Enforcement Div. that functions much more like a criminal prosecutor's office, moving swiftly, cutting deals, and focusing resources on high-profile issues, among other developments.

"This suggests bringing a prosecutorial mindset to a civil law enforcement agency," says securities attorney Mark K. Schonfeld, a partner at Gibson Dunn & Crutcher, who headed the SEC's New York office until last fall.

Accelerating Actions So count on more long-lingering cases to come to a head. The charges against former AIG executives Hank Greenberg and Howard Smith, for example, date to 2005 and earlier, while the action against GE goes all the way back to 2002 and 2003. Such cases "move at their own speed, but there is ability within the agency to speed things up or slow things down," says Fiona Philip, a partner in Howrey's securities law practice and previously enforcement counsel to the SEC's chairman.

The agency's newly minted enforcement chief, former federal prosecutor Robert Khuzami, vowed on Wednesday, Aug. 5, to move swiftly—saying in a speech to New York lawyers that "a sense of urgency is critical" and "long gaps between conduct and atonement undermine the deterrent impact of our cases and result in missed opportunities to achieve a permanent change in behavior and culture."

Khuzami spent nearly a dozen years as a federal prosecutor in New York, trying cases ranging from Ponzi schemes to the terrorism trial of Omar Ahmed Ali Abdel, the "Blind Sheikh" tied to the 1993 World Trade Center bombing. Immediately before joining the SEC, he had served as the Americas general counsel for Deutsche Bank (DB). Khuzami replaced Linda Thomsen, who left for private practice amid criticism that the Enforcement Div. had been sloppy in several high-profile incidents.

Appearing Active Securities defense attorneys say they and their colleagues are getting a wave of calls and letters telling them that long-open cases are either being dropped or will soon result in charges. Khuzami has told enforcement attorneys to wrap up cases that have been around for more than two or three years, bringing charges or dropping them as appropriate, according to three former or current SEC employees.

Pushing to wrap up old cases makes good sense with new leadership at the SEC, says Nancy Grunberg, head of the securities and white-collar practice at Washington law firm Venable. "There also is a desire to appear very active because of all the criticism."

A spokesman for the SEC said enforcement staff have been asked "to review inventory to see if there were matters that should be closed," taking into account the "clarity of the evidence" and how advanced the cases are, with the goal of bringing "the best cases and ones that are programmatically significant." Attorneys were also told that cases dormant because of a lack of resources could be reassigned, the spokesman said.

Back to Specializing In addition, Khuzami plans to establish specialized teams of attorneys to focus on key areas, including asset management (think hedge funds, mutual funds, and private equity), market abuse, "structured and new products" (aka derivatives and securitization), and foreign bribery cases. The move is a departure from recent practice, when nearly all SEC enforcement attorneys acted as generalists, aside from a few specialists in municipal securities or in the Foreign Corrupt Practices Act. (In the 1990s similar specialized groups existed that focused on investment management, broker-dealers, and other areas.)

Securities defense attorneys cautiously praise that move, saying it could help enforcement attorneys coordinate better with other divisions in the agency and may save companies time and money by ensuring attorneys are better versed in the practices they investigate. "There's nothing more frustrating than to get into the testimony room, and the staff doesn't understand what you do," one defense attorney says.

Another initiative Khuzami championed this week drives home the prosecutorial flavor of the agency's efforts: He called for increasing "incentives to individuals to cooperate in SEC investigations," which private-practice attorneys and former SEC officials say sounds like an effort by the SEC (which has only civil litigation powers) to emulate the plea bargains that criminal prosecutors can offer cooperative witnesses. The SEC, however, has fewer incentives to offer cooperating witnesses, short of waiving litigation and entering into deferred prosecution agreements, in which the agency puts litigation on hold and lets it lapse if a company or individual stays clean for a certain period.

"People who are in a position to cooperate usually do it because they've done something wrong—should they get a pass such that they're allowed to continue in the industry?" says one former enforcement attorney. "That's how federal prosecutors make cases, by getting cooperators, and the SEC has never really been able to do that because they don't have enough of a threat."

Just Clearing the Decks? Darren Check, a plaintiffs' attorney at Barroway Topaz who represents mostly institutional investors, praised the agency's tack, calling it a sign that SEC Chairwoman Mary Schapiro is listening to investors' concerns. The past week's case roster "shows the investor community they are out there," Check says. Schapiro "has given investors on the institutional side a great deal of optimism."

Ultimately, of course, it remains to be seen how much of the new push—beyond clearing the decks of old cases—will yield real results. Already, this week's round of proposed settlements has hit its first stumbling block, with a federal judge insisting on greater detail before signing off on the BofA deal. The judge said he was concerned that the agreement didn't provide a clear basis for Bank of America's $33 million payment or indicate whether any of it would come from federal bailout dollars.

That kind of scrutiny, plus sheer institutional inertia, could wind up blunting some of the changes underway. Says Treazure Johnson, a securities and white-collar attorney at Venable: "There's a lot going on internally, but I don't see it turning into a whole lot externally."
Nanette_byrnes
Byrnes is a senior writer for BusinessWeek.
Francis is a correspondent in BusinessWeek's Washington bureau.

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