WHEN: Tuesday, June 22nd at 8:30AM ET
WHERE: CNBC's "Squawk Box"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Robert Khuzami, SEC Director of Enforcement, today, Tuesday, June 22nd, on CNBC's "Squawk Box" at 8:30AM ET.
All references must be sourced to CNBC.
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SEC's Top Cop
Insight on the SEC's high-level investigations, with Robert Khuzami, SEC director of enforcement.
CARL QUINTANILLA: THIS MORNING WE HAVE A FIRST EVER LIVE TV INTERVIEW WITH THE MAN LEADING THE SEC'S COMMISSION, SEC THROUGH THE HIGH-PROFILE INVESTIGATIONS, THE CHIEF ONE INVOLVING GOLDMAN SACHS. ROBERT KHUZAMI IS THE SEC'S DIRECTOR OF ENFORCEMENT. HE JOINS US THIS MORNING FROM MENLO PARK. GREAT TO HAVE YOU.
ROBERT KHUZAMI: GREAT TO BE HERE.
QUINTANILLA: A LOT'S BEEN SAID AND WRITTEN SINCE YOU JOINED THE AGENCY, MAINLY THAT YOU LED THROUGH ITS BIGGEST OVERHAUL IN ABOUT 30 YEARS. I'M WONDERING, JUST TO START OFF, IF THAT'S HOW YOU SEE IT. AND IF SO, WHERE YOUR PRIORITIES ARE.
KHUZAMI: WE HAVE UNDERTAKEN A VERY SIGNIFICANT ASSESSMENT OF THE ENFORCEMENT DIVISION AND THE RESULTS HAVE NEW TOOLS AND NEW PROCESSES AND NEW INITIATIVE GOING FORWARD. WE'VE CREATED SPECIALIZED UNITS TO FOCUS IN THE AREAS OF ASSET MANAGEMENT, LARGE SCALE INSIDER TRADING AND MARKET MANIPULATION. STRUCTURED PRODUCTS, FOR INCORRUPT PRACTICES, AND ABUSES IN THE MUNICIPAL MARKETS. WE ARE FOCUSED ON THOSE AREAS. IN ADDITION, WE STREAMLINED OUR PROCESSES, FLATTENED OUR MANAGEMENT, CREATED A NEW OFFICE TO HANDLE ALL OF THE TIPS AND COMPLAINTS AND REFERRALS, NEW COOPERATION TOOLS TO REWARD WITNESSES FOR COMING FORWARD WITH EVIDENCE OF WRONG DOING. A GREAT TIME TO BE THERE, LOTS OF EXCITEMENT, LOTS OF ACTIVITY.
QUINTANILLA: WHAT IS MADE IT -- WHY ARE YOU ABLE TO DO THESE THINGS THAT I GUESS PREVIOUSLY OTHERS WERE NOT ABLE TO DO. IS IT A FACTOR OF THE BUDGET FOR ENFORCEMENT BEING LIFTED? IS IT PEOPLE FROM WALL STREET LOOKING FOR WORK. IS IT JUST A LOT OF LOW-HANGING FRUIT. CAN YOU TALK ABOUT WHY YOU'RE ABLE TO DO THIS NOW?
KHUZAMI: I THINK IT'S A REFLECTION OF THE TALENT AND COMMITMENT OF THE STAFF AND THE ENTIRE COMMISSION, ESPECIALLY UNDER CHAIRMAN SHAPIRO, WE TOOK A HARD LOOK AT OURSELVES AND FRANKLY ASKED OURSELVES WHAT EVERY PUBLIC AGENCY SHOULD ASK ITSELF, HOW COULD WE DO THAT JOB BETTER? AND IT WAS THAT QUESTION RESULTED IN THOSE ANSWERS, THOSE INITIATIVES, NOT JUST IN THE ENFORCEMENT DIVISION, BUT FRANKLY ACROSS THE ENTIRE COMMISSION.
