Should I Meet With SEC Staff After a Wells Notice??

At the bottom of our page on SEC defense, we provide a high-level overview of what this process means. Here we go into more detail. In summary:

• A Wells notice is a “warning shot.” It is a signal that the Enforcement staff has uncovered information that it believes is enough to justify recommending that the SEC’s commissioners bring an enforcement action against you. It is not a filed charge, and certainly not a conviction. But it is not an insignificant notice, either. It will likely be the first of many messages from the SEC Enforcement staff if you do not want to take early action.
• Only the SEC Commissioners can authorize enforcement action. While the Enforcement staff carries out investigations, its role is ultimately to persuade the SEC Commissioners that action is warranted.
• You are not required to submit a Wells response. If you choose to do so, be aware that:

- You will be handing the SEC Commissioners a roadmap of the SEC Enforcement staff’s case against you.

- Your Wells submission will be discoverable, and the SEC will likely be able to characterize it as an admission under Federal Rule of Evidence 801(d)(2).

- Your Wells submission will reveal to the SEC (and potentially to the public) the litigation defenses that you anticipate relying upon.

- Private litigants (along with other government agencies) will seek to obtain copies of any Wells submission through civil discovery.

• A Wells response should not be a comprehensive defense. Its purpose is not to provide reasons why the SEC should not file charges. Rather, a Wells response should provide reasons why the Enforcement staff’s recommendations are not warranted and should be reviewed carefully by the Commissioners.
• With this in mind, agreeing to meet with SEC staff can be worthwhile in some circumstances, but is counterproductive in most cases.

When is a post-Wells meeting worth the risk?

While a Wells response and post-Wells meeting are optional, they can be worthwhile in certain circumstances. Your federal defense counsel can make an informed decision on your behalf based on the circumstances at hand.

If your counsel makes the decision that a post-Wells meeting is worthwhile, counsel can reach out to Enforcement staff to request a meeting. The notice will include a request for your response, as well as for your availability to meet with staff. At this point, you can also request access to the case file, or at least to any material the Enforcement staff intends to present to the Commission.

If a post-Wells meeting is appropriate, counsel can use it to discuss the Enforcement staff’s proposed recommendation as well as potential arguments for your defense. If you are facing SEC charges along with parallel criminal exposure, this could present the possibility of reaching a negotiated settlement through the SEC Enforcement staff without the need to bring up your anticipated litigation defenses. However, it will also need to be carefully considered against the potential for parallel-case risk. In such cases, you may choose to make a substantive Wells presentation and seek a favorable outcome that resolves your civil liability without creating a record that is discoverable in civil and criminal cases.

What are the risks of meeting with the SEC?

While a post-Wells meeting can be worthwhile in certain circumstances, it is important to remember that a meeting with SEC staff is not a meeting with the SEC. The Enforcement staff have no ability to bind the Commission to settlement terms, and the SEC Commissioners could reject a recommended settlement. However, the SEC Commissioners could still consider staff’s recommendations, and also reject your Wells submission. The Commission considers enforcement proceedings on an individual or corporate basis; and it does not consider the merits of any defendant’s case in parallel proceedings when considering your defendant’s case.

When will the SEC grant access to the case file?

The SEC generally does not grant access to its investigative file to the subject of its investigation, or to subject’s counsel.

While staff may make file access available to subjects who have provided substantive cooperation or provided other types of “meritorious assistance,” such assistance will be weighed against the individual or corporation’s apparent unwillingness to cooperate during the subject’s investigation.

What actually happens in a post-Wells SEC meeting?

While there is a lot of room for misunderstanding, the actual process is relatively straightforward:

• The SEC’s Wells notices, as required, generally state the alleged federal securities law violations under investigation.
• SEC policy generally limits the number of meetings a Wells recipient’s counsel can meet with the Enforcement staff to a single meeting.
• The SEC’s rules do not require a Wells recipient to personally attend a post-Wells meeting.
• The SEC’s rules also do not provide a fixed agenda, order of discussion, or format for these meetings.
• Any information that you share with the SEC’s Enforcement staff can also be shared with the Commission. Information shared with the SEC can also be shared with federal prosecutors and other law enforcement agencies (see SEC Form 1662), including the Justice Department (DOJ).
• Generally, any statements you make in a post-Wells meeting will not be privileged. Even though the SEC is a civil enforcement agency, statements shared in a post-Wells meeting could later be used by federal prosecutors in parallel criminal proceedings.
• The SEC’s rules (Rule 5(c), 17 C.F.R. § 202.5(c)) govern Wells submissions. The rule provides only that a person involved in an investigation may submit a written statement of their interests and position, that the staff may in its discretion describe the general nature of the investigation and the time available to prepare that statement, and that any submission will be forwarded to the Commission along with the staff's recommendation; it sets no deadline and prescribes no format for oral presentations.
• Written Wells submissions are generally limited to 40 pages (though exhibits generally do not count toward this limit).
• SEC staff generally does not need to grant your counsel access to its investigative file prior to a post-Wells meeting or oral presentation.
• SEC staff will not necessarily notify you of any changes to its enforcement recommendations based on your Wells submission or oral presentation.

