The SEC Loses a Tough Guy

Who'll fill the shoes of departing enforcement chief Stephen Cutler? The answer may indicate the commission's future direction

By Amy Borrus

The Securities & Exchange Commission's announcement today that Enforcement Director Stephen Cutler would soon step down is bound to give investor advocates the jitters. Cutler, who joined the SEC in 1999 and became its top cop in 2001, has used hardball tactics and stiff penalties to bring hundreds of errant companies, executives, auditors, and gatekeepers to account.

The 43-year-old Yale Law graduate directed the SEC's huge financial-reporting cases against Enron, WorldCom, and Qwest, as well as its landmark probe of trading abuses at the New York Stock Exchange. During his tenure, the agency wrested payouts of more than $6 billion from alleged corporate wrongdoers. Ten of the 12 biggest penalties in SEC history were obtained in cases he oversaw.

Spurred in part by New York's headline-grabbing Attorney General Eliot Spitzer, Cutler molded his division into an elite squad that's forcing Corporate America and Wall Street to clean up dodgy finances and hidden conflicts of interest.

Joel Seligman, dean of Washington University School of Law, lauds Cutler as "one of the greatest directors of enforcement in the SEC's history." He adds: "Steve has been astonishingly effective in the range of cases he brought and in the new standards he raised through these cases."


  But Cutler's departure comes at a time when the SEC is increasingly under pressure to regulate with a lighter hand. His zero-tolerance approach has sparked resentment in business and legal circles. Two commissioners -- Paul Atkins and Cynthia Glassman, both Republicans -- have questioned the high fines the SEC has levied, at Cutler's urging, on corporations accused of wrongdoing. SEC Chairman William Donaldson's choice to succeed Cutler will send a signal about the agency's commitment to strict policing of the nation's securities laws.

A leading contender for the job is Linda Chatman Thomsen, Cutler's deputy and fellow tough cop. Her appointment would signal continuity. But a lengthy search for an outside successor would spark concern about a possible shift in direction.

"Steve Cutler has been an outstanding leader of the Commission's enforcement program. America's investors have been enormously well-served by Steve's keen intellect, superb judgment and abiding sense of justice," said SEC Chairman William H. Donaldson. "He is what every prosecutor should be: Tough but fair. We will miss Steve's dedication, leadership and integrity as we continue our critical efforts to pursue and root out wrongdoing in our marketplace."


  Cutler enjoyed a strong partnership with Donaldson, and he embraced wholeheartedly the chairman's push for the SEC to ferret out and squelch smelly practices before they become widespread and balloon into scandal. One result: Cutler's demand that Wall Street firms conduct top-to-bottom reviews of their operations to root out undisclosed conflicts. He regards the self-exams, which required companies to report back to the SEC, as a high point of his tenure. "It's been an incredibly beneficial exercise for the firms to identify potential problems and has promoted a healthy discussion between the agency and the industry," he says.

The lean California native, who practiced securities law at Wilmer, Cutler & Pickering in Washington before joining the SEC, says the division still has a full caseload. But after six-and-a-half years at the agency, he says, "I just thought that it was the right time for me to consider new and different challenges."

Cutler doesn't have a job lined up. To avoid potential conflicts, he didn't discuss his plans with any law firms prior to announcing his departure. But with his track record and reputation for fairness, it's a sure bet that Cutler will be flooded with lucrative offers to work the other side of the street.

Borrus is a correspondent in BusinessWeek's Washington bureau

Edited by Phil Mintz

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