QUINTANILLA: YOU CAME FROM DEUTSCHE, OBVIOUSLY, AS GENERAL COUNCIL. I'M WONDERING HOW THAT EXPERIENCE HAS COLORED YOUR VIEW OF YOUR JOB NOW. IS IT MADE IT -- ARE YOU ABLE TO HAVE THE CODES TO THE BOMBS, SO TO SPEAK, THAT HAVE BEEN WIRED BY WALL STREET. IS IT EASIER FOR YOU NOW TO UNWIRE THOSE OR LOOK FOR THOSE?
KHUZAMI: WELL, LOOK, I THINK THE EXPERIENCE THERE DID TEACH ME SOME OF THE WAYS TO MANAGE A LARGE ORGANIZATION WITH RESPECT TO HOW TO IMPLEMENT PROGRAMS AND DISCIPLINE. BUT IT ALSO GAVE ME AN UNDERSTANDING OF HOW BANKS OPERATE, HOW TRANSACTIONS ARE EXECUTED. AND THAT HELPS IN CONDUCTING AN INVESTIGATION. YOU KNOW, HOW TO TARGET YOUR FOCUS. AND, YOU KNOW, WHERE TO LOOK IN ORDER TO FIND WRONGDOING.
JOE KERNEN: BUT YOU MIGHT THINK THAT MAYBE YOU COULD PHRASE IT THAT YOU KNOW WHERE SOME OF THE BODIES ARE -- ARE BURIED. DID -- I MEAN, ETHICALLY AT THE TIME AT DEUTSCHE BANK, WERE THERE QUESTIONS IN YOUR MIND ABOUT SOME OF THE SAME THINGS THAT YOU'RE NOW LOOKING AT FOR POSSIBLY SOME ACTION?
KHUZAMI: I DON'T THINK IT WILL BE APPROPRIATE TO DISCUSS OUR PRIOR EMPLOYER. BUT CERTAINLY THE EXPERIENCE I HAVE AND THE LESSONS LEARNED FROM BEING IN A LARGE ORGANIZATION GIVE YOU INSIGHT INTO HOW OTHERS OPERATE. WE USE THAT KIND OF INFORMATION GOING FORWARD. I OF COURSE AM PERSONALLY RECUSED OF ANY MATTER INVOLVING THE BANK.
MARK OLSON: ROBERT, THIS IS MARK OLSON. I REMEMBER 15 MONTHS OR SO AGO WHEN YOU TOOK THAT JOB THE EXCITEMENT AT THE SEC OF YOU COMING ONBOARD. BUT I ALSO REMEMBER FROM OTHER CONVERSATIONS WITH OTHER PEOPLE COMING IN TO THE SEC THAT THE MAGNITUDE OF THE JOB ONCE THEY GOT THERE WAS SO MUCH BIGGER THAN WHAT THEY ANTICIPATED. HOW ARE YOU FINDING THE ROLE RELATIVE TO WHAT YOUR EXPECTATION WAS FOR COMING IN?
KHUZAMI: IT IS A SIGNIFICANT UNDERTAKING, A LARGE ORGANIZATION. I HAVE TO TELL YOU THAT IT IS THE TALENT AND COMMITMENT ON PERFORMANCE OF THE STAFF AND THE PEOPLE WHO WORK THERE THAT MAKE ALL OF THE DIFFERENCE. THEY ARE HIGHLY MOTIVATED, HIGHLY ENGAGED. HIGHLY FOCUSED. AND IT MAKES IT FRANKLY EASY TO DO THE JOB.
OLSON: ARE YOU ABLE TO RETAIN THAT? ARE YOU ABLE TO RETAIN THAT STAFF? BECAUSE IT'S ALWAYS BEEN AN HISTORIC PROBLEM -- DIFFICULTY WITH THE SEC?
KHUZAMI: WELL, IN THIS MARKET, WE'VE BEEN ABLE TO NOT ONLY RETAIN THE STAFF BUT ALSO BEEN ABLE TO ATTRACT INCREDIBLE NEW TALENT IN AREAS OF STRUCTURED PRODUCTS, CREDIT RATING AGENCIES, RISK MANAGEMENT DERIVATIVES. THE CHAIRMAN HAS BROUGHT IN A LOT OF GREAT TALENT. AND SO THERE'S GREAT EXPERTISE THAT WE RELY ON TO A GREAT EXTENT IN HELPING TO INFORM OUR INVESTIGATIONS.
