Eight former directors of the SEC’s Division of Enforcement spoke about their tenures at the SEC at a recent event hosted by the SEC Historical Society. The former directors discussed their experiences at the SEC and how the Enforcement Division has evolved over time.
Birth of the Division: 1970s. Moderator Dr. Harwell Wells kicked off the discussion with a remembrance of former SEC Commissioner Irving Pollack, who established the SEC’s Enforcement Division in 1972 and was its founding director. Pollack passed away in 2016 at the age of 98. Judge Stanley Sporkin, who served as Division director from 1974 to 1981, praised Pollack as the perfect leader and an extremely principled person who was available to everyone.
Wells inquired how the Division handled high-profile matters in the 1970s. Sporkin said that “no” was never an answer. If there was a problem they had to solve it, and they did it by using imagination and talent. Lawyers were given the opportunity to do their own investigations and this allowed them to develop solutions to their own problems, Sporkin said.
Insider trading in the 1980s. Wells asked Gary G. Lynch, who served as director of the Division of Enforcement from 1985 to 1989, about the challenges that arose during the 1980s, including the M&A boom and the rise of notorious insider trading cases. Lynch said that in 1985, the Division received an anonymous letter from an employee at Merrill Lynch about insider trading. That letter resulted in an investigation that eventually implicated Dennis Levine at Drexel Burnham Lambert, who paid $12 million in disgorgement and gave up his co-conspirators, including Ivan Boesky.
According to Lynch, while there had been criminal prosecutions for insider trading before this matter, after the Boesky case, U.S. attorneys across the country noticed the press it received. The prospect of going to jail for white collar criminals had a major deterrent effect, Lynch said.
Enforcement in the 1990s. Bill McLucas was appointed director of the Division of Enforcement by SEC Chairman Richard Breeden in 1989. According to McLucas, Breeden, who had been focused on the S&L crisis of the late 1980s, believed the only vehicle for effective civil enforcement was penalties. The Securities Enforcement Remedies Act soon followed in 1990. Other events impacting securities enforcement in the 1990s included changes in media coverage like the internet and CNBC, reform of the National Association of Securities Dealers (NASD), and establishing a solid insider trading program. McLucas also pointed out that most people prior to the 1980s had been savers, but by the end of the 1990s, more than 60 percent of Americans owned securities, which created risks and enforcement opportunities.
The 1990s also saw the Supreme Court’s endorsement of the misappropriation theory of insider trading, McLucas said. The misappropriation theory continues to be a key part of the Commission’s insider trading program today, he observed.
Richard H. Walker, who was named Enforcement Director in 1998, talked about the role of technology and how the SEC approached rapidly developing tech issues. Walker noted that while the traditional “boiler room” frauds required space and phone banks, with the internet it was much easier for people to commit these frauds on a computer in their living room. Walker said that this led to the formation of the Office of Internet Enforcement, where the SEC would quickly bring cases to let people know that these types of frauds were being pursued.
Walker also praised former SEC Chairman Arthur Levitt, whose “numbers game” speech criticizing the accounting profession led to a new focus on accounting issues by the Division. Levitt was good at using the bully pulpit to galvanize issues, Walker said. After the numbers game speech, accounting issues became a priority for the enforcement staff, Walker explained.
Scandals and reform: the 2000s. Wells asked about the financial scandals of the early 2000s, including Enron and WorldCom. Stephen Cutler, director of enforcement from 2001 to 2005, said that markets were already volatile in 2001 after September 11 when Enron announced its restatement in October that year. Cutler recalled that when WorldCom’s financial troubles became apparent, then-Chairman Harvey Pitt told him, “We’re going to sue WorldCom tomorrow.” Cutler was initially skeptical that the Division could do so, but with the hard work of the staff, “we filed the papers the next day.” Pitt was also “the brainstorm” behind the Sarbanes-Oxley requirement for management and auditor attestation, Cutler said.
Wells inquired about the influence of state attorneys general in the enforcement realm during this period, mentioning in particular then-Attorney General Elliot Spitzer of New York, who was well-known for going after Wall Street. A somewhat bemused Cutler replied, “It didn’t start out as collaborative,” after which his successor Linda Chatman Thomsen chimed in, “That’s an understatement.” Spitzer’s crusade was front page news in New York, Cutler said, it was like the sports pages.
