United States: Richman v. Goldman Sachs Group – Disclosure of Wells Notices

When a public company is notified by the SEC that the SEC has initiated an investigation of potential securities law violations by the company, the company must confront challenging disclosure issues. Should the commencement of the investigation be disclosed? When? In what matter, and in what detail?

These issues can be even more sharply posed when the company receives a "Wells notice" in connection with the investigation. After the SEC staff has investigated a matter and believes that a violation of federal securities laws has occurred, it will often issue a "Wells notice" to the company and individuals involved, informing them that the staff intends to recommend to the Commission that an enforcement action be commenced against the company for violation of the securities laws. The recipient of the notice has the opportunity to make a "Wells submission" to the SEC, making the company's case as to why the proposed action should not be brought.

Prior to the receipt of a Wells notice, the company may believe that the staff will conclude after investigation that there is no basis for asserting that securities laws have been violated. Upon receipt of the Wells notice, however, the chances of an enforcement action being brought ordinarily will appear to have been raised significantly. As a result, in the past, public companies have often concluded that upon receipt of a Wells notice, the company should make public disclosure of this fact, including a description of the violations alleged in the notice.

The recent decision of the United States District Court for the Southern District of New York in Richman v. Goldman Sachs Group, Inc., et al., 10 Civ. 3461 (June 21, 2012), the first reported decision squarely addressing the issue of a public company's obligation to disclose receipt of a Wells notice, may now afford companies a basis for determining that disclosure of receipt of such a notice is not required.

The case involved an investigation commenced by the SEC in August 2008 into certain practices and disclosures engaged in by Goldman Sachs in connection with a synthetic collateralized debt obligation transaction closed in 2007, in which investors had ultimately lost around $1 billion. After Goldman's receipt of notice of the investigation and a subpoena, Goldman disclosed in its SEC filings that "it had received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products relating to subprime mortgages," and that Goldman was "cooperating with the requests." According to the opinion, this disclosure first appeared in Goldman's 10-K for 2008, filed January 27, 2009.

On July 29, 2009, the SEC issued a Wells notice to Goldman, notifying Goldman that the Enforcement Division staff intended to recommend an enforcement action, and providing Goldman with an opportunity to respond concerning the recommendation. On September 10 and September 25, 2009, Goldman provided its Wells submissions to the SEC and thereafter engaged in numerous meetings and discussions with the SEC. On April 16, 2010, the SEC filed an enforcement action against Goldman (presumably publicly disclosed either by the SEC or Goldman, or both, although the opinion does not make this clear), at which time Goldman's stock dropped approximately 13 percent. The case was ultimately settled for $550 million.

Goldman never disclosed its receipt of the Wells notice. Plaintiffs alleged this failure constituted a violation of section 10(b) of the Exchange Act and Rule 10b-5. Goldman moved to dismiss the complaint on the grounds that plaintiffs failed to plead an actionable misstatement or omission.

The court granted Goldman's motion to dismiss. (Other aspects of plaintiffs' complaint were not dismissed; these are beyond the scope of this memorandum.)

The court first analyzed the disclosure requirements imposed by Item 103 of Regulation S-K with regard to pending or threatened litigation. These requirements would have been applicable to each 10-Q and 10-K filed by Goldman after its receipt of the Wells notice, and a failure to comply with the requirements would support a claim that the omission was actionable in a private action under section 10(b) and Rule 10b-5. Under Item 103, a company is required to describe any "material pending legal proceedings" "known to be contemplated by governmental authorities." In the court's view, the whole point of the issuance of a Wells notice is to provide the SEC with an opportunity to hear a defendant's position before determining whether to bring an action. The process recognizes that the staff's advice on the matter is not "authoritative." Thus, receipt of a Wells notice does not necessarily indicate that litigation will be commenced. The court stated that while a Wells notice may be an indication that the staff of the agency is considering making a recommendation to the agency to bring an action, "that is well short of litigation." An investigation, held the court, is not a "pending legal proceeding" unless it reaches a stage when the agency or prosecutorial authority makes known that it is contemplating filing suit or bringing charges.

The court noted that no court had ever held that a company's failure to disclose a Wells notice constituted an actionable omission under section 10(b) or Rule 10b-5.

Thus, in this case, where as is customary the Wells notice indicated only that the staff was contemplating (but had not as yet made) a recommendation to the Commission that an action be commenced, and where the Commission had taken no action on the matter, the possible proceeding that might or might not be commenced in the future was not at that point a "material pending legal proceeding" "known to be contemplated by governmental authorities," and thus was not required to be disclosed under S-K Item 103. Although not expressly stated by the court, the reasoning indicates that either (i) the staff intention to recommend an enforcement action to the Commission (giving rise to the issuance of the Wells notice) was not a "contemplation" of a legal proceeding, or (ii) if it was a contemplation of a legal proceeding, it was not contemplation by "governmental authorities" within the meaning of Item 103, the staff evidently not being a "governmental authority" for this purpose. And, at the point of receipt by the company of the Wells notice, the Commission itself could not be said to be "contemplating" legal action. So characterized, this decision could well be relied upon in other situations, particularly since it was not based on any assessment by the court of the magnitude of the potential financial impact of the matter upon the company, a matter likely to differ greatly from case to case.

In addition, the court addressed claims that, aside from the express requirements of S-K Item 103, Goldman's failure to disclose receipt of the Wells notice was actionable because such disclosure was necessary to make other statements made by Goldman in the relevant period not misleading. The court characterized plaintiffs' argument as follows: Goldman's disclosures in its SEC filings about governmental investigations triggered a duty to disclose Goldman's subsequent receipt of the Wells notice, and by failing to make such disclosure, Goldman misled the public into erroneously concluding that no significant developments had occurred that made the investigation more likely to result in formal charges.

The court agreed that under section 10(b) and Rule 10b-5, when a corporation chooses to speak, even where it lacks a duty to speak, it has a duty to be both accurate and complete. However, the court held, the disclosures that were made about the existence of an investigation did not necessitate disclosure of the Wells notice. Disclosure of the Wells notice, the court held, was not necessary to prevent the disclosures concerning the existence of an investigation from being materially misleading. At best, the court stated, a Wells notice "indicates not litigation but only the desire of the Enforcement staff to move forward, which it has no power to effectuate. This contingency need not be disclosed."

It bears emphasis that the disclosure framework presented in this case reflected an initial generalized disclosure of the commencement of an investigation. It is not clear how heavily the decision could be relied upon to justify nondisclosure of receipt of a Wells notice where no disclosure whatsoever had been made about an investigation. Also, there may be public relations or other reasons for determining to make disclosure of a Wells notice. Or, if the company is at the time of receipt of the Wells notice engaged in a distribution or repurchase of its securities, that may reduce the precedential value of the decision.

However, as a decision by a court that is highly respected in federal securities matters and that involves a high-profile party, this case may in appropriate circumstances afford a company a degree of comfort previously unavailable in determining not to make public disclosure of receipt of a Wells notice.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions