Wells Notice vs. Target Letter: Understanding the Difference.

SEC Wells Notice

An SEC Wells notice is a letter that informs you that the SEC’s Enforcement Staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding. However, a Wells notice is neither a formal charge nor is it a finding of liability. Receiving a Wells notice also does not mean that the SEC is just starting its formal investigation. The Wells notice is named after John A. Wells, who chaired the committee that developed the procedure in 1972. The committee established this practice to give defense counsel an opportunity to present its side of the case before the SEC brings charges.

Target Letter

On the other hand, a target letter is a letter sent to an individual who is targeted in a federal grand-jury investigation. Similar to a Wells notice, receipt of a target letter is neither an indictment nor a criminal conviction. Target letters also generally come from federal prosecutors at the U.S. Attorney’s Office or the Department of Justice (DOJ), rather than from the SEC. You may also receive a target letter even if you were not previously aware that a grand-jury investigation was underway.

Both a Wells Notice and a Target Letter

In certain scenarios, these two events could happen concurrently or sequentially. For example, the SEC and DOJ may coordinate their enforcement efforts with respect to one matter. Alternatively, the SEC might refer a matter to the DOJ for prosecution, and the DOJ might subsequently issue a target letter after the SEC has issued its Wells notice. If you have received a Wells notice, a target letter, or both, it is up to your defense counsel to establish the scope of your exposure and then determine how to protect you against both SEC and DOJ allegations.

Who Investigates Securities Violations and Decides What Charges Follow?

SEC / DOJ / FBI

The SEC’s Division of Enforcement is responsible for conducting civil investigations involving potential violations of the federal securities laws. While the SEC can pursue injunctive relief and assess civil money penalties, the SEC cannot initiate criminal prosecutions. Instead, the DOJ has the authority to prosecute suspected securities fraud and other criminal violations of federal law. Federal prosecutors at the DOJ often work in conjunction with the FBI to investigate criminal violations, and the FBI frequently works with the SEC on investigations involving possible securities violations.

The SEC Commission

Although the Division of Enforcement conducts the SEC’s investigations and makes the decision to recommend charges, the Division itself does not have the authority to initiate federal securities enforcement proceedings. Instead, the five SEC Commissioners sitting as the Commission must authorize enforcement action. In order for the SEC’s Enforcement staff to have subpoena authority during its investigations, the Commission must issue a formal investigation order.

FINRA and State Regulators

FINRA (the Financial Industry Regulatory Authority) is a self-regulatory organization (SRO) that investigates and disciplines misconduct by its member broker-dealers and their associated persons. Like the SEC, FINRA utilizes Wells notices. Similarly, state securities regulators enforce the securities laws applicable within their jurisdictions. Similar to the SEC, these state regulators may bring civil or administrative enforcement proceedings.

Coordinated Enforcement Efforts

The same issues that cause the SEC or DOJ to issue a Wells notice or target letter are often among the same issues that prompt investigations by the FBI, FINRA, or state securities regulators as well. If you have received notice from any of these agencies, it is imperative to engage experienced defense counsel immediately. Your counsel needs to obtain a clear understanding of your exposure, and then work to protect you against civil and criminal allegations on all fronts.

What Should I Do After Receiving a Wells Notice?

The SEC’s Discretion

The SEC does not issue Wells notices in all cases; it does so at its discretion. While SEC staff is not required to issue a Wells notice, doing so is in most cases contingent on their having completed a substantial portion of their investigation and having found sufficient evidence to warrant a recommendation to initiate enforcement action. If you have received a Wells notice, you should promptly engage experienced defense counsel who can seek to mitigate your exposure with the SEC.

What Should I Expect from a Wells Notice?

A Wells notice generally should:

• Clearly identify the securities violation(s) the SEC is contemplating bringing against you.
• State the SEC’s basis for bringing these enforcement charges, though the notice may summarize rather than detailed these grounds.
• Clearly state that it is not a finding of liability or a formal charge.
• Clearly state that you have the opportunity to persuade the SEC not to bring the charges it is contemplating bringing against you.

While the SEC is not strictly required to include these, you can typically expect this type of language within your Wells notice.

What Should I Do Next?

After receiving a Wells notice, you should get in touch with experienced defense counsel right away. At this stage, your attorney will contact the SEC, find out the scope of the SEC’s investigation and what the SEC is alleging, and then advise you on the potential penalties. Your attorney will also seek to work with the SEC to minimize your exposure while exploring the possibility of a pre-charge resolution. As well, your attorney can gather more information about any related federal criminal investigation.

What Is a Wells Submission?

A Wells submission is a written presentation or oral statement (or both) made in response to a Wells notice. In a Wells submission, your counsel can tell the SEC why it is not justified in bringing charges against you.

Typically, a Wells submission will include:

• A detailed discussion of the defenses available to you.
• Suggestions that the SEC Enforcement staff have the evidence and experience to find that you have not committed any wrongdoing, and then not file charges against you.
• Arguments against the enforcement recommendation based on the staff’s failure to establish a prima facie case.
• Arguments against the enforcement recommendation based on other statutory, regulatory, and policy considerations that require dismissal.

