UPDATE 2-SEC enforcement chief Khuzami is leaving

Wed Jan 9, 2013 5:46pm EST

* Took post after Madoff scandal embarrassed agency

* Reorganized SEC's enforcement division

* Expected to leave at month's end, no replacement named

By Sarah N. Lynch

WASHINGTON, Jan 9 (Reuters) - Robert Khuzami, the enforcement director at the U.S. Securities and Exchange Commission who worked to rebuild its tarnished image after the Bernard Madoff scandal and the financial crisis, said on Wednesday he is leaving the agency.

Khuzami follows SEC chairman Mary Schapiro and several other high-profile SEC officials who have stepped down since President Barack Obama's re-election in November.

The SEC did not name a replacement for Khuzami, who is expected to leave at the end of the month.

Agency insiders say candidates for the job could include the SEC's deputy enforcement director, George Canellos, and the regional director of the SEC's Boston office, David Bergers.

The new enforcement chief will have to address a still-large pipeline of cases stemming from the 2007-2009 financial crisis.

While the SEC brought a record 735 enforcement actions in fiscal 2011 and a near-record in fiscal 2012, that ended Sept. 30, the agency also faces criticism that it has not been tough enough in holding top executives accountable for their roles in the crisis.

Khuzami, a former federal prosecutor in the U.S. Attorney's Office in Manhattan, was tapped by Schapiro in early 2009 as the SEC was still reeling from the fall-out of the Madoff case.

Madoff's $65 billion Ponzi scheme went undetected by the SEC despite numerous red flags going back to the early 1990s. That failure, along with problems in the SEC's oversight leading up to the financial crisis, raised questions about the agency's credibility and willingness to crack down on wrongdoers.

Khuzami said on Wednesday he is most proud of how the SEC used the Madoff episode as an opportunity to learn from its mistakes and become a more forward-looking agency.

"We are now more proactive. We are finding stuff earlier," he said in an interview. "We are not just reacting to headlines."

Former SEC staffers say Khuzami will most likely be remembered for undertaking the largest reorganization in history of the enforcement division with the creation of five specialized units in structured products, asset management, market abuse, municipal securities and corporate bribery.

He also helped to establish a new Office of Market Intelligence, which created a central database and method for analyzing all tips, complaints and referrals.

Stephen Crimmins, a former deputy chief litigation counsel in SEC enforcement who is now a partner with K&L Gates, said he thinks Khuzami will be remembered as a "strong leader in very, very difficult times."

"Khuzami has projected an image of a larger-than-life tough prosecutor, and that is what was needed," said Crimmins.

Some critics of the agency have questioned why the SEC has not brought any cases against Deutsche Bank, where Khuzami worked as the top lawyer for the U.S. unit during a period when it was heavily involved in packaging subprime mortgages into securities, a practice that has been linked to investor lawsuits and regulatory scrutiny at other banks.

In response, Khuzami said he had already spent 12 years as a prosecutor before ever working on Wall Street.

"If I had some inappropriate sympathy for my former employer, I wouldn't have come in and in six weeks torn the place up and created specialized units to focus on exactly the kinds of things that they and other banks were doing," he said.

Many of the cases Khuzami's office brought were linked to financial crisis behavior by companies such as Citigroup, Credit Suisse , JPMorgan Chase and Goldman Sachs, which paid a record fine of $550 million to settle claims that it misled investors about a subprime mortgage-linked investment product.

The SEC also has raised its profile by filing major insider-trading cases, winning a $92.81 million settlement with the now-imprisoned Galleon Group hedge fund manager Raj Rajaratnam.

Khuzami said he has not decided yet what he plans to do, though he said it is unlikely to involve a job in academia. "Everything else remains on the table," he said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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