A Wells Notice Arrived: How Much Trouble Is That??

How Serious Is a Wells Notice?

When the SEC’s investigative staff believes that it has sufficient evidence to recommend that the SEC’s Commissioners take enforcement action against a target of an investigation, the staff usually sends the target a “Wells notice.” The Wells notice is an unusually serious signal; it is effectively the SEC’s staff signaling that it believes it has grounds for charges and is preparing to present the case to the Commissioners for approval. A Wells notice is not a formal charge, and it is not a finding of liability. A Wells notice indicates that enforcement action is being recommended. A Wells notice can also be a sign that an SEC investigation has become significantly focused on the target. The SEC’s Commission, and not its investigative staff, has the authority to authorize enforcement action. This means that in all cases, the Commission must determine to authorize enforcement action and give approval to the staff’s recommended charges. As a result, the SEC’s investigative personnel must prepare an enforcement case for the Commission. The Commissioners can then review the staff’s recommended charges, and they can decide to take enforcement action or to pursue other action (or no action) against the target. Although a Wells notice does not necessarily mean that the SEC Commission will take enforcement action, a Wells notice usually means that the SEC staff has completed (or is in the process of completing) its investigation of the matter. This means that the SEC’s staff likely has evidence that supports its findings. We represent SEC investigations and enforcement proceedings, and we are available to represent companies and individuals in cases involving all types of allegations. Typically, SEC investigations can be triggered by:

• Investor complaints
• Whistleblower tips
• Referrals from the Financial Industry Regulatory Authority (“FINRA”)
• State securities enforcement personnel
• Other government agencies
• Suspicious trading data detected by the SEC’s own market surveillance technology

  Does a Wells Notice Mean the SEC Will Charge Me?

  The SEC does not send Wells notices in every investigation it opens. A Wells notice is a discretionary action taken at the discretion of the investigative staff. As a result, the issuance of a Wells notice to the target of an investigation is not a requirement of the SEC’s investigative or enforcement process.

As a result of the fact that the SEC is not required to send a Wells notice, receiving a Wells notice does not necessarily mean that the investigation is over. While it often means that the staff has concluded its investigation, there are circumstances in which the SEC may send a Wells notice even if the staff intends to continue its investigation.

A Wells notice should name the specific federal securities law violations (or other applicable law) that the staff has determined that it has grounds to recommend charges with respect to. It should also include a summary of the grounds for its recommendation. But it can and often does include other information as well, including the staff’s observations or, in some cases, the staff’s preliminary findings regarding the target’s liability.

Receiving a Wells notice does not automatically mean that the SEC will file an enforcement action. In some cases, the staff may ultimately decide not to pursue any enforcement action, and in others, the Commission may ultimately refuse to authorize enforcement action despite the staff’s recommendation. However, the SEC’s enforcement statistics do not say what percentage of Wells notices lead to enforcement action, and the SEC’s resources are most likely best-deployed in cases in which the SEC believes it has grounds to seek a judgment against the target.

While a Wells notice can mean that the SEC is on the verge of taking an enforcement action, receiving one does not establish liability. Filing an enforcement action (or pursuing an enforcement action in the courts) only indicates that the SEC Commission has authorized the pursuit of an enforcement action against a target.

In some cases, the SEC will bypass the Wells process entirely. This is most often the case when urgent action is needed in order to protect investors from ongoing or threatened harm. Also, if the SEC is conducting an investigation that is parallel to an investigation by the Department of Justice, the SEC will not issue a Wells notice until the DOJ is prepared to take a formal action.

Does the SEC Always Issue a Wells Notice?

How Long Does a Wells Notice Inquiry Take?

The process of completing a Wells notice inquiry is highly fact-specific and can range from a few weeks to several months or more. The timing will depend on a variety of factors, including:

• The scope of the investigation and allegations
• The amount of information the target needs in order to formulate a response
• The complexity of the issues involved
• The target’s ability to preserve evidence and find necessary witnesses and experts
• The SEC’s internal priorities

Ultimately, the length of a Wells notice inquiry will depend on the circumstances involved.

Should I Submit a Response to a Wells Notice?

The SEC’s Rule 5(c) of its Informal and Other Procedures, 17 C.F.R. § 202.5(c), governs situations in which a party may make a submission to the Commission. Rule 5(c) states: “Persons who become involved in preliminary or formal investigations may, on their own initiative, submit a written statement to the Commission setting forth their interests and position in regard to the subject matter of the investigation.”

Importantly, Rule 5(c) contains no universal 30-day deadline. Rather, it says only that the staff, upon request and in its discretion, may advise a person of “the amount of time that may be available for preparing and submitting a statement prior to the presentation of a staff recommendation to the Commission.” While a Wells notice may contain a deadline for a response, the deadline in the notice controls.