KERNEN: I WANT TO TOUCH ON THE NEWS OF THE DAY, THE ICP ASSET MANAGEMENT NEWS MR. KHUZAMI.THIS IS LIKE THE WILD WEST READING THIS. THE WAY THAT CDOs ARE PRICED. FOR EXAMPLE, ON A GIVEN DAY, ICP BOUGHT SOME FOR $63.50 A PIECE AND THEN SOLD THEM FOR $75. A WIDE SPREAD, ADMITTINGLY, BUT IT'S NOT TRANSPARENT. YOU DON'T KNOW THE SELLER AND WHAT HIS SITUATION WAS OR THE BUYER.CAN THIS RISE TO THE LEVEL OF WHERE THERE WAS A CIVIL SUIT OR DO WE NEED TO -- TO SET SOME GUIDELINES FOR HOW CDOs ARE PRICED? IT SEEMS LIKE A HARD CASE TO PROVE.
KHUZAMI: WELL, I THINK THE ALLEGATIONS ARE PRETTY STARK IN THAT CASE. YOU HAVE A COLLATERAL MANAGER WHO MANAGED ASSETS IN MULTIPLE CDOs, MULTIPLE BILLION DOLLAR CDOs. HEDGE FUNDS AND MANAGED ACCOUNTS AND ESSENTIALLY VIOLATED FIDUCIARY DUTIES BY ENGAGING IN TRADING ACROSS THOSE DIFFERENT ENTITIES DEPENDING ON WHO THEY WANTED TO BENEFIT AT A PARTICULAR TIME. SO IF ONE OF THEIR CLIENTS WAS UNDER FINANCIAL STRESS, IT WOULD CAUSE ANOTHER CLIENT TO PURCHASE ASSETS FROM A CLIENT AT ABOVE MARKET PRICES. OR IN SOME CASES, THE ALLEGATIONS IN THE COMPLAINT ARE THE COLLATERAL MANAGER INTERPOSED ITSELF IN BETWEEN TRADES TO ORDER TO EARN A RISK-FREE MARKUP. I THINK THE CASE UNDERSCORES FIRST OF ALL THE CAPACITY AND THE EXPERTISES OF THE SEC TO DELVE INTO THESE AREAS BUT ALSO THE DANGERS OF OPAQUE MARKETS. IN THE CDO WORLD AND THE STRUCTURED PRODUCT WORLD WHERE THERE'S A LACK OF PRICE TRANSPARENCY, A LACK OF LIQUIDITY, A LACK OF THE GOVERNMENT'S CONTROLS IN TERMS OF ENGAGED BOARDS OF DIRECTORS, LEGAL DEPARTMENTS, COMPLIANCE DEPARTMENTS.ALL OF THE SAFEGUARDS YOU RELY UPON TO MAKE SURE INVESTORS ARE PROTECTED ARE OFTEN NOT THERE IN THOSE MARKETS. THAT'S WHY A STRONG ENFORCEMENT PRESENCE IS CRITICAL.
KERNEN: BUT EVEN THE GROUP THAT BOUGHT IT AT $75 THEY MAY STILL MAKE MONEY ON THESE. IF IT WAS NOT $75 FROM 63.50, LET'S SAY IT'S $68. WOULD THEN THERE BE THIS ACTION? IF THERE'S LESS OF A MARKUP, WOULD YOU BE TALKING ABOUT IT HERE?
KHUZAMI: OBVIOUSLY THERE'S A POINT AT WHICH THE SALE PRICE WAS SIMPLY THE RESULT OF ACTUAL SUPPLY AND DEMAND IN THE MARKET AND THE PRICE MIGHT BE APPROPRIATE. BUT IN THIS CASE, IT'S BOUGHT AT 63 AND RESOLD AT 75 LATER IN THE SAME DAY. AND IT'S OUR ALLEGATION THAT WAS AN IMPROPER MARKUP. THERE'S ALSO ALLEGATIONS OF INTERPOSITIONING WHERE THE COLLATERAL MANAGER RIPPED UP A TRADE AND REBOOKED IT WITH ITSELF IN THE MIDDLE OF THE TRADE EARNING A $14 MILLION RISK FREE MARKUP. THAT'S NOT APPROPRIATE UNDER ANY CIRCUMSTANCES.
