The SEC Wells Process: Wells Submissions and Defense Strategies

The SEC Wells Process: Wells Submissions and Defense Strategies

When the SEC believes someone has violated securities laws, they may issue a Wells Notice informing the recipient they plan to bring an enforcement action. This starts the Wells Process, giving the recipient a chance to convince the SEC not to file charges.

Receiving a Wells Notice can be scary. But it’s not game over! With the right strategy, you may be able to avoid charges or get sanctions reduced. This article explains the Wells Process and how to handle it.

What is a Wells Notice?

A Wells Notice tells you the SEC plans to bring an enforcement action against you. It will describe the charges and potential sanctions. It also gives you a chance to tell your side of the story.

You have a limited time, often just two or three weeks, to submit a Wells Submission – a written statement explaining why the SEC shouldn’t bring a case. The Wells Submission is your chance to convince the SEC staff to drop or modify the charges.

Should You Make a Wells Submission?

Some people choose not to make a Wells Submission. They worry about handing the SEC their defense strategy or think the SEC won’t change its mind. But in most cases, submitting a Wells Response is beneficial.

Here are reasons to submit a Wells Response:

• It’s your only chance to tell your side of the story before charges are filed.
• You may be able to convince the SEC not to bring a case.
• Even if charges are brought, you can negotiate reduced sanctions.
• Not responding may anger SEC staff and lead to tougher charges.

Before deciding, consult with an experienced securities lawyer. But in most cases, submitting a Wells Response is the best move.

Crafting an Effective Wells Submission

Your Wells Submission is crucial, so take time to do it right. Follow these tips:

1. Carefully review the Wells Notice and underlying facts.
2. Focus on legal deficiencies in the SEC’s case.
3. Emphasize facts that contradict the SEC’s allegations.
4. Avoid unsubstantiated legal arguments.
5. Be concise – keep it under 50 pages.
6. Submit supporting documents as exhibits.
7. Stick to the deadline – late submissions may be rejected.

A strong Wells Response pokes holes in the SEC’s case while presenting exculpatory facts. It should read like an abbreviated legal brief, not a rant denying wrongdoing.

Common Wells Submission Arguments

Certain arguments frequently appear in Wells Submissions. Which you use depends on the facts of your case. Common arguments include:

No Scienter

In fraud cases, argue you lacked scienter – intent to deceive. Explain misunderstandings showing you acted in good faith.

Reliance on Professionals

If you relied on attorneys, accountants or other experts, explain how their advice led to the conduct at issue.

No Material Misstatements

For disclosure violations, demonstrate your statements were accurate, or immaterial errors unlikely to mislead investors.

Due Process Issues

Allege investigative failures like lack of notice or access to documents. Procedural flaws won’t void charges but may reduce sanctions.

Cooperation and Remediation

Emphasize cooperation with SEC staff and steps taken to prevent future violations. This shows you’re serious about compliance.

After Submitting Your Wells Response

Don’t expect an immediate answer. The SEC staff will carefully review your submission and may ask follow-up questions. Eventually they will recommend one of three options:

1. Drop the investigation – no action taken.
2. Bring reduced charges – lesser violations or sanctions.
3. Proceed with original charges – the staff was unpersuaded.

Their recommendation goes to senior SEC officials who make the final call. Throughout the process, keep communicating with the SEC staff to negotiate the best outcome.

Settling an SEC Enforcement Action

If efforts to avoid charges fail, your focus will shift to settlement. About 97% of SEC cases settle out of court. Settlement talks often start after charges are filed, but you can initiate them during the Wells Process.

Settlements are complex but generally involve:

• Agreeing to sanctions like fines, disgorgement of profits and bars from the industry.
• Neither admitting nor denying the SEC’s allegations.
• Consenting to the entry of judicial or administrative orders.

Settlements let you avoid the cost and uncertainty of litigation. And the SEC may agree to drop or reduce charges in exchange for settlement.

Key Takeaways

• Take Wells Notices seriously – they often lead to enforcement actions.
• Submitting a Wells Response allows you to tell your side of the story.
• Well-crafted Wells Submissions can convince the SEC to drop or limit charges.
• Consider settlement if your Wells Response fails to avoid charges.
• Work with experienced securities counsel when navigating Wells Notices.

The Wells Process can be daunting but is manageable with an experienced legal team. Don’t panic if you receive a Wells Notice – it’s the start of a negotiation, not necessarily the end.

References

• The Wells Process at the Conclusion of an SEC Investigation
• Securities and Exchange Commission Division of Enforcement Enforcement Manual
• Everything You Need to Know about the SEC Wells Notice
• 7 FINRA/SEC Wells Notice Step-by-Step Response Strategies
• Navigating the SEC’s Wells Process
• Sec Enforcement: A Better Wells Process