Receiving a Wells Notice is a significant escalation in a securities fraud investigation. It means that federal law enforcement intends to initiate a formal legal action for what it perceives to be deceptive or fraudulent conduct in the trading of securities.
How you respond to the Wells Notice – or if you respond to it at all – can lay the groundwork for a quick resolution of the investigation or can divulge information that escalates it even further. Given the potential for these investigations to turn into civil or even criminal cases that carry millions of dollars in penalties and decades behind bars, it is paramount for the securities individuals or firms who are the target of the investigation to make an appropriate response to the Wells Notice.
Receiving a Wells Notice is a Sign That an Investigation is a Serious One
A Wells Notice is a letter that is sent by securities regulators to a securities professional or firm. The Notice informs the recipient of the intent of the regulator to pursue formal legal actions against the recipient for alleged securities fraud or misconduct.
The term “Wells Notice” comes from the chair of the 1972 committee that reviewed the enforcement practices of the U.S. Securities and Exchange Commission (SEC). After looking at how the agency investigated allegations of securities fraud, the committee, chaired by John Wells, recommended giving securities professionals that were in the agency’s crosshairs a notification of the intent to pursue the potential charges and be given the opportunity to respond to them before the case went any further.
Importantly, there is no requirement that securities fraud suspects who are the targets of an enforcement action receive a Wells Notice. However, it is the general practice of both the SEC and the Financial Industry Regulatory Authority(FINRA) to do so, for two reasons:
- They can speed up investigations by giving the target of the case the opportunity to present exculpatory evidence that the agency might have missed and that fully explains the incriminating evidence that has been gathered, and
- They give the suspect the opportunity to mistakenly divulge information that supports the agency’s case against them, effectively doing the agency’s job for them.
Given the loaded nature of a Wells Notice, your decision about how, or whether, to respond to it can drastically affect the subsequent stages of the securities fraud allegation.
You Have Options in Your Response to the Notice
As an initial matter, it is not compulsory that you respond to a Wells Notice. However, the decision about your response is not a simple yes or no: If you do decide to reply, the amount of information that you provide can range from “extremely little” to “all of it.”
Whether to respond or how much to divulge is the first decision that you make in what can end up being a quick investigation or one that escalates into criminal charges. It is also the decision that is going to lay much of the groundwork for the rest of the case as it progresses forward.
The following factors should guide your decision at this pivotal moment in the investigation:
- Whether you or your firm needs a complete and absolute victory or can live with a settlement or a mitigated penalty
- The specific charges that the securities regulator intends to press
- The potential penalties for those charges
- Any information about the investigation contained within the Wells Notice
- The likelihood that further investigation would uncover additional evidence against you or your securities firm that is relevant to the charges
- Whether an investigation is likely to uncover evidence of a violation not mentioned in the Wells Notice
- Whether you are allowed to review the non-privileged information in the case’s investigative files
Reading between the lines of the Wells Notice and taking the context of the situation into account are essential for making an informed decision at this point. While every Wells Notice reply is unique, the following are some general ideas and defense postures that you can take:
- Do not respond. This tells the SEC or FINRA regulator that you either want to let the investigation play out a bit more before providing information, or that you want to force the regulator to make their own case against you, without your help
- Disclose lots of information to explain the case. On the other end of the spectrum, you can choose to reveal all of the information that you have regarding what seems to be the core of the investigation. Making a full disclosure can make it appear that you have nothing to hide. However, it can also divulge information that you thought was innocuous but was actually very incriminating against you
- Selectively disclose information. Most Wells Notice responses fall between these two extremes. By selectively disclosing relevant information, you can hold on to whatever might help the SEC or FINRA, while also disclosing documents and files that are likely to undermine their case against you. Doing so, however, takes time and a solid understanding of what it is that the regulator intends to do and what they might find should the case progress
What Can Happen After the Wells Notice Response
Your response to the Wells Notice can make the securities investigation take one of several turns. Some possible avenues include:
- Terminating the investigation. If your response to the Wells Notice so completely explains or undercuts the agency’s suspicions, the SEC or FINRA is likely to end the investigation
- SEC subpoena. If the regulator thinks that more information is needed before deciding to drop or escalate an investigation, the SEC will issue a subpoena
- Settlement negotiations. If FINRA or the SEC decides that the charges outlined in the Wells Notice might stick, they can initiate discussions about settlement agreements
- Administrative actions. If the SEC thinks that there is support for the charges listed in the Wells Notice, but not enough to take it to court, it will file an administrative action against the recipient
- Civil or criminal enforcement. If there is sufficient evidence to support a civil filing, the SEC will do so. If the agency thinks that it can prove fraud or another financial crime beyond a reasonable doubt, it will forward the case to the Department of Justice (DOJ) for a criminal investigation
Some Frequently Asked Questions About Oberheiden P.C. and Wells Notices
Q: What are Some Charges That Wells Notices Can Contemplate?
Wells Notices can be filed by the SEC or FINRA in the preliminary stages of a wide range of financial and white collar crime investigations that deal with securities. Just a few of these include:
- Securities fraud
- Investor fraud
- Wire or mail fraud
- Bank fraud
Some of these offenses carry significant prison sentences and millions of dollars in fines if they lead to a criminal conviction.
Q: What is the Difference Between a Criminal, a Civil, and an Administrative Enforcement Action?
There are several differences between these types of enforcement actions. Three of the most important are the:
- Possible penalties
- Standard of proof
- Degree of formality
The most obvious difference are the potential penalties that you or your firm can face if found liable:
- Administrative actions can lead to professional sanctions, including financial penalties and restitution payments
- Civil actions can lead to these professional sanctions, as well as civil penalties and disgorgement of fraudulently-obtained money
- Criminal actions can lead to these professional and civil sanctions, as well as prison time and criminal fines
In order to impose these sanctions, though, law enforcement has to satisfy the burden of proof:
- For criminal cases, it is beyond a reasonable doubt
- For civil cases and administrative cases, it is generally by a preponderance of the evidence
The degree of formality also matters. Both civil and criminal cases have to go to court, where the rules of evidence apply and a neutral judge or magistrate oversees the process. Administrative claims, however, are resolved within the SEC or FINRA – generally seen as extremely friendly forums for the regulators pursuing your case.
Q: Why Doesn't Oberheiden P.C. Call Itself the Best Defense Firm?
Because that kind of praise is best heard from our clients, rather than from our firm.
However, there are numerous testimonials that say similar things about the legal representation that Oberheiden P.C. can provide to securities professionals and firms that have been accused of securities fraud and misconduct. Many of our prior clients applaud our team of experienced securities lawyers and investigators, all of whom have spent decades in the field of securities defense and white collar crime – including prior experience as investigators and prosecutors for the SEC, DOJ, and FINRA. That experience has given our lawyers valuable insight into the next steps that these agencies are likely to take in your claim, letting us better anticipate those moves and prepare for them. That insight has led to a string of success stories for our clients.
How the Securities Fraud Defense Lawyers at Oberheiden P.C. Can Help
The securities fraud defense team at the national law firm Oberheiden P.C. have guided numerous securities professionals and firms through the Wells Notice phase of a securities fraud case. Many of our lawyers have spent numerous years within the SEC or FINRA as investigators or law enforcement lawyers. That experience is invaluable for determining the scope and strength of SEC or FINRA investigations at this crucial early stage in the process.
Contact us online or call our law office at (866) 603-4540.