My parents were professional ballroom dancers. My father managed the Arthur Murray studios on 5th Avenue. They met in the office and had a secret relationship. One day they got on the subway down to City Hall and got married on their lunch hour. Have you heard the saying: ‘The cobbler’s son goes shoeless?’ Well, the dancing instructor’s son went without dancing ability!
I was born in Brooklyn and moved upstate to Rochester, New York. My parents were not well off and so we went to public high schools. It was a little rough. Very few went on to college.
My mother always used to say: ‘Rob is the white sheep of the family, where did we go right?!’ They were dancers, my sister is an artist and my brother a percussionist playing Middle Eastern music. Why law? Some of it was because the rest of my family were going in a different direction but part of it was because of my father, who was an immigrant from Lebanon. He never got past the eighth grade but was a very smart man who was very interested in politics. I religiously watched the Watergate hearings. Even though it was the lawyers committing a lot of the wrongdoing, it was also lawyers that proved we are a nation of laws and took down a president.
I was an uninspired high school student so I went to a local college called Geneseo, which was part of the State University of New York (SUNY) system, until I transferred to the University of Rochester as my mother worked as a secretary so I got discounted tuition. I loved learning and the study of law; it had embedded in it so many significant issues about democracy, society, opportunity and fairness.
My greatest regret is missing Woodstock in 1969. It was either go to Woodstock with my brother or go to my Aunt Selwa’s in Atlantic City, New Jersey. I chose Atlantic City. I’ve regretted it ever since.
I told my father I’d gotten a job at Cadwalader, when Cadwalader’s address was One Wall Street. He thought: ‘It doesn’t get any better than this.’ Not only for the salary but it represented a level of accomplishment. So he was completely shocked when I told him a few years later that I was to become a prosecutor. He thought of a local district attorney doing burglaries and car theft. He never really understood it until he heard about Rudy Giuliani.
‘My mother always used to say: “Rob is the white sheep of the family, where did we go right?!”’
The first things to hit your desk when you’re a young assistant US attorney are the cases in the office that others want to get rid of. One of the first was a bank robbery by one of the bank’s own security guards. This guy had robbed the bank, went straight to a liquor store to buy some booze, and went to Prospect Park in Brooklyn where he fell asleep with the money as a pillow and got arrested!
The World Trade Center was attacked on February 26 1993 and shortly after we began to get wind of a follow-up plot with conspirators seeking to retaliate for the arrest of the bombers. That became a massive plot to blow up the UN, the Lincoln and Holland Tunnels and the FBI headquarters, as well as to murder president Hosni Mubarak of Egypt. The FBI developed an informant who went back into the terrorist group following the World Trade Center bombing and presented himself as an Egyptian military officer who knew how to make bombs. We spent most of the next few months monitoring a safe house in Queens, where they were mixing up bombs, with video and audio surveillance. It was a ten-month trial with over 25,000 pages of transcripts and over 1,000 exhibits. Michael Mukasey, who went on to become the US attorney general, was the judge. Thankfully, they were convicted in the end.
Christopher Bagdasarian has to be the most unusual person I’ve ever come across. At age 13 he began creating a mock portfolio of securities mimicking the investment strategy of Warren Buffett. When he graduated he started managing family money in the 1990s. He took the mock portfolio – claiming it was real stocks he had been investing in – to Chemical Bank, which believed him and gave him a $20m loan using these ‘stocks’ as collateral. He continued to get additional loans – and when they began to ask him questions he claimed he couldn’t reveal any information because the money belonged to European royal families and he was a protector of these trusts. He got a partner at Deloitte & Touche to write letters claiming the assets and the returns were real. He convinced Salomon Brothers to underwrite an IPO. The night before the IPO the Securities and Exchange Commission (SEC) began asking questions and the whole thing began to unravel. None of those assets existed. The brazenness of this fraud, and the susceptibility of these institutions, was really quite something. He tried it on a whim and found the bankers accepted what he said. He got caught up in the lifestyle.
I was sitting at my desk at Deutsche Bank and my boss at the time, Dick Walker, who had himself been the director of enforcement at the SEC in the 1990s, came into my office and told me Mary Schapiro wanted to talk. I wasn’t hard to convince – there aren’t many better jobs than director of enforcement at the SEC. She was instrumental in me being offered the job. It was a unique time in the Commission’s history, immediately in the wake of the financial crisis and the Bernie Madoff revelations. I try to live modestly, so if opportunities come along like this you’re not so beholden to your salary that you can’t move.
