What Happens After the SEC Receives My Wells Response??

After receiving your Wells response, staff will consider your arguments and decide how to proceed. This is a discretionary decision, and staff generally will not share its reasoning with you. Staff may:

• Request additional evidence or clarification;
• Negotiate to avoid filing charges;
• Recommend filing charges; or,
• Close the investigation without recommending any enforcement action.

Do not read too much into your response. If you have not heard anything back, it means little to nothing. Silence is not confirmation that your arguments were accepted, and it is not proof that they were rejected.

Most importantly, just receiving a Wells notice does not authorize the SEC to file charges against you. While Enforcement staff can initiate an investigation on its own authority, a formal authorization from the Commission is necessary for any enforcement action to be filed.

How Did This Investigation Begin?

The SEC can initiate an investigation on its own, or in response to:

• Complaints, tips, and other red flags;
• SEC examinations;
• Referrals to the SEC Enforcement Division;
• Market surveillance;
• Self-disclosure; and,
• Media coverage.

Can the SEC File Charges Without Filing a Wells Notice?

Yes, the SEC can file charges without filing a Wells notice first, although it rarely does so. The SEC investigation process generally proceeds through these stages:

• A staff attorney may open an informal inquiry seeking voluntary cooperation.
• If warranted, Enforcement Division staff may seek a formal order from the Commission.
• Once the SEC obtains a formal order, it can compel testimony and document production via investigative subpoenas. SEC subpoenas can target your bank, brokerage, communications, trading, accounting, and telephone records, among other pertinent documents.
• While the SEC can issue Wells notices for various reasons, ordinarily, a Wells notice follows the collection of substantial investigative evidence that indicates enforcement action may be warranted.

Who Reviews My Wells Response and Decides Whether to Charge?

If SEC Enforcement staff intends to recommend filing charges, it will prepare an action memorandum. This memorandum is a lengthy, confidential, internal document. It contains a detailed analysis of the investigation’s findings and the Enforcement staff’s recommendation. The memorandum should specifically address:

• The recommended charges;
• The remedy the SEC should pursue if charges are filed; and,
• Staff’s views on any pertinent arguments, legal theories, or factual defenses raised in the Wells submission (if applicable).

Within the Division of Enforcement, one or more senior officials will review the action memorandum and the underlying investigative file to determine whether to forward the staff recommendation to the Commission for authorization. The recommendation also must be reviewed by, and signed off on by, at least one senior official (i.e., Division Director, Senior Litigation Counsel, or Assistant Director).

What Can the Commission Do With the Staff’s Recommendation?

If and when the Commission is presented with the staff recommendation, it has the opportunity to authorize, reject, or decline to act on the recommendation. A staff charging recommendation does not bind the Commission, and, if the Commission declines to authorize charges, Enforcement staff cannot file charges.

The Commission can authorize charges by either:

• Convening a meeting of Commissioners; or,
• Allowing authorization to pass through circulation as authorized by 17 C.F.R. § 200.42. Under this regulation, the Commission may use a process called seriatim voting, by which it can authorize action without holding a joint meeting. 17 C.F.R. § 200.41 addresses the quorum required for the Commission to take action.

If the Commission Authorizes Charges, Does That Mean the SEC Is Filing Them?

It is important to remember that Commission authorization merely authorizes the filing of a case; it does not itself commence a case. In practice, however, if charges were recommended and the Commission authorizes filing, Enforcement staff will typically file an action shortly thereafter.

Is There a Similar Process for Authorization to Establish a Wells Notice or Order an Investigation?

Not exactly. As we mentioned, while the SEC must obtain Commission authorization to file charges, it is not required to obtain such authorization to:

• Open an investigation, or,
• File a Wells notice.

However, if SEC staff wishes to obtain a formal order to allow it to issue investigative subpoenas, Enforcement staff must seek authorization from the Commission. Additionally, seeking a Wells notice usually signals that Enforcement staff already believes that the investigative findings justify filing charges. At this point, at least one senior official will have already reviewed the investigative findings and authorized issuing the Wells notice.

What Outcomes Can the SEC Pursue After My Response?

1. Settlement

The SEC can settle your case either before or after it files formal charges. If you and the SEC reach a settlement agreement, you will generally need to seek the approval of the SEC Commissioners before the agreement is finalized.

