Does My Public Company Have to Disclose A Wells Notice?

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A Wells Notice is sent to subjects of a Securities and Exchange Commission (“SEC”) investigation when Enforcement staff has substantially completed its investigation and intends to recommend that an enforcement be pursued.  Under SEC Rules, in response to such a notice, the recipient is entitled to make a Wells submission presenting facts and arguments intended to dissuade the staff from taking further action.  If the staff goes forward with its recommendation the Commission will review the recommendation and the Wells submission and then decide whether to authorize an enforcement proceeding.

Accordingly, receipt of a Wells Notice does not necessarily indicate that charges will be filed.

Publicly traded companies are often faced with the dilemma of whether or not to disclose the existence of a Wells notice to the public.

A recent decision in the United States District in the Southern District of New York held that a public company does not have a duty, upon which a federal securities fraud claim could be based, to disclose the receipt of a Wells Notice from the SEC.

Disclosure Obligations

The securities laws do not require disclosure of every fact.  An issuer is under no duty to disclose a specific material fact except where disclosure: (1) is dictated by a specific statute or regulation; (2) would be necessary to render what the issuer previously disclosed is not misleading; or (3) when the issuer is trading in its own stock.  Public companies are required to make disclosures necessary to prevent existing disclosures from being misleading.  Thus, an issuer may have a duty to disclose the existence of the receipt of a Wells Notice if the issuer’s prior statements would be rendered inaccurate or incomplete without such a disclosure.

The Court in Richman v. Goldman Sachs Group, Inc., et al., No. 1:10-cv-03461-PAC, slip op. (S.D.N.Y. June 21, 2012) rejected the argument that the issuer had an affirmative duty to disclose the receipt of Wells Notices directed to it and to two of its employees, under Regulation S-K Item 103, FINRA Rules.  The court held that under Regulation S-K, Item 103, a governmental investigation, even one in which a Wells Notice has been issued, does not rise to the level of a “pending legal proceeding.”  The court explained that while a Wells Notice “may be considered an indication that the staff of a government agency is considering making a recommendation” to institute a legal proceeding, such a notice is “well short of litigation.”  Until an SEC investigation “matures to the point where litigation is apparent and substantially certain to occur…disclosure is not required.”  In its ruling, the court noted that “no court has ever held that Regulation S-K Item103 creates an implicit duty to disclose receipt of a Wells Notice.”

The court also rejected the plaintiffs’ argument that the issuer’s existing public disclosures triggered the duty to disclose its subsequent receipt of a Wells Notice.  The issuer had disclosed that there were governmental investigations concerning certain of its business practices.  The issuer did not, however, update its public disclosures when it received a Wells Notice from the SEC.  The plaintiffs argued that by failing to disclose that the government inquiries resulted in a Wells Notice, the issuer’s public disclosures were misleading.  The court noted that the plaintiffs did not, and could not, allege that the Wells Notice was an indication that litigation was substantially certain to occur.  “At best,” the court noted, “a Wells Notice indicates not litigation but only the desire of the Enforcement staff to move forward, which it has no power to effectuate.”  Thus, the issuer’s receipt of the Wells Notice merely indicated that “governmental investigations were indeed ongoing,” which was consistent with its disclosure of the existence of governmental investigations.

The court stated “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.”  Issuers are “not obligated to predict and/or disclose their predictions regarding the likelihood of suit,” and a Wells Notice is a “contingency that need not be disclosed.”

For further information about this article, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings  please contact Hamilton and Associates at (561) 416-8956 or by email at [email protected].  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 201 South
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855