Many here refer to the scandal — a $65 billion fraud that, despite several red flags, went undetected by the S.E.C. for more than two decades — as “the event” or “the incident.”
It is the job of Robert S. Khuzami, the S.E.C. head of enforcement, to unmask the next Madoff — and, equally daunting, to convince skeptics that the commission can reassert itself and adequately police Wall Street.
Since arriving at the S.E.C. a year ago this month, just as the Madoff scandal was grabbing headlines, Mr. Khuzami has cut red tape, created specialized teams to plumb hedge funds and other worrisome areas and tried to make the S.E.C. quicker and more nimble.
Unlike some at the commission, Mr. Khuzami, 53, talks openly about the Madoff fiasco. “For a group of people committed to investor protection and prevention, the tragedy of investors’ losses are not lost on anyone,” he said in an interview in his bright, corner office in Washington.
While Mary L. Schapiro, the chairwoman, is the public face of the commission, Mr. Khuzami and his lieutenants are the officers on the beat. Their first challenge is to shake off the psychic blow of the Madoff affair. Not since the 1950s, when budget cuts and deregulation defanged the commission, have its stature and influence sunk so low. Mr. Khuzami, a straight-talking former federal prosecutor and Wall Street executive, says he wants to infuse the S.E.C. with the ethos of a start-up company, making it faster, more proactive and even a bit entrepreneurial.
The practical challenges are formidable. Wall Street vastly outdoes the S.E.C. in terms of people, money and, many in the financial industry argue, talent. The administration has requested a budget of $1.3 billion for the S.E.C. for 2011. Hedge fund stars can make that in a year. Big banks usually pull in the equivalent in revenue in a single week.
On Monday, what S.E.C. officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of S.E.C. lawyers filed into a New York courtroom where the commission was trying to end its long investigation into the takeover of Merrill Lynch by Bank of America. But District Judge Jed S. Rakoff — who last September rejected as too low an earlier $33 million settlement that the S.E.C. had reached with Bank of America — again raised questions about the commission’s handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1.
At the heart of Mr. Khuzami’s effort is the commission’s new Office of Market Intelligence, a clearing house for the tips and referrals that stream into the S.E.C. The head of that unit is Thomas A. Sporkin, son of Stanley Sporkin, the outspoken retired federal judge who earned national recognition in the 1970s for his investigations of corporate malfeasance as director of enforcement at the commission.
The S.E.C. also has established five investigative units, hoping to transform some of its many generalists into specialists. One of those units focuses on so-called structured products and securitization, which spawned some of the most dangerous instruments of the financial collapse. The others focus on the market in municipal securities, cases stemming from the Foreign Corrupt Practices Act, market abuses like insider trading, and asset management, including hedge funds.
The S.E.C. has been criticized for meting out relatively light punishments in some recent cases. The commission also has not satisfied critics on Capitol Hill — and many ordinary Americans — who had hoped to see charges leveled at banking executives after the financial collapse.
Mr. Khuzami recognizes that the cases the S.E.C. brings, or does not bring, will define his tenure and, possibly, the future of the commission. “It’s all about the cases in the end,” he said.
It may surprise many just how difficult it has been for the S.E.C. to act. Under Ms. Schapiro’s predecessor, Christopher Cox, investigators had to get approval from the five S.E.C. commissioners to negotiate financial penalties against corporations. She lifted that restriction. Enforcement lawyers had always had to get permission from the commission to open an investigation involving subpoenas. She has authorized the enforcement division to do that on its own.
Team Khuzami hardly comes across as the Untouchables, but members say they are energized and up to the job.
Kenneth Lench, a lawyer who heads the structured products group, is trying to become an expert in an arcane corner of Wall Street. He totes heavy textbooks on securitization law and says he now reads trade publications like Derivatives Week, the bible of the market in financial derivatives. He also attended an industry conference last month with 10 other S.E.C. lawyers.