WSJ: SEC Drops 20% of Probes After 'Wells Notice'In Two-Year Period, 159 of 797 Investigations of Individuals Ended Once Warning
By JEAN EAGLESHAM
Oct. 9, 2013 8:02 p.m. ET
About 20% of the people who were warned over a two-year period that they might be sued by U.S. regulators for allegedly violating securities law ended up not facing charges, government figures show.
The previously undisclosed numbers track the Securities and Exchange Commission's use of a powerful enforcement tool—called a Wells notice—to alert people that the agency might take enforcement action.
In the two-year period that ended in September 2012, 159 of the 797 Wells notices issued went nowhere or stalled, according to the SEC. The agency closed those investigations without taking any action against those individuals. The figures were disclosed to The Wall Street Journal in response to a request under the Freedom of Information Act.
Enlarge Image
SEC Chairman Mary Jo White vows to toughen agency's stance. Getty Images
The SEC didn't keep a tally of Wells notices before 2010, according to SEC officials, so a comparison with previous periods isn't possible.
The agency must decide whether to plow ahead with enforcement action within 180 days of issuing a Wells notice, unless SEC enforcement directors issue a formal extension of the deadline.
Wells notices are named after the lawyer who led an SEC advisory panel on enforcement procedures in 1972. The notices, which aren't used in all cases, disclose the specific charges that enforcement officials are considering recommending to the SEC's commissioners for approval.
Companies and people targeted by Wells notices can respond with a "submission" detailing why they believe the SEC should drop or water down its civil case.
An SEC spokesman said the numbers "confirm that when we invite submissions, we carefully consider the evidence and arguments presented to us." The overall Wells process "is one of the avenues by which we can obtain useful information to make appropriate charging decisions," he added.
SEC Chairman Mary Jo White, a former federal prosecutor who took over in April, has repeatedly vowed to toughen the agency's enforcement stance. She said at a securities lawyers conference Wednesday that the SEC will pursue "even the smallest infractions."
Some outsiders said the 20% abandonment rate is surprisingly high given the SEC stockpiles significant ammunition before issuing a Wells notice.
"This shows that individuals…are more successful than previously thought in persuading the SEC not to pursue an enforcement action," said Erik Gerding, a law professor at the University of Colorado.
Stanford University law professor Joseph Grundfest said he expected the percentage to be lower than 20% based on what he saw as an SEC commissioner from 1985 to 1990.
Stephen Crimmins, a partner at law firm K&L Gates LLP who was the SEC enforcement unit's deputy chief litigation counsel for about eight years, said the numbers could signal to targets of current and future investigations that "it's worth their while to at least try to persuade the SEC to change its mind."
Some longtime SEC officials said privately that they believe the percentage of people who successfully avoid being charged with wrongdoing after receiving a Wells notice is smaller than it was before 2010.
Former SEC Chairman Mary Schapiro said the recent numbers show "the system is working." She added, "It's exactly what the Wells notices are intended to do: to bring out someone's best defense before a decision is made on whether to charge them."
In the same two-year period, the SEC also sent Wells notices to 387 companies and other entities. The agency's response to the public-records request didn't specify how many of those cases were closed without further enforcement action.
Individual targets of SEC investigations who weren't later charged include Goldman Sachs Group Inc. trader Jonathan Egol, former Freddie Mac FMCC -1.01% finance chief Anthony Piszel and Netflix Inc. NFLX +1.82% Chief Executive Reed Hastings.
Mr. Hastings faced scrutiny by the SEC over a posting on his personal Facebook Inc. page about customer usage of the streaming-video service. Mr. Egol was snared in the SEC's probe of a mortgage-bond deal called Abacus 2007-AC1, and the agency warned Mr. Piszel that he might be sued over what Freddie Mac told investors about its exposure to subprime mortgages.
Spokesmen for Goldman and Netflix declined to comment on behalf of Messrs. Egol and Hastings.
Publicly traded companies on the receiving end of a Wells notice alleging wrongdoing by the company or top executives usually disclose the formal warning to investors. Brokers and certain other finance-industry employees are required to publicly disclose a Wells notice against them.
Such disclosures can move stock prices and threaten careers. Mr. Piszel was finance chief at CoreLogic Inc., CLGX +0.07% an Irvine, Calif., data provider, in February 2011 when he received a Wells notice related to his previous post at Freddie Mac. About 10 months later, the SEC filed civil fraud lawsuits against three former Freddie Mac executives, but not Mr. Piszel.
The three defendants have denied wrongdoing.
CoreLogic disclosed the Wells notice in a securities filing that also told investors it "would be in the best interests of the company" for Mr. Piszel to resign. CoreLogic said its board and Mr. Piszel mutually agreed with the decision, which would allow him to focus on responding to the Wells notice.
In April 2012, ProSight Specialty Insurance Group Inc. said it hired Mr. Piszel as chief financial officer of the closely held Morristown, N.J.-based insurer.
Mr. Piszel and ProSight didn't respond to requests for comment.
A spokeswoman for CoreLogic declined to comment.
Netflix refused to enter settlement talks with the SEC, arguing Mr. Hastings had done nothing wrong.
In April, the SEC said it wouldn't pursue civil charges against Mr. Hastings.
The agency also sanctioned the use of social-media sites such as Facebook and Twitter Inc. for market-moving corporate news.