2. Settlement Agreement Remedies

Generally, the SEC will permit you to enter a settlement agreement without admitting wrongdoing. However, in some cases, the SEC may require that you admit to certain allegations or accept certain responsibilities as a condition of the settlement. A settlement agreement may also include any or all of the following remedies:

• Civil money penalties
• Disgorgement of “ill-gotten gains”
• A permanent injunction against committing the underlying fraud or securities violation in the future
• A permanent or temporary bar against continuing to operate within the securities industry or serving as an executive or director of a public company
• A compliance undertaking
• Other equitable and/or disciplinary remedies

3. Commission Authorization of Charges

If the SEC decides to pursue enforcement charges, the Commission may authorize filing claims narrower in scope than those described in your Wells notice. The Commission may also authorize staff to file charges against some, but not all, of the potential respondents staff originally contemplated.

4. Combination of Settlement and Charges

Just because the SEC pursues a settlement does not mean it cannot pursue enforcement charges as well. In fact, if you have not reached a settlement prior to the Commission’s decision on your Wells response, the SEC may file charges and then continue to work with you toward a settlement agreement. At this point, both settlement and enforcement charges are potential outcomes.

5. No Enforcement Action

Finally, just because the SEC has opened a formal investigation does not mean it will seek enforcement charges; and, just because you received a Wells notice does not necessarily mean the SEC will pursue enforcement action.

Does an SEC Closure Notice Mean the Matter Is Over?

If the SEC Enforcement staff finds your arguments and evidence in your Wells response persuasive, it may decide to close your case without filing enforcement charges. If this is the case, the SEC will generally issue a closure notice. If you have received a closure notice, you should remember that:

• You Are Not Exonerated. A closure notice does not exonerate you in any way. It is simply evidence that the SEC’s Enforcement staff has no immediate plan to pursue enforcement charges.
• The SEC’s Position Could Change. While the issuance of a closure notice confirms the Enforcement staff’s current position, it does not prevent later action if new evidence comes to light or if staff discovers other potential violations.
• No Public Record of Your Case. Generally, the SEC’s Enforcement Division will only post public records of enforcement actions on the SEC website. If your case was closed without charges, the SEC will not post a record of the closure.
• No Effect on Prior Disclosures. An SEC staff closure notice will not automatically remove any prior voluntary disclosures made on your Form U4. If such action is necessary, you will need to work with your broker-dealer and FINRA to get the disclosure removed.

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

How Long Will the SEC Take to Decide?

Some complex SEC investigations can continue for several years. In general, the SEC’s rules prescribe no standard duration for completing any enforcement investigation, and, while, in some cases, staff must meet an investigative deadline, this is not the case in most cases.

Do the 60- and 90-Day Deadlines Apply to the SEC?

Many people have seen online claims that the SEC has 60 or 90 days to make an informed decision or that the SEC must make its decision within a specific number of days after receiving the Wells response. These claims are unfounded. There are no rules requiring the SEC to make a decision within these timelines.

Can the SEC Wait Forever to File Charges?

In general, if the SEC wants to seek civil penalties, it must file a complaint or administrative proceeding within five years of the date of the alleged violation or failure to file required documents or statements under 28 U.S.C. § 2462. Under 15 U.S.C. § 78u(d)(8)(C), the SEC has ten years to seek a complaint or order to enjoin and impose a temporary or permanent bar against future association with the securities industry, or to enjoin continuing or future conduct in equitable relief cases. Of course, the SEC can negotiate with potential defendants to extend these limitations periods by obtaining “tolling agreements.” These agreements typically extend the limitations period for a set amount of time in exchange for the SEC continuing its investigation or continuing to work with potential defendants toward reaching a settlement in lieu of filing enforcement charges.

What Is the SEC’s Average Post-Wells Decision Time?

While the SEC does not publish information regarding the average time to make a post-Wells response decision, we can provide some insights. Since the SEC does not publish its post-Wells decision outcomes, any online sources claiming to know the SEC’s average decision time are likely guessing based on their own clients’ experiences. Some post-Wells decisions can take months; others can take more than a year.

What Should I Do While Waiting for the SEC’s Decision on My Wells Response?

Generally, SEC investigations remain confidential until the SEC decides to publicly pursue enforcement charges. However, the SEC can share investigative information with prosecutors and other regulators, and not all investigators will respect confidentiality. In other cases, the SEC and the Department of Justice (DOJ) may be pursuing what are called parallel investigations into the same (or overlapping) potential misconduct. As a result, voluntary factual admissions could affect parallel criminal or regulatory investigations, even if they were intended for the SEC’s review only.

In many cases, if an SEC enforcement case or DOJ criminal case becomes probable or imminent, Federal Rule of Civil Procedure 37(e) will require you to implement an electronically stored information (ESI) preservation policy to preserve any information that may be relevant to the anticipated litigation. If the SEC or DOJ pursues charges, any intentional destruction or deletion of electronically stored information could trigger a violation of 18 U.S.C. § 1519, which criminalizes destroying records to impede an ongoing or anticipated federal investigation.