I know revolving door issues are controversial, but from my point of view, individuals with expertise going into the public sector is of great benefit to law enforcement. I had been at Deutsche Bank for seven years at this point, so understood how a large bank operated and had been a criminal prosecutor, so I thought I had the right skills for the job.
‘We spent the next few months monitoring a safe house in Queens, where they were mixing up bombs, with video and audio surveillance.’
There was a great deal of pressure for the first 18 months. When we first got there it was like changing the tyres on a moving car; there was intense scrutiny by the public and the press over what had happened at the SEC, and why Madoff hadn’t been detected sooner. There were great expectations in and outside the Commission about what we were going to do about the financial crisis and congressional hearings about the Commission and what had gone wrong, while at the same time trying to learn from these situations and improve how we did our jobs.
SEC staff all embarked on some serious self-scrutiny and reflection about what we could do better following the financial crisis. The enforcement division underwent a huge restructuring, created specialised units, eliminated a layer of management, created incentives for co-operating witnesses and whistleblowers and used Big Data to launch risk-based investigations.
There was a great deal of focus on financial crisis cases and either [mortgage-backed bonds] or CDOs. We created a specialised unit to investigate those cases, and brought a number of them against financial institutions and mortgage companies. All of those cases were significant.
There was a great deal of excess in large financial institutions, be it the risk-taking, short-term thinking, skewed incentives, excessive leverage and products not being transparent. That’s what Dodd-Frank [Wall Street Reform and Consumer Protection Act] was designed to address. The question of how much of the conduct was illegal, as opposed to being risky and reckless, but not illegal, continues to this day. A lot of the practices were not scrutinised and people didn’t understand how interrelated everything was, so difficulties in one part of the market can spill over and infect all parts. Vigorous enforcement and legislative reforms will hopefully prevent this from happening. Let’s hope we don’t forget these lessons.
I never did meet Obama. I had one opportunity to speak with him when I was considering the job but I told Mary [Schapiro]: ‘Oh please, no, don’t bother him – he’s got much more important things to do.’ I regret that.
I testified in front of Congress about 12 times on the financial crisis, Bernie Madoff and Allen Stanford Ponzi schemes. Some senators and congressmen are interested in your answers. Sometimes their goal is more to make a point. It’s less about answering the question and more about being part of a process.
There’s no substitute for a forceful regulator so that institutions and individuals know if they cross the line they will be confronted by an informed and well-resourced regulator. At the same time it’s also advantageous to have a dialogue between agencies and the institutions so companies understand where the lines are and can conform their behaviour to the law. Everything doesn’t always need to end up in an enforcement case, particularly in situations where it’s unclear whether conduct broke the law and everybody would be better served to identify that in advance.
‘I testified in front of Congress about 12 times. Some senators are interested in your answers. Sometimes their goal is to make a point.’
Cases settle for all the reasons that parties settle disputes without going to trial. When we settled a case there wasn’t much ambiguity about whether the individual or firm had engaged in wrongdoing. They have to consent to the filing of a complaint with all the evidence and allegations, pay a fine and are prohibited from denying allegations in the complaint. They may not have been required to admit to them but they are also prohibited from denying them so it’s pretty clear there was wrongdoing. I know the policy changed after I left, and there’s been a handful of cases where the Commission has now required companies to admit wrongdoing, but I’m not sure there’s a significant difference. I have no objection to the current policy though. If it restores the public’s faith in law enforcement, that’s a good thing.
I miss the institution and more so the friendships I made there but I felt good about what the Commission had accomplished while I was there. The worst thing would be to leave with unfinished business.
Mary Jo White became chairman after I left and she will zealously guard the independence of any institution she works for. But you always have to be careful. There is concern that the country is becoming more politicised and people seem to be drifting into camps more at odds with each other. You worry that appointments to the SEC could become more politicised.
As a prosecutor you are taught not to be flamboyant or theatrical as you need to show credibility and fairness. Your job is not just to win, it’s to make sure a trial is carried out in a fair fashion. My style was to be well-prepared, credible. Not given to exaggeration.
Mark Filip, who runs the government investigations practice here, was a big factor in joining Kirkland & Ellis in 2013. Mark couldn’t be a more down-to-earth and wise man and I wanted to practise law with him. He spent a great deal of time with me when I was thinking about where to go.
I hadn’t been at a law firm for 23 years. The biggest change is billing my time! It takes some getting used to…
Robert Khuzami is a partner at Kirkland & Ellis and the former director of enforcement at the Securities and Exchange Commission
tom.moore@legalease.co.uk