How Long Do I Have to File a Wells Submission?

Once you receive a Wells notice, you will ordinarily have about four weeks to make a Wells submission. However, SEC staff commonly allows extensions for a Wells submission if necessary.

What Happens If I Don’t File a Wells Submission?

If you received a Wells notice, you are not required to make a Wells submission. You can make these submissions as you see fit, although, in most cases, they will be highly recommended.

Can the SEC Use My Wells Submission Against Me?

Yes, the SEC may use any statements made in your Wells submission if you do not avoid charges at this stage. As a result, making a Wells submission requires a strategic decision. If you choose to make a Wells submission, your counsel will need to ensure it does not open you up to additional penalties and other consequences.

How Likely Is It That the SEC Will Seek to Enforce Charges Against Me?

While there is common talk that the SEC seeks to enforce charges after issuing a Wells notice 80 percent of the time, no reliable dataset or methodology supports this number. While it is generally believed that the SEC does not issue Wells notices unless it considers charging you likely, it is not certain that it will go on to enforce its contemplated charges.

At this stage, it is up to your defense counsel to persuade the SEC’s Enforcement staff that pursuing charges against you is not warranted.

How long after a target letter could indictment happen?

The Definition of a “Target”

Section 9-11.151 of the Justice Manual provides that a “target” is “a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant.” However, the Justice Manual does not require prosecutors to issue target letters before seeking an indictment; Section 9-11.153 merely encourages prosecutors, in appropriate cases, to notify a target a reasonable time before seeking an indictment so the target has an opportunity to testify before the grand jury.

How Is a “Target” Different from a “Subject” or a “Witness”?

Justice Manual Section 9-11.151 distinguishes among “targets,” “subjects,” and “witnesses.” Under this section:

• A “subject” is “a person whose conduct falls within the scope of the grand jury’s investigation,” but for whom the prosecutor “does not have substantial evidence linking him or her to a crime” or “do not believe that he or she committed a crime.”
• A “grand jury witness” is a “person who may possess information that is relevant to the grand jury’s investigation, but the person’s conduct may not fall within the scope of the grand jury’s investigation, and the grand jury’s investigation does not involve the person being the subject or target of the grand jury’s investigation.”

How Long After You Receive a Target Letter Could Indictment Occur?

There is no federal rule, statute, or case law that sets a timeline for how long after receiving a target letter an indictment could follow. Whether an indictment will follow a target letter, or how long later it will occur, depend on a variety of factors, including:

• Whether additional grand-jury evidence needs to be presented;
• Whether the prosecutor is able to conclude that a crime has been committed; and,
• Whether the prosecutor believes there is probable cause to charge the subject or target with the crime.

If you have received a target letter, you should discuss your concerns with experienced defense counsel, who can help you determine your chances of facing criminal charges.

As with an SEC Wells notice, if you have received a target letter, this does not necessarily mean that an indictment will follow. The grand jury investigation may end without an indictment.

Is It Typically 30 to 45 Days, or Three Weeks in the Southern District of New York (SDNY)?

While there are beliefs that target letters are typically sent 30 to 45 days before an indictment, and three weeks before an indictment in the SDNY, there is no evidence in any case law, the Justice Manual, or any other identified source to support these claims. The length of time from receipt of a target letter to an indictment is, if an indictment is issued, dependent on various factors unique to the case and the prosecutor’s judgment.

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

Can an SEC Investigation Create Separate Criminal Exposure?

Parallel Civil and Criminal Investigations

The SEC is a civil enforcement agency. While it can bring civil enforcement actions against private individuals, private corporations, public corporations, and various others, it cannot bring criminal charges or seek imprisonment under any circumstances. The DOJ and the U.S. Attorney’s Office are the federal government’s criminal enforcement agencies. They can pursue federal criminal prosecutions against those that commit federal crimes including securities fraud. The DOJ and the SEC often conduct “parallel civil and criminal investigations” to determine the extent of criminal charges. Parallel investigations are generally legally permissible as long as the SEC does not violate the suspect’s or target’s criminal rights in doing so.

Can I Know If the DOJ is Investigating?

As a general matter, you cannot expect SEC staff to disclose the existence of any parallel criminal investigation. SEC staff are generally reluctant to make representations concerning parallel criminal investigations. So, receiving a Wells notice does not establish that the DOJ is investigating (even if it has), and not receiving a target letter does not exclude the possibility of a criminal investigation. Thus, if you have received a Wells notice, it is imperative to engage experienced defense counsel to help you understand how to respond.

What Should I Do If the SEC Asks Me to Testify?

If the SEC has asked you to testify in its civil investigation, you can invoke the Fifth Amendment privilege against self-incrimination if you have reason to believe that the SEC’s investigation will lead to a criminal indictment. At this stage, in civil proceedings, an adverse inference may be drawn from certain invocations of your Fifth Amendment right to remain silent. However, the Fifth Amendment privilege does not apply to corporations and other entities.