Write to Jean Eaglesham at jean.eaglesham@wsj.com
http://online.wsj.com/news/articles/SB10001424052702304500404579125633137423664
By JEAN EAGLESHAM
Oct. 9, 2013 8:02 p.m. ET
About 20% of the people who were warned over a two-year period that they might be sued by U.S. regulators for allegedly violating securities law ended up not facing charges, government figures show.
The previously undisclosed numbers track the Securities and Exchange Commission's use of a powerful enforcement tool—called a Wells notice—to alert people that the agency might take enforcement action.
In the two-year period that ended in September 2012, 159 of the 797 Wells notices issued went nowhere or stalled, according to the SEC. The agency closed those investigations without taking any action against those individuals. The figures were disclosed to The Wall Street Journal in response to a request under the Freedom of Information Act.
Enlarge Image
SEC Chairman Mary Jo White vows to toughen agency's stance. Getty Images
The SEC didn't keep a tally of Wells notices before 2010, according to SEC officials, so a comparison with previous periods isn't possible.
The agency must decide whether to plow ahead with enforcement action within 180 days of issuing a Wells notice, unless SEC enforcement directors issue a formal extension of the deadline.
Wells notices are named after the lawyer who led an SEC advisory panel on enforcement procedures in 1972. The notices, which aren't used in all cases, disclose the specific charges that enforcement officials are considering recommending to the SEC's commissioners for approval.
Companies and people targeted by Wells notices can respond with a "submission" detailing why they believe the SEC should drop or water down its civil case.
An SEC spokesman said the numbers "confirm that when we invite submissions, we carefully consider the evidence and arguments presented to us." The overall Wells process "is one of the avenues by which we can obtain useful information to make appropriate charging decisions," he added.
SEC Chairman Mary Jo White, a former federal prosecutor who took over in April, has repeatedly vowed to toughen the agency's enforcement stance. She said at a securities lawyers conference Wednesday that the SEC will pursue "even the smallest infractions."
Some outsiders said the 20% abandonment rate is surprisingly high given the SEC stockpiles significant ammunition before issuing a Wells notice.
"This shows that individuals…are more successful than previously thought in persuading the SEC not to pursue an enforcement action," said Erik Gerding, a law professor at the University of Colorado.
Stanford University law professor Joseph Grundfest said he expected the percentage to be lower than 20% based on what he saw as an SEC commissioner from 1985 to 1990.
Stephen Crimmins, a partner at law firm K&L Gates LLP who was the SEC enforcement unit's deputy chief litigation counsel for about eight years, said the numbers could signal to targets of current and future investigations that "it's worth their while to at least try to persuade the SEC to change its mind."
Some longtime SEC officials said privately that they believe the percentage of people who successfully avoid being charged with wrongdoing after receiving a Wells notice is smaller than it was before 2010.
Former SEC Chairman Mary Schapiro said the recent numbers show "the system is working." She added, "It's exactly what the Wells notices are intended to do: to bring out someone's best defense before a decision is made on whether to charge them."
In the same two-year period, the SEC also sent Wells notices to 387 companies and other entities. The agency's response to the public-records request didn't specify how many of those cases were closed without further enforcement action.
Individual targets of SEC investigations who weren't later charged include Goldman Sachs Group Inc. trader Jonathan Egol, former Freddie Mac FMCC -1.01% finance chief Anthony Piszel and Netflix Inc. NFLX +1.82% Chief Executive Reed Hastings.
Mr. Hastings faced scrutiny by the SEC over a posting on his personal Facebook Inc. page about customer usage of the streaming-video service. Mr. Egol was snared in the SEC's probe of a mortgage-bond deal called Abacus 2007-AC1, and the agency warned Mr. Piszel that he might be sued over what Freddie Mac told investors about its exposure to subprime mortgages.
Spokesmen for Goldman and Netflix declined to comment on behalf of Messrs. Egol and Hastings.
Publicly traded companies on the receiving end of a Wells notice alleging wrongdoing by the company or top executives usually disclose the formal warning to investors. Brokers and certain other finance-industry employees are required to publicly disclose a Wells notice against them.
Such disclosures can move stock prices and threaten careers. Mr. Piszel was finance chief at CoreLogic Inc., CLGX +0.07% an Irvine, Calif., data provider, in February 2011 when he received a Wells notice related to his previous post at Freddie Mac. About 10 months later, the SEC filed civil fraud lawsuits against three former Freddie Mac executives, but not Mr. Piszel.
The three defendants have denied wrongdoing.
CoreLogic disclosed the Wells notice in a securities filing that also told investors it "would be in the best interests of the company" for Mr. Piszel to resign. CoreLogic said its board and Mr. Piszel mutually agreed with the decision, which would allow him to focus on responding to the Wells notice.
In April 2012, ProSight Specialty Insurance Group Inc. said it hired Mr. Piszel as chief financial officer of the closely held Morristown, N.J.-based insurer.
Mr. Piszel and ProSight didn't respond to requests for comment.
A spokeswoman for CoreLogic declined to comment.
Netflix refused to enter settlement talks with the SEC, arguing Mr. Hastings had done nothing wrong.
In April, the SEC said it wouldn't pursue civil charges against Mr. Hastings.
The agency also sanctioned the use of social-media sites such as Facebook and Twitter Inc. for market-moving corporate news.
Write to Jean Eaglesham at jean.eaglesham@wsj.com
http://online.wsj.com/news/articles/SB10001424052702304500404579125633137423664