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U.S. Securities and Exchange Commission

Remarks Before the Consumer Federation of America's Financial Services Conference


Robert Khuzami

Director, Division of Enforcement
U.S. Securities and Exchange Commission

Washington, D.C.
December 1, 2011

Thank you. It is a pleasure to be here today at the Consumer Federation of America’s Financial Services Conference.

Let me say at the outset that the views I will express today are my own, and not necessarily the views of the Commission.

CFA has long been a vigorous advocate for American consumers, and the many organizations you represent are a strong voice for honest commerce at the retail level – whether it concerns consumer products or financial services.

That is why I know that you are committed, just as we are at the SEC, to a financial market that is fair and efficient – a market where regulators have the authority and the resources to oversee thousands of entities and professionals and to protect the interests of millions of consumers of investment services.

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.

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.

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.


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.

Future Initiatives

And more is yet to come. To take just one example, our newly-created Asset Management Specialized Unit is utilizing data and risk-based analytics to identify the early-warning signs of fraud, thus increasing our ability to cut off schemes in their infancy.

Some of these frauds are focused on the kind of retail fraud that is of interest to many of you.

Let me give you two examples. First, we are reviewing registration documents for high-risk investment advisers to determine who is lying about their educational achievements, their business affiliations, and their assets under management.

It’s like the crime-fighting approach championed by Rudy Giuliani in 1990s New York – if you stop people when they commit small infractions, they are less likely to graduate to bigger ones.

For Rudy, it was a focus on subway turnstile-jumpers and squeegee-men. For us, it’s advisers who lie about graduating Phi Beta Kappa, conceal their association in a past failed business venture, or inflate their assets under management who might well be the same persons who outright steal your money when the markets turn against them.

We also are focusing on analyzing databases to identify mutual funds that exhibit poor performance, have relatively high fee arrangements, and sub-advisers – all of which may suggest excessive fee arrangements that can eat away at the returns you should be getting in your mutual fund investments.

These are just some examples of many new approaches and initiatives being undertaken by the Enforcement Division.


I am proud and excited to be part of the current Enforcement Division, one characterized by creative thinking, increased talent and expertise, and a strong sense of the mission of investor protection.

But I recognize that my pride and excitement exists alongside the frustration I mentioned earlier, the view that more people should be held to account for the financial crisis, that Wall Street hasn’t been penalized enough, and that the SEC should be doing more.

I want to take the kind opportunity you have given me today to address what I think are some misconceptions that may be fueling this frustration.

Let me be clear.

By attempting to clear up some of these misconceptions, I am not suggesting that we don’t listen closely to the comments and criticisms being expressed.

We listen because it is our obligation as a public agency accountable to investors and taxpayers, among others, to make sure there is not a better idea out there that we should embrace.

1: Put Them in Jail

First, let me begin by clearing up a common misperception, especially when it comes to big financial crisis cases.

Often, people ask me “Why isn’t the SEC putting more people in jail?”

And I am reminded that not everyone realizes the SEC does not have criminal enforcement authority.

We’re a civil enforcement agency.

That means our employees carry no guns, we have no handcuffs and we cannot put people in prison.

Although we work closely and cooperatively with the Justice Department, bringing criminal charges is their exclusive job.

At the SEC, on the other hand, we can pursue other important remedies against securities law violators.

We can recover ill-gotten gains, seek monetary penalties, bar people from serving as officers and directors of public companies and bar professionals from working in regulated industries.

And on that score, I am extremely proud of the work that the men and women at the SEC have done and the record number of actions we have brought.

2. Get Higher Penalties

A second source of frustration sometimes expressed is that the penalties won by the SEC seem low.

Often, this point is made by comparing the penalty to the amount of investor losses, a company’s annual revenues, the profit of a particular trading desk or business line or even a company’s entire market capitalization.

The reality is that the penalty amount the SEC can seek in a civil action is strictly limited by statute.

In fact, we cannot seek a penalty larger than the financial gain a wrongdoer made as a result of the violation, even if the loss caused to investors is substantially greater than those ill-gotten gains.

