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Securities Litigation

Is There a Duty to Disclose an SEC Wells Notice?

By  Jeffrey B. Coopersmith
October 2012
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Over the years, public companies have often wrestled with the question of whether receipt of a “Wells Notice” should be disclosed pursuant to Regulation S-K Item 103 or otherwise. Regulation S-K Item 103 (17 C.F.R. § 229.103) provides that a company is required to “describe briefly any material pending legal proceedings . . . known to be contemplated by governmental authorities.”  A recent federal case from New York answered this question in favor of not requiring disclosure. Under section 2.4 of the SEC’s current Enforcement Manual and long-standing SEC practice, the SEC’s enforcement staff may, but is not required to, send a letter to a company or individual providing notice of a decision by the staff to recommend to the Commission that an enforcement case be filed. This is known as a “Wells Notice” in SEC practice, named after John A. Wells, the chairman of a 1972 committee that recommended institution of the notice letter.

On June 12, 2012, in the first case to expressly rule on this question, Judge Paul Crotty of the Southern District of New York found that there is no requirement to disclose receipt of a Wells Notice. The case, Richman v. Goldman Sachs Group, Inc., involved a claim by class action plaintiffs that Goldman Sachs committed securities fraud by, among other things, failing to disclose receipt of a Wells Notice issued by the SEC staff in connection with an investigation about a synthetic collateralized debt obligation (CDO) transaction. Analyzing Regulation S-K Item 103, FINRA and NASD rules, as well as general securities fraud principles, Judge Crotty found that Goldman Sachs had no duty to disclose the Wells Notice. It should be noted that Goldman Sachs had disclosed generally that it had received requests from various government agencies and others for information related to CDOs and other subprime mortgage products—although Judge Crotty referred to this, his opinion does not appear to have turned on this point.

Although the views of a single judge from the Southern District of New York will not be binding elsewhere, the case arose from a very high-profile SEC investigation, is well-reasoned, and presents a useful data point in connection with disclosure decisions about Wells Notices and similar matters.

Full October 2012 Quarterly Securities Enforcement Briefing

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