Stepping Up Enforcement
Rosen and others say the Division of Enforcement is gearing up to push open the boardroom doors as well. Khuzami, has a reputation as a hard-boiled former federal prosecutor who is putting the bark—and the bite—back in the SEC’s role as “watchdog.” Prior to joining the agency last year, Khuzami was general counsel for the Americas at Deutsche Bank. He also served 11 years with the U.S. Attorney’s Office for the Southern District of New York, where he prosecuted white-collar and securities crimes, including insider trading and Ponzi scams. He also directed some of the initial investigations into the 9/11 attacks.
During the January 13 press conference, Khuzami enthusiastically announced the division’s new “strong, swift and strategic” cooperation initiatives, which include the authority to issue subpoenas and targets and provide invaluable and early assistance in SEC investigations and enforcement actions, he said. The risk-management enhancements to both human and technology resources should result in powerful tools with substantial consequences for investigators—and those individuals and corporations being investigated, he said. “If our batting average isn’t .1000, it will be close to it,” Khuzami pledged.
Rosen and others interviewed for this story say the increased resources of the Division of Enforcement will allow it to pay unprecedented attention to audit reports, internal and external controls, and risk assessments. “If the numbers aren’t making sense and the board isn’t paying attention, and something goes wrong, the enforcement division has the right to question the board,” Rosen said, adding that moving forward, the board chairman should not just ask the chair of the audit committee to sign off on audit reports, but seek input from the entire board. “Other board members should be able to read a financial statement,” Rosen says. “Otherwise, what are they doing there? Are they just there to show up or do they understand what the company faces?”
Martin S. Wilczynski, senior managing director-forensic litigation for FTI Consulting who worked for the SEC Division of Enforcement from 1993 to 1998 as a member of its accounting staff, says the “new and improved” division will create “issues for many companies and the boards of directors who serve those companies.”
Wilczynski cites the example of whistle-blowing employees who report alleged violations to management and then, as many do, follow up by sending the same complaint to the SEC. Corporations must manage each and every complaint out of an abundance of caution, as well as at the expense of money and time because “if not, that one time it doesn’t” and the allegations prove to be a true problem with material consequences and substantial risk, Wilczynski says “the SEC begins to get very interested in issues and how they are resolved. It’s really important for companies and their boards to take this seriously because if you miss one, you could really accelerate a bad situation…The Commission will say [to directors] ‘You could have known, you should have known, and because you didn’t, you’re part of the problem.’”
The Original Bully Pulpit
Reflecting on Levitt’s comment that Schapiro’s legacy will be her use of the bully pulpit brings to mind the original bully pulpiteer: Theodore Roosevelt, 26th president of the United States. His brand of activism brought effective reforms during an eight-year term, which ended in 1909, 24 years before distant cousin FDR established the SEC to protect investors in public companies. Perhaps what directors of public boards should expect from the SEC today could best be illustrated by this quote from Roosevelt’s bully pulpit: “No man is above the law and no man is below it: nor do we ask any man’s permission when we ask him to obey it.”
I look forward to receiving a copy of the article
I believe the SEC should look into controlling the practice of “Naked Short Selling.” While there has been a lot of conversation we need some action.