WASHINGTON, April 27 (Thomson Reuters Accelus) - Being
violation-free alone does not guarantee that a public company or
registered entity will not face the wrath of the U.S. Securities and Exchange Commission Division of Enforcement, its director,
Robert Khuzami, told Thomson Reuters Tuesday.
"We have charged firms for having compliance failures even
where there were no underlying violations. We want to send a
message that businesses have to have controls in place in order
to prevent fraud. Preventing wrongdoing in the first place is
much better than after-the-fact enforcement, which more often
than not is not going to fully compensate investors for the harm
they have suffered," Khuzami said in an interview.
Khuzami pointed to a $22 million settlement with Goldman Sachs earlier this month for lacking controls over the
dissemination of material non-public information through
"huddles" between its analysts and traders and selected
customers. The SEC, in coordination with the Financial Industry
Regulatory Authority, the self-regulatory organization for
broker-dealers, filed the action even though there was no actual
charge of insider trading.
Khuzami, a native of Rochester, New York, graduated magna
cum laude from the University of Rochester in 1979 and went on
to receive his law degree from Boston University four years
later. Before coming to the SEC, he headed up the Securities and
Commodities Fraud Task Force of the U.S. Attorney's Office for
the Southern District of New York and was on the legal team that
prosecuted Omar Abdel-Rahman, the mastermind of the 1993 World
Trade Center bombing. He also oversaw Americas-based litigation
and regulatory enforcement for Deutsche Bank.
Here are insights into a variety of areas Khuzami addressed
during a conversation in his office:
TR: You have contended that letting companies pay a fine
without admitting or denying a violation raises the amount of
money the agency collects for investors. In cases such as the
one the SEC brought against Citigroup, judges like Manhattan
U.S. District Judge Jed Rakoff said this policy may not serve
the public interest. How do such rulings influence the way your
office settles cases? Will you offer these terms less often?
Will you modify this approach, or use other tools more often
Khuzami: While we listen to all the commentators, as well as
the judges, we have not changed our "neither admit nor deny"
policy except in one narrow set of circumstances.
I note first that the Second Circuit Court of Appeals recently
issued an opinion which strongly suggested that Judge Rakoff
erred in declining to approve the Citigroup settlement.
Beyond that, it is my view and that of my predecessors that
"neither admit nor deny" reflects a wise policy choice. We only
settle cases where we obtain what we reasonably could expect to
get if we prevailed at trial, taking into account the strength
and weaknesses of the evidence. Without "not admit or deny,"
many fewer defendants would settle due to the civil and criminal
consequences of admitting wrongdoing. Thus, with this policy we
are able to get relief to harmed investors today, without
waiting years for a trial and verdict, and without the risk that
we would lose at trial and get nothing for investors or win and
get less in an award than we were offered in settlement.
Perhaps most importantly, we are able to use the resources
we save to fight other frauds and return money to other harmed
investors. Virtually every other civil enforcement agency uses
"neither admit nor deny" or some formulation of it.
The only change we have made since Judge Rakoff's ruling is
that when a company has been found guilty in a criminal trial,
the admission of guilt must be made in a civil settlement with
TR: The SEC recently announced a sweep of the private equity
sector. Are you noticing glaring compliance weaknesses in
private equity? Do you envision enforcement cases coming out of
the recent sweep?
Khuzami: The recent sweeps focused less on compliance and
more on so-called "zombie" funds where managers may be sitting
on portfolio holdings, but not liquidating them in order not to
cut off their management fees. With hedge funds in general, we
have looked at compliance issues along with valuation, conflicts
of interest and excessive fees.
TR: How has the quality and type of whistleblower tips
differed since bounties were offered than before they were
established by the Dodd-Frank Act?
Khuzami: Anecdotally, the quality of tips has increased with
more detail and greater supporting documentation. This may be
explained by the fact that a greater percentage of tipsters are
hiring lawyers to help them.
In large measure due to the publicity about the
whistleblower program generated by Dodd-Frank, we're seeing tips
across a wider range of subject areas - financial disclosure,
Foreign Corrupt Practices Act, broker-dealer conduct, to name a
few - and we are receiving tips from around the nation and many
foreign countries. What we are not getting is an avalanche of
frivolous and non-securities law related matters such as human
resources and workplace claims that critics of the bounties said
we would get.