Wells noted that there was a period of pushback around 2005 against enforcement and aggressive market regulation when Thomsen became Division chair. Thomsen said that the SEC had taken on entire swaths of the financial industry, and a lot of people weren’t happy and were fleeing to the London markets. According to Thomsen, a report on competitiveness was being assembled by people who thought the SEC had gone too far in its enforcement efforts and that others were going to jail for financial fraud for offenses that weren’t “jail-worthy.” However, she remarked, right before the report was issued, “2008 happened,” and they had to scramble to rewrite the report.
Robert Khuzami was named Enforcement Director in March 2009, only a few months after Bernard Madoff’s Ponzi scheme had been revealed. It was a difficult time for the Commission, Khuzami noted, observing that both he and then-Chair Mary Schapiro had been called before Congress multiple times to be harangued about the SEC’s failure to detect Madoff’s fraud. Even the SEC’s successes were criticized, Khuzami said. When the SEC brought charges against Goldman Sachs, there was a congressional investigation into whether the SEC did so just to get the Dodd-Frank Act passed, he remarked.
Andrew Ceresney, Enforcement Director from 2013 to 2017, praised Khuzami and his enforcement staff for their efforts, stating that his own tenure as director benefited from the fruits Khuzami and others put in place. Ceresney noted that the Division had many “first of their kind” cases while he was there. The Division was also able to take advantage of the “data explosion” over the preceding five years, and in some ways had actually surpassed parts of the financial industry in its ability to use data to bring cases.
Ceresney also noted that the whistleblower program put in place under Dodd-Frank has resulted in millions of dollars of awards to whistleblowers. It took a number of years to see the benefits, he observed, but now it’s coming into its own.
Walker also praised former SEC Chairman Arthur Levitt, whose “numbers game” speech criticizing the accounting profession led to a new focus on accounting issues by the Division. Levitt was good at using the bully pulpit to galvanize issues, Walker said. After the numbers game speech, accounting issues became a priority for the enforcement staff, Walker explained.
Scandals and reform: the 2000s. Wells asked about the financial scandals of the early 2000s, including Enron and WorldCom. Stephen Cutler, director of enforcement from 2001 to 2005, said that markets were already volatile in 2001 after September 11 when Enron announced its restatement in October that year. Cutler recalled that when WorldCom’s financial troubles became apparent, then-Chairman Harvey Pitt told him, “We’re going to sue WorldCom tomorrow.” Cutler was initially skeptical that the Division could do so, but with the hard work of the staff, “we filed the papers the next day.” Pitt was also “the brainstorm” behind the Sarbanes-Oxley requirement for management and auditor attestation, Cutler said.
Wells inquired about the influence of state attorneys general in the enforcement realm during this period, mentioning in particular then-Attorney General Elliot Spitzer of New York, who was well-known for going after Wall Street. A somewhat bemused Cutler replied, “It didn’t start out as collaborative,” after which his successor Linda Chatman Thomsen chimed in, “That’s an understatement.” Spitzer’s crusade was front page news in New York, Cutler said, it was like the sports pages.
Wells noted that there was a period of pushback around 2005 against enforcement and aggressive market regulation when Thomsen became Division chair. Thomsen said that the SEC had taken on entire swaths of the financial industry, and a lot of people weren’t happy and were fleeing to the London markets. According to Thomsen, a report on competitiveness was being assembled by people who thought the SEC had gone too far in its enforcement efforts and that others were going to jail for financial fraud for offenses that weren’t “jail-worthy.” However, she remarked, right before the report was issued, “2008 happened,” and they had to scramble to rewrite the report.
Robert Khuzami was named Enforcement Director in March 2009, only a few months after Bernard Madoff’s Ponzi scheme had been revealed. It was a difficult time for the Commission, Khuzami noted, observing that both he and then-Chair Mary Schapiro had been called before Congress multiple times to be harangued about the SEC’s failure to detect Madoff’s fraud. Even the SEC’s successes were criticized, Khuzami said. When the SEC brought charges against Goldman Sachs, there was a congressional investigation into whether the SEC did so just to get the Dodd-Frank Act passed, he remarked.
Andrew Ceresney, Enforcement Director from 2013 to 2017, praised Khuzami and his enforcement staff for their efforts, stating that his own tenure as director benefited from the fruits Khuzami and others put in place. Ceresney noted that the Division had many “first of their kind” cases while he was there. The Division was also able to take advantage of the “data explosion” over the preceding five years, and in some ways had actually surpassed parts of the financial industry in its ability to use data to bring cases.
Ceresney also noted that the whistleblower program put in place under Dodd-Frank has resulted in millions of dollars of awards to whistleblowers. It took a number of years to see the benefits, he observed, but now it’s coming into its own.