In many cases, this profit-based penalty calculation provides us with enough authority to extract penalties sufficient to impose appropriate punishment on the wrongdoer.

But that is not always the case.

As I testified last month before Congress, under current law, generally if a swindler pockets $2 million, but defrauds investors of $10 million, we only can seek to recover the $2 million in gains plus a penalty equal to that gain.

That is, we can recover only $4 million, not the entire $10 million lost by investors

We believe that increased penalty authority would help us deliver a tougher message of deterrence in situations where there is a disconnect between the harm caused by a defendant and the amount of penalty we can obtain.

That is why Chairman Schapiro is seeking authority from Congress to pursue penalties up to the full amount lost by investors as a result of the misconduct or three times the financial gain to the wrongdoer, whichever is greater.

With this authority we would be able to return not just a portion of investors’ losses, but where appropriate, and when they are recoverable, all investor losses.

As an alternative, we can currently seek so-called “Tier Three” penalties per violation of up to $150,000 per person and $725,000 per company.

And while those amounts have increased with inflation, they have not kept pace with the impact of the misconduct.

That is why Chairman Schapiro also requested that the Tier Three penalties be increased to $1 million per violation if the misconduct is committed by an individual, and $10 million per violation if committed by a company.

3. Charge the Recidivists with Contempt

Third, commentators have suggested that the SEC settles matters with firms that have previously violated the law without properly taking those prior violations into account.

Let’s start with the basics. Many firms that settle with the SEC agree, as part of the settlement, to be bound by an injunction that bars them from violating the securities laws in the future.

These injunctions put the public on notice of what laws we believe have been violated.

They force companies and their boards of directors to focus on establishing, funding, and implementing compliance programs to prevent unlawful conduct.

A company may commit a later securities law violation, which both independently violates the law and the previous injunction barring it from violating the law.

Where that happens, we don’t have the authority to punish a defendant – or seek criminal contempt – for violating the previous injunction. Only the Justice Department has that criminal contempt authority.

What the SEC has is civil contempt authority. That means that we can only go to court and ask for an order requiring the company to stop committing the second violation.

And that is the key – the second violation has to be ongoing, still being committed, for the company to be in civil contempt.

If the misconduct is over, as is the case in the vast majority of our cases, there is no ongoing misconduct to “stop,” and thus no basis for civil contempt.

But we don’t let the legal limits on our contempt authority stop us from punishing repeat offenders.

We pursue the new violation, and consider the recidivist behavior in determining the appropriate sanction.

So, make no mistake about it – recidivist behavior has consequences, consequences in the decision to bring charges, in the decision of what charges to bring, and in the decision about what kind of sanctions to seek.

But to add to our toolkit, to make sure we have a broad range of tools to address each situation, Chairman Schapiro also has asked Congress to give the Commission the authority to seek enhanced penalties against a party who violates a prior court injunction, separate and apart from any penalty we may seek for the underlying violation.

In this way, there is an added punishment for repeating an offense.

4. Make Them Admit They Broke the Law

Lastly, there has been much commentary on our “neither admit nor deny” policy. That is where, as part of a negotiated settlement, a defendant cannot deny that he violated the law, but also is not required to admit that a violation occurred.

Again, let’s start first with the principles.

All settlements are negotiated resolutions in which both parties agree to a compromise outcome instead of obtaining every element of relief or sanction that may have been sought.

When the Division of Enforcement recommends that the Commission settle a case, it is because our informed judgment tells us that what we are obtaining in settlement is within the range of outcomes we reasonably can expect to get after we prevail at trial, taking into account the strength of the case as well as the delay and resources required for a trial and the benefits of returning money to harmed investors quickly – not to mention the chances that we might lose at trial, or win but be awarded less than what the settlement achieves.

To turn down that type of reasonable settlement due to the absence of an admission is, in my view, often unwise policy.

It would mean many fewer settlements – settlements that, as I said, reflect generally what we could hope to get if we were successful at trial.

The result would be longer delays before victims get compensated, the expenditure of SEC resources that could be spent stopping the next fraud, and – quite possibly – less money in the pockets of wronged investors. And we’d lose the certainty that the victims would actually get compensation.

