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The Wells Process in Securities Enforcement Actions

At the conclusion of an enforcement investigation by the Securities and Exchange Commission (SEC), and before the SEC Commissioners bring or settle a related enforcement action, the SEC division will typically engage the target of their investigation in what is known as a “Wells Process.” In this article, we describe the Wells Process, share recent suggestions about ways to handle the process from a key SEC enforcement deputy, and end with some considerations about whether to engage in the process.

The Wells Process is a prelude to a potential lawsuit. What a litigant shares with the SEC during the process may be admissible. It is therefore crucial that anyone served with a Wells Letter immediately retain an experienced securities lawyer to guide the client though this important process.

What is the Wells Process?

The Wells Process is named for a corporate lawyer named John A. Wells who headed up a committee appointed in 1972 by then SEC Chairman William Casey to review the SEC’s enforcement practices and make recommendations. The SEC Enforcement Division rarely has the power to decide whether to bring an enforcement action. Whether to bring an enforcement action is made by the Commissioners themselves based on recommendations from the Enforcement Division.

The Wells Committee recommended that the SEC Enforcement Division notify potential targets of enforcement actions of their intentions to give the targets an opportunity to submit additional evidence and argument to persuade the Commissioners from following the Enforcement Division’s recommendations. The letter from the Enforcement Division notifying potential targets of the planned recommendations became known as a “Wells Letter” or “Wells Notice,” and exchanging information and positions is known as the “Wells Process.” After the information has been exchanged, Enforcement may invite the target defendant’s counsel to a “Wells Meeting” where defense counsel can make a pitch for his or her client.

Self-Regulatory Organizations, such as FINRA, conduct enforcement actions too. They have typically followed the SEC’s lead by providing Wells Notices before filing.

The Enforcement Division Co-Director’s Recent Suggestions For An Effective Wells Process

Steven Peikin is the Co-Director of the Division of Enforcement. In a recent speech he delivered to the New York City Bar Association’s White Collar Criminal Institute, Co-Director Peikin offered his suggestions for ways a target defendant could effectively use the Wells Process and Wells Meetings. His suggestions include:

  • Focus on a few strong defenses rather than trying to address every possible argument. Taking what he called the “blunderbuss” approach by addressing every point in the SEC’s Wells Letter is rarely effective.
  • Alert Enforcement staff in advance of key facts for the defense. Supplemental submissions on the eve of a Wells Meeting are rarely effective.
  • If a target defendant intends to waive the attorney-client privilege to offer a defense, such as reliance on counsel, it is a mistake to wait until the Wells Meeting to make this disclosure.
  • Counsel should cite case law and prior SEC actions. The Enforcement staff prides itself on consistency in its actions. If a target can demonstrate that its questioned conduct has been approved by the court in analogous litigation, or SEC actions, the Enforcement staff finds that information persuasive in reconsidering their recommendation.
  • Do not overdue visual aids, PowerPoint presentations, or handouts at the Wells Meeting. The staff considers the Wells Meeting to be an opportunity for an open dialogue. Handouts and PowerPoint presentations inhibit the opportunity to exchange information.
  • Finally, do not use the Wells Meeting to rehash arguments over the scope of the investigation, or complain about the work the SEC investigators put you through.

Our Take on the Wells Process

We appreciate Mr. Peikin’s unofficial guidance. But in our experience, the Wells process, including the Wells Meeting, tend to be perfunctory boxes regulators check on the path towards recommending prosecution. As a consequence, targets of investigations should evaluate their chances of success. If there is little or no chance of success, then it might make sense to avoid the Wells Meeting altogether. The target may only help the regulators hone their case, or worse, use some admission in the Wells process against the target later in the prosecution. And participation in the Wells process is not inexpensive. It will result in the target paying substantial attorney’s fees to put together a written submission and possible presentation to the regulators during the Wells Meeting. Targets should weigh with their counsel whether it is worth investing in the Wells process.

If however, the target’s goal is to get the matter settled as quickly as possible, or in the rare instance where a target believes there is a legitimate chance to convince the regulators that the prosecution is misguided, then we recommend engaging meaningfully. Many regulatory investigations settle at the Wells stage. And occasionally, regulators rethink their positions. In those instances, participation in the Wells process makes sense.

Gordon C. Young
by Gordon C. Young
Updated: December 24, 2020

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