SEC Upsets Some as It Tries to Sharpen Teeth
Several Moves Draw In-House Criticism

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, July 15, 2009

The Securities and Exchange Commission has begun moving far faster to stop financial scams and open investigations into potential wrongdoing than in the past, according to agency data, adopting an aggressive posture after it was sharply criticized about its oversight of Wall Street and failure to uncover Bernard Madoff's massive fraud.

Since Mary Schapiro became chairman in January, for instance, the SEC has launched nearly as many formal investigations as it did in any of the past five years.

At the same time, Schapiro and her enforcement director, Robert Khuzami, have undertaken a series of personnel changes that employees say are causing turmoil within the enforcement division and posing a distraction from its work investigating financial crime. Khuzami has two meetings scheduled today with employees to discuss these moves.

The enforcement division -- the largest at the SEC -- is at center stage as the agency prepares to gain new responsibilities under the Obama administration's proposed reworking of financial regulations. In testimony before Congress yesterday, Schapiro said the agency was keenly aware of its obligations. "There is an invigorating sense of urgency among the staff of the agency to demonstrate that we are up to the job," she said. "Khuzami is reducing bureaucracy by streamlining management within the enforcement division, putting many more talented investigators directly to work on cases."

Schapiro and Khuzami have pushed investigators to close old cases and focus more on those arising out of the financial crisis.

Since January, the SEC has filed several notable cases. It sued former executives of mortgage lender Countrywide Financial for allegedly failing to disclose the risks of its business practices to investors, and the agency has sued Reserve Management for allegedly deceiving investors in the money market fund company. The agency also sued a former executive of Beazer Homes for allegedly manipulating earnings and American Home Mortgage executives for allegedly concealing from investors the truth about the deteriorating condition of that company. And the SEC filed the first case involving credit-default swaps, opaque financial instruments that exacerbated the crisis.

"It's pretty clear that the commission under its new leadership is moving more quickly and more aggressively -- particularly in areas related to the financial crisis," said Mark Schonfeld, a partner at Gibson Dunn & Crutcher and a former SEC enforcement official.

The commission has launched 224 formal investigations, more than double the number at this time last year and nearly as many as in any full year since at least 2004, according to SEC data. The number of emergency actions taken to stop fraud has more than doubled since the same period last year.

According to an analysis by Gibson Dunn & Crutcher, the SEC has filed cases against 527 defendants in the first six months of this year, compared with 317 last year.

The heightened activity has prompted renewed pride inside the enforcement division even as personnel changes are fueling disenchantment, employees say. One investigator described the feeling as "schizophrenic," with staff concerned about the changes but pleased with Schapiro's support for aggressive enforcement.

Senior SEC officials have decided, among other things, to eliminate a category of managers known as "branch chiefs" and to reduce the staff assigned to another known as "assistant directors."

Agency officials say the changes are designed to direct fewer of the division's resources to management and more to investigations. The SEC is notorious for a labyrinthine reporting structure that can dramatically prolong how long it takes for the agency to decide whether to pursue cases.

Khuzami was known as a deft manager while head of the white-collar unit in the U.S. Attorney's Office in the Southern District of New York. At the SEC, he is planning for specialized groups to focus on particular types of financial wrongdoing.

But some enforcement lawyers say the plans amount to a pointless reshuffling of chairs when the agency is trying to focus its energies on cases linked to the financial crisis. These lawyers also say the plans ignore the merits of the current structure, for example assigning branch chiefs the role of investigating cases as well as managing staff.

Another concern among some enforcement lawyers is that three of the most important positions at the agency -- the enforcement director, the deputy enforcement director and the head of the New York Office -- have been filled this year by people with no SEC experience.

Khuzami bypassed an SEC veteran, Scott Friestad, to choose his former colleague, Lorin L. Reisner, as his deputy. He skipped over Andrew Calamari, who was seen by many at the agency as next-in-line in New York, to choose George S. Canellos to head the prestigious office. Both Canellos and Reisner are former Khuzami colleagues from the Southern District of New York.

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