Securities and Exchange Commission (SEC) enforcement chief Robert Khuzami took to the airwaves this weekend to defend his embattled agency’s record against Wall Street firms.
Faced with mounting criticisms that the SEC has failed to bring a charge against a high level executive at a major Wall Street investment firm, Khuzami went to the C-Span Washington, D.C. studios last week to be questioned by New York Times reporter Ed Wyatt and Wall Street Journal reporter Andrew Ackerman.
Wyatt asked why top executives at the big Wall Street investment firms aren’t being charged.
“You see the big executives in some of the cases, on the public company issuer side – Countrywide, New Century and those companies – we have charged CEOs, CFOs, senior corporate officers,” Khuzami said.
“In the investment banks, it is a little different. The cases we have in this area are with the issuance of a particular CDO that was misleading. Those kinds of transactions often don’t get vetted in the executive suite. Some information does. When you are talking about a public company, earnings reports, disclosures and prospectuses to investors – those types of matters are signed off by CEOs and CFOs.”
“But CDO transactions and other deal specific matters often aren’t vetted at the senior corporate level. Now, don’t get me wrong, we follow the trail wherever it leads. But the nature of the transactions is a little different. You are not going to see as many prosecutions of those folks for those types of violations as you might otherwise. But again, we look strongly and thoroughly across the entire corporate network.”
In April 2010, the Wall Street Journal reported that Khuzami oversaw a group of lawyers at his old firm, Deutsche Bank AG, that was closely involved in developing collateralized debt obligations, the same product in the agency’s fraud lawsuit against Goldman Sachs Group.
Former SEC official and whistleblower Gary Aguirre saw reports of the C-Span interview with Khuzami and was puzzled.
“I am puzzled how journalists can conduct a conversation with Khuzami without mentioning the pink elephant sitting beside him,” Aguirre said. “If Khuzami begins trading back the responsibility for the toxic debt and derivatives to executive suites, he will find himself visiting his own executive suite. Khuzami was neck-deep in supervising the attorneys responsible for that staff at Deutsche Bank. Who would go softer on the Wall Street execs who created the financial crisis than one of their own?”
In it’s April 2010 article, the Journal reported that “before taking his current job at the SEC last year, the 53-year-old Mr. Khuzami spent five years running the U.S. legal division of Deutsche Bank, one of the largest issuers of collateralized debt obligations in 2006 and 2007.”
“As part of that job, he worked with lawyers who advised on the CDOs issued by the German bank and how details about them should be disclosed to investors. The group included more than 100 lawyers who also defended the bank against lawsuits and vetted other financial products, these people said,” the Journal reported.
“Deutsche Bank has faced allegations of inadequate disclosure over its creation of CDOs. It isn’t clear if Mr. Khuzami personally reviewed any structured-finance deal documents in his role at the bank, and outside law firms were also involved in CDO work.” “Deutsche Bank was doing exactly what Goldman Sachs was doing,” Aguirre told Corporate Crime Reporter. “And Khuzami was supervising the attorneys creating the legal documents for that. For every one of these documents – he’s at the head supervising the lawyers.”
“If you are going to start digging back into the executives suites – how about the general counsel’s office?”
“And at the SEC, Khuzami sets the model for settling with the big Wall Street firms. Goldman gets busted for $550 million, but only a mid-level trader gets charged. No higher level Goldman executives get charged.”
But during the C-Span interview, Khuzami wasn’t challenged about Goldman or Deutsche Bank.
That gave him space to make the argument that the SEC is fulfilling its role as tough cop since the financial crisis.
“Over 102 entities and firms have been charged,” Khuzami said. “Over 55 CEO, CFOs and senior corporate executives – for conduct across the mortgage related areas, from issuing companies like Countrywide and New Century, to those firms that issues CDOs with misleading statements, such as Goldman Sachs, JP Morgan, Wachovia and Citigroup to the mutual fund complexes who loaded their funds up with riskier mortgage assets.”
“We have been active across the board. We have a specialized unit set up to handle these cases. We are vigorous across the platform.”
“Why aren’t more of these folks in jail? The SEC does not have criminal authority. But we work closely with the Justice Department in these cases.”
Khuzami said the SEC is “significantly underfunded.”
“While we are responsible for regulatory 35,000 entities, public companies, broker dealers, investment advisors, transfer agents – anybody who might commit securities fraud – we are about the size of the DC police force.”
“But we punch well above our weight class. And I like our chances in our cases.”
“We were underfunded before Dodd Frank, Dodd Frank has only increased the burden.”
Khuzami said that the SEC’s newly created whistleblower office is “thriving.”
“We are getting a substantial number of tips and referrals – and more importantly higher quality ones,” Khuzami said. “The whistleblower program, as well as the cooperation program where we offer reduced sanctions for persons who come forward with evidence – those are two of the programs to get information sooner about wrongdoing.”
Russell Mokhiber edits the Corporate Crime Reporter.