SEC Investigations 101: The Wells Notice (Part 2)

This post is the seventh in a series of posts for non-lawyers, or non-securities lawyers, who might suddenly find themselves on the wrong end of a Securities and Exchange Commission document request, subpoena or call from Enforcement division staff.

SEC HQ front.jpgBy  Dan Portnov

In our last SEC Investigations 101 post we teased the Wells Notice but ultimately wrote more about pre-Wells strategy in the SEC investigation: the white paper and the pre-Wells meeting. So let’s jump right in. Enforcement staff have issued the Wells notice. What now?

As discussed previously, the Wells notice lays out the recommendation of charges against you, the securities laws they are based on and your right to submit a response directly to the Commission. It may be given in writing or orally by Enforcement staff, though the latter form is rare and always followed by written confirmation.[1]

The Wells notice tracks what the Enforcement staff has submitted in writing to each of the SEC Commissioners and their respective advisers. It also previews what the staff would, absent further input, propose at the weekly Closed Commission Meetings (CCM) during which the Commissioners vote on proposals for enforcement actions.

It is important to note that only the Commission, by majority vote, can commence an enforcement action against you. Between the time the Enforcement staff submits its recommendation in writing to the Commissioners and the time the Commissioners vote at the CCM, weeks or months may pass. During that time the Commissioners and their counsel may seek clarification or push back on the Enforcement staff’s recommendation. It is also during that time that your Wells submission may be considered.

Should you make a Wells submission?

There are actually good reasons not to make a Wells submission. First, in a parallel investigation, the SEC may share your Wells submission with DOJ or other regulators.

Second, the SEC considers statements made in the submission as admissible in later proceedings for impeachment purposes or independently, as statements against interest. The case law is murky on this, with courts coming out for and against admissibility.

Third, your Wells submission is exempted from FOIA disclosure only as long as it is part of an active investigative file. Once an investigation is closed, third parties may request and obtain your Wells submission. If your matter is one of national prominence or involves salacious details, you can bet a FOIA request will be made following announcement that your investigation/case has resolved. You can also bet that the Wells submission will be used in any related civil suit against you.

Finally, there may be other cost-related or strategic reasons not to make a Wells submission. You and your lawyer may feel that the staff has dug in and your submission will only preview your defense in the upcoming contested litigation or admin proceeding. So you decide save your bullets and retain the element of surprise.

Reasons in favor of making a Wells submission are much more obvious.

First, this is your direct line of communication to the Commissioners. A strong Wells submission can cause Commissioners and their counsel to push back and test the staff’s theory(ies) of the charges, turning a skeptical Commissioner into your quasi-advocate.

In addition to the Commission, your Wells submission is a final attempt to convince the Enforcement staff and senior decision makers such as the associate director and (co)Director of Enforcement to reconsider charges. Until this point, the staff has guided the course of investigation and focused on the issues it found important. With your submission, you and your lawyer re-frame the narrative. Small weaknesses, inconsistencies and mitigating factors that arose piecemeal during the investigation may be marshaled into a convincing story that trumpets your lack of misconduct… or intent (scienter).

Form of Wells submission

The Wells submission can either be a written document of up to 40 pages (not including exhibits) or a video that is 12 minutes or shorter.

The typical submission is written… because lawyers love to write. Also, submissions that involve complex facts, transactions or legal arguments naturally require the organization and detail of a written response.

However, video submissions have become more common and can be very persuasive. One of the major advantages of the video submission is previewing for the Commission and staff the credibility and impact of your live testimony – if those happen to be your strengths. If your submission includes the appearance of potential witnesses who are also credible and impactful, even better.

Content of the Wells submission

Once you and your lawyer have decided to go forward with a Wells submission, there are several things you should keep in mind:

  • Focus your arguments. It should go without saying that the Wells submission is your last chance to avoid an enforcement action so do not waste time (or paper) in getting to your strongest factual or legal arguments. Minor disputed points or clarifications from the investigation should be noted but not rehashed in detail.
  • Similarly, try to avoid the tough talk and posturing of ordinary legal pleadings. Your submission will be reviewed and discussed by over a dozen experienced regulatory lawyers, not law clerks or a single judge.
  • Include analysis of case law and previous enforcement decisions/outcomes if you hope to convince the Commission that the instant action might be unsuccessful or unduly harsh.
  • Include any favorable policy arguments. The Commission, after all, has stated policy goals and statements. If you believe that Enforcement’s recommended action flies in the face of, or contradicts the SEC’s policy efforts, this is the time to say so.
  • If you have cooperated in the investigation, provide details and fruits of that cooperation in order to maximize the credit and mitigation you should receive. Stress how the proposed charges against you might not have been possible without your own cooperation.

Conclusion

This post has highlighted several strategic and substantive decisions of the Wells process. Remember, just because you can make a Wells submission, and have 40 pages with which to do so, does not mean that it is the prudent course. Carefully consider all of the pros and cons and don’t forget that you are ultimately addressing five SEC Commissioners with your arguments.

In our next SEC 101 installment, we will discuss various endgames with the SEC, including litigation and settled administrative proceedings.

[1] In some instances, however, providing a Wells notice prior to enforcement action may impede other law enforcement objections. For the purpose of this post, we need not get into those scenarios.

 

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