Robert Khuzami, the former enforcement chief at the Securities and Exchange Commission (SEC), once wrote that the revolving door is a “myth” perpetuated by critics “armed with nothing but cynical assumptions and speculation.”
Khuzami has now taken his own trip through the mythical revolving door, accepting a job at Kirkland & Ellis, a major corporate law firm that represents clients before the SEC.
The announcement, first reported by DealBook on Monday, highlights concerns raised by the Project On Government Oversight and other “cynics” about the steady movement of employees between financial regulatory agencies and major firms representing Wall Street.
From the DealBook story:
When he left his role as Wall Street’s top federal enforcer, Robert S. Khuzami began a long courtship with a who’s who of the legal world.
The calls rolled in from financial giants like Visa and Bridgewater, and from white-shoe law firms, like WilmerHale. Some offered outsize paydays, others promised an office not only in New York but also in Washington, where his family lives. They all wanted the benefit of his experience as a terrorism prosecutor and enforcement chief at the Securities and Exchange Commission.
Six months later, lawyers briefed on the matter say, Mr. Khuzami has accepted a job that pays more than $5 million a year at Kirkland & Ellis, one of the nation’s biggest corporate law firms. In doing so, he is following the quintessential Washington script: an influential government insider becoming a paid advocate for industries he once policed.
Khuzami says he didn’t pull any punches as an SEC enforcer. “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 DealBook. The SEC says Khuzami presided over a number of enforcement feats: bringing cases against companies and individuals who contributed to the 2008 financial crisis, cracking down on insider trading, and setting up a new whistleblower program, among other things.
At the same time, Khuzami’s career path illustrates how the revolving door can blur the lines between the regulators and the regulated.
Before he joined the SEC, Khuzami was a top lawyer at Deutsche Bank, one of the largest financial firms regulated by the agency. While he was at Deutsche Bank, the firm was heavily involved in selling collateralized debt obligations (CDOs), a type of mortgage-related product that played a central role in the financial crisis.
A 2011 report by the Senate Permanent Subcommittee on Investigations found that Deutsche Bank “continued to issue CDOs after mortgages began losing money at record rates, investor interest waned, and its most senior CDO trader concluded that the mortgage market in general and the specific…securities being included in the bank’s own CDOs were going to lose value.” Deutsche Bank “aggressively marketed the CDO securities to clients despite the negative views of its most senior CDO trader, falling values, and the deteriorating market,” the report said, adding that the bank failed to inform potential investors about the senior trader’s negative views.
When he joined the SEC, Khuzami recused himself from handling agency business that could affect Deutsche Bank, which had paid him nearly $4 million in his final three years at the firm. Nonetheless, the presence of a former Deutsche Bank lawyer atop the SEC enforcement division led some critics to ponder whether Khuzami’s employment history would color the SEC’s approach to Deutsche Bank, CDO cases, and firms involved in the financial crisis generally. They also raised questions about the SEC’s interactions with Deutsche Bank whistleblowers who sounded an alarm about the firm’s practices.
One commentator at the Naked Capitalism blog said Khuzami’s recusal wouldn’t relieve his staff of the potential conflict of interest because they would still have to report to him. “They can’t pursue any real dirt that could implicate him without hurting themselves,” she wrote. Some critics have suggested that the SEC didn’t move more aggressively on mortgage-related cases in general because, as another Naked Capitalism commentator argued, a more vigorous examination of CDO practices could involve scrutinizing Deutsche Bank and, potentially, Khuzami.
Khuzami did not respond to POGO’s request for comment. A spokesperson from Deutsche Bank declined to comment.
By joining a major corporate law firm, Khuzami is traveling a familiar path for former SEC lawyers. Past enforcement chiefs are now partners at similar firms or are in-house lawyers at powerhouse banks regulated by the SEC. Between 2001 and 2010, more than 170 alumni from the enforcement division disclosed that they would be representing a client before the agency during their first two years out, according to disclosure statements obtained by POGO.
Other SEC alumni at Kirkland & Ellis include Charles J. Clark, a former enforcement official, and Robert W. Pommer III, a former litigation counsel who has represented several clients during SEC probes, according to the disclosure statements obtained by POGO. In addition, Kirkland & Ellis announced this week that one of Khuzami’s former SEC enforcement lieutenants, Kenneth Lench, will also be joining the firm.
On its website, Kirkland & Ellis boasts that it is “able to draw upon lawyers at our Firm who are former senior members of the staff of the Securities and Exchange Commission and former federal prosecutors with an extensive securities enforcement practice, and we have been successful in obtaining [prosecution] declinations and favorable settlements.” The firm’s clients include Wall Street giants such as Bank of America, Morgan Stanley, and UBS, as well as PricewaterhouseCoopers, one of the “Big Four” accounting firms overseen by the SEC.
Khuzami, like other former senior officials, faces a one-year “cooling off” period during which he cannot personally appear before the SEC on behalf of Kirkland & Ellis’s clients. (“Think of how it would look for a Division Director to leave office on Friday and contact his or her former staff on Monday on behalf of a private client,” the SEC wrote in an internal newsletter explaining the timeout rule.) Nonetheless, Khuzami may still be able to provide invaluable “behind-the-scenes” advice to his new colleagues and their clients.
Khuzami has insisted that the revolving door does not lead to weak enforcement actions, pointing to an academic study that tracked the career paths of certain SEC lawyers to see if the revolving door affected enforcement outcomes. But, as POGO noted in a February report on the SEC, the subtle effects of the revolving door may not lend themselves to this kind of quantitative analysis. At a broader level, the revolving door can “shape the culture and ethos of employees throughout the SEC—and the institution’s prevailing way of doing business,” POGO wrote in its report. “This kind of influence is hard to measure, but it can still be beneficial to the companies and individuals regulated by the SEC,” and it may “help to explain why the agency does not take a tougher stand against the businesses it oversees.”