Robert Khuzami, a former terrorism prosecutor who revamped the Securities and Exchange Commission’s enforcement unit, is stepping down from the agency after an aggressive four-tenure.
His departure signals the end of an important chapter in the history of the agency, which has been praised for taking significant actions against some of Wall Street’s largest banks after the financial crisis but also scrutinized for not suing top bank executives at those firms.
After joining the S.E.C. in 2009, Mr. Khuzami reinvigorated the enforcement team, which was maligned for missing the warning signs of the financial crisis and Bernard L. Madoff’s Ponzi scheme. Mr. Khuzami, an imposing presence with a piercing stare, reorganized the management ranks, fashioning specialized units to track complex corners of Wall Street, and applied aggressive prosecutorial tactics to civil cases. In recent years, the enforcement division notched a record number of actions, many against banks at the center of the crisis.
“They know we’re out there, and we’re smarter and can cover more ground,” Mr. Khuzami said in an interview. He announced his departure to staff in an e-mail on Wednesday and is set to depart in about two weeks.
Mr. Khuzami’s successor, who has not been named, faces challenges. The enforcement unit must contend with the increasingly influential rapid-fire trading firms that, by some accounts, have introduced instability to the stock market.
The unit also faces lingering questions about its negotiating tactics. Some consumer advocates complain that the agency’s headline-grabbing settlements let Wall Street off the hook. Mr. Khuzami’s unit notably butted heads with a prominent federal judge in New York, Jed S. Rakoff, who in 2010 called the agency’s $150 million settlement with Bank of America over lax public disclosures “half-baked justice at best.”
Mr. Khuzami’s departure, part of a broader exodus from the S.E.C. following the resignation of its chairwoman, Mary L. Schapiro, raises further questions about the future of the unit. The move, at the very least, adds to the gap in the S.E.C.’s roster.
The agency has witnessed a wave of turnover in recent weeks, with the head of trading and markets and the director of corporation finance both leaving. Elisse B. Walter, Ms. Schapiro’s replacement, named interim replacements for those spots.
But the enforcement division, officials say, could struggle under a provisional leader. The enforcement chief, they note, sets the tone for Wall Street oversight.
Ms. Walter is weighing a short list of candidates to replace Mr. Khuzami, according to people briefed on the matter. The list includes Mr. Khuzami’s current deputy, George Canellos, and the enforcement division’s chief litigation counsel, Matthew Martens.
With Mr. Khuzami gone, the field of contenders to replace Ms. Schapiro is also shifting. President Obama awarded the job to Ms. Walter, a Democrat who became an S.E.C. commissioner in 2008, but her term expires at the end of 2013.
Mr. Khuzami, a political independent described as alternately harsh and playful with his employees, built a loyal following among some enforcement division officials who hoped he would win the chairman post. He opted instead to position himself for a lucrative spot at a white-shoe law firm.
“I don’t know what I’m doing next, but I loved the last four years and I’m sad it’s ending,” he said in the interview.
Mr. Khuzami, a Rochester native with a bohemian upbringing, followed an unlikely path to the S.E.C. His parents were ballroom dancers; his sister a muralist. They jokingly refer to Mr. Khuzami as “the white sheep” of the family.
He put himself through school with odd jobs, as a dishwasher, bartender, overnight dockworker. After graduating from Boston University law school, he was hired as a junior lawyer at Cadwalader, Wickersham & Taft in New York.
Mr. Khuzami tried out for the United States attorney’s office under Rudy Giuliani, but missed the cut. When the office eventually hired him in the early 1990s, he was assigned to terrorism prosecutions. The move led to a career-defining case — the conviction of the so-called “Blind Sheik,” a Muslim leader tied the 1993 bombing of the World Trade Center. He later ran a securities task force.
But after more than a decade as a prosecutor, he departed for Deutsche Bank, where he eventually became general counsel of the firm’s American arm.
In 2009, he landed on Ms. Schapiro’s radar screen. She was searching for an aggressive personality to shake up the enforcement team, a demoralized group criticized for missing the warning signs of the crisis.
“It had to be someone who was a great prosecutor,” Ms. Schapiro said in an interview.
Their relationship began with an awkward meeting. Mr. Khuzami, having dressed in the dark to catch a predawn plane to Washington, wore mismatched shoes of different colors. And at the end of the interview, without an explicit offer, he was unsure whether he won the position. Finally, after days of silence, Ms. Schapiro phoned him to ask: “Are you taking the job or not?”
Mr. Khuzami soon hatched a game plan for overhauling — some officials called it “dismantling” — the division.
