SEC Door, Spinning Mightily, Smacks Investors

SEC Door, Spinning Mightily, Smacks Investors

The appalling — yet hardly surprising — news that Robert Khuzami, the former enforcement director at the Securities and Exchange Commission, has cashed in his four-year stint for a $5 million-plus salary at Kirkland & Ellis, a prominent Wall Street law firm, is the latest example of the corrupt relationship between money and power in the U.S.

Courtesy of a mostly fawning July 22 New York Times story, we learn that Khuzami orchestrated a frothy auction for himself. Who better than me, Khuzami’s logic must have gone, to provide clients with the government access, connections and insights needed to bill them $1,000 an hour?No one, apparently. There were calls from, among others, Visa Inc., the credit card giant, and Bridgewater Associates, the world’s largest hedge fund, and, of course, a slew of law firms looking to beef up their business advising corporate clients on how to deal with a supposedly resurgent financial regulatory regime.

In case anyone doubted how the game is supposed to work, the Times found Peter Zeughauser, a consultant to large law firms, who allowed this: “To make a white-collar practice work, you have to have an incredibly strong and credentialed lawyer who can generate a material number of matters.” He added, without a hint of irony, that “you want a big name you can trot out before corporate boards.”

Revolving Door

Khuzami is a premier practitioner of the fine art of spinning the revolving door between Wall Street and Washington for personal benefit. He learned from an expert. One of his early mentors was Richard Walker, who was a partner at the law firm Cadwalader, Wickersham & Taft when Khuzami was an associate in the firm’s securities litigation department. After about five years, Khuzami in 1991 joined the U.S. attorney’s office in Manhattan. He remained there for 11 years, working under several U.S. attorneys, including Michael Garcia, now a partner at Kirkland & Ellis, and Mary Jo White, now the SEC chairman, among others.

Meanwhile, his mentor, Walker, left Cadwalader to become the SEC enforcement chief. In 2001, Walker left the agency to join Deutsche Bank as the general counsel of its corporate and investment banking division in New York. A year later, Walker recruited Khuzami to join him at Deutsche Bank as the global head of litigation and regulatory investigations.

Ka-ching! Two years later, Khuzami was promoted to be general counsel of Deutsche Bank in the Americas, where he was ultimately responsible for blessing the work of the bank’s mortgage-backed-securities factory, which churned out billions of dollars of squirrelly instruments.

Some of these securities were so poorly underwritten that one of Deutsche Bank’s own traders, Greg Lippmann, referred to them as “crap” and “pigs,” according to a 2011 report about the crisis by the U.S. Senate Permanent Subcommittee on Investigations, and was one of the people who famously bet (correctly) that they would fail. “I don’t care what some trained seal bull market research person says this stuff has a real chance of massively blowing up,” Lippmann wrote in an August 2006 e-mail.

Deutsche Bank, of course, was one of the largest purveyors of the mortgage “crap.” Between 2004 and 2008, Deutsche Bank issued $32.2 billion of asset-backed collateralized debt obligations, or CDOs, making it the fourth-largest underwriter of CDOs in the world.

‘Strong Incentive’

Here is what Democratic Senator Carl Levin of Michigan, chairman of the Senate investigations panel, had to say about Deutsche Bank’s mortgage group in the 2011 report: “Because the fees to design and market CDOs ranged from $5 to $10 million per CDO, investment bankers had a strong financial incentive to continue issuing them, even in the face of waning investor interest and poor quality assets, since reduced CDO activity would have led to less income for structured finance units, smaller bonuses for executives, and even the disappearance of CDO departments, which is eventually what occurred.”

Stands to reason, of course, that Khuzami would be just the guy you would want to head up enforcement at the SEC after the financial crash, if the goal were to make sure Wall Street didn’t get too roughed up. With the help of his former boss, Walker — who remains Deutsche Bank’s general counsel and is a member of its powerful management board — Khuzami got the SEC job in February 2009. While there, he received favorable news coverage for supposedly revitalizing a moribund enforcement effort.

He sees himself as a crusader. “You don’t undertake a historic restructuring of the enforcement division and bring a record number of cases if you’re trying to curry favor with the industry,” he told the Times after he landed at Kirkland & Ellis. “Wherever I go, I’m not expecting favors.”

The truth is, aside from the SEC’s prosecution of Fabrice Tourre, the Goldman Sachs Group Inc. vice president who was just found liable for intentionally misleading participants in a failed $1 billion Goldman CDO, Khuzami’s enforcement division was particularly toothless. Sure, there was the $550 million settlement with Goldman in 2010, over the infamous Abacus CDO at the root of the Tourre case, but Goldman was a piker in that market compared with Deutsche Bank.

It goes without saying that the SEC, under Khuzami’s watch, gave Deutsche Bank a pass. (Khuzami recused himself from involvement in Deutsche Bank cases while at the SEC, according to SEC spokesman John Nestor, who also confirmed that the agency had brought no financial-crisis-related enforcement actions against Deutsche Bank.)

Another Example

Given how mightily the revolving door between Washington and the SEC is spinning these days, don’t expect the situation to change soon. For instance, Eric Ben-Artzi, a former Deutsche Bank quant who worked in the compliance department in New York, has brought allegations to the SEC that the bank overstated the value of some $120 billion of CDOs on its balance sheet in the years after the financial crisis. The bank did so, the whistle-blower alleges, to keep regulators from thinking the bank was insolvent and in need of a bailout.

Such talk, Ben-Artzi claims, got him fired. In the year before his departure, he had many interactions with Robert Rice, who held Khuzami’s former job as head of governance, litigation and regulation for Deutsche Bank in the Americas. Rice, according to Ben-Artzi, was the first person to threaten to fire him if he persisted in claiming that Deutsche Bank mismarked the value of its assets. Deutsche Bank says the charges are unfounded.

The result of Ben-Artzi’s whistle-blowing remains to be seen, especially now that Rice is general counsel to SEC Chairman White, and Ben-Artzi is claiming, in a case pending at the U.S. Labor Department, that he was fired in retaliation.

“When he went to the S.E.C., this was not a guaranteed happy ending,” Walker helpfully told the New York Times about Khuzami’s tenure at the agency.

What a joke. If anything was guaranteed when Robert Khuzami went to Washington, it was that his tenure there would result in a very happy ending — for him. Too bad it comes at the expense of the rest of us.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres & Co., Merrill Lynch and JPMorgan Chase.)

To contact the writer of this article: William D. Cohan at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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