The recently departed enforcement director at the Securities and Exchange Commission said the agency’s “enforcement machine” will roll along even as expected new SEC Chairwoman Mary Jo White likely dedicates much of her early tenure to Dodd-Frank rulemaking.
Robert S. Khuzami, who spoke today at a compliance conference hosted by Dow Jones in Washington, D.C., said that White’s focus on clearing up the backlog in implementing rules for the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act would not affect the volume of enforcement cases.
What remains to be seen, Khuzami said, is where the SEC will now aim its firepower after pursuing more than 150 cases tied to the 2008 financial crisis.
“Those cases will roll off over time,” said Khuzami, who joined the SEC in 2009 and left earlier this year. “The question is what will be the SEC’s, the enforcement division’s focus and priority in the months and years ahead.”
Khuzami noted the potential caseload that may be tied to the SEC’s whistleblower office, which pays bounties if tips lead to successful enforcement actions.
The office established under Dodd-Frank is valuable, he said, because it allows the SEC to learn about sophisticated corporate schemes that might go undetected unless a whistleblower steps forward.
In remarks yesterday at Georgetown University, current SEC Chairwoman Elisse B. Walter said up to 143 enforcement actions from 2012 could be eligible for whistleblower payout. The office received 3,000 complaints in its first year, she said.
Even so, Khuzami said the SEC is conscious that the whistleblower system can lead to abuse.
His perspective, he said, is informed by his time as in-house legal counsel at Deutsche Bank AG. “Every February or March, when bonuses were announced and promotions were announced, there’d be a huge spike in whistleblower complaints, not surprisingly,” Khuzami said.
Employees unhappy with their pay or promotion would suddenly become whistleblowers.
When the rule was being written in 2011, business advocates pushed the SEC to require whistleblowers to report problems internally to the company before running to the government. Companies argued they had spent millions of dollars setting up compliance programs and tipster hotlines in the last ten years to comply with the 2002 Sarbanes Oxley Act, and that whistleblowers should use those channels.
Khuzami noted the commission gave whistleblowers incentives to report internally before coming to enforcers. For instance, a person who reports to the company first will not be passed over for a reward if another whistleblower reports immediately to the government.
The SEC, he said, will also favorably consider the fact that a whistleblower made a report to the company when deciding on the percentage of a whistleblower award.
Coming to the SEC on the heels of the financial crisis and the Bernie Madoff investment scandal, he oversaw a major restructuring of the agency’s enforcement division, which cut down on bureaucracy and created specialized units to focus on specific enforcement priorities.
When he came in, he said there were roughly 3.25 SEC staff members per supervisor, an indication that the organization was top heavy.
“Those kind of ratios just stifled innovation and accountability,” he said, ”and just created too much process and bureaucracy.”
Supervisors were rededicated to the front lines, he said, and members of the field units were able to focus on their core enforcement competencies.
The SEC has been criticized for allowing companies to settle cases without admitting to conduct. The “neither admit nor deny” language in most SEC civil settlements means that companies can essentially pay a disgorgement or penalty and make compliance changes — and avoid saying they did anything wrong.
Notably, U.S. District Judge Jed S. Rakoff of New York’s Southern District rejected a settlement in 2011 between the SEC and Citigroup because the financial industry giant did not admit wrongdoing. That decision is on appeal.
Khuzami said the commission continues to allow companies to avoid admitting guilt — which can open them to liability in civil suits, particularly from shareholders — because it allows cases to be settled sooner, saving resources which can be used to pursue other enforcement actions.
The commission only settles, Khuzami said, if the settlement is comparable to what could likely be won at trial.
If settlements occur early on, the commission is able to bar officers from violations in the industry — something that wouldn’t happen until years later if the case went its full course.
Companies cannot deny wrongdoing, he said. And even if they don’t admit anything, he said there’s often little question that the company was at fault because the commission will lay out allegations in the complaint, officers may be charged, and the company will agree to pay a large sum of money.
“If you put that whole package together, there’s not a lot of ambiguity that the company engaged in wrongdoing,” Khuzami said.