Is The Criminal Case Against Goldman About To be Reopened

http://www.zerohedge.com/article/criminal-case-against-goldman-about-be-reopened-robert-khuzamis-ethical-reputation-lies-ruin

Is The Criminal Case Against Goldman About To be Reopened, As Robert  
Khuzami's "Ethical" Reputation Lies In Ruins
Submitted by Tyler Durden on 01/11/2011 19:09 -0500

Bank of America Bloomberg News CDO Citigroup Collateralized Debt  
Obligations Deustche Bank Deutsche Bank Goldman Sachs Housing  
Marketkeynesianism Real estate Robert Khuzami Securities and Exchange  
Commission Securities Fraud Subprime Mortgages

After a few days ago we described in detail the facts behind the ACA  
lawsuit against Goldman, we were left scratching our heads how it  
could be that the SEC could ever possibly scuttle this criminal case  
which was obviously a slam dunk through  court, and which based on the  
disclosures presented by ACA, is a blatant violation case of 10(b)-5  
securities fraud and underwriter representation. We asked: did the SEC  
hide a key piece of the case against Goldman to fast track a  
settlement process? We concluded that even the SEC's otherwise  
completely inexperienced legal team should have been able to get this  
case through the finished line without the need to settle. Two  
developments today may allow us to postpone the head scratching for at  
least a bit. According to the FT, the Senate permanent subcommittee on  
investigations is about to issue a report which "will press the SEC to  
reopen its investigation into the bank." And in a completely separate  
report, we learn from Bloombergthat the SEC's top enforcement  
official, Robert Khuzami, who settled the SEC case with Goldman, is  
now being probed for his role in Citi's abrupt settlement over the  
summer. According to Bloomberg disclosures in a letter that served to  
open the probe "Khuzami ordered his staff to drop the claims after  
holding a “secret conversation, without telling the staff, with a  
prominent defense lawyer who is a good friend” of his and “who was  
counsel for the company, not the individuals affected.” We hope  
readers are able to put two and two together, and ask: just why is  
Robert Khuzami, former General Counsel for Deutsche Bank, still  
pretending to represent investor interests, when he obviously has far  
more powerful (and rich) interests to answer to?
 From the FT:
Goldman Sachs will come in for harsh criticism from an influential US  
Senate report into the financial crisis that will highlight alleged  
conflicts of interests in the bank’s dealings with clients, according  
to people familiar with the matter.

People familiar with the matter said the report from the Senate  
permanent subcommittee on investigations, which could be published by  
the end of the month, would renew pressure on Goldman by focusing on  
complex transactions similar to a deal involving a mortgage-linked  
security called Abacus.

The regulators alleged Goldman did not disclose to clients that a  
hedge fund eager to short the housing market had influenced the type  
of loans included in the security.

Senior Democrats hope the new report, which deals with Wall Street’s  
behaviour during the crisis but is believed to focus heavily on  
Goldman, will press the SEC to reopen its investigation into the bank.

The SEC settlement with Goldman infuriated some of the bank’s critics  
in Congress, who believed the case should have gone to court. Some of  
Goldman’s supporters, who believed the case had no merit, were also  
disappointed.
Which is where the Bloomberg story on Robert Khuzami's, who just  
happens to be Deutsche Bank general counsel, proclivity to settle SEC  
cases comes into play:
The U.S. Securities and Exchange Commission’s internal watchdog is  
reviewing an allegation that Robert Khuzami, the agency’s top  
enforcement official, gave preferential treatment to Citigroup Inc.  
executives in the agency’s $75 million settlement with the firm in July.

Inspector General H. David Kotz opened the probe after a request from  
U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an  
unsigned letter making the allegation. Khuzami told his staff to  
soften claims against two executives after conferring with a lawyer  
representing the bank, according to the letter. Jon Diat, a Citigroup  
spokesman, declined to comment.

