Wells, Wells, Wells

(May 2006) You see a legitimate trading strategy. Your regulator sees an anomaly, and quite possibly wrongdoing. What’s your next step?

If you believe the regulator has overlooked some key facts, or didn’t understand the facts it sifted through, then provide a Wells response outlining your version of events. (John Wells chaired an enforcement advisory committee at the U.S. Securities and Exchange Commission in the 1970s. He outlined the protocol the SEC later adopted whereby the commission intended to charge someone and give them the opportunity to make their case). Wells responses let advisors tell a provincial securities commission, or other regulator, that they reached the wrong conclusions regarding liability, or made mistakes about charging decisions.

If the regulator buys the story, it can lead to a case being dropped or a decision to not refer a matter to enforcement. After all, regulators have limited resources. If they can bring them to bear on bona fide bad actors — or at least focus on cases where the facts are less in dispute — they’ll be glad for the knowledge and the free pass to move on.

But they only help your cause if done properly. “Make sure you’ve done your fact finding and that what you say is accurate,” says Patrick Sullivan, with Taylor, Veinotte, Sullivan Barristers in Vancouver. An advisory firm planning to respond must consider what makes the particular situation different enough to encourage a regulator to just walk away. “You need to be able to say, ‘It’s not really an uneconomic trade, here are all the circumstances around it,’ ” he says. “The answer has to be factdriven and you’d better be certain of what you say.”

John Petch, who directs enforcement for the Alberta Securities Commission, says a response can come in the form of a legal argument, a factual argument, or both. “You can have something that looks downright incriminating but has a plausible explanation. That’s especially true on the institutional side,” he says. “A Wells response is an opportunity for a market participant to provide that explanation.”

Contrary to what some believe, the Wells process is not an opportunity for a firm, or the firm’s defence counsel, to reopen a debate with the enforcement staff about the merits of the case. “It’s a formal way of saying, ‘Now that we’ve completed our investigation, do you have any pitch you’d like to make?’” says Petch. In some cases, he adds, a firm may use Wells to show it received bad advice from a paid professional, such as a lawyer, and indicate it has since made a good-faith effort to rework operations. But, again, an advisor should only make such assertions if they have the facts to back them up. Be prepared to cough up documents that show what advice you were given, and talk openly about how any affected transactions can be unwound.

Joel Wiesenfeld, a lawyer with Torys in Toronto, agrees the Wells response is no time for advocacy. And don’t repeat information you know the regulator already has. “Sometimes it’s better to forgo the opportunity unless you’re going to bring something substantive to the table,”Wiesenfeld says. “Just putting something on paper without yielding the proper result can do more harm than good.”

A Wells response is a chance to explain a trading strategy the regulator doesn’t understand, or to point out site examiners failed to ask questions that would have gotten to the heart of the matter — and to then provide the facts to answer the questions the firm thinks should have been asked.

Petch notes most securities act contraventions are linked to liability, which means showing due diligence is always available as a defense. But the regulator can’t be put in a position to guess whether such diligence took place. “If the regulator doesn’t have all the information, then a Wells response can make a difference,” he says. “Parties can exonerate themselves, but they have to come forward with the information. They’re the ones with that knowledge.”

And sometimes silence is golden, notes Sullivan. “There are times when you know it’s going to enforcement, so why say anything?” See, it really is simple. If you think it will help, speak up. And if you think it won’t. . .

AER

(05/08/06)