KERNEN: THE CLIENTS ON BOTH SIDES NEED TO DO SOME OF THEIR OWN DUE DILIGENCE. THESE ARE BIG BOYS IN HERE DEALING WITH ICP ASSET MANAGEMENT.THEY DON'T NEED TO DEAL WITH THIS FIRM ANYMORE, RIGHT?
KHUZAMI: THEY DON'T. BUT SECURITIES LAWS ARE DESIGNED TO PROTECT ALL INVESTORS AND COLLATERAL MANAGERS LIKE ALL INVESTMENT ADVISORS HAVE FIDUCIARY DUTIES. IT IS NO DEFENSE TO CLAIM THAT YOUR CLIENT IS A SOPHISTICATED INVESTOR. YOU HAVE DUTIES THAT APPLY TO YOU AS A COLLATERAL MANAGER TO ACT IN THE BEST INTEREST OF YOUR CLIENT.
QUICK: IS THAT THE SAME LINE OF THINKING THAT WE SHOULD APPLY TO THE GOLDMAN SACHS CASE? AGAIN, THAT WAS A SITUATION WHERE THE PEOPLE ON THE OTHER SIDE OF THAT TRADE SHOULD HAVE BEEN VERY SOPHISTICATED INVESTORS AS WELL.
KHUZAMI: WELL, THE ALLEGATIONS IN THE COMPLAINT IN GOLDMAN ARE NOT -- THERE WERE VIOLATIONS OF FIDUCIARY DUTIES BUT THAT THERE WERE MISLEADING STATEMENTS MADE WITH RESPECT THE ROLE OF THE INDEPENDENT SELECTION AGENCY. SO IT IS A DIFFERENT KIND OF LEGAL THEORY.
QUINTANILLA: WHAT DID YOU MAKE OF THE COMPLAINTS, THE ARGUMENTS AT THE TIME THAT THE COMPLAINT WAS RELEASED REGARDING GOLDMAN THAT IT WAS SOMEHOW TIED TO GETTING FINREG TO HAPPEN ON THE HILL. A LOT OF CONSPIRACY THEORIES FLOATED THAT THE TIMING OF IT AND YOU CAN TELL US WHETHER OR NOT IT WAS TRADITIONAL OR NOT WAS TIED TO MAKING SURE THAT BILL MADE PROGRESS ON THE HILL.
KHUZAMI: I CAN UNEQUIVOCALLY SAY THAT IS FALSE. THE CASE WAS BROUGHT BASED ON THE FACTS AND CIRCUMSTANCES OF THE PARTICULAR CASE AND NO CONSIDERATION WAS GIVEN TO THE TIMING OF THE CASE. AND, IN FACT, NO CONSIDERATION OF THAT NATURE HAS BEEN GIVEN TO ANY CASE THAT'S BEEN BROUGHT AS LONG AS I'VE BEEN THERE.
QUINTANILLA: CAN YOU UPDATE US ON YOUR OWN VIEW OF THE CASE AND MAYBE EVEN YOUR VIEW OF HOW GOLDMAN RESPONDED OVER THE LAST SEVERAL MONTHS?
KHUZAMI: THIS IS AN ACTIVELY LITIGATED CASE, THOUGH, I DON'T THINK IT WOULD BE APPROPRIATE FOR ME TO COMMENT ON THAT.
QUINTANILLA: A GREAT QUESTION, THOUGH.
KERNEN: IT IS A GREAT QUESTION. WE'VE HAD PEOPLE IN THE PAST SAY TO REALLY GET THINGS ROLLING THAT THE SEC HAS TO OFFER BOUNTY. WHEN A WHISTLEBLOWER COMES IF THERE IS SOME TYPE OF INCENTIVE FOR SOME OF YOUR AGENTS TO ACT THAT YOU KNOW, MAYBE THE AGENCY WOULD HAVE BEEN MORE EFFECTIVE IN THE PAST. MARK ALLUDED TO THE LURE OF THE PRIVATE SECTOR FROM THE -- YOU KNOW, FROM SERVING THE GOVERNMENT AND THE SEC. DOES THAT MAKE ANY SENSE? ANY PROPOSALS ON THE TABLE FOR THAT?