These are likely the reasons why civil settlements with many federal agencies include a provision that a party does not admit any fault – like the one recently obtained by the National Credit Union Administration with two financial institutions to recover losses on behalf of credit unions whose failures were tied to bad residential mortgage-backed securities investments.

Or others – like the settlement that the FTC announced this week with Facebook on privacy issues – actually allow the defendant to specifically deny the allegations

And it is likely the reason why federal courts across the nation have approved these terms time and time again.

Indeed, one appellate court in New York has noted that requiring a resolution of factual disputes as a condition of entering a consent decree would “emasculate the very purpose for which settlements are made.”

While it is easy to criticize from the sidelines, the practical reality is that many companies would refuse to settle cases if they are required to admit unlawful conduct because that might expose them to additional lawsuits by litigants seeking damages.

Now, I don’t have any particular sympathy for a company facing increased legal risks based on admissions. But there are real costs to refusing to settle cases where we can obtain most or all of the sanctions and other remedies to benefit investors in a case.

We also have to consider the risks associated with litigation, including that cases are won and lost on subtle concepts of materiality, intent, and the meaning of a single sentence in a 500-page offering document.

Litigation also takes time. Some judges move their dockets along rapidly, but in other cases – real cases that we have in fact litigated – it can take years before a case sees the inside of a courtroom, and more years before all appeals are exhausted.

A settlement removes the uncertainty and puts money in the pockets of investors relatively quickly.

And further, litigation requires resources, lots of resources. And we are an agency on a modest budget.

Trials are time-consuming and the agency spends a great deal of money deposing witnesses, producing exhibits, and arguing motions.

And our opponents are well-armed with teams of expensive lawyers – a single company could spend an amount on its defense equal to half or more of our Division’s entire annual operating budget.

A settlement conserves our resources and allows us to redirect them in productive ways.

Settling a case in Miami today could mean preventing the next accounting fraud in Phoenix, pursuing the next manipulation case in Memphis, and prosecuting the next Ponzi scheme in Pittsburgh.

Don’t misunderstand my point. As I said at the outset, we will only agree to a settlement that reflects our best judgment of what we could get if successful at trial, with consideration given to the risk of loss or lesser sanctions.

If we can’t get a settlement that meets that standard, we don’t settle – pure and simple. We proceed with a litigated case and prepare for a trial.

What we don’t do is say, “Well, the case is strong and we could get high penalties, but we’re going to settle for less because we want to save money.”

That’s just not the calculus.

What is the calculus is that if we can get in a settlement, say, 85 percent of what we might reasonably expect to get in trial if – I repeat, if – everything goes our way, it would be cold comfort to say to other victims whose cases are put off, or who are stung by fraudsters we couldn’t catch for lack of resources, “sorry, we needed that two years of staff time to try and capture that last 15 percent. I hope you understand.”

And we are not reluctant to try cases.

We have trial units in all of our offices.

The lawyers assigned to those units live to try cases. I spent more than a decade as a prosecutor in the U.S. Attorney’s Office in the Southern District of New York in Manhattan.

I like going to trial.

I have a new head of the SEC’s trial unit who also spent many years as a prosecutor, and there are many former prosecutors and experienced trial attorneys throughout the SEC.

And we have not shied away from going to trial where that is the right call – even where there was a settlement reached with some of the parties involved in the same conduct.

In the Citigroup matter, we are in fact litigating against Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction, despite having reached a settlement with the company.

In the Goldman Sachs matter, we are litigating against Fabrice Tourre, the Goldman employee primarily responsible for structuring that CDO transaction, despite having reached a settlement with Goldman.

In the case involving the sale of CDOs to Wisconsin Public School Districts, we are litigating against David Noack – the former Stifel Nicolaus & Co. employee who was primarily responsible for selling the unsuitable and risky CDO investments to the Schools – despite having reached a settlement with one of the firms involved.

In short, we settle cases for the right reasons.

