Circle Jerk 101: The SEC's Robert Khuzami Oversaw Deutsche Bank's CDO, Has Recused Himself Of DB-Related Matters

The incest continues: the WSJ has informed that the SEC's chief investigator, Robert Khuzami, used to be general counsel for Deutsche Bank, and presumably reviewed numerous CDO-related transaction, while on the "other side" of the wall. "As part of that job, he worked with lawyers who advised on the CDOs issued by the German bank and how details about them should be disclosed to investors. The group included more than 100 lawyers who also defended the bank against lawsuits and vetted other financial products, these people said." The good: he probably knows more about CDOs than any other person in government administration history, and thus would not have brought on the Goldman case without being aware of all the potential tripwire nuances (and yes, if the Goldman case gets to the discovery stage, which it will, it is game over for Goldman's defense strategy, which means settlement and/or much worse). The bad: who knows how many Deustche Bank CDO's of comparable or worse nature he allowed to see the light of day. The most interesting: "Because of Mr. Khuzami's old job and his financial interest in the company, he has recused himself from any matters related to Deutsche Bank, according to an SEC spokesman." With Greg Lippmann's (legendary head of CDO trading at the German firm whose assets are greater than all of Germany's GDP) recent sudden departure, and the SEC being prevented from bringing CDO-related charges against the bank (for the time being), is DB currently actively cleaning up its tracks? After all the firm was one of the top 3 CDO issuers in the period under consideration.

From the WSJ:

SEC officials say Mr. Khuzami's résumé is a nonissue, adding that the agency will go after illegal conduct wherever it occurs. "The Commission's recusal policy prevents even the appearance of a possible conflict of interest by prohibiting employees from working on particular matters that could affect their financial interests," said SEC spokesman John Nester. Mr. Khuzami declined to comment through the spokesman.

Mr. Khuzami has vowed to pursue wrongdoing against Wall Street firms in high-profile areas such as subprime mortgages and CDOs. That mission created shockwaves last week when the SEC accused the world's most profitable securities firm of duping investors in its sale of a CDO called Abacus 2007-AC1.

Goldman denies any wrongdoing, but Wall Street and Washington are buzzing with speculation about whether Mr. Khuzami will bring other cases over CDOs. The SEC has sent requests for information to Deutsche Bank and numerous other firms about CDOs and other structured mortgage products, according to a person familiar with the matter.

Mr. Khuzami is the first SEC enforcement director in recent history to come directly from an investment bank. The agency's tradition has been to promote from within. SEC Chairman Mary Schapiro cited Mr. Khuzami's skills as a former prosecutor when she recruited him to run the SEC's enforcement division, which was reeling from the missed Bernard Madoff fraud.

Some securities lawyers say Mr. Khuzami's high-level position at Deutsche Bank could have given him insight into structured-finance products, an area where the SEC has been criticized for a shortage of expertise.

In his seven years at the German bank, Mr. Khuzami took a hands-on role, including when he was general counsel for the Americas from 2004 to 2009. He hired government lawyers and pushed them to more aggressively audit the bank's activities. His group reminded colleagues that regulators would be watching their emails closely, according to one former Deutsche Bank employee.