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News January 18, 2010 Issue

Specialized Units in Enforcement Take Shape

Back in the summer, SEC Division of Enforcement director Robert Khuzami announced a series of initiatives in response to the criticisms levied against the agency in the wake of the Madoff scandal. One of those initiatives was a plan to establish a series of specialized units within the division dedicated to specific complex areas of law. The units would be staffed with personnel from across all SEC offices who have existing expertise or a desire to learn it. The units would receive specialized training and also recruit additional expertise from outside the agency.

Khuzami took the first big step toward launching those specialized units last week when he named the chiefs who will run them. The announcements come ahead of further structural reorganization in Enforcement, and give Khuzami the opportunity to strategically reorganize the Division's talent.

To refresh your recollection, the five "priority areas" on which the specialized units will focus are asset management, market abuse, structured and new products, foreign corrupt practices, and municipal securities and public pensions. Almost all, if not all, will have an impact on advisers and their business.

Asset Management

Bruce Karpati and Robert Kaplan are teaming up to run the asset management unit, which will focus on hedge funds, investment advisers and private equity firms. Karpati has run the SECís hedge fund working group out of New York, while Kaplan has been involved in high-profile cases, including an insider trading ring involving former Morgan Stanley executives. This is the only unit with co-chiefs, and it is unclear how responsibilities may be divided between them.

Market Abuse

Daniel Hawke, director of the SECís Philadelphia regional office, will run the unit focusing on investigations of large-scale market abuses and complex manipulation schemes within and across trading markets. He has worked on high profile enforcement actions that ferreted out such abuses as traders who employed an electronic "spider" program to improperly access a newswireís confidential information, audit improprieties, complex recordkeeping violations, and Regulation FD violations. The recipient of several SEC service awards, Hawke has been described by his superiors there as a creative thinker, a tenacious investigator, and a skilled litigator with solid judgment.

Hawkeís deputy chief is Sanjay Wadhwa, who was most recently an assistant director in the SECís New York office.

Structured and New Products

Kenneth Lench will lead the unit focusing on derivative securities such as credit default swaps, collateralized debt obligations, and securitized products. Lench, most recently an assistant director in Enforcement, was actively involved in the SECís auction rate securities investigations, and brought a high-profile derivatives action against Electronic Data Systems.

The unitís deputy chief will be Reid Muoio, also an assistant director in Enforcement.

Municipal Securities and Public Pensions

This unit will devote its energies to investigating misconduct in connection with public pension funds and the municipal securities market. Pay-to-play and public corruption violations, as well as accounting, valuation, and other frauds will be overseen by Elaine Greenberg, associate regional director in the Philadelphia office and a co-chair of the divisionís Municipal Securities Working Group. Mark Zehner, a former attorney-fellow (read "outside expert") in the SECís Office of Municipal Securities and co-chair of the MSWG, will deputy chair the unit.

Foreign Corrupt Practices

Cheryl Scarboro, an eighteen-year veteran on the staff and former counsel to Chairman Arthur Levitt, will lead the unit focusing on violations of the Foreign Corrupt Practices Act. The FCPA prohibits bribing foreign officials for business. Most recently an associate director in Enforcement since 2006, Scarboro has worked on a variety of complex enforcement actions and actions involving foreign entities. No deputy was named for this unit.

As he announced the chiefs and their deputies, Khuzami said that the complex and fast-paced nature of innovation and "the willingness of violators to use every trick to cover their tracks" are the two great challenges in policing the securities markets. "These specialized units address both challenges through improved understanding of complex products and markets, earlier and better capability to detect emerging fraud and misconduct, greater capacity to file cases with strike-force speed, and an increase in expertise throughout the division," he said.