How should counsel sequence the Wells process?

The sequencing of the Wells process is relatively flexible, provided you do not miss the response deadline. Here is an overview of how the process can (and should) unfold:

1. The Response Deadline

The Wells notice you received should set the deadline for filing a Wells response.

2. Requests for File Access

While you cannot assume that the SEC Enforcement staff will provide access to its investigative file, you should request access to all nonprivileged investigative material that the Enforcement staff has gathered to date. This request should be sent to the SEC Enforcement staff as soon as possible, so that you have an opportunity to review all materials before the response deadline.

3. Request for a Meeting

If you are considering holding a post-Wells meeting, you should make your request for a meeting as soon as possible. Again, this request should be made to the SEC Enforcement staff. If you have not yet requested a meeting, then you need to request one promptly. If you are facing additional parallel-case exposure, this is especially important.

The Enforcement staff will be in a position to agree to meet (or not) based on the terms of any specific settlement offer or offer of “meritorious assistance” from your counsel. The post-Wells meeting should only come after a thorough assessment with the advice of your federal defense counsel.

4. The Response Deadline (again)

If you are considering a post-Wells meeting or oral presentation, your counsel should ensure that you have sufficiently addressed all aspects of the Enforcement staff’s proposed recommendations in your Wells response. With this in mind, when you prepare your response, ensure it addresses the following critical considerations:

• The proposed settlement is distinct from the Wells response. Any negotiations regarding a settlement will proceed on a separate track.
• In its Wells notice, the SEC’s Enforcement staff will list your alleged federal securities law violations and potentially your alleged violations of various other federal laws as well. While these are the allegations, they are not charges. This means that you have not been convicted of any of these allegations and you will not face any additional punishment if you are ultimately found innocent.
• The SEC’s Rules and Regulations only provide that an alleged individual’s Wells submission may contain “any reasons for not recommending enforcement proceedings.” It does not state that a Wells submission needs to contain a comprehensive defense.
• An alleged individual’s Wells submission does not need to be comprehensive in the sense that a party should not present all possible defenses in its submission. While a party must preserve all possible defenses, it does not need to present all defenses in a Wells submission.
• While you should continue to negotiate a settlement with the SEC’s Enforcement staff during the Wells process, you should also keep in mind that any offer of settlement is not entitled to the protections of Federal Rule of Evidence 408.

5. The Meeting with the Enforcement Staff (if any)

• Finally, there is the actual meeting with the SEC’s Enforcement staff if appropriate. As noted earlier, the SEC’s rules do not prescribe a certain format or provide a set agenda. Your counsel should use his or her discretion in deciding how to address these meetings and what to say. With all other considerations in mind, your counsel will need to be able to assess the appropriateness of holding the meeting and the risk of discussing specific information in the meeting.
• The Wells process is named in honor of John A. Wells, who chaired the SEC’s Securities Advisory Committee in 1972. In 1972, the committee released a statement on the need for an enforcement policy that encourages cooperation and fairness.

We think a post-Wells meeting is often necessary. However, we also recognize that it can be counterproductive. When it is necessary, we work with our clients to make it happen. Our attorneys will communicate with the SEC’s staff and do everything they can to ensure a favorable result for our clients.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

Who should attend when criminal exposure or conflicts exist?

