Top Enforcement Officer Leaving SEC For Private Sector

After nearly four years as director of the Securities and Exchange Commission's Division of Enforcement, Stephen Cutler announced last week that he was leaving the SEC to return to the private sector.

Cutler

Prior to joining the SEC in 1999, Cutler was a partner with Wilmer, Cutler & Pickering.

An aggressive prosecutor described as "tough but fair" by SEC Chairman William Donaldson, Cutler played a critical role in many of the Commission's most high-profile investigations, including those at Enron, Tyco, HealthSouth, WorldCom and Adelphia. Probes under his watch led to enforcement actions against former Adelphia CEO John Rigas, former Qwest CEO Joseph Nacchio, former Tyco CEO Dennis Kozlowski, former HealthSouth CEO Richard Scrushy, and several ex-Enron executives including Chairman Kenneth Lay, CEO Jeffrey Skilling, and CFO Andrew Fastow.

During Cutler’s tenure, the SEC obtained judgments in enforcement actions totaling more than $6 billion in penalties and disgorgement, including WorldCom’s record-setting $750 million penalty.

Cutler also caught the brunt of criticism that the Commission was sleeping on the job while corporate

shenanigans were pervasive. The charge alleged that the SEC's lax enforcement efforts not only created an environment in which companies like Enron and WorldCom could commit fraud and thrive, but which ultimately enabled New York Attorney General Eliot Spitzer to break and pursue several high-profile cases that have altered the way the financial services industry operates.

Regardless of those accusations, Cutler's impact on the regulatory agency is considered great; according to an SEC press release announcing his resignation, 10 of the 12 largest penalties in Commission history were brought under Cutler’s leadership.

Cutler's other accomplishments include a crackdown against illegal IPO allocation practices on Wall Street, enforcement efforts against mutual fund abuses, and a review of conflicts of interest by large financial services firms.

Cutler also played a key role in articulating and communicating SEC strategy to public companies on a fairly regular basis. In a September 2004 speech, for example, Cutler outlined the Commission's enforcement program as it pertains to the themes of Sarbanes-Oxley.

One of those themes was renewed focus on "gatekeepers," including the lawyers and accountants who serve public companies. Cutler noted that the Commission would likely pursue actions against lawyers who allegedly assisted their clients in engaging in illegal late trading or market timing arrangements. "We are also considering actions against lawyers, both in-house and outside counsel, who assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the company's condition," he said.

Cutler also noted that another area of focus would be the role of lawyers in internal investigations. "We are concerned that, in some instances, lawyers may have conducted investigations in such a manner as to help hide ongoing fraud, or may have taken actions to actively obstruct such investigations."

In an April 2004 speech, Cutler similarly outlined his staff's current approach to penalties.

While noting that, "we start from the presumption that any serious violation of the federal securities laws should be penalized with a monetary sanction," Cutler discussed the numerous factors "which justify departing from this penalty presumption."

Besides the type of violation and the harm it caused, Cutler said the Commission considers "the extent of a violator's cooperation" with the investigation. Though cooperation with SEC investigations was widely considered critical to reducing penalties, Cutler's speech more clearly outlined provisions of "extraordinary cooperation,"

which could lead to a conclusion "that a penalty recommendation should be more moderate in size or reduced to zero." Among the items the SEC would consider: self-reporting of violations, being forthcoming during the investigation, and implementing appropriate remedial measures—including appropriate disciplinary action.

The related speeches by Cutler are available from the box above, right.

Donaldson, who said Cutler has been an "outstanding leader of the Commission's enforcement program," will be responsible for choosing Cutler's successor.