Securities Law Blog

Robert Khuzami is making big moves in his first year at the helm of the Securities and Exchange Commission (SEC)’s enforcement division. The director has helped to lead the largest overhaul of the SEC in the last thirty years. Trying to move on from the SEC’s devastating missteps surrounding the Madoff scam, the changes in the enforcement division will seek to stop financial criminals in their tracks.

Khuzami’s new “whistle-blower initiative” aims to catch crooks before they have caused too much damage. The initiative is directed at individuals involved in perpetrating the scams. For those who participate in fraudulent schemes but now wish to turn in their co-conspirators, the SEC is offering escalated levels of protection. The whistle-blower’s help will be taken into consideration when taking enforcement action in what the SEC is calling “cooperation agreements.” These agreements could exempt the whistle-blower from SEC suits and provide legal help if the U.S. Department of Justice were to launch its own criminal case.

Another part of Khuzami’s revitalization efforts include pushing for legislation to add whistle-blower payments and protections to U.S. securities laws. The proposed legislation would offer big economic incentives for securities tattletales. If passed into law, an individual who provided crucial information that led to the capture of a felon could collect an award worth up to 30% of the amount regulators later recover from the scam.

According to Khuzami, having an insider will make uncovering the well-hidden tracks of white-collar criminals much easier.

“People who engage in a lot of white-collar crimes are often planning their defense at the same time as they are planning their offense,” Khuzami said.

The SEC restructuring comes after one of the worst years for securities fraud. According to “Select SEC and Market Data 2009”, the SEC:

*Obtained orders in SEC judicial and administrative proceedings requiring securities violators to disgorge illegal profits of approximately $2.09 billion and to pay penalties of approximately $345 million.

*Sought emergency relief from federal courts in the form of temporary restraining orders to halt ongoing fraudulent conduct in 71 actions, and sought asset freezes in 82 actions.

*In SEC-related criminal cases, prosecutors filed indictments, informations, or contempts in the 2009 fiscal year in 154 cases.

The regulatory agency has never before caught as many crooks or ordered as much money returned to investors. The numbers also reflect that millions of investors lost billions of dollars before the crooks were caught, and will be lucky to recover what little they can.

What could derail the SEC and Khuzami’s entire initiative? The current federal prison sentence being served by former international banker, Bradley Birkenfeld. Birkenfeld turned in his bosses at Swiss banking agent UBS, leading to one of the largest IRS settlements in history. Supporters of Birkenfeld are seeking a pardon for him as a reward for his cooperation with the government. Despite his cooperation, the Justice Department sought prison time for Birkenfeld, saying he turned in his superiors but did not disclose his own role in helping one of his clients.

Although Khuzami had no role in the Birkenfeld case, the SEC could face problems in launching a successful whistle-blower program while one whistle-blower is sitting in federal prison.