Furthermore, the SEC may consider continuing the investigation as an option if it determines that your response is incomplete or inaccurate. In addition to the above, it could lead to criminal liability under 18 U.S.C. § 1001, which criminalizes making materially false statements and representations in a matter within the U.S. government’s jurisdiction. Therefore, it is very important to avoid any unnecessary or unwanted exposure when discussing with the SEC what you can and cannot do or say or share information.

While you are waiting for the SEC’s decision on your Wells response, you should ensure that you are mitigating any adverse consequences of your alleged violation. Showing evidence of your full cooperation with the SEC, your self-reporting to the appropriate authorities, your efforts to remediate any alleged harms you caused, and your willingness to compensate any victims could all support mitigation arguments if necessary. However, like other steps in the process of responding to an SEC Wells notice, these measures should be taken with an experienced SEC defense attorney, and should not be undertaken on your own.

Must I Disclose the Wells Notice or the SEC Investigation to the Public?

In general, the public does not have an automatic right to learn about SEC investigations. For example, in Richman v. Goldman Sachs, the court rejected shareholders’ claim that issuers must automatically disclose receipt of Wells notices to the public. While this makes sense in most cases, it makes less sense in cases where the SEC is already authorized to pursue an enforcement case. This is because the public’s right to know may be broader than the SEC’s authority to punish fraud and securities violations.

When Must Individuals and Firms Disclose SEC Investigations or Wells Notices?

There are a few instances when individuals and firms must disclose SEC investigations to the public. For example, broker-dealers and investment-adviser firms must disclose regulatory proceedings in the SEC’s and FINRA’s Form U4. However, individuals do not file Form U4 themselves. Individuals must report to their firm if they have personal information or conduct that falls within the reporting requirements of an applicable Form U4 disclosure question.

Generally, though, there are no requirements for companies to disclose SEC investigations through a Form 8-K. Form 8-K contains no specific item requiring disclosure of Wells notices, and Regulation S-K Item 103 requires disclosure of material pending legal proceedings, but it does not require disclosure of every investigation or inquiry. However, an investigation that involves accounting irregularities could trigger reporting obligations under the Securities Exchange Act for a public company.

There are other instances in which private litigants could seek discovery of the SEC’s records, including any statements that an individual or company made in response to a Wells notice. For example, if a person’s investment losses are allegedly the result of fraud or securities violations, a court could find that the a company’s disclosure or non-disclosure obligations are a relevant issue for litigation.

What Happens if the SEC Files Charges Against Me?

If you receive notification that the SEC is pursuing an enforcement action against you, you have two main options. You can either work with the SEC to settle your case, or you can enter the litigation process in an attempt to protect your interests and avoid civil or criminal liability.

In a contested SEC action in federal district court, litigation will proceed through several stages:

• Pre-filing Stages. As we mentioned, you have the opportunity to work with the SEC’s Enforcement staff during the investigative and pre-charge stages. This is generally the best time to protect your interests, because once federal litigation begins, the risks and benefits of negotiating with the SEC may change significantly.
• Post-filing Stages. The federal litigation process generally consists of several post-filing stages. This includes (i) filing of the SEC’s complaint, (ii) discovery, depositions, motions, and, (iii) trial. If you do not want to settle your case or enter a settlement agreement, then these post-filing stages are when you will have the opportunity to present your arguments and evidence to a judge or jury.

Can I Request a Jury Trial in an SEC Enforcement Case?

If your case proceeds to trial and if you are a federal defendant entitled to a jury trial, you can request a jury trial in your case. According to SEC v. Jarkesy, the SEC must generally go through a district court in order to seek securities-fraud civil penalties against individuals, broker-dealers, and other covered entities. This means that, generally, if the SEC pursues securities-fraud charges against you, a jury will decide the outcome of your case if it is not settled beforehand.

Does Receiving a Complaint Mean that I Am Liable?

No. Even if the SEC pursues charges against you, this is not proof of your liability. A complaint filed by the SEC only alleges that you committed a securities violation. In order for the SEC to legally establish your liability, a judge in federal district court, a member of the Securities and Exchange Commission, an administrative law judge, or a jury must make a determination that you committed an actionable violation.

Could I Have Requested a Hearing or Trial Before the SEC Issued a Wells Notice or Complaint?

No. The pre-charge Wells process is not a matter that is adjudicative in nature, and it does not provide an evidentiary hearing or trial.

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.