Robert Khuzami, the U.S. Securities and Exchange Commission’s enforcement chief, said the agency is “very focused” on bringing cases against exchanges and traders when system or programming failures harm investors.
The agency plans to bring more cases related to weak controls that result in “real harm to clients” in addition to those stemming from intentional misbehavior or rule violations, Khuzami said at a Securities Regulation Institute conference in Coronado, California.
“You are going to see a variety of cases in this area,” said Khuzami, who plans to leave the SEC in two weeks after four years as enforcement director. “It may not be an intent-based violation, but the consequences are real and harmful in terms of investor losses and market impact.”
The enforcement division’s scrutiny of electronic trading follows a series of market breakdowns, including the so-called flash crash of May 6, 2010, when the 30-stock Dow Jones Industrial Average briefly fell 9.2 percent before recovering. The SEC has since acquired technology to improve its ability to track electronic orders and unravel market-destabilizing events.
During Khuzami’s tenure, the SEC has fined exchanges and dark pool operators for actions that it found were detrimental to investors. In September, NYSE Euronext agreed to pay $5 million to resolve SEC claims that it routed market data earlier to paying customers than to the public data feed.
Direct Edge
Khuzami, 56, also highlighted the commission’s 2011 case against Direct Edge Holdings LLC for having weak controls that led to about $2.8 million in trading losses and a system outage.
“As far as the enforcement angle, I think we are very focused on things like compliance failures and rules violations and situations where you have weak controls that result in system outages,” he said.
Khuzami, a former federal prosecutor and top lawyer at Deutsche Bank AG, took over the SEC’s enforcement division in 2009. In recent weeks, he has defended its record of filing more than 150 cases related to the financial crisis, including 65 actions against senior corporate officers.
That record has been criticized by some lawmakers, judges, investors and at least one current commissioner who say the SEC should have held more top executives accountable for practices that led to taxpayer bailouts of financial institutions including Bank of America Corp. and Citigroup Inc.
“It’s a very strong record,” Khuzami told Bloomberg’s Television’s Peter Cook in an interview for the “Capitol Gains” program scheduled to air Jan. 27. “We are leaving no stone unturned in pursuing misconduct arising out of the financial crisis.”
Suing CEOs
Khuzami said much of the criticism stems from expectations that chief executive officers of investment banks should be sued over the sale of toxic mortgage securities or derivatives based on bad mortgages.
“With rare exceptions” CEOs weren’t aware of how those products were put together and marketed to investors, he said.
“Most of the public questions have to do with why Jamie Dimon and Lloyd Blankfein and Dick Fuld and their lieutenants haven’t been charged,” he said, referring, respectively, to the CEOs of JPMorgan Chase & Co. and Goldman Sachs Group Inc. and the former head of Lehman Brothers Holdings Inc. “With rare exceptions, that information and those issues — those deals — simply don’t rise to that level in the corporation.”