Citigroup agreed in July to pay $75 million to resolve SEC claims that  
the bank understated investments linked to subprime mortgages as the  
housing crisis unfolded. Gary Crittenden, who stepped down as chief  
financial officer in 2009, and Arthur Tildesley, the New York-based  
bank’s former head of investor relations, agreed to pay $100,000 and  
$80,000, respectively, to resolve related claims. The two men settled  
without admitting or denying the SEC’s allegations.

According to the letter, the SEC’s staff was prepared to file fraud  
claims against both individuals. Khuzami ordered his staff to drop the  
claims after holding a “secret conversation, without telling the  
staff, with a prominent defense lawyer who is a good friend” of his  
and “who was counsel for the company, not the individuals affected,”  
according to a copy of the letter reviewed by Bloomberg News.
Furthermore regular readers will recall our expose on Mr. Khuzami, who  
also ended up recusing himself from investigating Deutsche Bank for  
comparable CDO-type shennanigans, as Goldman ended up settling with  
the agency for over half a billion. From our May 16, 2010 piece titled  
Robert Khuzami Stands To Lose Up To $250,000 If He Pursues Action  
Against Deutsche Bank. ("Oddly" enough, the Deustche Bank  
investigation has gone nowhere fast).
When the SEC'a Robert Khuzami recently recused himself of pursuing an  
investigation against Deutsche Bank in regard to potential CDO  
malfeasance, a bank where it is common knowledge the CDOs flowed (and  
were shorted "where appropriate" by Mr. Lippmann and his henchmen)  
like manna from heaven, we were curious just how large the conflict of  
interest must be for him to not pursue his official duty. Luckily, we  
were able to answer this question when we recently encountered Mr.  
Khuzami's Public Financial Disclosure Report for Executive Branch  
Personnel. It appears that Mr. Khuzami, who from 2002 to 2009 worked  
at DB, most recently as General Counsel, might have directly profited  
quite handsomely from the very activity he is now prosecuting Goldman,  
and other banks very likely soon, for engaging in. How handsomely? His  
2007 bonus, 2008 salary and bonus, and 2009 salary added up to  
$3,804,537. This works out to about $1.9 million in comp per year. And  
let's not forget that 2006/2007 was the peak years for DB's CDO  
issuance. It sure seems Mr. Khuzami benefited nicely as a participant  
in precisely the kind of CDO gimmickry that he is currently all over  
Goldman for. Yet most ironic, is that Robert is expecting to receive  
between $100,001 and $250,000 in vested deferred stock comp from  
Deutsche Bank in August 2010. Should he, or someone else at the SEC,  
commence an investigation into Khuzami's former employer, the SEC's  
Director of Enforcement is sure to lose a substantial amount of money  
tied into the absolute value of Deutsche Bank stock.

And it doesn't end there. Khuzami lists the following asset holdings  
as of June 2009:
Federated US Treasury Cash Reserves: $1,001-$15,000
US Treasury Cash Reserves: $1,000,001-$5,000,000
Fidelity Advisor New Insights Fund: $15,001-$50,000
Henderson Int'l Opportunities Fund: $15,001-$50,000
Deutsche Bank Cash Account Pension Plan: $100,001-$250,000
DB Stable Value Fund: $1,001-$15,000
Goldman Sachs Mid Cap Value Fund: $1,001-$15,000
Dodge and Cox Int'l Stock Fund: $50,001-$100,000
SSGA Money Market Fund: $15,001-$50,000
Delaware Emerging Markets: $50,001-$100,000
Gateway Fund (401k): $15,001-$50,000
Third Avenue Real Estate Fund (401k): $15,001-$50,000
Touchstone MidCap Growth Class A (401k): $15,001-$50,000
Wells Fargo Endeavor Select FD (401k): $15,001-$50,000
Yacktman Fund (401k): $15,001-$50,000
PIMCO Real Return Class A (401k): $50,001-$100,000
Principal Short-Term Fixed Income (401k): $1,001-$15,000
Personal Residence - New York (Gross Rental Income): $1,000,001- 
$5,000,000
Deutsche Bank Common Stock (Vested Amount Compensation): $100,001- 
$250,000
Vanguard 529 Moderate: $50,001-$100,000
Vanguard 529 Aggressive: $1,001-$15,000
It appears Mr. Khuzami has done quite well while working in the  
private sector, undoubtedly defending his German employer from  
precisely the same actions he, or someone else at the SEC, may soon  
charge the firm was defrauding investors by. His total disclosed asset  
range from $2,525,000 to $11,375,000. It is also ironic that nearly  
half Mr. Khuzami's assets are contained in real estate, and not to  
mention that a substantial amount of his assets are also contained in  
Deutsche Bank plans as well as DB stock deferred comp. In fact, let's  
take a look at that deferred comp of $100,001-$250,000 a little closer.

