What Is A Wells Notice

A Wells Notice is a letter sent by a securities regulator, like the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), to notify an individual or entity that the regulator intends to recommend bringing an enforcement action against them for alleged violations of securities laws.

The notice provides details on the potential charges and violations, and gives the recipient a chance to submit a written statement to try and convince the regulator not to pursue action. While regulators are not legally required to issue Wells Notices, it is standard practice for the SEC and FINRA to provide them prior to initiating proceedings.

Background of the Wells Notice

The Wells Notice gets its name from a 1972 SEC advisory committee chaired by John Wells that recommended the SEC adopt procedures giving potential defendants a chance to address allegations before an enforcement case is filed.

While not an admission of guilt, receiving a Wells Notice means the regulator has likely completed an investigation and found evidence of possible securities law violations. Statistics show that most recipients of Wells Notices from 2011-2013 ultimately faced SEC charges.

Wells Notice Process

Here is how the Wells Notice process typically unfolds:

• Investigation: The SEC or FINRA conducts an investigation into potential violations of securities laws. This is usually confidential.
• Wells Notice: If the regulator believes it has found violations, it will issue a Wells Notice detailing the potential charges and violations. The notice gives the recipient a chance to respond, usually within 2 weeks.
• Wells Submission: The recipient can submit a written Wells Submission explaining why the regulator should not pursue action. This is not a privileged communication and can be used against them.
• Decision: The regulator will consider the Wells Submission and then decide whether to authorize proceeding with enforcement action.

Responding to a Wells Notice

While Wells Notices often lead to charges, they are not a final determination of guilt. Key steps for responding include:

• Carefully reviewing the allegations and evidence cited in the notice
• Consulting a qualified securities lawyer to discuss defense strategy
• Drafting a persuasive Wells Submission refuting the charges and violations
• Highlighting any mitigating factors or additional evidence the regulator may have overlooked
• Discussing potential settlement options before an enforcement case is filed

Submitting a well-reasoned Wells Submission can sometimes convince the regulator to drop the matter or pursue reduced charges. At minimum, it initiates settlement talks pre-litigation.

Implications for Investors

For investors, a Wells Notice issued to an individual or company they have invested in can signal legal troubles ahead. It does not guarantee enforcement action will be taken, but it is a serious matter.

Possible implications for investors include:

• The company’s stock price may drop on the news, affecting the value of shareholders’ investments
• Investors may grow uncertain about the company’s future prospects in light of the violations alleged
• If fines, penalties or sanctions result, it could significantly impact the company’s finances and operations
• However, in some cases the issues raised are resolved without major consequences for investors

So while a Wells Notice is not good news, its exact effects can vary case by case. Investors should stay informed on new developments, and consider consulting financial and legal advisors to understand their options.

Differences from a Subpoena

A Wells Notice differs from a subpoena, which demands documents or testimony. Key differences:

• A Wells Notice warns of potential enforcement action, a subpoena requires evidence production
• Wells Notices offer a chance to make a defense before charges are filed, subpoenas typically come later in the process
• While both should be taken very seriously, a Wells Notice signals charges are being contemplated

Working With Counsel

Given the seriousness of receiving a Wells Notice, retaining experienced securities counsel is highly advisable. An attorney can help:

• Carefully parse the allegations and charges in the notice
• Develop legal arguments and defenses to include in the Wells Submission
• Negotiate with the regulator on possible settlement of the matter
• Guide the response process to achieve the best possible outcome

Skilled securities lawyers regularly handle Wells Notice defense. Their expertise can prove invaluable for recipients hoping to avoid significant enforcement action.

Example Wells Notice Cases

Here are a few recent examples of Wells Notices in the crypto space:

• Coinbase: In March 2022, the SEC issued a Wells Notice to Coinbase identifying possible securities laws violations related to certain listed assets, staking services, and custody offerings. Coinbase announced plans to respond.
• BlockFi: The SEC issued a Wells Notice to crypto lender BlockFi in February 2022, related to its interest-bearing accounts. BlockFi said it disagreed with the SEC’s concerns but would seek to resolve the matter.
• Kraken: In September 2021, the SEC sent Kraken a Wells Notice connected to its staking-as-a-service product. Kraken criticized the SEC’s approach to crypto regulation in its Wells Submission response.

The outcome in these cases remains to be seen, but the notices exemplify crypto firms contending with increased SEC scrutiny. The Wells process provides them an avenue to justify their offerings and push back on allegations.

Conclusion

While not an outright accusation, receiving a Wells Notice should be taken very seriously. It signals the regulator believes it has evidence of violations and is contemplating enforcement action.

With the stakes high, consulting qualified legal counsel to navigate the response process is essential. The Wells Submission allows recipients to make their case, but crafting an effective one requires experience with securities litigation.

In some instances, recipients convince regulators to drop cases altogether. More often, Wells Notices spark settlement talks before any formal case is filed. Either outcome is preferable for those hoping to avoid protracted public legal battles.

So for both investors and regulated entities, the Wells Notice marks a critical moment. Paying close attention to these cases can provide valuable insight into the regulators’ areas of focus and concerns. For recipients, understanding the Wells process and advocating vigorously in response offers the best chance of averting the harshest potential consequences down the road.