SEC Investigations 101: The Wells Notice (Part 1)

By  Dan Portnov

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SEC investigations can last a long time. Even when the Enforcement staff comes charging out of the gate, the investigative pace invariably slows once there are terabytes of documents and hundreds of pages of testimony to review. The staff might even lose contact with your lawyer for months at a time, causing your lawyer to sagely advise you not to poke the sleeping bear.

And then the other shoe drops: the SEC wants to charge you with securities laws violations. Your lawyer tells you that a Wells Notice is coming. What exactly is a Wells Notice? And is there anything that you can do at this stage to avoid litigation with the SEC?

What is a Wells Notice?

The process by which the Enforcement staff notifies you of impending proceedings against you – either in federal court or its in-house administrative process – begins with the Wells Notice.

The Wells Notice is named after the chair of 1972 SEC special committee that gave the following recommendation to the Commission:

Except where the nature of the case precludes, a prospective defendant or respondent should be notified of the substance of the staff’s charges and probable recommendations in advance of the submission of the staff memorandum to the Commission recommending the commencement of an enforcement action and be accorded an opportunity to submit a written statement to the staff to be forwarded to the Commission together with the staff memorandum.

In sum, the notice lays out the recommendation of charges and their basis(es). The notice is not privileged; that means it can be obtained and used by third parties such as the press and prospective civil litigants.

The notice allows for a response from the soon-to-be charged party – known as the Wells Submission.

Avoiding the Wells Notice

Jumping back for a moment, there may be several “off-ramps” in an SEC Enforcement investigation that will avoid the dreaded Wells Notice. We wrote about cooperation here, and how it could result in a non-prosecution agreement, deferred prosecution agreement, or a non-public cooperation agreement. There is even the possibility that the staff will realize it cannot or should not go forward and quietly drop the matter. But if it doesn’t, your counsel can still argue on your behalf at critical junctures such as at the pre-Wells meeting or through submission of a white paper.

The pre-Wells meeting is not an official part of an investigation, and there is no formal process for its initiation or agenda. Rather, when it appears that the Enforcement staff may be dug in with an unfavorable view of your conduct and not entertaining opposing viewpoints, your lawyer should consider asking for a meeting with the Enforcement associate director supervising the investigation. (We wrote briefly on the new Enforcement associate directors’ views on pre-Wells meetings here).

Like the pre-Wells meeting, submission of a white paper by counsel is optional and discretionary. The white paper generally lays out the reasons – factual, legal and even policy – why Enforcement staff should recommend no action be taken. The white paper isn’t subject to page limits or deadlines, like a Wells Submission. And, in the even that the staff seriously engages with it, the white paper can be revised and supplemented – unlike the Wells Submission.

Further, a white paper may be marked “confidential” for FOIA purposes, like documents produced in response to SEC subpoenas, and therefore retains some protection from third party discovery and use. (Still, the law is not settled and skilled plaintiff’s securities lawyers will be salivating to get their hands on your white paper, so be careful.) Additionally, statements and positions taken in the white paper may be used against you later for impeachment purposes or, if construed as false or misleading, as the basis for a false statements or obstruction prosecution.

Pre-Wells meetings and white paper submissions have increased in the post-Dodd-Frank enforcement era. The reasons for this are several, but one stands out: increased Enforcement resources and recent SEC leadership have ushered in many first of their kind investigations. The novelty and complexity of these investigations make Enforcement staff acutely aware of litigation risk; thus, increasingly open to engaging with defense counsel before a charging decision is made.

With increased opportunities to advocate on your behalf, counsel should seriously consider requesting a pre-Wells meeting or submission of a white paper. Still, all hope is not lost should the Well Notice be issued.

In our next SEC 101 installment, we will continue our discussion of the Wells process, including how to respond to the notice.

 

 

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