Securities Law - Wells Notice

A Wells Notice advises a public company or a principal officer of a public company that the Securities & Exchange Commission is considering enforcement action because of some alleged violation of the Securities Laws. The company or individual is given a chance to respond and explain why enforcement action should not be brought. Not all Wells’ Notices lead to enforcement action. The term “Wells Notice” is named after Senator John Wells, who in 1972 chaired a committee to review SEC enforcement procedures.

Goldman Sachs received a Wells Notice in July 2009 in connection with the sale by Goldman Sachs of a synthetic collateralized debt obligation known as Abascus 2007-AC-1. The notice was not disclosed to shareholders or otherwise made public. Corporate lawyers believe that it depends on the facts whether a Wells Notice should be disclosed. Plaintiff’s lawyers generally take the position that such notices should be disclosed because they are material. In other words an SEC investigation has proceeded to the point that the staff is considering proceeding against the company or a principle officer. Two class actions have been filed so far against Goldman Sachs alleging, among other things, that the Wells Notice was concealed from investors.

According to an article in the Wall Street Journal dated April 10, 2010, five Senior Executives of Goldman Sachs Group Inc., including the firm’s co-general counsel, sold $65.3 million worth of stock after the firm received notice of possible fraud charges, which later drove its stock down 13%. There is no suggestion in the article that those executives had any knowledge of the Wells Notice.

The SEC has alleged in the well-publicized case against Goldman Sachs that the firm made misrepresentations and material omissions in the marketing in 2007 of a collateralized debt obligation known Abascus 2007 AC-1.

The public will learn much more about Wells Notices after there is further disclosures by either Goldman Sachs or the SEC.

Ira Schochet, a partner in the New York law firm of LaBaton, Sucharow LLP, responded to the argument that disclosing Wells Notices just repeats unproven allegations.
However, Schochet stated that if there is a substantial defense, issuers can disclose that as well. Schochet is also President of the National Associations of Shareholder and Consumer Attorneys, a group of about 100 law firms that represent investors and consumers.