So Why Hasn’t SEC Enforcement Chief Robert Khuzami Resigned? SEC Only Now Investigating CDOs Created on His Watch at Deutsche Bank

I’d heard from German speaking readers about the Der Spiegel report of an SEC investigation in its German edition over the weekend and they’ve now released it in their English language version.

Der Spiegel is careful about its sourcing, so readers should take this account seriously. The story is about the overall litigation risks facing the German powerhouse, the SEC investigation is a mention in passing (hat tip reader Mary L):

Meanwhile, the US Securities and Exchange Commission is also investigating Deutsche Bank, SPIEGEL reports. According to financial regulatory sources, the bank launched one CDO transaction called “START” in which it allegedly allowed the hedge fund of US speculator John Paulson to choose junk mortgage securities against which he could speculate — without the other investors knowing about it.

Goldman Sachs settled a suit with the SEC in a similar case for $550 million, SPIEGEL reported.

Why is there probably less here than meets the eye? For this investigation to be taken seriously, SEC enforcement chief Robert Khuzami would have to resign. He was the general counsel for the fixed income area at the time when the deals in question were undertaken (contra Der Spiegel, START was a program of synthetic CDOs, not just a single deal, just the Goldman Abacus trade that was the focus of an SEC lawsuit was actually just one of 25 Abacus trades). It would not be sufficient for Khuzami to recuse himself from this investigation. Staff would still be concerned about how the probe might affect their ultimate boss.

In addition, the fact that Paulson approached Deutsche Bank has been in the public domain since October 2009, when Greg Zuckerman’s book, The Greatest Trade Ever, was released. It discussed in detail how Paulson approached Goldman, Deutsche Bank, and Bear Stearns about constructing synthetic CDOs so Paulson could bet against the subprime market cheaply. This is how Scott Eichel, a senior Bear Stearns trader, saw it:

“We had three meetings with John, we were working on a trade together,” says Eichel. “He had a bearish view and was very open about what he wanted to do, he was more up front than most of them.

“But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side,” Eichel says.

If this conduct was so questionable that the SEC thought it made sense to sue Goldman in April 2010, why was Deutsche not sued then or shortly thereafter? Why is the SEC only “investigating” nearly two years later?

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  1. steelhead23

    If Khuzami were ethical, he would recognize the conflict you allude to and take appropriate action. Resignation would be extreme, but forming a special prosecutor – at arm’s length from SEC, made up of SEC, FBI, and other agency pros could provide the distance needed to ensure serious investigation. The fact that he has neither resigned nor created an arm’s length agency to manage the case is fairly strong evidence that the man is simply not ethical.

  2. readerOfTeaLeaves

    Last week on Ratigan’s program, DE AG Beau Biden made a point that it’s his view the big banksters think that law enforcement and prosecutors are afraid of going after the banks.

    Fear may not be Khuzami’s driving motive, but this whole mess makes him **appear** to be a gutless chickensh!t.
    Beyond pathetic.
    Someone please remind him there are probably not really monsters lurking under his bed.

  3. LeonovaBalletRusse

    YVES, can we get Abigail Caplovitz Field to take on the SEC-Duetsche Bank – John Paulson connection? Just follow the money and the DNA for We the People.

  4. Blurtman

    Ummm,…., Hank Paulson was US Treasury Secretary and headed up numerous scams at Goldman Sachs before the plum appointment. There is ample precedent for immunity to crime by the ruling class. Move along, peasant.

      1. Blurtman

        I was only trying to make the point that past crimes are no disqualifier for public office, or cuase for resignation. In fact, they are not even crimes. Hank Paulson was on board when GS committed crimes. He became Treasury Secretary. He bailed out GS directly and indirectly (AIG).

  5. LeonovaBalletRusse

    YVES, connect the above with “size matters” — Bill Moyers interviews John Reed (“longtime CEO of the commercial bank Citicorp”) on 27 January 2012 at re WHY Glass-Steagall had to be eliminated for Citigroup-Travelers and the BOYS in The Club: if they didn’t take this step, they would lose “biggest” status to London or Frankfurt! They just *had* to go for broke!