What are the pros and cons of making a Wells submission?

In all cases, the decision of whether to make a Wells submission will depend on the circumstances at hand. However, in almost all cases, there are significant risks to making a Wells submission, and there are some potential benefits as well. #

Risks of Making a Wells Submission One

significant risk is that a party’s statement (and some documents) may qualify as a party admission under Evidence Rule 801(d)(2) or Rule 801(d)(2)(D) (which covers a statement that “was made by the party’s agent or employee on a matter within the scope of that relationship and while it existed”).

Another risk is that the party’s Wells statement may reveal the party’s anticipated litigation strategy, and this can be highly problematic in some cases.

An additional risk is that the SEC may share the party’s submission with criminal authorities (e.g., the Department of Justice or the FBI), and this can put the party in danger of criminal prosecution.

Additionally, a party’s Wells statement can inadvertently become evidence that undermines the party’s case in the long term. #

Potential Benefits of Making a Wells Submission

While there are significant risks to making a Wells submission, it can also be beneficial. One primary benefit of making a Wells submission is the ability to persuade the SEC (i.e., the staff or the Commission) to forgo filing charges. However, this can also serve a purpose even if enforcement action is likely to be taken. If a party believes it may be unlikely that it can avoid enforcement action entirely, a convincing Wells submission can be used to narrow the scope of the charges sought. For example, this can mean the difference between the SEC pursuing charges for all of the violations it has identified and the SEC pursuing charges for only certain types of violations.

Q: Do I need to consult an attorney?

Yes, you must consult an experienced attorney. Making a Wells submission in any case involves navigating numerous legal risks, and it is especially important to speak with a lawyer in cases involving charges of fraud, embezzlement, and other serious alleged violations. When faced with the prospect of civil or criminal charges, you need to make informed decisions based on the particular circumstances of your case, and in all cases, you need to engage an experienced lawyer to conduct an assessment on your behalf.

Q: How long do I have to respond?

As noted above, SEC Rule 5(c) does not mandate a 30-day deadline in all cases. While a Wells notice might specify a 30-day deadline, the deadline stated in the notice controls, and it can be longer (or shorter) than 30 days. Your attorney can determine the deadline for your specific case.

Q: Do I have to make a Wells submission?

No, you do not have to make a Wells submission. Again, the decision to do so is a strategic decision that you need to make in consultation with an experienced attorney.

How Long Will the SEC Take to Decide What Happens?

Federal law does not set any duration for SEC investigations. When an SEC investigation involves a complex issue (or several complex issues), the investigation can last for several years.

When the SEC staff solicits a Wells submission, the staff needs time to review the party’s submission in order to make an informed recommendation to the SEC’s Commissioners. The amount of time the staff needs for this review can range from a few weeks to a few months, or even longer.

Similar to the issue with investigation duration, there is no standard interval between the issuance of a Wells notice and the SEC staff’s charging decision. The SEC has never published information regarding the duration of its Wells process. The SEC’s published enforcement metrics also do not provide a median duration for SEC investigations.

When will the SEC make a decision after it issues a Wells notice? When will it file charges? Unfortunately, this is a question that is not easy to answer, even for an experienced defense lawyer who has handled dozens of SEC investigations.

So, what factors can increase the length of an SEC investigation? While there are many factors that can either lengthen or shorten an investigation, certain factors are known to be capable of extending an investigation, and these include (but are not limited to):

• The volume of documents and other records that the SEC must review
• The number of witnesses the SEC needs to interview
• The nature of the issues and charges that are involved
• Parallel criminal proceedings
• Highly litigious enforcement proceedings

For example, in cases that involve issues like computer fraud, securities fraud, and embezzlement, the SEC may need to review a massive volume of documents in order to reach its decision to recommend charging individuals for securities fraud. Similarly, when conducting an investigation that will lead to civil and criminal charges, the SEC will have to wait for a charging decision from the Department of Justice before taking any action. Also, in any case that involves an enforcement action that is vigorously litigated, it can be years before the litigation is resolved, and this is not limited to cases that ultimately result in a judgment for the parties involved in litigation.

Can the SEC Fine Me or Send Me to Prison?

Can the SEC Fine Me?

Yes, the SEC is capable of pursuing and obtaining civil monetary penalties against individuals and companies for violations of the federal securities laws and other laws under its enforcement authority. The ceilings for these penalties vary by “tier,” and these ceilings are subject to annual adjustments for inflation. At the SEC, civil penalties can be applied as follows:

• Tier 1: Minor or technical violations
• Tier 2: Violations that involve intent or recklessness that did not result in substantial losses
• Tier 3: Violations that involved intent or recklessness and resulted in substantial losses or the potential for substantial losses Settlements with the SEC can involve monetary penalties, disgorgement of illicit gains, prejudgment interest, and other forms of liability. While the Supreme Court did, to some extent, limit the SEC’s ability to seek disgorgement in Liu v. SEC, this case restricted the amount the SEC could seek to the amount of “net profits” obtained by a party and generally required the SEC to return any disgorged funds to victims. In many cases, however, Liu v. SEC does not limit the SEC’s authority to seek disgorgement. Securities-industry bars, public-company officer and director bars, and other non-monetary remedies are also available in the SEC’s enforcement toolkit.

