SEC Files Rare Subpoena Enforcement Action against Wells Fargo

Though it hardly seems this way from the outside, the SEC’s enforcement staff is in a somewhat difficult position in its investigations. The staff issues voluntary requests or administrative subpoenas to entities with potentially responsive documents, and then it waits. If a company doesn’t respond quickly, or at all, what is the SEC going to do? Sue? Remember that in the investigative stage no judge is in place to hear a motion to compel, as there would be with a publicly filed action in federal court.

But, yes, maybe the SEC will sue. If the circumstances are extreme enough, the SEC will file a subpoena enforcement action to seek to compel production of documents sought in the subpoena. As it did yesterday in this matter against Wells Fargo in the Northern District of California. The facts that follow assume that the facts in the SEC’s application are true, though they may not be.

Underlying Investigation

In the underlying investigation, the staff is investigating whether Wells Fargo made material misrepresentations or omissions in connection with a series of offerings of residential mortgage-backed securities. For each of the offerings, Wells Fargo engaged an investment bank to serve as the underwriter and perform due diligence on the quality of the loans. This due diligence included evaluating a sample of the loan pool to ensure that the sampled loan complied with the bank’s loan origination standards. If loans did not meet those standards, the bank removed them from the loan pool. Based on the information currently available to the Commission, though, it does not appear that Wells Fargo took any steps to address similar deficiencies in the remainder of the loans being securitized and sold to investors.

The Subpoenas

The SEC’s staff received a formal order of investigation in November 2010 and sent the first of six subpoenas to Wells Fargo on September 30, 2011. The first requested, among other things, all loan underwriting guidelines associated with the RMBS offerings. In response, Wells Fargo produced some documents with the representation that the documents “may be responsive to or may contain information responsive to” this request. After reviewing the documents, the SEC found that the production actually failed to include any but a few sets of what appeared to be summary versions of underwriting guidelines. In a meeting in January 2012, the Commission’s staff reiterated the need to produce all of the outstanding responsive documents, and specifically identified the guidelines as missing ones. A similar reminder followed in February, but the bank never produced the guidelines.

The other subpoenas followed a similar pattern. In November 2011, the SEC asked for documents relating to the RMBS prospectuses.  Wells Fargo did not produce them, but on February 14, the bank said it would do so by “next week.”  To date, it has not produced any. In December 2011, the SEC asked for draft RMBS prospectuses. The bank produced some, but not all, and said it expected to complete its production by March 7. It didn’t. Three other subpoenas went much the same way.

Wells Notice

On February 24, the SEC staff notified Wells Fargo that it was “considering recommending” that the Commission bring an enforcement action against the bank. To be clear, this “Wells notice” (no relation) related to the underlying RMBS investigation itself, not the subpoena enforcement action. Wells Fargo’s counsel took the Wells notice as reason to abandon any efforts to produce documents in response to the subpoenas.

SEC’s Argument

The Commission’s argument for production is pretty simple, and cites three factors it must meet: (1) whether it has authority to investigate; (2) whether procedural requirements have been followed; and (3) whether the evidence is relevant and material to the investigation.  Application at 9 (citing EEOC v. Karuk Tribe Housing Auth., 260 F.3d 1071 (9th Cir. 2001)). The SEC obviously argues that it has met the three requirements. It argues further that the investigation continues regardless of the Wells notice and that the notice is no justification to ignore outstanding subpoenas.

Procedural Posture and Lessons from the Case

To press its case, the SEC filed an application for an order compelling compliance with its subpoenas, not a complaint. The Commission spends a page in the application justifying this summary procedure. It is wise to seek the most efficient remedy it can, because there is substantial risk in its position. Subpoena enforcement actions require a lot of time and effort, and the potential payoff is unclear. It could take a long time for the court to make a ruling on the SEC’s application. Further, if the court simply writes to hold Wells Fargo to account for its deficient document production, without further sanctions for delay, the message to defendants will be that resisting production could be a useful exercise. Merely getting the documents due under the subpoena would be useful, but still a tough pill to swallow for the Commission given the substantial costs in pressing this interlocutory matter.