    Connect with NC LINKS piece re Vikram Pandit, the Citigroup Bandit, living very, very high on the hog indeed. And a *Star* at Davos, imagine.

    Take it to the ground, YVES. This sh$t has to stop. CLAW BACK!

    1. bob

      He was testifying.

      “T-sec, Rubin….Yeah, I’ve heard of him.”

      Why would he lie about this?

      “BILL MOYERS: Robert Rubin? He was the Secretary of the Treasury at the time.

      JOHN REED: Yeah, we would’ve spoken to him, I’m sure. And had Bob Rubin said, “No, the Treasury feels this is wrong,” we would’ve been careful. Because obviously, the Treasury recommends to the President on an issue of this sort. And there was no argument. No one said, “We’ll have to think about it.” And so a consensus built up. I don’t think it started in the Fed. I would guess it started in the industry, it certainly got into the Congress. “

  6. Sam

    Who don’t all Republicans resign, en masse, whereever they are? Republicans want deregulation. What they’re too dumb to realize is that it leads to increased risk.

    No farmer in his right mind would think a grain silo would somehow magically double, in the field, overnight. Yet some houses in former farm fields worth about 75K became suddenly worth 575K. Ridiculous. The more Republicans harmed, the better. The more bankers, hedge fund managers, and traders unemployed, broke, and on food stamps, the better. I’d like to see Wall Street shut down for a year. Let the private sector provide for a year.

    1. TK421

      “Republicans want deregulation.”

      It was a Democratic administration, that of Bill Clinton, that pushed through deregulation of the financial sector that allowed all this mess to happen.

      1. wunsacon

        Democrats moved to the right, because that’s what voters wanted.

        But, yes, Clinton signed the CFMA-2000 and passed legislation favoring capital gains in housing over other investments. I lump him together with Reagan and Bush II as horrible helmsmen.

        1. LeonovaBalletRusse

          wunsacon, don’t forget: after GATT, Clinton bore NAFTA with Gingrich as midwife in the hallowed halls of Congress. Rubin, Clinton, and other Agents of the Foreign Power (the .01% Reich of Transnational Monopoly Finance) then murdered Glass-Steagall, Pecora’s brilliant child born to protect We the People.

          The conspirators achieved their goal: the fix was in for the rape of Pensions public and private. The murder of Glass-Steagall created the tipping point for Private Plunder of Public Funds to enrich infinitely the Global .01% and their trickle-down Agency, for the 1% Total Fleecing of the People’s retirement money and demand deposits. The Boomers along for the joy ride either swam or sank, depending on their connections, until the Sure Thing Gravy Train ran off the cliff at top speed, to be held in suspension (“on life support”) until …

          Cry TREASON! Agents of a Foreign Power, while in Office in All Three Branches of Government, robbed us blind, betrayed us, and they remain above the Law. Barack Obama, in Office, became part of the conspiracy by refusing to have Justice prosecute these criminals.

      2. Don't GS me please!

        How can you forget Repub Senator Phil Graham (the owner of infamous quote: Recession is only in the minds of Americans!)who was able to push thru the bill(to gut the Glass Steagal act) in a late night session with hardly any debate on the issue.

        The crooks on both sides of isle are involved in this crime at the behest of Financial Oligarchy!

        1. LeonovaBalletRusse

          Precisely! While in Office, they were/are Agents of a Foreign Power: the .01% to 1% Global Transnational Monopoly Finance Cartel.

      3. readerOfTeaLeaves

        I don’t excuse Clinton, Rubin, and the Dems.
        But Phil Gramm, R-TX/Enron-UBS was sitting on the Senate Banking fiefdom jamming through bills to deregulate, with Sen Richard Shelby and other GOP members at his right hand. Too many Dem votes joined them.