KHUZAMI: SURE, WE HAVE A WHISTLEBLOWER PROPOSAL THAT IS BEFORE CONGRESS NOW WHERE WE SEEK TO BE ABLE TO PAY FUNDS TO PERSONS WHO COME FORWARD FOR WITH INFORMATION ABOUT FRAUD AND WRONGDOING UNDER CERTAIN CIRCUMSTANCES AND THEY CAN BE ELIGIBLE FOR PAYMENTS FOR MONEY THAT WOULD OTHERWISE GO TO THE U.S. TREASURY. SO WE HOPE THE WHISTLEBLOWER PROGRAM PASSES. WE HAVE A COOPERATION INITIATIVE WHERE WE ARE ABLE TO GIVE REDUCED SANCTIONS FOR PERSONS WHO ARE AWARE OF WRONGDOING AND BRING IT TO OUR ATTENTION. IT'S CRITICAL TO GET INFORMATION AS EARLY AS POSSIBLE SO THAT YOU CAN STOP A FRAUD OR A WRONGDOING BEFORE INVESTOR LOSSES HAVE MOUNTED.
QUICK: MR. KHUZAMI, YOU'VE TOUCHED ON THIS BEFORE.YOU SPENT SOME TIME ON WALL STREET. YOU UNDERSTAND HOW IT OPERATES. COULD YOU JUST EXPAND A LITTLE BIT AND MAYBE TELL US YOUR SENSE. WRONGDOING ON WALL STREET, HOW PERVASIVE DO YOU THINK IT IS?
KHUZAMI: WELL, LOOK, ONE OF THE CHALLENGES FOR THE ENFORCEMENT DIVISION IN THE SEC AND THE WAKE OF THE FINANCIAL CRISIS IS TO DISTINGUISH BETWEEN POOR RISK TAKING AND POOR CORPORATE GOVERNANCE AND RISK MANAGEMENT ON ONE HAND AND FRAUD ON THE OTHER HAND. IN THE ENFORCEMENT DIVISION, THAT'S OUR FOCUS. WE -- WE ARE LOOKING FOR THOSE SITUATIONS WHERE INDIVIDUALS OR INSTITUTIONS CROSS THE LINE. I DON'T THINK IT'S HELPFUL TO SPECULATE ABOUT HOW RAMPANT FRAUD MIGHT OR MIGHT NOT HAVE BEEN ACROSS AN ENTIRE SECTOR. WE'RE MUCH MORE FOCUSED ON THE PRACTICES THAT WE SEE, THE TROUBLES SUCH AS THE ICP CASE ON MONDAY AND GOING AFTER THAT CONDUCT.
QUICK: ARE YOU INTERESTED IN GOING AFTER PEOPLE AT THE HIGHEST LEVELS? WOULD SARBANES-OXLEY BE A TOOL TO HELP YOU WHEN YOU LOOK BACK AT SOME OF THE PROBLEMS AND SOME OF THE FALLOUT FROM THE FINANCIAL CRISIS?
KHUZAMI: LOOK, WE GO WHEREVER THE EVIDENCE LEADS US. THAT CAN BE AT LOW LEVELS OR AT HIGH LEVELS. WE HAVE RECENTLY BROUGHT UNDER SARBANES OXLEY A CASE THAT A COURT RECENTLY INDICATED THAT WOULD SURVIVE A CONSTITUTIONAL CHALLENGE WHERE WE COULD CLAW BACK EXECUTIVE COMPENSATION FOR CEOs AND CFOs UNDER CIRCUMSTANCES WHERE THE COMPANIES THAT THEY WORKED FOR ARE REQUIRED TO RESTATE THEIR FINANCIAL STATEMENTS. SO THAT'S A TOOL THAT CONGRESS GAVE THE SEC, WHICH WE WILL USE IN APPROPRIATE CIRCUMSTANCES.
