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Khuzami Departs, Leaving the SEC in Better Shape

Robert Khuzami, director of the division of enforcement at the SEC at the House Financial Services Committee hearing in Washington

Photograph by Andrew Harrer/Bloomberg

Robert Khuzami, director of the division of enforcement at the SEC at the House Financial Services Committee hearing in Washington

Soon after Mary Schapiro, former chairman of the Securities and Exchange Commission, took office in 2009, she called Robert Khuzami, a former federal prosecutor who was then an attorney at Deutsche Bank, and asked him if he was interested in running the agency’s enforcement division.

Khuzmai could have politely declined, and nobody would have held it against him. The SEC enforcement division was in shambles. It had failed to uncover hedge fund manager Bernie Madoff’s Ponzi scheme as it metastatized under the nose of its investigators. Morale in the division was at an historic low. Even so, Khuzami took the job. He told me last year that he saw it as a “once in a lifetime opportunity.”

Khuzami announced on Wednesday that he is stepping down from his position after four years in which he turned the division around. The SEC filed 735 enforcement actions in 2011, a record for the agency. It collected $928 million in penalties, almost four times the amount it collected in 2008. Thanks to early spade work by the SEC, hedge-fund heavyweight Raj Rajaratnam is behind bars, and his case has generated scads of leads pursued by the SEC. Some of them inspired the agency’s high-profile investigation of alleged insider trading by SAC Capital, the powerful hedge fund in Greenwich, Conn., that that makes Galleon look tiny by comparison.

Yet Khuzami had his critics. Some thought he wasn’t tough enough on Wall Street. Others didn’t understand that he was running a civil enforcement division rather than a criminal one. ”I was shocked at the number of people that still don’t understand this, but we don’t put people in jail,” Khuzami told me last year. “We can’t. You know, you still read stuff, and people say, ‘How come you’re not throwing people in jail?’”

Khuzami had more substantial differences with U.S. District Court Judge Jed Rakoff. In 2011, Rakoff admonished the SEC for not being tough enough on Citigroup (C), refusing to sign off on the SEC’s $285 million settlement negotiated with the bank. Rakoff’s objection: The agreement included one of the SEC’s standard clauses allowing the defendant to “neither admit nor deny” wrongdoing. Khuzami responded that the SEC wouldn’t have gotten a substantially larger amount if it had taken the case to trial and appealed the decision.

Yet Rakoff has nothing but praise for Khuzami on Wednesday. “Although, from our different perspectives, Rob Khuzami and I sharply disagree about some matters, overall I think he has done a terrific job,” Rakoff told the New York Times.  “Most important, he has restored a sense of pride and purpose to the SEC enforcement division, and we are all the better for it.”

Leonard is a staff writer for Bloomberg Businessweek in New York.

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