        But it’s not simply partisan politics.
        The fundamental stupidity involved – the plausible deniability, the refusal of electeds and Wall Streeters to accept consequences, the brazen attempts to re-write history are all more boldly perpetrated those who still strongly believe in neoclassical economic ideology. It happens that the GOP is more closely aligned with this way of thinking, which manifests itself in gutting laws and positioning ‘free market’ ideologues into judgeships.

        You want to address some of these problems?
        The economic ideologies and the economic belief systems are from La-La Land, but judging from the Florida Primary chatter, there are still plenty of True Believers.

        If simply bashing Dems were a solution, then the whole mess would have been solved by now.

        1. LeonovaBalletRusse

          Yes, the unholy Cabal of Texas Traitors from the S&L scandal through Enron through 9/11, Endless War, and TARP; and Bush Dynasty Agents with a finger in every pie unto this very day. Cry TREASON! Cry War Crimes and Crimes Against Humanity.

          Who will bring “The Tyrannicide Brief” against Obama to start?

  7. Bernd

    Yves, slightly OT, I believe you have a very wrong impression of how “Der Spiegel” works in Germany: “Der Spiegel report of an SEC investigation in its German edition over the weekend”.
    Der Spiegel(in Print) is the most read weekly magazine, the website is the most important/visited news site by far.
    They didn´t just publish a report, they had a cover with photos Ackerman and Jain titled “Gambler´s PLC, the shady dealings of Deutsche Bank” ( ), which will be on the newsstands for the next week. The main report itself covers 10+ pages gives almost as good an orientation of the facts on that matter as I still remember from having read your blog and several over the past years.
    The significance is less the news value(that maybe true for some of the articles published solely online), but the fact, that an analysis of a depth approaching the treatment this particular story in your blog, has just been provide to ~1m people in Germany in print.

    A bit of background what Spiegel is concerned: It´s majority owned by the employees, the journalists writing for the paper( ).
    It´s the magazine that actually fought out and expanded/established (real)press freedom in Germany after WWII( ).
    And it´s one of the two news sources(Bild, Spiegel), which can really influence politics in Germany. Comparable in importance to the role “Sun” played in the UK, before the Murdoch scandal.

      1. Bernd

        Just reread my post and I guess I really didn´t do a very good job of explaining what my general view on the quality of their articles is.
        I really like the investigative journalism they do, especially in terms of what is published in their cover story and the reports and articles relating to that. Those are usually well researched and thorough. Quite often they make news rather than following it(e.g. the Euro-crisis is the news of the day currently, so tying the whole banking aspect back into it and giving a bit of background info is a very decent idea).
        The rest of the articles in the print version are usually ok, but not outstanding.
        The online edition is a bit of a mixed bag. Some excerpst of the print version are adopted 1:1, the heavy hitting/good ones have more of a summary character(though I´ve found the international(english) version to be slightly better than the german one in terms of detail).
        What I like though, is the fact that journalist rather than some corporation ultimately influence what is regarded newsworthy. This due to the fact, that you can´t really manipulate or ignore them, if you´re a domestic politician. Some have tried virtually none have succeeded.
        So yes, it´s probably a good idea to read them if the investigative story they are on interests you, in terms of the rest especially online, you´ll probably get a fairly decent and factual account, but if you´re looking for in depth analysis I´d stick with other sources.

    1. LeonovaBalletRusse

      Well, so the People have a voice in Germany, via Freedom of the Press in print!

      Will Michael Hudson please work it out with Germany for all of us?

  8. Paul Tioxon

    From 2004-2009, Khuzami worked for Deutsche Bank as a general counsel with 100 lawyers under his supervision. Today, Director of the Enforcement Division of the SEC. The conflict of interest for his work as it relates to the US based Deutsche Bank investigation is as clear as could be. His job would be legal opinions on regulatory compliance, or what little of that was left after decades of deconstruction by capitalist financial interest to make it nearly impossible to break the laws since they erased most of the major obstacles to making money out of money and the contracts for and against the money that was making money out of money.

