Wells Notices May Not Compel Disclosure, at Least for Now

On June 21st, Judge Paul Crotty largely denied a motion to dismiss in Richman v. Goldman Sachs Group, Inc.(S.D.N.Y.), private litigation surrounding the same CDOs that were the subject of the SEC’s famous enforcement action against Goldman in 2010.  While many of the plaintiffs’ claims survived to reach discovery, the court rejected one: a claim based on Goldman’s failure to disclose the SEC’s Wells notice of that very enforcement action. For background, a Wells notice is an alert from the SEC staff that it is considering enforcement action against a potential defendant. 

It typically comes after the fact-gathering in an investigation is complete, but before the five members of the Commission have voted on (or even considered) whether enforcement action should actually be taken. The process gives the recipient a chance to make a written submission urging that enforcement action not move forward. Believe it or not, these submissions are sometimes successful. But because the data is not public, it is impossible to tell exactly how often they are persuasive. Others have given pretty complete treatment to Judge Crotty’s analysis (see here and here, for example), but this uncertainty lies at its heart. From the court’s perspective, the Wells process merely tees up a decision for the Commission:

“”””An investigation on its own is not a ‘pending legal proceeding’ until it reaches a stage when the agency or prosecutorial authority makes known that it is contemplating filing suit or bringing charges.”  ABA Disclosure Obligations under the Federal Securities Laws in Government Investigations—Part II.C.; Regulation S–K, Item 103: Disclosure of “Legal Proceedings,” 64 Bus. Law. 973 (2009).  A Wells Notice may be considered an indication that the staff of a government agency is considering making a recommendation, id., but that is well short of litigation.

Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261, 272 (S.D.N.Y. 2012) (emphasis added). While many companies disclose receipt of Wells notices out of an abundance of caution, the analysis here is not crazy. But the Wells notices at issue in Richman were issued in 2009 and early 2010. I wonder if the answer would be the same for ones issued after the passage of the Dodd-Frank Act in July 2010. One of Dodd-Frank’s provisions requires that SEC enforcement actions be filed 180 days after issuance of a Wells. This deadline may seem like pretty tame stuff to those who have not gone through the process of getting enforcement actions approved by the Commission. It isn’t. 

Many divisions and offices get the opportunity to weigh in on the proposed cases even before the Commissioners themselves do. They have to have answers to their questions, which can be complicated and require considered responses. The trial unit, which will handle litigation of any unsettled matter, also has to be comfortable with the language in the complaint or order instituting proceedings. In short, many people have to be on the same page for a case to get approved. Days of this process can turn into weeks, can turn into months. For thorny cases, the time can easily get away. These days, therefore, the staff has to be pretty committed to pushing the case through to Commission approval to get to that point. They do not want to trigger the 180-day clock if they can avoid it. The staff can instead invite a potential defendant to submit a white paper that lays out a reasoned argument against enforcement action and the staff can explain orally why none of those reasons hold water (or sweat because they do). The dialogue can actually be useful for both sides. That does not mean the Wells process is entirely avoided; it can just happen a bit later than it otherwise would, after internal and external questions have been locked down.

All of which is to say that the staff’s decision to actually issue a Wells notice is an even bigger step today than it used to be. It starts the clock ticking in a way that cannot be undone. And it makes me think that the analysis for disclosure of a Wells may be slightly different now than it was two years ago. It’s true that commencing litigation is still the Commission’s decision to make; the staff can only recommend action. But more and more, the 180-deadline compels the staff to be pretty confident that litigation will follow before a Wells notice is issued. Judge Crotty might still come out the same way, but I think it’s a closer call than it was under the facts of his case.