QUINTANILLA: ARE YOU CONVINCED THE FINREG BILL WHAT LITTLE WE KNOW ABOUT IT IS GOING TO LEAVE YOU THE TOOLS YOU NEED OR GOING TO LEAVE YOU WANTING MORE?
KHUZAMI: I THINK THE BILL HAS A LOT OF PLUSES FOR THE ENFORCEMENT DIVISION. THE WHISTLEBLOWER LEGISLATION WHICH I MENTIONED AS WELL AS JUST A BUNCH OF ADJUSTMENTS THAT INCREASED THE SANCTIONS THAT WE HAVE AVAILABLE BY CHANGING CERTAIN OF OUR STATUTORY AUTHORITY, THINGS LIKE NATIONWIDE SERVICE OF PROCESS WHERE WE CAN SERVE SUBPOENAS ACROSS THE COUNTRY WHICH WILL MAKE IT EASY FOR OUR TRIAL UNIT TO PROCEED WITH ITS CASES. SO, FROM AN ENFORCEMENT DIVISION, THERE'S LOTS IN THE BILL THAT WOULD BE HELPFUL TO US.
QUINTANILLA: DO YOU -- I WONDER FOR A LONGTIME, THE IMAGE OF THE AGENCY WAS A -- WAS THAT OF A PLACE WHERE THEY HAD TO SETTLE FOR SECOND BEST IN TERMS OF TALENT ON ENFORCEMENT. THE KIDS WHO GOT OUT OF SCHOOL WITH FINANCIAL DEGREES OBVIOUSLY WENT TO THE STREET. AND GOING TO ENFORCE THE STREET WASN'T FIRST AND FOREMOST ON THEIR MINDS.HAS IT CHANGED? DO THE AGENCIES HAVE ALL BEEN TO A PLACE WHERE NEW TALENT, SMART TALENT IS GOING TO WANT TO GO? WHERE THERE'S HONOR IN POLICING THE STREET?
KHUZAMI: ABSOLUTELY. WE CREATED OUR FIRST NEW DIVISION, THE DIVISION OF RISK FINANCE AND STRATEGY WHERE WE'VE HIRED EXPERTS IN CORPORATE GOVERNANCE, RISK MANAGEMENT, DERIVATIVES, OUR INSPECTION UNIT HAS HIRED EXPERTS IN CREDIT RATING AGENCIES, DERIVATIVES IN ELSEWHERE.WE'RE HIRING MARKET SPECIALISTS IN SOME OF OUR SPECIALIZED UNITS. THERE'S A GREAT DEAL OF TALENT OUT THERE EAGER TO COME TO THE SEC. WE'RE TAKING FULL ADVANTAGE OF IT. AT THE SAME TIME, WE'RE HOLDING ON TO THE TALENT THAT WE HAVE. IT'S A GREAT TIME FOR THE COMMISSION.
QUINTANILLA: HOW CONFIDENT ARE YOU THAT A MISS LIKE MADOFF COULD NOT HAPPEN TODAY.
KHUZAMI: LOOK, WE'RE IN A BUSINESS WHERE THERE'S ALWAYS RISK THAT FRAUD WILL NOT BE IDENTIFIED AS EARLY AS WE WOULD LIKE. BUT WE'RE DOING EVERYTHING WE CAN TO MAKE SURE THAT WE MINIMIZE THE CHANCE OF THAT HAPPENING. SO THERE'S INITIATIVES JUST ACROSS THE ENTIRE DIVISION TO MAKE SURE THAT WE DO EVERYTHING WE CAN THAT THAT DOES NOT HAPPEN AGAIN.
QUINTANILLA" ROBERT, IT'S NOT EASY GETTING YOU ON THE LINE FOR AN INTERVIEW, BUT WE'RE OBVIOUSLY GLAD TO HAVE YOU. WE HOPE YOU'LL COME BACK.
KHUZAMI: I WILL. AND THANKS VERY MUCH FOR HAVING ME.
QUINTANILLA: THE SEC'S ROBERT KHUZAMI.
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