Do I Need a Lawyer for a Wells Notice??

No, there is no federal law that requires the recipient of a Wells notice to hire an attorney. The fact that the SEC does not require you to have legal representation doesn’t mean that you don’t need a lawyer. The SEC’s policy for issuing a Wells notice is, in fact, an indication that you have reached a point in the inquiry where it may be time to seek the advice of experienced independent counsel. The reasons behind the SEC’s decision to issue a Wells notice (and the policy behind its decision to allow recipients to retain legal counsel) may give some insight into how the SEC will approach potential enforcement action.

What Does It Mean if I Received a Wells Notice?

If you received a Wells notice, it means that the staff assigned to investigate the inquiry has made a preliminary decision. According to the SEC’s enforcement manual, the staff may issue a Wells notice “if the staff has decided that enforcement action is warranted.” However, this doesn’t mean that you have been charged under federal securities laws or that you are liable. A Wells notice reflects the staff’s preliminary decision to recommend enforcement action; it is not an accusation of guilt or liability.

Do I Need to Make a Wells Submission?

Recipients of Wells notices are not legally required to make a Wells submission. However, they are encouraged to do so. The federal government relies heavily on voluntary cooperation throughout the inquiry process. Until the SEC decides to take formal action (such as filing a complaint in federal court or pursuing administrative enforcement), the SEC’s ability to compel compliance with subpoenas for records and interviews is limited.

What Does a Wells Notice Actually Mean for My Case?

The issuance of a Wells notice by an SEC staff member generally occurs when the investigation is substantially complete as to the recipient. However, it is not a final act. The enforcement staff does not have the authority to bring an enforcement action on its own. As stated in the SEC’s enforcement manual, the Commission must authorize all SEC enforcement actions. When the enforcement staff issues a Wells notice, it generally occurs after the staff has substantially completed its investigation as to the recipient and initiates a process for obtaining the Commission’s authorization to bring an enforcement action. The issuance of a Wells notice may make the timing and scope of the enforcement action clear, but it is far from an end to the government’s investigative activity.

What Types of Information Will a Wells Notice Include?

The contents of a Wells notice will vary depending on the circumstances. However, most notices identify the specific federal securities laws at issue, as well as the specific claims for which the SEC is considering enforcement action. The notice is not necessarily exhaustive.

How Long Do I Have to Respond to a Wells Notice?

The SEC’s enforcement manual states, “The staff ordinarily will allow the recipient of the Wells notice four weeks to make a submission.” The length of time you have to respond to a Wells notice is the time stated in the notice, unless you are able to persuade the staff to grant an extension.

Is the Receipt of a Wells Notice Public Knowledge?

The SEC only issues a Wells notice in the context of a private inquiry, and receiving a Wells notice does not make the matter public. The receipt of a Wells notice will only become public if the SEC formally announces an enforcement action. However, if you are a public company, the receipt of a Wells notice may have disclosure implications.

Does the Issuance of a Wells Notice Signal the End of the SEC’s Inquiry?

No, as discussed above, the issuance of a Wells notice does not terminate the SEC’s inquiry. The issuance of a Wells notice does not suspend investigative activity either; if you received a Wells notice, the SEC may still be able to initiate an enforcement action before making a determination based on the merits of your Wells submission.

Which Agencies May Be Investigating Me at the Same Time?

What Does the SEC’s Division of Enforcement Staff Do?

The SEC’s Division of Enforcement staff investigate suspected civil violations of federal securities laws. The staff’s ability to investigate is restricted by the agency’s investigative authority. When the Enforcement Division suspects a violation has occurred, the staff may have authorization to conduct a formal SEC investigation (or initiate an informal inquiry).

What Does the Department of Justice (DOJ) Do with Respect to Securities Matters?

The DOJ is a separate executive agency with its own independent authority to investigate and prosecute potential criminal violations of federal securities laws. While the SEC investigates civil violations, the DOJ investigates criminal violations of federal securities laws. The DOJ also has the authority to prosecute criminal violations of other federal laws in connection with a federal securities inquiry.

Can Other Federal Agencies Get Involved in an SEC Investigation?