If you are facing criminal exposure or there is a conflict, this will also change who should attend your post-Wells meeting with the SEC’s Enforcement staff. This could include:

• SEC staff members who will likely share information obtained through a post-Wells meeting with the criminal authorities if they find evidence of criminal wrongdoing. This also includes information you share through your Wells response. When deciding whether to provide access to its investigative file, the Enforcement staff will take parallel criminal investigations into account.
• Company counsel who represents the company as a whole. However, in some cases, he or she may be able to represent an individual if no individual representation exists. This is why it is important to determine who is being represented. In some cases, the potential for conflicts could require an executive or an employee to retain separate counsel.
• Lawyers who have conflicts of interest. ABA Model Rule 1.7 prohibits representation of a client when there is a concurrent conflict of interest. This includes, “ (i) representation of one client will be directly adverse to another client; or (ii) there is a significant risk that representation of one client will be materially limited by the lawyer’s responsibilities to another client, a former client or a third party.” An informed consent that is confirmed in writing will, however, be sufficient to overcome waivable concurrent conflicts.
• Counsel who may need to determine if staff will provide notice. The existence of parallel criminal proceedings can influence whether the SEC’s Enforcement staff provides notice and access to the investigative file. For instance, Enforcement staff could decline to provide access to the file if parallel criminal proceedings are likely to be initiated. This is especially true in the following situations:
• Parallel criminal proceedings are likely to be initiated by the DOJ or state or local prosecutors.
• The recipient of the notice (or the subject of the investigation) may invoke the Fifth Amendment in parallel proceedings, even if no criminal proceedings have been initiated.
• Subpoena duces tecum has been issued in parallel proceedings. A subpoena duces tecum is a command to produce specified documents or tangible evidence. Unlike a subpoena ad testificandum (which requires you to appear at a hearing), a subpoena duces tecum does not require your personal attendance.
• Enforcement staff is not required to provide notice of a Wells meeting, a post-Wells response, or a post-Wells meeting, but will likely do so if it doesn’t feel any risk of conflict.

What financial and disclosure issues require immediate attention?

Finally, as a defendant or company in a Wells proceeding, there are several other issues that may require immediate attention. These issues include:

• The question of disclosure. SEC investigations are ordinarily nonpublic. This means that a company cannot necessarily assume it needs to disclose its investigation into the public, or that a person being investigated is required to publicly disclose it as well. This depends on whether it becomes material or whether you or your company have other reporting obligations, and other facts as well.
• D&O insurance. D&O insurance policies typically cover certain individual defense costs, but it depends on the terms and conditions of the policy. If you or your company has a D&O insurance policy, your counsel should reach out to the insurance company and determine if there is coverage for your civil defense. While it is also possible to get coverage from a company’s stock redemption plan, this depends on the applicable state’s corporate laws, the company’s governing documents, and other factors as well.
• Rights to the company’s advancement and indemnification. If you are an individual, you may have rights to the company’s advancement and indemnification as well. This will also depend on the applicable state’s corporate laws, the company’s governing documents, and any other relevant factors.
• The company’s bylaws, corporate bylaws, and other governing documents.
• Filing of a formal complaint. This is a formal step that the SEC’s Enforcement staff takes, and a notice may not be required. Even so, if a company’s D&O insurance policy requires notification of a formal complaint, a company may need to provide such notification.
• Formal investigation orders. A formal order of investigation is a significant step. However, formal investigation orders are not automatically made public, so this also depends on the applicable state’s laws and your company’s corporate bylaws, and other factors as well.
• The SEC’s enforcement actions in federal court or administratively. If an enforcement action is authorized, the SEC may pursue the action in federal court or administratively.
• SEC v. Jarkesy. The Supreme Court’s decision in SEC v. Jarkesy (2024) restricts the SEC’s ability to impose administrative civil penalties in cases involving securities fraud. This decision has implications for the types of remedies that the SEC can seek and the forum in which it can pursue enforcement actions.

Can anyone predict whether a Wells meeting will work?

Generally, a Wells notice is sent after the SEC’s Enforcement staff has carried out a substantial investigation. It does not necessarily mean that the investigation is complete. In addition, while the SEC Enforcement staff generally recommends enforcement action based on a Wells notice, the SEC does not publish its actual charge rate.

Similarly, while companies and lawyers frequently hold post-Wells meetings with the SEC’s Enforcement staff, the SEC does not publish any statistics isolating the effect of post-Wells meetings on enforcement outcomes.

Likewise, while companies and individuals frequently receive closing letters from the SEC’s Enforcement staff, it is not possible to determine the elapsed time from receiving a Wells notice to an SEC enforcement outcome. There is no reliable published dataset.

Due to a lack of available data, any purported evidence of the success rate of post-Wells meetings relies solely on anecdotal outcomes. These anecdotal outcomes cannot establish a success rate for a post-Wells meeting without a defined denominator.

Finally, even when a case results in a closing letter, it is important to understand that a closing letter does not constitute a formal SEC finding of exoneration.

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.