A Wells Notice informs a company that SEC staff is recommending that federal securities law charges be brought against the company. The notice does not serve as a formal charge and it does not impose any duty on SEC staff to actually follow through with the recommendation. While the staff attorneys may recommend that the SEC commissioners file charges, the power to charge individuals is reserved solely to the five commissioners.
The plaintiffs in the case were shareholders of the defendant corporation. Their complaint was based on the defendant's receipt of a Wells Notice arising out of the defendant's 2007 underwriting of a collateralized debt obligation (CDO) transaction known as "Abacus." The plaintiffs claimed that the defendant allowed one of its clients to handpick risky assets for the CDO, knowing that the client would eventually assume a large short position in the transaction. The defendant's clients invested in Abacus, which eventually returned a loss of $1 billion - the same amount that the allegedly favored client gained due to its short position.
The SEC notified the defendant of its investigation into the Abacus transaction in August 2008 and the firm received the Wells Notice on July 29, 2009. Although the defendant disclosed the existence of an investigation in its SEC filings, it never mentioned its receipt of the Wells Notice.
The plaintiffs alleged that the defendant breached its duty to disclose material information to investors, alleging that:
the defendant was obligated to disclose its receipt of the Wells Notice, because failing to do so would make its disclosure that it was only being investigated misleading
the regulatory duty to disclose the receipt of a Wells Notice to FINRA triggered a duty to disclose for Rule 10b-5 purposes
The court found both claims lacking and granted the defendant's motion to dismiss the claims arising from the Wells Notice. First, the court found that a Wells Notice merely informs a company that SEC staff has a "desire" to bring charges - not that charges are actually being brought. Second, the court relied on precedent and held that a securities fraud claim may not be based on a regulatory violation if such regulation does not provide for a private right of action.
Richman v. Goldman Sachs Group, Inc., et al., No. 1:10-cv-03461-PAC, slip op. (S.D.N.Y. June 21, 2012)