Study Finds that SEC Decides Not to Bring Charges in 20% of Cases Where it Issues a Wells Notice


An independent study by the Wall Street Journal found that 20% of individuals and entities who received Wells Notices from the U.S. Securities and Exchange Commission ("SEC") from 2010-12 did not end up facing any charges.   The percentage of those receiving Wells Notices that do not face charges is much higher than many outside experts believed.  This study shows that it is worthwhile for anyone receiving a Wells Notice to have counsel provide a robust Wells Response, because there is a good chance of persuading the SEC not to bring charges.


In a Wells Notice, the SEC warns an individual or entity that the SEC's staff has made a preliminary determination to recommend to the Commission that the SEC file charges.   A Wells Notice will offer the recipient the opportunity to submit a written or videotaped response to the Notice (called a "Wells Response"), setting forth defenses and any other reasons why the SEC should not bring charges.   The purpose of the Wells process is to ensure that the SEC hears a potential defendant's side of the story before bringing charges.  Since SEC charges themselves can adversely affect the career of any securities professional - regardless of whether they are later proven wrong - the process is aimed at avoiding unnecessary harm to those who may be innocent.


The 20% chance that a Wells Response may cause the SEC not to bring charges is a "game-changing" finding, offering a compelling reason to invest in having counsel submit a robust Wells Response.   Prior to the release of this study, many outside experts (including former SEC Commissioners) believed that the rate of SEC not bringing charges after a Wells Notice was much lower, such as 5-10%.   Given such long odds, the risks of submitting a Wells Response in many cases could be viewed as outweighing the benefits of a Wells Response.  Such risks include that a Wells Response: 


(i) can be obtained through discovery by third parties in related private lawsuits, and make such cases easier to prove; 


(ii) gives the SEC a preview of your litigation strategy before a complaint is filed, thus giving it a roadmap to beat your case; and


(iii) may contain admissions of disputed fact - or factual positions that you later learn are wrong - which the SEC reserves the right to use against you in Court.


However, the Study's conclusion that 20% of cases result in no charges after a Wells Notice dramatically changes this calculus even though it is just a study and future results could be different.  A one-in-five chance of avoiding charges would, in most cases, outweigh the risks of a Wells Response.  That is particularly so given that even the announcement that the SEC is bringing charges can ruin the career of a securities professional.   


For example, the SEC issues a press release when it announces charges; which will remain on the internet for posterity, and often causes clients and/or employers to distance themselves.  Such press releases are usually picked up by news sources such as Bloomberg, Reuters or the Wall Street Journal, making the damage virtually impossible to undo.  Further, virtually all securities professionals must publicly disclose any SEC charges, such as a Form-ADV (for investment advisers) or Form-U4 (for brokers).  And pending SEC charges may be viewed by clients and/or employers - usually unfairly - as a red flag against continuing to do business with you.   


Accordingly, a vigorous Wells Response in most cases appears to be a valuable opportunity to change the Commission's mind about bringing charges.  You should always have counsel assist you on a Wells Response if you are currently dealing with one.  Sadis and Goldberg can provide extensive advice.  



Cheryl Spratt