When I came to the SEC in 2009 to lead the Enforcement Division, the United States was struggling to come to terms with the impact of the financial crisis.
The impact of the crisis was severe, as each of you and the people you represent know all too well.
Robert Khuzami
Our job, our challenge, in the Division of Enforcement was to investigate and hold accountable those who had contributed to the financial crisis.
We took that challenge head on.
This is the December 1 address by Robert Khuzami before the Consumer Federation of America’s Financial Services Conference in Washington, D.C.
We immediately set to work investigating violations of the securities laws that may have contributed to the financial crisis.
At the same time, we launched an ambitious plan to reform the organizational structure of the Enforcement Division, and to forge better tools with which to do our job, so that we could work smarter and more efficiently.
This effort has yielded impressive results. I’m going to talk about that in more detail in just a moment.
But I know that, despite our improved performance, some question the adequacy of our efforts, and in particular the terms of some of the settlements we have obtained in cases against financial institutions arising out of the credit crisis.
Some feel the SEC can and should do more, that the penalties we have recovered are insufficient to deter future misdeeds by some large firms.
Some of this frustration – to the extent it is directed at the regulators – is rooted in misunderstandings, including misunderstandings of the SEC’s powers as a law enforcement agency.
And some is the result of limits placed on the penalties we can impose, and on the resources we can deploy.
And so, I thought I should try to clear up some of those misperceptions and talk about proposals that our Chairman has asked Congress to consider.
These are proposals that would give us greater authority to punish and deter, and allow us to more effectively enforce the law against large institutions and against the smaller operations that target the men and women your organizations represent.
Reorganization
Through hard work and innovation, we have now completed what was the most significant reorganization in the history of the Enforcement Division.
What did we do? We flattened our management structure by taking attorneys out of management positions and putting them back on the front lines to conduct investigations, bring cases and hold bad actors accountable.
We radically reconfigured our organizational structure by creating five new specialized units with nationwide scope, all focused on complex, high-priority areas:
- Asset management and mutual funds.
- Illegal trading and other market abuses.
- Structured and new products including complex mortgage-related products.
- Foreign corrupt practices.
- Municipal securities and pensions.
These units allow us to build specialized, institutional knowledge and experience that allow our attorneys to recognize and respond to suspicious activity more quickly.
We recruited industry experts – non-lawyers with genuine market expertise and specialized experience to assist in our investigations. These folks know where the rocks are and what is buried underneath them.
Today, if someone is under investigation about improperly inflating the value of bonds in the mutual fund one of your members or clients owns, there is a good chance that sitting across from them is someone from the SEC who used to value bonds for a living.
That keeps the discussion very “accurate” shall we say.
We secured two significant tools that help us gather high-quality evidence quicker than in the past.
First, we established a Cooperation Initiative to encourage “insiders” with knowledge of wrongdoing to come forward early, thus allowing us to bring stronger cases and shut down fraudulent schemes earlier than would otherwise be possible.
And second, we set up a Whistleblower Program – as required by the Dodd-Frank Act – that expands our authority to reward individuals who provide the SEC with early, useful information about securities law violations.
Additionally, we worked with our Chairman, Mary Schapiro, and the other Commissioners to give our attorneys more power to act swiftly and aggressively, opening investigations without having to go through the process of full Commission approval in advance.
And we have been bringing 21st Century IT into the battle, increasing our use of sophisticated analytic tools and data-based templates.
This helps us identify suspicious patterns and activities before they have hatched into full-blown frauds.
Together, these initiatives are designed to allow us to detect much of the fraud to which retail investors are particularly vulnerable – and to detect it sooner than previously possible.
This reduces the number of people who become victims, minimizes the harm to those who unfortunately have already been victims, and increases the odds we will catch the perpetrators, bar them from working in the industry and return the funds to defrauded investors.
Record Productivity and Performance
The conventional wisdom was that the dislocation and distraction that comes with implementing such fundamental organizational changes would cause our productivity to slip.
That did not happen. A few weeks back we closed the books on one of our most productive years ever.
In fiscal year 2011, the SEC filed a record 735 enforcement actions – a nearly 9 percent increase over the previous year.
While numbers do not tell the whole story, it was nonetheless the most cases we’ve ever filed in the history of the agency.
Equally, if not more important, these record numbers include many highly complex, difficult-to-detect schemes.
During 2011, we continued to aggressively bring actions stemming from misconduct related to the financial crisis. In fact, since 2008, we have filed 36 financial crisis-related cases and charged more than 80 individuals and entities.
That’s more cases than any other federal agency can claim. What’s more, nearly half of the individuals we charged in these cases were CEOs, CFOs and other senior officers.
And these were not simple cases. They involved misconduct such as:
- Concealing the risks associated with collateralized debt obligations (CDOs) and other complex structured products.
- Misrepresentations about the terms of those transactions.
- False valuations of mortgage-related assets.
- Accounting schemes involving those products.
We also filed cases against investment advisers and others who concealed the extent of risky mortgage-related investments in mutual funds and other financial products that were marketed and sold to retail investors.
As a result of our actions, courts have ordered nearly $2 billion in penalties, disgorgement and other monetary relief – most of which has or will be returned to harmed investors.
In fact, we are achieving record results across our entire program.
We filed 57 insider trading cases in 2011, a nearly eight percent increase over the previous year.
Included in that number are additional Galleon-related insider trading cases, where we worked with criminal authorities to break up one of the largest insider trading schemes ever uncovered – one that undermined the integrity of the market and created an uneven playing field for those without inside information.
In addition to the criminal actions, the SEC to date has charged 29 hedge fund professionals, corporate insiders, and others in this one scheme. And, the ringleader, Raj Rajaratnam, was recently ordered to pay a record $92.8 million civil penalty to the SEC in addition to the criminal penalties imposed.
But it’s not all about hedge funds and investment banks. We’re keeping an eye on the professionals who handle people’s IRAs and their kids’ college funds.
The nearly 150 enforcement actions we filed related to investment advisers and investment companies were a single-year record and a 30 percent increase over the previous fiscal year.
Meanwhile, our 112 enforcement actions related to broker-dealers constitute a 60 percent jump over the previous fiscal year.