    In other words, he can not investigate his former employer without directly implicating himself, and his legal judgements, since his former employer would point to him signing off on the legality of the financial transactions.

    Deutsche Bank may have hired him in 2004 for his previous decade of experience as a Federal prosecutor for the SEC, but his time at the D-Bank makes him poisoned fruit. It is corruption ipsa loquitor , the revolving door of former federal employees going into the business they just got done regulating and then coming back to government to complete the unseemly arrangement of regulatory capture.

    1. Ms G

      Why doesn’t Khuzami resign or appoint a special prosecutor? Well, one would have to ask why he was hired in the first place — his DB affiliation compromised his integrity at the outset, as he was being appointed to head the enforcement unit at the very agency that (in a just republic) would have been training its sights on DB immediately — certainly as fast as it did (albeit milquetoast) with Goldman.

      It’s dispiriting really, because we’ve been asking the same question (on NC and elsewhere) regarding Holder and Breuer — in a just republic, their Covington-MERS-Big 5 Banks connections would have instantly scuttled their eligibility for appointment to DOJ. Never mind that, unfathomably, they are part + parcel of the “new” fraud taskforce.

      So what is the answer, other than . . . well, they have it all so well sewn up — they’ve cornered the enforcement powers to ensure that the crimes and wreckage will never be dealt with as they would be … in a just republic.


  9. Ken Liu

    My colleagues and I at Deutsche Bank Risk Alert have been asking similar questions about SEC’s Khuzami and Deutsche Bank for a while now. See these posts:

    The latest development, from Carrick Mollenkamp’s excellent piece on Deutsche Bank at ProPublica (, appears to be that Khuzami “in general” does not work on Deutsche Bank-related matters.

    1. Ms G

      But he is the chief of enforcement, the person who would direct where SEC looks and investigates. If he is “not working on DB related matters generally” is there an “acting chief” making the threshold decisions about what entities should be investigated, e.g. DB? If not, then K’s non-involvement in DB matters sort of begs the question . . . and there’s an enforcement vacuum precisely because he, with his DB conflicts, is the chief and main “decider” of who gets investigated.

  10. orionATL

    YS, the real question for me is not the one you pose.

    for me, the real question is:

    why wasn’t khuzami asked by the obama whitehouse to resign from the sec within obama’s first 6-months in office?

  11. Martskers

    Khuzami’s just the tip of the iceberg. The real
    problem is who hired him, and who was chosen to
    run the agency. When Mary Schapiro was chosen to
    be the chair, I knew there was a sweetheart deal
    in the works with the Street. Remember, she was
    the head honcho at FINRA (formerly the NASD) who,
    among other things, was Bernie Madoff’s big pal,
    and who got a sweetheart deal when she left.

    FINRA is a notoriously ineffectual “self-regulator”
    that kissses the industry’s butt, and forces
    the industry’s customers to use its arbitration
    forum (a fixed deal if there ever was one) to
    resolve disputes. Schapiro was, and remains, a
    disaster. Nothing good will happen at that agency
    until she’s forced out.

  12. b.

    “Der Spiegel is careful about its sourcing…”

    Huh. There was a time (around when I was born) under its founder Augstein, where that would have been accurate, but what I read in the German edition on the web – and read in the paper edition in the 80’s and early 90’s – wouldn’t exactly back this up. Granted, it never sunk to the levels of the Stern Hitler Diaries insanity, but around the time it spawned Spiegel TV (satellite, presumably cable now) things changed. Resting on Augstein’s accomplishment, a lot of dwarfs in the ranks also laced their reporting with condescending editorializing, presumably hoping to cast longer shadows.

    Buyer beware. The individual matters, the mag itself is not a gurantee.

  13. C

    What worries me as much or more is this part of the quote: “he was more up front than most of them.”

    It implies that even to the insiders this behavior was not wrong, just a matter of more overt. It feels like an indictment of the ethics of the whole field that they would see this just as being too open.

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