Yes, it is possible for other federal agencies to get involved in an SEC investigation. The DOJ has the authority to investigate criminal violations of the federal securities laws, and the CFTC has parallel authority over violations of the Commodity Exchange Act in the futures, options, and swaps markets, and the SEC’s enforcement staff frequently works closely with these other agencies during investigations.

What Is the Role of the Financial Industry Regulatory Authority (FINRA)?

FINRA is a self-regulatory organization that investigates and disciplines member firms and associated persons who violate FINRA’s rules and standards. FINRA also has the authority to refer cases to the SEC and DOJ for further investigation.

What Is a Formal SEC Investigation Order?

A formal SEC investigation order is a Commission document that authorizes the enforcement staff to seek documents, data, and testimony via subpoenas. Before the issuance of a formal investigation order, the SEC can typically only conduct inquiries based on voluntary cooperation from the targets of the inquiry.

Does the SEC Share Information with the DOJ and Other Agencies?

Yes, the SEC can share investigative information with criminal prosecutors, regulators, and the DOJ as well.

How Does the SEC Assert Enforcement Jurisdiction?

When the SEC decides to pursue enforcement action, the Enforcement Division litigates authorized civil actions in federal court and administrative proceedings before SEC administrative law judges.

Can the SEC Enforcement Staff Create Rules for Civil and Criminal Securities Matters?

The Enforcement Division does not have the authority to create or adopt rules in the civil or criminal securities domain. The SEC’s rulemaking authority rests solely with the Commission.

When Does the Commodity Futures Trading Commission (CFTC) Get Involved?

The CFTC enforces the Commodity Exchange Act (CEA), which applies in addition to the federal securities laws in transactions involving futures, options, and swaps markets.

Should I Make a Wells Submission to the SEC?

What Is a Wells Submission to the SEC?

Rule 202.5(c) of the SEC’s Rules of Practice provides, “The recipient of a Wells notice may submit written factual and/or legal arguments, and may request an appearance before the staff, as described in Rule 202.5(c).” These submissions can include any arguments that the recipient believes the enforcement staff should take into account when determining whether to recommend enforcement action to the Commission. When a securities matter is referred for criminal prosecution, any submission made to the enforcement staff can be made available to criminal prosecutors. A timely and effective Wells submission can serve as a means of persuading the enforcement staff that enforcement action is not warranted. In some cases, a Wells submission can provide the basis for seeking a negotiated settlement.

What Types of Issues Can Be Addressed in a Wells Submission?

Recipients of Wells notices can address any and all issues with their Wells submission. Issues can range from challenging the facts presented by the enforcement staff to addressing the specific legal theories the enforcement staff is using to justify the issuance of a Wells notice. Other issues that may be addressed include challenging proposed remedies, questioning the appropriateness of the proposed sanctions, and challenging the SEC’s jurisdiction. In short, any and all issues are potentially appropriate to address in a Wells submission.

When Should the SEC Enforcement Staff Narrow or Abandon the Enforcement Action Recommendations Contained in a Wells Notice?

When the enforcement staff receives a Wells submission, the submission will not always lead to a successful outcome. However, the enforcement staff should be willing to narrow or abandon its enforcement recommendations when a timely and informative Wells submission provides a valid argument. This includes, but is not limited to, when the Wells submission raises the following issues:

• The facts presented by the enforcement staff are incorrect;
• The enforcement staff is relying on a mistaken or improper legal theory;
• The enforcement staff is relying on a deficient legal theory;
• The enforcement staff is seeking the incorrect remedy;
• The enforcement staff is relying on an outdated or improperly interpreted legal theory; or
• The enforcement staff is relying on a defective or improper legal theory.

How Can a Wells Submission Potentially Increase the Recipient’s Liability Exposure?

A Wells submission can potentially increase a recipient’s liability exposure because any information presented to the SEC in the submission is not privileged. If the recipient makes admissions or presents arguments that are likely to be interpreted as admissions, these admissions could be used to prove the recipient’s liability and to justify the SEC’s seeking of injunctive relief or other penalties in an SEC enforcement action. Similarly, if the Wells submission includes information that the SEC enforcement staff was not aware of, this information could be used in subsequent SEC enforcement proceedings or criminal prosecutions.

