'Urgency' Drives SEC Crackdown

New Leadership Accelerates Investigations and Levies Millions in Penalties
The Wall Street Journal
AUGUST 12, 2009
By KARA SCANNELL
The Securities and Exchange Commission is reeling off a string of enforcement moves against high-profile companies and individuals as it tries to establish what its new enforcement chief calls a "sense of urgency."
In the past week, the SEC announced three settlements with Bank of America Corp., General Electric Co. and former American International Group chairman Maurice "Hank" Greenberg, with each agreeing to pay stiff penalties. Those coincided with the announcement of the most significant changes to the agency's inner workings in decades, including the creation of at least seven specialized divisions and moves to speed up cases.
SEC Chairman Mary Schapiro and enforcement director Robert Khuzami are trying to repair the agency's reputation, which has been battered in recent years. The agency was taking a longer time to bring cases and failed to stop the multibillion-dollar investment scheme pulled off by Bernard Madoff before he confessed in December.
"Many aspects of our initiatives are designed directly or indirectly to create efficiencies and a sense of urgency in our work," Mr. Khuzami said in an interview.
The change of tone is being felt by SEC staff and defense attorneys representing companies and individuals under investigation.
"Clearly the message going out is that the SEC is going to be much tougher with regard to settlement postures, in terms of penalties," said Walter Ricciardi, a former deputy director of enforcement who is now a partner at the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. "They want to demonstrate there is a tough, new cop on the beat."
Since taking over the SEC in January, Ms. Schapiro has sought to reinvigorate the enforcement division. She brought in Mr. Khuzami, a former federal prosecutor, who is drawing from the playbook of the Justice Department to make the agency more fleet-footed.
Mr. Khuzami has hired two former federal prosecutors he once worked with to help implement the changes. He brought in Lorin Reisner as his deputy director and George Canellos to run the New York office, which is often the front-line investigator of Wall Street firms.
In a speech last week outlining the changes, Mr. Khuzami noted the agency had "listened to the criticism and used it as a learning opportunity."
The changes come a few weeks before the SEC's inspector general is expected to release a critical report on the SEC's handling of the Madoff matter.
The SEC staff is undertaking a "targeted" review of older cases or those with little activity "to determine if continued investigation is warranted," Mr. Khuzami said. "Cases worthy of continued investigation will remain open and active. Some will be closed."
Last month, the SEC settled one matter related to hedge fund Perry Corp. over the timeliness of its 2004 disclosures concerning its ownership stake in a pharmaceutical company before a takeover vote.
The SEC hasn't brought many cases related to hidden ownership stakes around votes. The Perry investigation had lingered for years. Perry agreed to pay $150,000 to settle without admitting or denying wrongdoing.
The agency opened another new front last week when it filed what it billed as the first cases against "naked short selling" a trading practice that critics say has been long ignored by the federal watchdog. Several corporate executives have blamed the tactic, in which traders place sell orders with shares they don't yet own, for their plunging stock prices. In May, the SEC brought its first case alleging insider trading through the use of credit-default swaps.
Last week, the SEC showed its willingness to bring penalties against individuals and corporations, a practice Ms. Schapiro says slowed under its previous chairman. It settled with Bank of America agreeing to pay a $33 million fine, General Electric $50 million and Mr. Greenberg $7.5 million, in addition to returning $7.5 million in alleged improper gains.
All parties settled without admitting or denying wrongdoing.
The agency is trying to speed up cases with new tactics. It is looking for ways to grant cooperation points to individuals who help authorities uncover frauds. To expedite cases, the five-member SEC leadership no longer needs to approve all formal orders of investigation.
That authority will be delegated to Mr. Khuzami, who said he will pass the decision-making responsibility to senior staff attorneys. A formal order enables SEC staff to send subpoenas.
The SEC also is taking a firmer position in dealing with those under investigation by no longer routinely granting extensions to respond to Wells notices, the letters sent to companies and individuals detailing what charges the agency is considering filing, according to several defense lawyers.
While the changes are new and are just beginning to be absorbed by the business community, they could result in a backlash at some point.
When the pendulum last swung in favor of stronger enforcement, after the Enron and WorldCom prosecutions, business groups including the U.S. Chamber of Commerce said aggressive enforcement was driving U.S. companies offshore.