What Happens After a Wells Notice??

This is the seventh post in a continuing series for non-lawyers (or lawyers who don’t practice in the area of securities law) who have received document requests or subpoenas from the Securities and Exchange Commission, or who get calls from the Enforcement Division.

In my last post, I addressed issues related to your pre-Wells strategy, including a “white paper” and a pre-Wells meeting with the Staff. Now, you’ve gotten your Wells notice. What’s next?

The Wells notice states the charges that the Staff will recommend, the securities laws implicated, and that you may respond directly to the Commission. It may be in writing or oral. The oral version is unusual, and in any event always followed up in writing. (I have addressed a few exceptions in a footnote to this post.)

The content of the Wells notice is intended to mirror the content of the Staff’s written recommendation memorandum, which is sent to each Commissioner and their advisers. The memo shows what the staff will recommend at the weekly “Closed Commission Meeting,” (or “CCM”) where the Commissioners meet and vote.

Only the Commissioners decide whether to bring an enforcement action. This decision is made by a majority of voting Commissioners. The actual vote by the Commissioners at the Closed Commission Meeting may be weeks or months after the staff sends its memo to the Commissioners. During that time, Commissioners and their counsel may ask the staff questions, or challenge its reasoning. Your response will be considered during this period.

Still, there may be good reasons not to respond. One is that if the Department of Justice (or another regulator) is conducting a parallel investigation, the SEC may provide your Wells submission to them.

A second reason is that the SEC believes your statements in a Wells submission can be used as impeachment material, or in their own right as statements against interest. Courts have ruled both ways on this.

Third is the issue of public disclosure. If your Wells submission resides in an active investigation, it is exempt from disclosure under the Freedom of Information Act. But once the investigation is closed, third parties can make FOIA requests and obtain it. This almost certainly will happen in matters that are nationally prominent or salacious. In addition, your Wells response likely will be disclosed in any civil litigation.

The final reason is tactical, and cost. If the Staff is already dug in to its conclusion, responding may be a waste of time, and a giving up of surprise if you later have to defend a contested case or administrative proceeding.

Reasons for Responding

The reasons for responding are easier to understand.

First, you get a straight-line to the Commissioners. A good Wells submission may result in the Commissioners themselves challenging the Staff’s theory. If a Commissioner is not fully on board, he or she can become almost your advocate.

Second, your Wells response is your last chance to change the staff’s view, and the views of senior Enforcement officials. It is an opportunity to reframe the narrative, since the Staff has controlled the narrative to this point. It also permits you to bring together scattered weaknesses, inconsequential inconsistencies, and mitigating facts to present a whole that shows you didn’t break the law, or didn’t act with the required intent (called scienter).

In Writing or by Video

The response may be in writing or by video. Each has a size limit.

Written response is typical (part of it is the lawyers’ tendency: lawyers just want to write). Where transactions are complex, or legal arguments are equally so, written submissions permit the type of detail required.

On the other hand, video submissions have become increasingly common, and they can be very persuasive. If the credibility of your own testimony is a strength, this can be a way to leverage that. And if your credible potential witnesses add their testimonials by video, the impact is increased.

A Few Tips

Here are a few tips on what to do once you’ve decided to respond.

First, if you’re going to respond, know that this is your last chance to stop charges from being brought, so go hard to the main points first. If there are minor disputes or small clarification, say them once, briefly, and don’t repeat them.

Second, don’t use aggressive “litigation-y” rhetoric: this submission isn’t going to a single judge and law clerks, it’s going to over a dozen experienced regulatory lawyers. Posturing won’t work here.

Third, examine case law and past results to develop arguments as to why the Staff’s proposed action may not succeed before a court, or is too harsh.

Fourth, the Commission has published policy statements and goals. Now is the time to point out where the Staff’s recommended action contradicts those policy goals.

Fifth, and particularly if you cooperated, describe that cooperation in detail, and detail its fruits. Point out that some of the Staff’s case may have arisen from your own help, and leverage that with the objective of getting as much credit and mitigation as possible.

There is a lot of strategy, and substance, in what I’ve described. But just because you have the option, and the page limit, doesn’t mean it makes sense to respond. A careful weighing of pros and cons is critical.

In some situations, a Wells notice prior to commencing an enforcement action may interfere with other law enforcement objectives, and therefore may not be provided.