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Wall Street on edge as SEC top cop gets aggressive

WASHINGTON (Reuters) - In the office of Wall Street’s top cop hang a courtroom sketch and a framed newspaper article from his biggest case, when he sent the villain away for life.

Now Robert Khuzami, who convicted the “Blind Sheik” and his ring of bomb plotters in that trial, is targeting a different kind of villain -- corporate executives, traders and fund managers who dare to break securities laws.

About six months into his job as the U.S. Securities and Exchange Commission’s enforcement director, Khuzami, who was handpicked by SEC Chairman Mary Schapiro, has shaken the agency to its core with reforms designed to ensure it does not miss the next Bernard Madoff.

Last Friday, the SEC brought civil charges against billionaire Raj Rajaratnam and others for what investigators call the largest hedge fund insider trading scheme ever.

To some, the former federal prosecutor has revolutionized SEC enforcement by scrapping middle managers, giving lawyers more subpoena power, and creating squads to focus on areas such as complex financial products and municipal securities.

“Aggressive is an understatement,” said Cam Funkhouser, senior vice president of market regulation at the Financial Industry Regulatory Authority, who has known Khuzami for a decade.

Yet to others, Khuzami’s reforms have created uncertainty within a division lashed by Congress and the SEC’s own inspector general for missing Madoff’s $65 billion fraud.

Also watching closely are the corporate titans and brokers who were more loosely overseen by a more business-friendly SEC during the latter years of the Bush administration.

Khuzami says he is listening to everybody.

“I don’t enjoy the criticism, but it is important that we continue to listen and not get closed off,” the 53-year-old Khuzami said in a Reuters interview early in October.

NEW AGGRESSIVENESS

Outsiders say the SEC under Schapiro and Khuzami is moving quickly on high-profile enforcement cases to help the agency regain its luster.

Most recently, there is the Rajaratnam case, in which the U.S. Attorney’s office in New York, where Khuzami worked for 11 years and led its securities fraud unit, brought related criminal charges.

In June, the SEC filed civil fraud charges against Angelo Mozilo, who founded the onetime mortgage giant Countrywide Financial Corp.

It is also appealing a dismissal of insider trading charges against Dallas Mavericks basketball team owner Mark Cuban.

“The SEC is moving more quickly, it’s trying to be more creative,” said Mark Schonfeld, a partner at Gibson Dunn & Crutcher LLP and former director of the SEC’s New York office. “But the jury is still out on how his ideas will play out.”

Some say the SEC is not as aggressive as it should be.

Last month, U.S. District Judge Jed Rakoff pilloried the agency for being too lenient on Bank of America Corp over what it had not disclosed about its purchase of Merrill Lynch & Co. The two sides may go to trial by March.

His former co-workers say Khuzami can take the heat.

“He has thick enough skin,” said Mary Jo White, a partner at Debevoise & Plimpton LLP in New York, who was Khuzami’s boss as U.S. Attorney for the Southern District of New York. “When you are in the Southern District, you are really quite in the spotlight. He did not let it get to his head.”

Khuzami joined the SEC from Deutsche Bank AG, where he had been general counsel for the Americas.

As Congress and investors wait impatiently for whether the SEC will discipline anyone for fumbling the Madoff case, Khuzami appears philosophical about criticism of the agency.

“Recent events and scrutiny have combined to make the division and the agency probably much more receptive to self-assessment and considering different and better ways to do its work,” he said.

NO TALENT?

Khuzami traces his decision to become a lawyer to having been mesmerized as a teenager by the Watergate investigation that forced U.S. President Richard Nixon to resign in 1974.

“Even though it was the lawyers committing most of the misconduct, it was also the lawyers that were there to vindicate the process and the U.S. Constitution,” he said.

Khuzami says he learned the value of hard work from his father, a professional ballroom dancer who never went to high school. His mother was also a ballroom dancer, while his brother is a band percussionist and his sister, a muralist.

“I never had any talent,” Khuzami joked. “I toyed with going to culinary school.”

A graduate of the University of Rochester, Khuzami took some time off to paint houses and work at a bar before earning a law degree from Boston University.

Khuzami’s most famous success as a prosecutor was the 1995 conviction of “Blind Sheik” Omar Abdel-Rahman.

Ten were convicted for conspiring to blow up the United Nations building and other New York City landmarks, following the 1993 bombing of the World Trade Center.

One wall in Khuzami’s fifth-floor office displays a framed article and a courtroom artist’s sketch from the trial. Khuzami said his wife jokes that he decorates his office with more pictures of terrorists than of her.

Additional reporting by Jonathan Stempel in New York; Editing by Julie Vorman, Gary Hill

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