I Received a Wells Notice: What Are My Options??

What is a Wells notice?

The SEC staff uses Wells notices as a communication device. When the staff contemplates recommending enforcement action in a matter, including an enforcement action involving a federal court or an administrative proceeding, it will send a Wells notice to the person or entity it intends to recommend targeting for enforcement.

Is a Wells notice a formal complaint or charge?

A Wells notice is not a formal complaint or charge. It is not a conviction, and it is not a formal allegation.

What are the deadlines for responding to a Wells notice?

The Wells notice itself will establish the deadline for submitting your response, as well as any other applicable submission requirements. While responding is optional, responding often makes the most sense. This is not a universal rule; rather, it is a common decision. In most cases, responding shows your willingness to cooperate with the SEC and is generally well-received by the SEC staff.

How long is a Wells response?

If you choose to record a video Wells response, it may not exceed 12 minutes in length. Written Wells responses may not exceed 40 pages in length (excluding any exhibits).

What happens if I do not respond to a Wells notice?

If you do not respond to a Wells notice, you may still be subject to enforcement action if the SEC Commission deems it appropriate. If you do respond to a Wells notice, you may be able to avoid enforcement action, though this is not guaranteed.

What happens if my Wells response exceeds the length limit or is late?

If you fail to submit a Wells response within the specified timeframe or if your response exceeds the length requirements, the SEC staff may reject your response, or it may not take your response into account during its deliberations.

What Should I Do After Receiving a Wells Notice?

In addition to recommending that you contact a federal white collar defense attorney right away, we recommend that all recipients of Wells notices seriously consider doing the following:

1. Read the Wells Notice (and the Rules Governing Wells Submissions)

The Wells notice will set a deadline for your response and will also detail any applicable submission requirements. In addition to the Wells notice, you should also read Rule 5(c), 17 C.F.R. § 202.5(c), which governs the manner in which individuals and entities may submit responses to the SEC staff in the event of a Wells notice. Rule 5(c) provides a comprehensive overview of how individuals and entities may respond to a Wells notice; among other things, it allows for written submissions to the Commission prior to staff recommending enforcement action.

2. Work with Your Attorney to Determine Whether to Offer a Settlement Proposal

If you want to attempt to settle your matter with the SEC, any offer to do so must be delivered separately from your Wells submission. Again, our attorneys will help you determine how to proceed with your specific case.

3. Carefully Consider Whether to File a Comprehensive Wells Submission

While filing a comprehensive Wells submission is the most common choice for the majority of respondents, there are certain risks to taking this approach. For example, providing the SEC with a detailed account of your defense positions may inadvertently reveal your anticipated litigation defense strategies. As a result, in certain cases, it may make more sense to provide less detail.

4. Decide Whether to Request Access to the Investigative Materials

In addition to the SEC staff’s notice, recipients of Wells notices have the right to request access to the nonprivileged investigative materials that the staff is using to support the proposed enforcement charges. This right is discretionary; nevertheless, we recommend that all recipients of Wells notices request access to the relevant investigative materials.

5. Decide Whether to Request a Meeting with the Enforcement Staff

If you have experienced prior experience with the enforcement staff in your matter, or if you have a specific reason to request a meeting with the enforcement staff, our lawyers can request a post-notice meeting for you.

6. Decide Whether to Oppose Authorized Charges

If you choose not to settle your matter with the SEC, you should use the opportunity provided by the Wells process to make the SEC’s enforcement authorization process as difficult as possible. If the Commission authorizes charges against you, you should work with your attorneys to decide how to most effectively oppose these authorized charges.

7. Evaluate the Sufficiency of the Wells Notice

Along with ensuring that your Wells notice refers to the correct statutes, provisions, and regulations, you should also ensure that the notice describes the underlying conduct that violates the specified securities law in particular.

8. Evaluate Whether Settlement is an Appropriate Option

How Do I Protect Evidence, Coverage, and Privilege Now?

