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SEC faces setbacks, skepticism in trying to reform its enforcement image
But the agency also has faced setbacks. In addition to the Bank of America misstep, a judge rejected the agency's case against Cohmad Securities, which was a major supplier of business for Madoff. The judge called some of the SEC's allegations "speculatively and flimsy." Although the SEC had accused Cohmad of fraud, the judge said the agency did not present any evidence to support the allegation.
Other major cases brought by the SEC are proceeding, but it could be months, or even years, before the agency learns whether it has prevailed. "Once the case gets filed, the timeline is out of our control," Khuzami said.
More than nine months ago, the agency filed a complaint against Angelo Mozilo, former chief executive of major subprime mortgage lender Countrywide Financial, for fraud and insider trading, but the case is still in its initial stage. The agency is also pressing ahead with civil charges against the former managers of two Bear Stearns hedge funds that imploded at the start of the credit crisis in mid-2008. The managers have been acquitted of criminal charges brought by the Justice Department.
To help build stronger cases, Khuzami announced earlier this year that the SEC would use cooperation agreements with potential witnesses. The agency would offer immunity to executives who were aware of wrongdoing and even involved in it if they came forward and testified. Khuzami has called this new approach a "game changer."
But without similar guarantees from the Justice Department, defense lawyers who represent those potential witnesses are skeptical that they'd sign up.
"To make yourself attractive as a witness, you have to be able to deliver the goods and to deliver a true, compelling story of something that's quite unlawful," said Charles J. Clark, a securities lawyer at Kirkland & Ellis and former top enforcement lawyer at the SEC. "We won't want to do that without minimizing the risk of our clients being charged criminally."
Khuzami said this shouldn't be an issue in most SEC cases because typically there are not parallel criminal prosecutions.
Khuzami has begun to rearrange his division, reassigning mid-level managers known as bureau chiefs and redeploying many of them as investigators on the front lines. But the union representing SEC employees said the impact is limited because some of those branch chiefs must be promoted to oversee others who become investigators. "We do not anticipate the 'management restructuring' component of the reorganization will result in a significant increase in frontline investigators," the union said last month in a bulletin. "Nor have we seen any real evidence that the Division intends to change the basic management model that it has employed over the past decade."
The union also minimized the significance of Khuzami's initiative, which is just now underway, to set up teams specializing in different aspects of financial crime. The units, which make up about one-fifth of the enforcement division's staff, will focus on wrongdoing in asset management, structured and new financial products, municipal securities and public pensions, as well as foreign bribery and market manipulation. "Specialized units are essentially a formalization and consolidation of the working group models that have existed in the Division for years," the union said in its bulletin.
Khuzami, however, said the specialized units are a major improvement. "They have real structure, with heads and deputies who have authority," he said. "They are very much stand-alone, concrete, formalized prosecution units designed to be forward-looking."
Some observers of the SEC say that whatever the impact of these changes proves to be, the reform agenda at the agency has already bolstered its image.
When Schapiro began her tenure early last year, "there was a feeling that the SEC was a failed agency. There was talk of carving up the SEC and dividing its functions," said John Olson, a securities lawyer at Gibson, Dunn & Crutcher and a longtime observer of the agency. Schapiro "listened to the criticism and responded. A major part of that was showing that the SEC could bring in a tough former prosecutor in Rob Khuzami who could change the management style."