A Wells Notice represents a critical juncture in SEC investigations, signaling that staff has found sufficient evidence to recommend enforcement action. However, receiving a Wells Notice doesn't mean charges are inevitable. The Wells submission process provides your opportunity to persuade the SEC not to proceed, potentially avoiding enforcement altogether.
What a Wells Notice Means
Named after John Wells, who chaired the committee that recommended the procedure, a Wells Notice informs investigation subjects that SEC staff intends to recommend enforcement action to the Commission. The notice identifies the specific violations staff believes occurred and the evidence supporting their conclusions. It also invites you to submit a written response explaining why enforcement would be inappropriate.
Receiving a Wells Notice indicates the investigation is nearing completion and staff believes they have a case. However, staff recommendations are not final determinations. The Commissioners themselves decide whether to authorize enforcement, and Wells submissions can influence that decision by presenting information or arguments staff may not have fully considered.
Deciding Whether to Respond
While Wells submissions are optional, declining to respond wastes a valuable opportunity to influence the outcome. Effective submissions can result in no action, reduced charges, or narrower relief than staff originally contemplated. They also signal willingness to engage constructively, which may benefit later settlement discussions if enforcement proceeds.
Strategic considerations affect how to respond. In some cases, detailed factual responses effectively counter staff's theory. In others, legal arguments challenging the application of securities laws to your conduct may be more compelling. Sometimes acknowledging certain facts while contesting their legal significance provides the strongest approach.
Crafting an Effective Wells Submission
Wells submissions should address both the factual record and the legal conclusions staff has drawn. Begin by identifying any factual errors or missing context that weakens staff's theory. If witnesses were misunderstood, documents were misinterpreted, or exculpatory evidence was overlooked, the submission should highlight these problems.
Legal arguments should address whether the conduct at issue actually violated securities laws, whether the SEC's interpretation of the law is correct, and whether policy considerations counsel against enforcement. Submissions may also argue that even if some violation occurred, the proposed relief is disproportionate to the conduct.
Procedural Considerations
Wells submissions typically must be filed within a specified timeframe, often 30 days. Extensions are sometimes granted for cause. The submission goes to the enforcement staff, who prepare a memorandum for the Commission summarizing the investigation, staff's recommendations, and the subject's response. Commissioners review these materials in deciding whether to authorize action.
Some subjects request meetings with Commissioners or senior enforcement officials to supplement their written submissions. These face-to-face presentations can personalize arguments and allow real-time discussion of key issues. Whether meetings help depends on the strength of your presentation and the complexity of issues involved.
Outcomes After Wells Submissions
After reviewing Wells submissions and staff recommendations, the Commission may decline to proceed, authorize the action as recommended, or direct staff to pursue modified charges or relief. If action is authorized, enforcement staff will contact you regarding settlement discussions or proceed with litigation if settlement isn't reached.
Even unsuccessful Wells submissions provide benefits. They create a record of your position, may narrow charges, and frame subsequent settlement negotiations. Arguments developed for the Wells submission often carry forward into any resulting litigation, making thorough preparation at this stage valuable regardless of immediate outcome.