  Can the SEC Send Me to Prison?

  No. The SEC does not have the authority to initiate criminal prosecutions against individuals or companies, and the SEC does not have the authority to sentence anyone to imprisonment.

Prosecution of federal securities crimes falls to the United States Justice Department. This includes criminal prosecutions for insider trading, criminal charges for securities fraud, and other violations of federal law involving the financial markets and trading in securities.

Insider trading is a prime example. Insider trading can lead to both civil and criminal charges. Civilly, the SEC can seek disgorgement of the avoided loss or profit (plus prejudgment interest) and disgorgement-equivalent civil penalties up to three times the amount of the avoided loss or profit. Criminally, the DOJ can prosecute individuals for federal securities fraud and other criminal charges in accordance with the specific violations charged in the case.

How Can the SEC Pursue a Case After Jarkesy?

When an enforcement action is authorized, it may proceed either in federal district court or administratively.

However, the Supreme Court’s recent decision in SEC v. Jarkesy requires that any enforcement actions involving claims of securities fraud go to federal district court, where jury trials are available for enforcement actions that seek the imposition of civil monetary penalties (with certain exceptions).

The statutory period for filing an enforcement action generally varies based on the specific charges involved. Under 28 U.S.C. § 2462, civil penalties in many cases generally prescribe in five years. However, under Exchange Act § 21(d)(8), the SEC can seek disgorgement for ten years if it can establish that scienter was involved.

If authorized in federal district court, the remedies the SEC can seek are generally referred to as judicial remedies. Federal courts are the only courts capable of imposing these judicial remedies. The penalties imposed will depend on the specific type of violation in question.

If authorized administratively, an enforcement action can lead to the imposition of a wide range of remedies as well. Under Jarkesy, the SEC can no longer use administrative adjudications to pursue civil penalties for securities fraud violations, but in order to use the SEC’s administrative enforcement process, the SEC can only pursue statutory civil monetary penalties and other penalties and remedies that are available in the Commission’s enforcement rules.

How Can the SEC Impose Monetary Remedies, Disgorgement, and Other Types of Penalties and Remedies?

Courts and administrative proceedings that involve an enforcement action can result in the imposition of monetary remedies, disgorgement, and other types of penalties and remedies. The specific monetary remedies and other penalties and remedies available to the SEC depend upon the particular circumstances involved in each case.

The SEC also has the ability to seek an injunction prohibiting the target from committing similar future violations of the federal securities laws.

Finally, in some cases, the SEC is also able to seek a bar against an individual’s ability to serve as a public company officer and director.

Do I Have to Disclose a Wells Notice Publicly?

A Wells notice, by itself, does not typically trigger disclosure requirements. Whether disclosure is required after receiving a Wells notice will depend upon the circumstances at hand, and this can, in turn, depend upon the applicable securities-law reporting requirement and the perceived materiality of the receipt of a Wells notice in question.

For example, with respect to Form U4, receipt of a Wells notice does not, by itself, trigger a Form U4 disclosure obligation. Similarly, while there is no item that requires a company to file a Form 8-K solely upon receipt of a Wells notice, companies that are required to file Form 8-Ks can file Forms 8-K disclosing the receipt of a Wells notice if they deem it necessary.

Similarly, while Regulation S-K Item 103 governs the disclosure of material pending legal proceedings, receipt of a Wells notice is generally not-by-itself a trigger for disclosure under Item 103 of Regulation S-K.

Can a Wells Submission Become Public?

While a Wells submission itself is generally not made public, it can become public in certain circumstances. For example, in a case involving a private litigation over securities fraud allegations, the private plaintiff may attempt to obtain the Wells submission through the discovery process. Even though Wells submissions are typically made with the SEC on a confidential basis, an SEC investigation that results in no action will not necessarily result in the investigative file becoming permanently confidential. While the SEC’s policies on disclosure of investigative files can be confusing, many SEC investigative files will eventually become subject to Freedom of Information Act requests by members of the public.

Is an SEC Investigation Public?

Prior to the formal initiation of an enforcement action, SEC investigations are generally conducted confidentially, and charges typically do not become public until the SEC officially files its case. As a result, in all cases, if you or your company is facing an SEC investigation, you will need to consult with a defense attorney about the consequences and other relevant issues.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm& #x27;s attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.