What is a Wells Notice ? Securities Lawyer 101
After the staff of the Securities and Exchange Commission (“SEC”) Division of Enforcement staff has completed its investigation, it may send a notice (“Wells Notice”) to the party being investigated notifying them that it intends to recommend an SEC enforcement action. Under SEC Rules, in response to a Wells Notice, the recipient is entitled to reply by providing a “Wells Submission”. A Wells Submission presents facts and arguments to persuade the SEC’s staff to not pursue an enforcement action.
If the SEC staff proceeds with its recommendation the SEC’s Division of Enforcement will review the recommendation and the Wells Submission.
After its review it will decide whether to an enforcement proceeding should be pursued. Accordingly, the receipt of a Wells Notice does not necessarily indicate that charges will be filed. Recent data suggests that the SEC does not act on 20% of the wells notices issued.
Issuers must determine whether they should publicly disclose a Wells Notice in their SEC or OTC Markets filings.
Wells Notice 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 more information about the SEC investigations and responses to SEC subpoenas and Wells Notices, see:
Securities lawyer, Brenda Hamilton provides legal advice to market participants about securities matters including SEC investigations and testimony.
For further information about this securities law blog post, 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 www.securitieslawyer101.com. This securities law blog post 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 advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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