He arrived in Washington with strategies imported from the United States attorney’s office. Mr. Khuzami pushed the S.E.C. to offer leniency for cooperating witnesses and to strike deferred-prosecution agreements to companies that promised to behave. The tools, he said, are “game changers” for unearthing fraud.
He also poached former prosecutors for his staff, including Lorin L. Reisner, Mr. Khuzami’s friend from the United States attorney’s office, who joined as the top deputy. Mr. Khuzami plucked other new hires from Wall Street, including traders and compliance officers. Adam Storch, then a 29-year-old Goldman Sachs vice president, became the unit’s first chief operating officer.
Under the new regime, the enforcement team eliminated a layer of management, moving senior lawyers onto the front lines of investigations. Mr. Khuzami mandated, for the first time, that all enforcement employees carry a BlackBerry, holding them accountable beyond the 9-5 workday.
Mr. Khuzami also built specialties among his staff, a strategy he picked up at Deutsche Bank. He created an Office of Market Intelligence to analyze and triage tips and complaints from investors. He then opened five units that tracked some of the darkest corners of finance, focusing on structured products like derivatives, market abuse like insider trading and the secretive world of hedge fund returns.
“The changes were necessary and dramatic,” Ms. Schapiro said.
Mr. Khuzami introduced the broad outlines of reform in May 2009 at a retreat in Solomons Island, Md., an annual gathering of senior enforcement officials. “It’s time to get serious about change,” he said, according to attendees.
But the message provoked concerns among enforcement lawyers, who lined up at microphones to question the nuances of new procedures and complain about potential violations of their contracts. A few top officials, some who were widely respected, were about to be left at the sidelines under his regime.
“Everyone in the office was scared, but we also started working harder,” said Thomas Sporkin, who ran the Office of Market Intelligence until last year, when he departed the agency.
The group faced some growing pains, as it adjusted to Mr. Khuzami’s management style. He had a harsh streak and a knack for aggressively grilling lawyers about the nuances of enforcement cases, according to staff members. But they also recalled a softer side. He invited employees to his family Christmas party, they say, and went to motorcycle safety school with Mr. Canellos.
As a motivational tool, he would often publicly perform for his staff. At a swearing-in ceremony for new members, he quoted poetry from Gwendolyn Brooks. Mr. Khuzami also once donned a red wig to sing a version of the “Annie” theme song “Tomorrow,” with lyrics twisted to fit the S.E.C., at an annual awards ceremony.
“Even though he scares the hell out of people,” one employee said, “you like him because he’s genuine.”
Mr. Khuzami’s tactics appeared to bear fruit. Under his tenure, the unit leveled more charges than in any comparable four-year period, including a record number of enforcement actions in 2011. They also mounted 150 actions against people and firms tied to the crisis.
Mr. Khuzami emphasized that the unit was tracking bigger game. The agency has taken aim at billionaire hedge fund managers, including Philip Falcone, and filed complex cases involving collateralized debt obligations, a crackdown that ensnared some of the biggest names on Wall Street. At the urging of Mr. Khuzami and Mr. Reisner, the S.E.C. brought a landmark fraud case against Goldman Sachs, netting a record settlement in excess of $500 million.
“He’s really broadened the net,” said Mary Jo White, a white-collar criminal defense lawyer at Debevoise who was Mr. Khuzami’s boss when she was the United States attorney in Manhattan.
Some consumer advocates say the enforcement unit remains too timid. They complain that it opted not to charge Lehman Brothers executives and went soft on firms like Bank of America and Citigroup. Judge Rakoff refused to bless the $285 million Citigroup deal, calling the penalty “pocket change.”
Critics also question why the S.E.C. sued only a handful of top executives who ran companies at the center of the credit crisis.
“If you’re rich and connected on Wall Street, then don’t worry about the S.E.C,” said Dennis M. Kelleher, the head of Better Markets, a nonprofit advocacy group critical of the financial industry.
Mr. Khuzami dismissed the grumbling, saying, “The critics ought to take comfort in that we’re not reluctant to charge high-ranking individuals.” The agency, he noted, sued 65 senior executives involved in the crisis, including the leaders of Fannie Mae, Freddie Mac and most major mortgage companies that caused the housing bubble. The cases involving big banks, he said, lacked sufficient evidence implicating chief executives.
And despite their differences, even Judge Rakoff credits Mr. Khuzami with a rapid turnaround of the enforcement division.
“Although, from our different perspectives, Rob Khuzami and I sharply disagree about some matters, overall I think he has done a terrific job,” Judge Rakoff said. “Most important, he has restored a sense of pride and purpose to the S.E.C. enforcement division, and we are all the better for it.”
DealBook: S.E.C. Enforcement Chief, Robert Khuzami, Steps Down
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