Michael R. MacPhail is of counsel with Holland & Hart’s Government Investigations and White Collar Defense group.
The issuance of a Wells notice presents defense counsel with an opportunity to learn about the proposed case against their client. Granting access to the entire investigative file (including the testimony transcripts of other witnesses) is a key part of the Wells process, since it permits defense counsel to more intelligently advise clients of the risks of possible enforcement action, facilitates the preparation of more focused and helpful Wells submissions, and encourages better and quicker resolutions of proposed enforcement actions. Yet the standards governing whether to grant such access, and their application by the staff, are arbitrary and capricious.
The Division of Enforcement’s Enforcement Manual (commonly known as the “Red Book”), now available on the SEC’s website, states:
On a case-by-case basis, it is within the staff’s discretion to allow the recipient of the [Wells] notice to review non-privileged portions of the investigative file . . . . In considering a request for access . . . the staff should keep in mind:
- whether access would be a productive way for both the staff and the recipient of the Wells notice to gauge the strength of the evidence that forms the basis for the staff’s recommendations;
- whether the prospective defendant or respondent invoked his Fifth Amendment rights or otherwise refused to testify during the investigation; and
- the stage of the investigation with regard to other persons or witnesses, including whether certain witnesses have yet to provide testimony.
Id. at § 2.4. Taken as a whole, this standard is severely flawed and gives the staff excessive discretion. The Red Book does not indicate whether all three of the factors must be satisfied, whether a “balancing test” should be applied, or which factors are most important.
The second and third factors usually favor granting access. Although the frequency of Fifth Amendment assertions is unknown, it is my belief that only a minority of eventual defendants/respondents failed to give substantive testimony on this basis. Further, Wells notices usually are issued at the conclusion of the staff’s investigation, meaning no further testimony is anticipated.
Assuming the second and third factors point towards granting access, the first factor is of paramount importance. Unfortunately, this factor is particularly broad and subjective so as to be nearly meaningless. It allows individual staff members to decide whether they believe allowing defense counsel to see their evidence is “productive,” without defining this term or stating from whose perspective productivity should be assessed. Given the critical importance of this issue, the staff should not have discretion to deny access based on application of such an imprecise and subjective standard. Allowing “open file” pre-litigation discovery is consistent with the equitable objectives of the Wells process and therefore should be presumed useful and productive, in the absence of rare circumstances.
Not only are the standards defective, their application by the Enforcement staff is arbitrary and capricious. Based on my investigation, it appears that eight of the eleven regional offices, and certain Associate Director groups within the Home Office, are willing to grant access to the entire investigative file during the Wells process, or at a minimum, disclose key evidence supporting proposed charges, unless there is a compelling reason not to do so. In contrast, the New York, Philadelphia and Los Angeles regional offices, and certain other Associate Director groups, routinely deny such access, presumably based on the presumption that granting access would not be “productive.” These offices apparently have adopted a “blanket denial” approach that ignores the Red Book standards.
The important decision whether to grant access should be governed by fair standards that are fairly applied. The amount of process extended to a prospective defendant or respondent should not depend on which office conducted the investigation. The SEC should require staff members to articulate in their enforcement recommendations whether they decided to deny access, and if so, explain the reasons for such denial. Defense lawyers whose clients are denied access should raise this issue in their Wells submissions. I believe the full Commission will require changes to relevant Enforcement policy once it becomes aware of these flaws and inconsistencies.