Can the SEC Use What I Say to the SEC to Support a Federal Criminal Case?

If you voluntarily make statements to the SEC and the DOJ is investigating, the DOJ may use what you said to the SEC to support its prosecution. Generally, the DOJ will be able to use your statements if you have not invoked your Fifth Amendment privilege against self-incrimination and if there is no statute or other authority which protects your disclosure of information to the SEC from being disclosed to the DOJ as well.

What If You Are Charged With a Crime for Which You Have Also Received a Wells Notice?

In this scenario, your counsel should explore all possible avenues for limiting your liability. Your counsel will want to understand:

• Whether the DOJ is in communication with the SEC’s Enforcement staff;
• The scope of the DOJ’s evidence; and,
• Whether a pre-charge resolution is possible.

Along with managing the DOJ’s investigation, your counsel will also need to handle the SEC’s investigation.

What Should I Tell My Lawyer About the Investigation?

The Attorney-Client Privilege

The attorney-client privilege protects certain confidential communications between a client and their attorney. In general, this means that your attorney cannot disclose the contents of your confidential communications to anyone else. Your attorney will also be able to use these communications to better assist you with your defense. While the attorney-client privilege generally protects confidential communications intended to seek legal advice, it typically does not protect the underlying facts contained in these communications.

The Crime-Fraud Exception

The crime-fraud exception is an exception to the attorney-client privilege. This exception prohibits the privilege from applying in cases in which the client engaged his or her attorney to assist in furthering a planned crime or continuing wrongdoing. If you made statements to your attorney that you intend to commit a crime in the future, these statements may not be protected under the crime-fraud exception, and your attorney could potentially use them against you.

Waiving the Attorney-Client Privilege

While the attorney-client privilege is critical for effectively handling your defense, voluntary disclosure of this privilege to outsiders (such as a bank, the SEC, the DOJ, or other third party) could mean that you have waived your right to assert the privilege against these parties in the future. In this case, a court could allow the parties to use your statements to prove your involvement or liability.

How Should I Present My Defense to My Lawyer?

As with any legal matter, it is imperative that you be honest and complete when presenting your defense to your lawyer. You do not have to share the entire world’s information about yourself, but it is imperative that you share information that is relevant to your defense. If you intentionally or inadvertently hide damaging facts, it will prevent your attorney from being able to accurately assess your exposure. This can be potentially damaging later in the process.

It is important to remember that if you knowingly tell your attorney a fact that is untrue, this may constitute a violation of Model Rule 3.3. This rule requires lawyers to not “knowingly: (i) make a false statement of fact or law to a tribunal or, (ii) offer evidence that the lawyer knows to be false.” Thus, while your attorney will do everything possible to help you defend yourself, you also have certain ethical obligations when speaking with your counsel.

Will a Wells Notice or Target Letter Become Public?

SEC Wells Notice

Receiving a Wells notice does not, in itself, make a person or corporation subject to public disclosure. However, individuals and corporations may have disclosure obligations depending on their registration status with the SEC, the specific conditions of their offering, the specific nature of the documents that govern their reporting obligations, and the materiality of the information within the notice. For example, in most cases, the registration requirements for public companies are addressed under their Form U4 filings. Form U4 filings can make various disclosures mandatory if the filer is a Broker, Investment Adviser, or any associated person. If the filer is a Broker or Investment Adviser, filing a Form U4 is an obligation. If the filer is an associated person, the obligation to file a Form U4 depends upon the circumstances. The information in a Wells notice is subject to disclosure if it is material and disclosure of the information is required under the relevant federal reporting rule.

Target Letter

Grand juries’ proceedings are secret. This includes keeping a person’s status as a target or subject of a grand jury’s investigation secret. However, this secrecy is imposed on the grand jury witness and other participants. It is generally not imposed on the target of a grand jury’s investigation. If you have received a target letter and you are not a witness in a grand-jury investigation, you should not be subject to the provisions of Rule 6(e). But if you have been called to testify as a grand-jury witness, Rule 6(e) only applies to what you testify to and any information you receive during the grand-jury proceedings. It does not prohibit you from disclosing information that you receive outside of the grand jury. For example, even though Rule 6(e) prevents you from disclosing what you said to the grand jury, Rule 6(e) does not prevent you from disclosing that you received a target letter as well.

Do Target Letters Disclose Other Things?

A target letter usually only reveals that you are the target of an investigation. A target letter generally does not:

• Disclose that the investigation is a criminal investigation;
• Disclose whether you are a target in the grand jury’s investigation or if you are the target of an investigation by the FBI;
• Disclose the potential charges against you; or
• Disclose if a criminal case is being prepared for a specific courtroom, district, or circuit.

What About Wells Submissions?

A Wells submission could potentially be disclosed to a private litigant during the discovery process. If you make a Wells submission, you should discuss with your defense counsel the possibility of a private litigant obtaining your submission.

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.