Deadline Extension

If your Wells notice response deadline is tomorrow or in a few days and it is not possible to meet this deadline, you will need to seek a deadline extension. The deadline extensions require an agreement from the staff, and they should be requested as promptly as possible.

Evidence Preservation

The duty to preserve all relevant evidence (paper evidence, electronic evidence, and other types of evidence) is triggered upon reasonable anticipation of litigation. This includes evidence for which you may be entitled to use to support your case, as well as evidence that may have a negative bearing on your case. With respect to electronically stored information (ESI), Federal Rule of Civil Procedure 37(e) governs the remedies available to the court for loss of electronically stored information due to a lack of reasonable efforts to preserve. The remedies available to the court under Federal Rule of Civil Procedure 37(e) include, among others, imposing an adverse inference, instructing the jury to disregard certain evidence, terminating the affected party’s right to rely upon the lost or destroyed evidence, or imposing other adequate sanctions.

Insurance Coverage

If you have a claims-made D&O policy, your insurance policy will require you to give notice within a particular reporting period. You will also need to carefully read the insurance policy in order to determine whether it applies to you. For example, the insurance policy should specify whether the policy defines a Wells notice as a claim, as this may be necessary to trigger coverage.

Attorney-Client Privilege

With respect to attorney-client privilege, corporate counsel’s representation does not extend to individual employees unless the corporate counsel has an individual engagement with the employee. This generally applies regardless of whether the employee is a member of the individual’s corporate board. With respect to corporate privilege, the corporation will generally control this privilege, which includes making decisions about whether to waive this privilege in order to assist in its defense.

Indemnification and Advancement

With respect to indemnification, the relevant corporate law (e.g., the Delaware General Corporation Law § 145) may treat indemnification and advancement separately, with the latter being the most urgent issue in the current situation. If you have a right to advancement under the applicable corporate law or your employment contract, you should contact your employer’s counsel right away.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

Could My Wells Response Be Used in a Criminal Case?

Admissibility as Evidence

Any statements in your submission could potentially be admitted as evidence in a criminal case under Federal Rule of Evidence 801(d)(2), which may treat these statements as party admissions. This rule would permit the government to present the statements as made by a party-opponent or by a person whose admission the party is offering in support of their position.

Sharing of Information

The SEC staff may share your Wells submission with prosecutors or other federal regulators. This is true whether you chose to submit your response voluntarily or whether it was obtained through an administrative subpoena. This practice is common, and individuals and entities need to be aware of the risks associated with making voluntary disclosures during the Wells process.

DOJ vs. SEC Enforcement Power

The Department of Justice (DOJ) is the only authority that can initiate and prosecute criminal securities offenses. The SEC staff lacks this authority and can only pursue civil enforcement actions. However, in some circumstances, it may be possible for the SEC staff to refer the matter to the DOJ for criminal investigation.

Fifth Amendment Privilege

Corporate Privilege

Generally, the Fifth Amendment privilege against self-incrimination does not extend to corporations. Corporations cannot invoke this privilege to shield corporate records or communications from disclosure during federal investigations.

Individual Privilege

Individuals may be entitled to invoke the Fifth Amendment privilege against self-incrimination in certain circumstances. However, as noted above, individuals must be able to demonstrate a “real and appreciable risk” of future criminal prosecution to justify this privilege.

Testimonial Waiver

While it is true that providing voluntary testimonials can create a testimonial waiver, this waiver generally only covers the specific subject matter of the testimony in question. It does not typically give the government a blanket waiver to pursue all potential criminal charges without meeting the legal requirements.

Cooperation vs. Immunity

Cooperating with the SEC does not inherently provide immunity from criminal prosecution. While cooperation may be viewed favorably in some civil enforcement matters, it does not preclude the DOJ from pursuing criminal charges if deemed necessary.

Bypass of Notice

While the SEC staff generally provides notice before recommending enforcement action, this is not strictly required in all cases. Emergency relief or parallel criminal proceedings can justify bypassing the notice process, and the SEC staff will generally explain its reasoning if it decides to skip the notice requirement in a specific case.

