“The environment was just incredibly tense,” Schapiro said in the interview. “Madoff had just been arrested, the financial-crisis consequences were still unfolding, the market was plummeting and people were in fact talking about abolishing the agency.”
She said her first job was “to try to stem the tide of skepticism” and then to focus on long-term needs. She removed hurdles for investigators and hired new senior staff. By the time Dodd-Frank was enacted a year and a half later, the SEC was handed wider jurisdiction and more funding.
“I give her enormous credit for -- virtually single- handedly -- preventing the commission’s demise,” former SEC chairman Harvey Pitt said, adding that her greatest contribution was “restoring the agency’s credibility and importance.”
Schapiro recruited Robert Khuzami, a former prosecutor then at Deutsche Bank AG, to head enforcement. He cut a layer of management, formed groups to focus on specialized areas of wrongdoing and created a system for handling tips about frauds. She tapped Carlo di Florio from PricewaterhouseCoopers LLP to revamp the inspections unit, which also had been faulted with missing the Madoff fraud.
The SEC says it has brought 115 cases related to the credit crisis, including 57 against senior managers. Yet big Wall Street CEOs and other executives haven’t been among them.
In March 2010, Lehman’s court-appointed bankruptcy examiner publicly detailed the firm’s questionable accounting methods, saying some top executives may have violated their duties to shareholders. While SEC investigators determined there wasn’t enough evidence to bring a case, federal judges have allowed some shareholder lawsuits to proceed.
Later that year, U.S. District Judge Ellen Huvelle scolded the SEC for extracting “unimpressive” penalties from two executives named in a $75 million settlement with Citigroup Inc.
“When you bring this long complaint and make it sound like there have been all these misdeeds, who’s responsible?” the judge asked at a hearing in Washington. “These things don’t happen without individuals.”
Khuzami said in a December speech that critics are fueled by “misconceptions” about the SEC’s powers. He has said that bad business decisions aren’t necessarily fraudulent and that if there is a fraud, regulators need hard evidence that top executives knew about it before they can file a case. He also has defended the practice of allowing firms to settle without admitting wrongdoing, saying it resolves actions that otherwise could drag for years through the courts.
Criticism of the record, though, resonates even inside the SEC. Commissioner Luis Aguilar, a Democrat, said in a Washington speech yesterday that public concern about the lack of financial-crisis cases against executives was understandable.
“The investing public has a right to expect that government regulators will continue to hold accountable those individuals responsible for misconduct -- and that includes those culpable at the top, not just the flunkies below,” Aguilar said.
Lynn Turner, a former SEC chief accountant, said that the agency’s actual enforcement record signals to Wall Street that the tough talk is just rhetoric.