On Friday, March 23, 2012, the SEC filed a subpoena enforcement action in federal court in California against Wells Fargo & Company. The Commission is investigating Wells Fargo’s sale of nearly $60 billion in residential mortgage-backed securities ("RMBS") to investors. The proceeding is unusual in that, while the Commission was still attempting to obtain information from Wells Fargo which it sought in investigative subpoenas, it sent Wells Fargo a "Wells Notice," stating that the Commission staff was "considering recommending" an enforcement action against the bank. When the SEC continued to press Wells Fargo for responses to the subpoenas, the company responded that it no longer thought a response was necessary while the Wells Process was ongoing. As a result, the Commission filed the subpoena enforcement action, arguing that the issuance of a Wells Notice did not forgive Wells Fargo from responding to the subpoenas.
Since 2010, the SEC has been investigating whether violations of the federal securities laws occurred between September 2006 and early 2008 in connection with Wells Fargo’s sale of nearly $60 billion in RMBS. Beginning in September 2011, the Division of Enforcement staff exercised its usual authority to issue a series of investigative subpoenas to Wells Fargo. Wells Fargo provided some documents and stated that it expected to complete its production of documents in response to the subpoenas by no later than March 7, 2012.
However, on February 24, 2012, the Commission staff sent a "Wells Notice" to Wells Fargo, stating that it was "considering recommending" that the Commission bring an enforcement action against the company, alleging violations of the antifraud provisions of the securities laws in connection with the RMBS offerings.
It is the SEC’s practice to provide persons involved in investigations with notice of the general nature of the investigation, including the indicated violations, and give that person an opportunity to prepare and submit a statement before the staff makes a recommendation to the Commission regarding the commencement of an enforcement proceeding. The practice is known as the Wells Process – the notice is called a "Wells Notice" and the submission made by one under investigation is called a "Wells Submission."
The SEC’s Enforcement Manual provides:
The Wells notice should tell a person involved in an investigation that 1) the Division is considering recommending or intends to recommend that the Commission file an action or proceeding against them; 2) the potential violations at the heart of the recommendation; and 3) the person may submit arguments or evidence to the Division and the Commission regarding the recommendation and evidence.
One of the factors that the Division is required to consider under the Manual is "[w]hether the investigation is substantially complete as to the recipient of the Wells notice." As a result, the Wells Notice is often (although not always) sent after the SEC staff has completed its investigation.
Although the Wells Process was underway, the Commission continued to press Wells Fargo for the complete responses to the investigative subpoenas. According to the Commission, counsel for Wells Fargo stated "we assumed that the investigation was over and we had moved to a different phase," but added that they "might agree to ‘revisit the issue of any additional production’ after the staff considered the bank’s Wells submission."
On March 23, 2012, the SEC filed the subpoena enforcement action, seeking an order from the federal district court compelling Wells Fargo to comply with the Commission’s administrative subpoenas and to produce all responsive materials. The Commission made the arguments and cited the case law is often cites in seeking an order to enforce investigative subpoenas, arguing that: (1) it has the authority to conduct its investigation; (2) it has followed all procedural requirements in issuing the subpoenas; and (3) the evidence sought is relevant and material to the Commission’s investigation.
The Commission also addressed Wells Fargo’s assertion that the issuance of the Wells Notice as a reason for not responding. The Commission argued that the issuance of a Wells Notice does not terminate the Commission’s investigative power, citing a 2005 Oregon case, SEC v. Sears for the principle that "no regulation … precludes the [Commission] from continuing with or reopening its investigation following the issuance of a Wells notice." Indeed, in its Litigation Release regarding this matter, the SEC stated that "it is continuing to conduct a fact-finding inquiry and has not concluded that anyone has broken the law."
David Smyth, a former Assistant Director at the SEC, takes a careful look at these proceedings in his fine Cady Bar the Door Blog (here). Wells Fargo is not the only entity to litigate with the Commission over an unusual subpoena enforcement action recently – a discussion of the SEC’s case against Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai"), who is located overseas, is here, here and here.