To believe otherwise, you would have to believe the following narrative:

That we established and funded an entirely new specialized unit directed solely at investigating fraud related to structured and mortgage-related products that gave rise to the credit crisis … that we staffed that unit with dedicated and talented SEC staffers, some of whom have spent their careers in public service, and all of whom are committed to uncovering fraud in these markets and transactions … we hired private sector experts with market experience to cut through the jargon and the complexities and help us zero in on the possible areas of misconduct … we set up extensive training programs to teach these staffers the complexities of structured products and the markets in which we operate; the staff then went out and spent years pouring over millions of pages of documents, e-mails and 500-page prospectuses and indentures and flow charts to find evidence of fraud … then spent months and years in conference rooms questioning witnesses about these transactions in painstaking detail … and then we put together our case, charging both the company and the persons who were responsible for the deal.

And against all that background, and not settling the case against the individual, such that there will be a trial regardless of what happens with the company, some suggest that we nonetheless intentionally settle the case against the company on the cheap because we just don’t like to try cases, or for other, even more ridiculous reasons.

To believe that scenario is to have a fundamental misunderstanding about the professionalism and commitment of the SEC staff, not to mention human nature.

Given the chance to reach a favorable settlement with at least some of the parties, and the opportunity to focus the SEC staff on the next fraud where victims need our help, I would not necessarily assume the risk of a lengthy trial simply to get an admission. Forgoing such a favorable settlement would not be in the public interest.


Funding, of course, is at the heart of this debate.

When Chairman Schapiro previously spoke to this group she cited the budget as a major concern. It’s only natural, because the SEC has long struggled with funding.

Now, since the passage of the Dodd-Frank Act, the problems are greater as we have significantly more work to do, without the additional money to do it.

Additional funding will, among other things, allow us to bring on board more enforcement attorneys and investigators, and to pay the ever-increasing costs of e-discovery and expert witnesses – not just to pursue more wrongdoing but to litigate when a firm refuses settlement terms that we insist upon.

More resources would mean greater leverage when negotiating with a defendant.

And more resources would allow us to become more proactive in detecting fraud.

Right now, the SEC can only inspect – on average – eight percent of all investment advisers each year.

Raising that figure would mean a substantially greater ability to deter fraud or to detect it early.

More funding would allow us to hire more economists to do cost-benefit analyses of our rules.

And it would permit us to operationalize the hundred or so new rules we have to put in place under the Dodd-Frank Act.

Most important for us is that increased funding for the SEC does not contribute to the deficit.

That is because, by law, any funding we receive from Congress is offset by the fees the SEC collects from Wall Street.

If Congress appropriates us $1 billion, we must adjust the fee rates so that we can collect about $1 billion in fees.

If Congress appropriates us $2 billion, we must adjust the fee rates so that we can collect about $2 billion.

The money, therefore, does not come from the American taxpayer.

And, it doesn’t get pulled from another part of government, like the Defense Department.

To put it another way – last year, we collected about $1.3 billion in transaction fees from Wall Street. If Congress appropriates us less than that amount, it would be tantamount to giving a sort of financial rebate to Wall Street – something that would likely generate even greater frustration.

It also is worth noting that in the past two years, the SEC has more than earned its budget.

Against total appropriations over 2010 and 2011 of about $2.3 billion, we have obtained court orders totaling $5.6 billion in penalties and disgorgements, and we have put back $3.6 billion in the hands of harmed investors’ hands.

Very few companies can claim to deliver the return on investment that the SEC is delivering.


The SEC and the CFA share a common interest in a fair and efficient financial system, one in which rules are observed, crime is detected and deterred and justice is served.

I am proud of the work the SEC has done to further this ideal. In the past two years, we have completely restructured the agency, reformed the way we operate, reinvigorated the enforcement program and taken on significant new responsibilities – all while significantly increasing the level of our performance.

But I understand the frustration many feel. I feel it, too.

I have the honor of leading hundreds of talented, committed individuals who are doing excellent work against overwhelming odds keeping order in the world’s largest and most complex financial markets.

I can only imagine how much more effective they’d be with better tools and proper funding, and how much better off the retail investors at the heart of the CFA’s mission would be.

Americans expect a great deal from their securities regulator. We believe we should have the authority and the resources that will help us meet those expectations.



Modified: 12/01/2011