Must a Public Company Disclose a Wells Notice?

Does the SEC make Wells notices public?

The SEC does not automatically make a Wells notice public. However, recipients of Wells notices may have fact-specific securities-law duties to disclose these notices. This may be due to the nature of the securities violation under consideration or the nature of the potential enforcement action.

How do courts determine if a contingent event needs disclosure?

Courts look at the probability of the contingent event occurring and the anticipated magnitude of the event’s effect to evaluate the materiality of a contingent event. The two cases that deal with this are:

• Basic Inc. v. Levinson, 485 U.S. 224 (1988)
• TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)

What does the SEC say about “numerical materiality”?

The SEC staff addresses the concept of numerical materiality in Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45150 (Aug. 19, 1999). According to the SAB No. 99, companies may not rely exclusively on numerical materiality thresholds when evaluating disclosure; instead, companies must also consider all relevant circumstances, including qualitative factors.

Which SEC rules govern public company disclosure?

The following SEC rules govern public company disclosures (though this is by no means an exhaustive list):

• Regulation S-K, Item 103, 17 C.F.R. § 229.103, which requires disclosure of certain material pending legal proceedings.
• Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b-20, which requires public companies to disclose any information that is necessary to prevent a company’s filed statements from misleading.
• Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5, which prohibits misrepresentations or omissions of material facts.
• Securities Act Rule 408, 17 C.F.R. § 230.408, which requires a registration statement to include any further material information necessary to make the required statements not misleading.

Can a company avoid disclosure by relying on SEC Staff Accounting Bulletin No. 99?

Although the SEC acknowledges the importance of numerical thresholds, it also emphasizes that quantitative analysis is merely the first step in assessing materiality. As the SAB No. 99 states, “exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.” As a result, relying solely on numerical thresholds may be insufficient.

What Happens After SEC Staff Issues a Wells Notice?

1. Preliminary Charging Recommendation

The SEC staff makes a preliminary recommendation to seek enforcement action based on the evidence they have gathered.

2. Commission Review and Decision

The Commission decides whether to authorize the staff’s proposed enforcement action. The enforcement process at the SEC can proceed through either a federal court civil action or an administrative proceeding. The Commission can approve the staff’s recommendation as is, or it may narrow the scope of the recommendation, or it may even decline to authorize the recommended enforcement action.

3. How long do SEC investigations typically last?

SEC investigations have no fixed duration and can last for several years. Factors that influence the length of an investigation include:

• The complexity of the underlying fraud or violation.
• The degree of cooperation of the entity under investigation.
• The number of entities and individuals that have the engagement with the SEC.
• The nature of the evidence and the need to collect voluminous data or interview numerous witnesses.
• The workload of the SEC staff and any potential resources available to the government.

4. What percentage of Wells notices lead to charges?

The SEC does not publish an official percentage of how many Wells notices lead to charges. Some individuals have suggested that this percentage is very low, while others have stated that it is relatively high.

5. What are the potential defenses for SEC enforcement action?

The most common defenses for SEC enforcement actions include:

• The underlying conduct did not violate the federal securities laws.
• The SEC lacks the authority to seek civil penalties or cease-and-desist orders in an administrative proceeding. This defense is now more common in light of the U.S. Supreme Court decision in SEC v. Jarkesy, 144 S. Ct. 2146, 2157 (2024), which reaffirmed the Seventh Amendment’s guarantee of a jury trial in cases involving claims seeking civil penalties.

6. Is a Wells notice the final step of an SEC investigation?

Issuance of a Wells notice is one of the final steps of an SEC investigation. However, it is not necessarily the last step. The SEC staff can still continue investigating after issuing a Wells notice.

7. Will a Wells notice always be followed by enforcement action?

No, a Wells notice does not necessarily lead to enforcement action. The SEC Commission has the authority to reject the staff’s recommendation for enforcement action based on both substantive and procedural grounds.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.