Can a Detailed Wells Submission Be Especially Risky When Recipient’s Parallel Criminal Exposure is a Concern?

A detailed Wells submission can be especially risky when criminal exposure is a concern. In addition to the risk of the SEC’s civil action becoming a criminal prosecution, a detailed Wells submission carries the risk that the DOJ (or any other criminal prosecutor with access to the submission) can use the submission as a roadmap for pursuing a criminal prosecution. This risk does not necessarily mean that the recipient of a Wells notice should not make a submission; however, in cases in which criminal exposure is a concern, the recipient should carefully consider the contents and scope of its submission.

Should Recipient’s Settlement Proposals and Other Requests Be Included in Its Wells Submission?

No. Settlement proposals and other requests should remain separate from the formal Wells submission. This approach ensures that if a Wells submission is forwarded to the Commission, the Commission’s consideration of the submission remains focused on whether to pursue enforcement action and whether it is appropriate to impose particular sanctions. It also allows the recipient to maintain a clearer record of the matters it has discussed with the SEC and the responses it has received.

Should the SEC Grant the Recipient Access to Non-privileged Portions of Investigative Materials After Issuance of a Wells Notice?

Yes. Upon receiving a Wells notice, recipients (and their counsel) should be entitled to access to any and all non-privileged portions of investigative materials in the SEC’s possession. This includes any documents and any interview transcripts related to the SEC’s inquiry. The enforcement staff has acknowledged that providing access to investigative materials is consistent with its obligation to be fair. When the enforcement staff declines to provide access to investigative materials after issuing a Wells notice, this may warrant an appeal to the SEC’s commissioners.

Will the SEC Enforcement Staff Forward the Recipient’s Wells Submission to the Commission for the Commission’s Consideration?

The SEC’s enforcement manual states, “Staff will generally forward a timely Wells submission together with the staff’s enforcement recommendation to the Commission.” This means the staff will generally provide your Wells submission to the Commission along with its enforcement recommendation, although the Enforcement Manual frames this as a general practice rather than an absolute requirement. If the staff decides not to forward a Wells submission to the Commission, the recipient has the right to contact the Commission to request that the Commission consider its submission in the matter.

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

How Do I Choose the Right Wells Notice Lawyer?

Do I Need to Hire My Own Lawyer if I Received a Wells Notice at Work?

If you received a Wells notice as part of your employer’s inquiry, it’s imperative that you establish a clear understanding of who your employer’s lawyer represents. Ordinarily, a lawyer hired to handle an inquiry for an employer is representing the employer, and not individual employees. For an individual to be represented, a separate attorney-client relationship must be formed, and the lawyer must be free of disqualifying conflicts of interest.

What Are the Problems With Joint Representation?

Joint representation of an employer and an employee can be problematic, especially where the joint clients have divergent interests. As an inquiry progresses, it is likely that the employer’s interests will diverge from those of its employees. If the employer’s and employees’ interests diverge to the extent that the lawyer’s continuing joint representation is problematic, then the joint representation will have to be unwound.

What Happens When Joint Representation Creates a Waivable Concurrent Conflict of Interest?

According to the American Bar Association’s (ABA) Model Rules of Professional Conduct, ABA Model Rule 1.7 requires attorneys and other legal providers to obtain “informed consent, confirmed in writing” when joint representation creates a waivable concurrent conflict of interest. At Spodek Law Group, we comply with all applicable rules regarding conflicts of interest, including ABA Model Rule 1.7.

Can the Common-Interest Doctrine Protect Joint Representation?

In many cases, the common-interest doctrine allows for the preservation of an existing attorney-client privilege when two or more clients are cooperating to defend against the same legal action or enforcement action. However, the common-interest doctrine can lead to the potential loss of a client’s attorney-client privilege if a client chooses to assert a claim in a different matter. Finally, the common-interest doctrine does not protect communications that are not already privileged.

What Should I Tell My Lawyer, and What Stays Privileged?

What Information Should I Share With My Personal Counsel?

