New SEC rules put more responsibility on execs

WASHINGTON — Corporate executives are more likely to end up in court for their employees' misconduct now that Congress has handed broader powers and more money to the U.S. Securities and Exchange Commission, former agency officials said.

Since the start of the financial crisis, lawmakers, investors and judges have criticized the agency for giving bosses a pass while accusing companies of wrongdoing, as in recent cases involving Citigroup and Bank of America.

The Dodd-Frank regulatory act lowers the bar for filing fraud lawsuits against individuals and authorizes the SEC to double its spending within five years.

"The SEC is going to cast a much broader net to include people on the edge of a fraud," said Steve Crimmins, a former trial attorney at the agency who's now at law firm K&L Gates in Washington. "There will be legions more SEC cops on the beat, and that will mean a lot more activity."

Under Dodd-Frank, which was signed into law in July, the SEC can sue an individual who "recklessly" aids a fraud even if the person isn't aware of the wrongdoing. Previously, lawyers had to show the person knowingly assisted the misconduct. The law also allows the agency to sue senior officers, directors or other people directly or indirectly accountable for the fraud.

Robert Khuzami, the SEC's top enforcement official, is scheduled to answer for the agency's progress today before the Senate Banking Committee after Sen. Ted Kaufman, D-Del., told him in December he was "frustrated" that regulators hadn't been able to prosecute more executives and bankers.

While Dodd-Frank may make that easier, it may be too late for financial crisis cases, Crimmins said. "Had these standards been in place two or three years ago, we probably would have seen more individuals named in cases they've brought involving the financial crisis."

The provisions "increase the likelihood of litigation" with fewer quietly settled cases, said David Kornblau, who was the SEC's top prosecutor from 2000 to 2005.

Regulatory lawsuits "can be potentially career-ending issues for individuals, whereas companies mostly can find a way to settle it and move on," said Kornblau, who's now an attorney at Covington & Burling in New York.

To be sure, the SEC has taken aim at some individuals for conduct related to the financial crisis, including Angelo Mozilo, the former Countrywide Financial Corp. chief executive officer, whom the agency accused of misleading investors about risks tied to the bank's subprime mortgage holdings. Mozilo has denied the allegations.

The agency also sued former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin in 2008 on claims they misled clients about pending losses and redemptions. Cioffi and Tannin were acquitted of criminal charges in November and deny wrongdoing in the SEC's case.

Judges have questioned whether the agency avoided pursuing individuals in exchange for a quick resolution.

"When you bring this long complaint and make it sound like there have been all these misdeeds, who's responsible?" Judge Ellen Huvelle asked the SEC at an Aug. 16 hearing in Washington at which she reviewed a $75 million settlement with Citigroup to resolve claims the firm misled investors about its exposure to subprime mortgages in 2007. "These things don't happen without individuals."

Khuzami, 54, took the enforcement division's helm in March 2009 as the agency was being pilloried for missing Bernard Madoff's multibillion-dollar Ponzi scheme and for failing to curb financial practices that helped spark more than $1.8 trillion in losses and writedowns. He has replaced senior staff, created specialized enforcement teams, streamlined probes and added front-line investigators.

"A deep and talented trial unit is critical to encouraging defendants to settle on appropriate terms, or face a formidable adversary in the courtroom," Lorin Reisner, deputy director of the SEC's enforcement division, said in a statement.