TR: On Sunday, the New York Times reported that Wal-Mart hid
results from the SEC and the Justice Department of an
investigation it did into a massive bribery operation by company
officials in Mexico. How satisfied are you generally with the
cooperation your division is receiving from businesses on FCPA
and other enforcement areas?
Khuzami: I cannot comment on the Wal-Mart case specifically.
What I can say in general is that many companies cooperate fully
and take all the steps necessary to provide meaningful
cooperation, but there are instances where companies do not act
in a cooperative manner and do not get the benefits cooperation
brings. One area we are seeing a troubling trend is an overly
broad assertion of attorney-client privilege for a broader
category of documents than the law justifies. We are also seeing
an increasing frequency of internal investigations that are not
as objective and searching. These tend to be more like advocacy
pieces for current management rather than reflecting what is in
the best interest of the real client, the shareholders who own
TR: The SEC has had great success in a series of
insider-trading cases unfolding in the Southern District of New
York. Is the SEC taking a new "joint-task force" approach to
securities enforcement and working more closely with the FBI and
DOJ now than it was before your arrival?
Khuzami: This cooperation isn't anything new. We have a long
and successful partnership with criminal authorities across the
country. In fact, the U.S. Attorney's Office in Manhattan has
had a securities and commodities fraud task force in place since
1964. But criminal authorities are coming to us more recently,
in part because financial crisis misconduct is a high priority
for them, and because we now have even more specialized
expertise, in the units and throughout the division, where they
can get answers to specific questions about specific market
TR: You mention the specialized units. One of the first
things you did when you came on board two years ago was to set
up five of them. Have they been an effective way to organize the
Enforcement Division and if so how?
Khuzami: The specialized units have proven to be highly
effective because they have allowed staff to become focused and
smarter about products, markets and transactions. People in our
specialized units are better equipped to detect wrongdoing
earlier because they are talking to experts, getting specific
training, reading literature and doing multiple cases involving
the same products, markets and transactions. If you don't need
to educate yourself on the basics of every new case, you can get
right to the heart of the conduct you are targeting. Even
outside the specialized units, there are numerous initiatives
based on specialized expertise and focus.
SEC staffers are applying the expertise developed in one
case to other similarly situated institutions to see if they are
involved in the same misconduct. We are also doing "deep dives"
on certain institutions and practices, learning about companies,
reading public filings, following blogs and news, and looking at
stock price movements to see if there are any "red flags."
TR: How confident are you there is not a Madoff-size scam in
operation as we speak where the SEC was warned of its presence
as was the case with Madoff?
Khuzami: No system is foolproof, especially when an agency
gets the number of complaints that we do, but the SEC is in a
far better position to detect a massive fraud than it was before
the Madoff revelations.
The challenge then was that we were getting tips and
complaints from many different forms - phone calls, emails,
postcards, etc. - and they were coming into multiple portals
within the agency. Now, with our new Office of Market
Intelligence, we have centralized the process, such that all of
the complaints are coming into a central intake point.
We are also standardizing the information in a tip into a
structured format, which permits us to create a searchable
database. We also have dedicated staff conducting first-level
reviews of these tips, so that we can more easily risk-weight,
triage, assign and monitor them in an efficient and more
thorough process. It's a huge improvement in the complaint
TR: How much longer do you plan to stay on the job?
Khuzami: I have one of the best law enforcement jobs in the
country and I am thrilled to come to work every day.
Robert Khuzami is Director of the Division of Enforcement of
the U.S. Securities and Exchange Commission. From 2002 through
2009, Khuzami served as General Counsel for the Americas for
Deutsche Bank AG, and before that as the Bank's Global Head of
Litigation and Regulatory Investigations. From 1990 through
2002, Khuzami was a federal prosecutor with the United States
Attorney's Office for the Southern District of New York.
(Reporting by Ted Knutson)
This article first appeared in Compliance Complete, a Thomson Reuters Accelus service.
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