It appears the SEC's Enforcement Director has between $100,001 and  
$250,000 in DB deferred stock compensation, which becomes payable in  
August 2010. Obviously this is not a trivial number. And while Khuzami  
may have recused himself from pursuing DB for CDO infarctions, that  
does not mean that some other SEC enforcer (surely, their $1 billion a  
year budget allows them at least more than one enforcement  
professional) would not be able to go after DB. The problem as we see  
it is that since the announcement of the SEC case against Goldman the  
firm has lost about 25% of its market cap. It is conceivable that DB,  
which dabbled far more in CDOs, and thus the SEC would have a much  
stronger case agaisnt the bank, would thus lose far more of its market  
cap should the SEC announce a case against the Germans. In fact, we  
could be looking at Mr. Khuzami's Vested Deferred Compensation value  
dropping from $100,001 - $250,000 to maybe even as low as $15,001- 
$50,000. Then again, this becomes irrelevant after August, when the  
former DB GC will have collected all his dues. Does this mean we  
should expect nothing from the SEC against Deutsche Bank for at least  
4 more months? And is September 1 the day when the SEC formally  
announces charges against Deutsche? We would love to get the SEC's  
feedback on this.
Mr. Khuzami's potential conflicts of interest do not end with his open  
exposure to Deutsche Bank. His Schedule A appendix indicates that the  
man has open equity positions with firms such as Bank of America,  
Deutsche Bank, and JP Morgan. To wit:


Would this mean that Mr. Khuzami, and thus the entire SEC Enforcement  
Division, if judging by the Deutsche Bank case study, would recuse  
itself of investigating these three firms from an enforcement  
standpoint?
We certainly do not begrudge Khuzami's generous winnings as part of  
the private sector. If anything, any borderline criminal activity he  
may have helped cover up as GC of Deutsche (an act he was supposed to  
do so no ill-will there) should provide him with the knowledge to  
prosecute just such activity. However, when the head of the main US  
regulator's enofrcement body is so terminally ensnared in not just the  
Wall Street complex, but in the very fabric of Keynesianism (that up  
to $5,000,000 Treasury holding for example and not to mention his up  
to $5,000,000 rental property), the population should ask just how  
extremely biased this man can be when prosecuting the very system that  
allows him to have up to $11 million in assets currently tied in to  
the perpetuated status quo. Surely, should the Fed, and the market in  
general, be "surprisingly" uncovered to be the same ponzi construct as  
Madoff's pyramid scheme, Khuzami, and who knows how many other people,  
stand to lose virtually the bulk of their assets. This makes them very  
much conflicted in any real enforcement action, and certainly not  
independent or impartial. Perhaps Dodd, in his joke of a bill, can  
consider just how to establish a securities regulator which by its  
very nature is not constantly in bed with the very subject it is  
supposed to be investigating.
We indirectly called for Khuzami's resignation then. In light of  
today's disclosure that Khuzami may have put Citigroup's interests  
above those of US citizens and investors (the people the SEC  
issupposed to represent), we are forced to do so again. And if it is  
found that there was backroom scheming to force the settlement of the  
Goldman fraud, it is Khuzami who should face criminal charges himself.
In the meantime we welcome with open arms the chance that Goldman will  
be retried. After all, disclosures from the ACA lawsuit against  
Goldman have made it so easy that even the most inexperienced first  
year lawyer out of law school should be able to win a case against the  
firm.

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