New Initiatives are Intended to Streamline and Shorten Investigations

In a speech on August 5, 2009, to the New York City Bar Association, the SEC’s new Director of Enforcement, Robert Khuzami, outlined several new initiatives to be undertaken by the Division of Enforcement and provided further detail about previously-mentioned initiatives. The initiatives are driven by four principles he asked the SEC staff to embrace upon his arrival: 1) be strategic; 2) be swift; 3) be smart; and 4) be successful; i.e., build strong cases.

  1. National specialized investigative units. Khuzami has discussed the creation of specialized units before, but provided additional detail in his speech. Five specialized units will be established covering the following areas: asset-management (focusing on investment advisors, investment companies, hedge funds and private equity); market abuse (focusing on complex manipulation schemes by institutional traders and market professionals); structured products (focusing on CDS and CDOS); foreign bribery (i.e. FCPA investigations); and municipal securities and public pension plans (pay-to-play). Each unit will be headed by a unit chief and staffed by those who either have existing expertise in the area or a demonstrated interest in developing expertise in the area. While specialized investigative groups are not a new concept at the SEC, they have not previously been so formalized. In recent years, for instance, there have been national task forces concentrating on fraud in the areas of hedge funds, foreign bribery and subprime lending.
  2. Reorganization of the Enforcement Division. Acting on criticisms that the Division of Enforcement is too bureaucratic, Khuzami’s plan does away with an entire level of supervision – branch chiefs – who have traditionally supervised 4 to 5 staff attorneys each. Instead, some branch chiefs will be demoted to staff attorneys, and others will be promoted to assistant directors. At the same time, the authority of assistant directors is being reduced. Instead of supervising 3 to 4 branches, and thus approximately 20 attorneys each, each assistant directors will supervise approximately 6 staff attorneys, in effect functioning as branch chiefs. While Khuzami has stated that the change will encourage accountability and increase the number of talented investigators available to work full-time on investigations, it is unlikely to be wellreceived by the existing staff. The impact of the resulting bad morale on the progress and efficiency of investigations is yet to be seen.
  3. Greater Authority to Senior Managers. Senior managers will have authority to approve more actions than they were able to previously. For instance, all senior officers will have the authority to issue subpoenas. Chairman Shapiro has already stated that the Commission will delegate the authority to approve formal orders and issue subpoenas to the Director of Enforcement, a power previously vested only in the Commission itself. This change will increase the speed with which investigations can be conducted, since staff will no longer have to justify a formal investigation to the Commission in order to secure subpoena power. It is also likely to increase the number of formal – as opposed to informal – investigations conducted by the staff. Senior managers will also have authority to approve all routine case decisions.
  4. Fewer Tolling Agreements. A tolling agreement extends the statute of limitations, extending the length of an investigation as a result. Securities fraud actions must be brought within 5 years, and by virtue of tolling agreements, staff in the past has been able to draw out the term of an investigation to an inordinate degree. According to Khuzami, going forward, tolling agreements will be the exception, rather than the rule; he alone will have the authority to authorize them.
  5. Creation of the Office of Market Intelligence. This newly-created Office will be responsible for collecting and analyzing tips, referrals and complaints made to the SEC. It is an obvious response to the Madoff situation, and an effort to install checks and balances to ensure nothing else falls through any cracks.
  6. Encouraging Cooperation by Individuals. Unlike criminal prosecutory units, the SEC historically has relied more on the cooperation of organization than that of individuals. For instance, in the 2001 Seaboard decision, the SEC laid out a number of factors for consideration in evaluating corporate cooperation, and thus leniency in sanctions imposed. On the theory that cooperating individuals can be rich sources of information for investigations, Khuzami plans to devise a similar cooperation policy for individuals. Previously, there was no real mechanism for individuals to gain any benefit through cooperation and, therefore, no incentive to cooperate.

Khuzami is also exploring an expedited process by which authority to submit immunity requests to DOJ is delegated to the Director. Finally, he is exploring ways to let witnesses know at an earlier stage whether or not charges will be filed against them, and anticipating the use of deferred prosecution agreements with respect to both individuals and entities.

While it remains to be seen what the impact of these changes will be in the future, it is safe to expect that they will have at least some of their intended impact – the streamlining and shortening of investigations – which should be welcomed by both public companies and individuals under investigation. On the other hand, given these measures, individuals and entities under investigation should recognize that they will probably be expected to step up the pace of their responses to agency requests, both in the context of producing documents more expeditiously and providing witness testimony on an expedited basis.