When seeking personal legal counsel, one of the first things that you must do is communicate with your attorney. To defend you effectively, your personal counsel needs to give you sound and informed legal advice and then develop an informed and sound defense strategy. This requires that you give your attorney complete and truthful information about your conduct. If you knowingly mislead your personal counsel by making false statements or by omitting information, this can compromise the quality of your attorney’s legal advice and your attorney’s ability to develop and execute an effective defense strategy on your behalf.

How Can I Maintain the Confidentiality of My Attorney-Client Relationship?

Once you have formed an attorney-client relationship and informed your personal counsel, you must then be careful to maintain confidentiality. While you have the right to consult your personal counsel in private, you also have a duty to maintain the confidentiality of any communication or information which is protected by attorney-client privilege. If you share privileged legal communications or legal work product with anyone outside of the attorney-client relationship, you may waive your confidentiality protections. Even sharing privileged communications with trusted, though unprivileged, third parties can waive confidentiality and expose you to substantial risks.

What Does Attorney-Client Privilege Protect?

While attorney-client privilege is a powerful tool for securing confidentiality for a client’s legal team, the privilege is not absolute. Understanding what attorney-client privilege is and what it is not is essential for retaining the benefit of confidentiality. While attorney-client privilege covers communications and documents which are confidential and made between a client and their lawyer (or other legal representative) for the purpose of seeking and obtaining legal advice, it does not protect the underlying facts themselves. For example, if you give a copy of a preexisting document to your personal counsel, this will not make the document privileged.

What Happens When I Waive Attorney-Client Privilege?

If you waive your attorney-client privilege, whether intentionally or unintentionally, the SEC enforcement staff may use all communications and documents which would otherwise be privileged in its enforcement proceeding. While intentionally disclosing documents or communications which are privileged to a third party (such as the SEC enforcement staff) will waive your privilege, this waiver extends to any communications and documents which were not intentionally disclosed. As explained in Federal Rule of Evidence 502(a), if a client voluntarily discloses privileged material to the SEC: “It waives the privilege with respect to any information or matter that: (1) is or is substantially similar to the information or matter disclosed, or (2) is part of the same act, omission, agency relationship, transaction, plan, or other subject matter to which the waiver extends, if the court determines that the waiver of the privilege is necessary for fairness.”

How Much Will Wells Notice Representation Cost Me?

How Much Will It Cost to Hire a Wells Notice Lawyer?

Federal law does not establish a fixed fee for Wells-notice representation. Instead, defense costs depend on several factors, including the complexity of the inquiry at hand, the amount of evidence to be considered, the staffing needs of the legal team, and the presence of parallel criminal exposure.

When engaging personal counsel, it is important to ensure that you clearly identify the terms of your engagement. Your attorney-client engagement agreement should clearly identify:

• Hourly rates;
• Retainers;
• Staffing;
• Expenses; and,
• Billing practices.

Can My Employer Pay for My Representation?

Yes. D&O policies or contractual indemnification agreements may, in some cases, pay for an individual’s defense costs. A review of the relevant documents is necessary in order to make an informed decision in each instance.

What Is Advancement of Defense Costs?

Under an advancement provision, an insurer or employer pays the costs of an individual’s defense before final disposition. To qualify for advancement, an individual’s defense costs must be eligible under the insurer’s or employer’s governing documents. The individual may also be required to execute an undertaking promising to repay all advance payments if final disposition finds the individual was not entitled to reimbursement.

What Is Indemnification of Defense Costs?

Indemnification is a post-disposition reimbursement of covered legal expenses. Along with being a covered expense, indemnification also requires that the individual satisfy the relevant statutory or contractual requirements.

Depending on the type of indemnification agreement that is in place, an individual may also need to make a present demand for reimbursement, or simply wait to make a demand for reimbursement after final disposition in order to recover its defense costs. In many cases, indemnification triggers reimbursement as well.

What Requirements Must I Meet to Recover Defense Costs from a D&O Policy?

Under a D&O policy, an individual’s defense costs must meet several requirements in order to qualify for reimbursement. Many policies require that the policyholder provide timely notice of the claim, agree to abide by the insurer’s right to choose counsel, and seek the insurer’s consent before incurring defense costs. Additionally, an individual’s right to reimbursement depends on his or her eligibility under the D&O policy’s governing terms and conditions.

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's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.