Wells Processes

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					                                American Bar Association
               Committee on Regulation of Futures and Derivative Instruments
                                     Winter Meeting
                                  San Juan, Puerto Rico
                              January 31 – February 2, 2008

    Comparing the “Wells Processes” of the SEC, CFTC, and FERC:
                  Is There Room for Improvement?
                                          Charles R. Mills
                                         Benjamin J. Oxley
                          Kirkpatrick & Lockhart Preston Gates Ellis LLP
                                         Washington, D.C.
                    / 202-778-9096

       Government‟s power to commence enforcement actions is one of its most consequential
because the mere commencement of such actions can destroy the lives, livelihoods and
businesses of the accused before the merits are ever decided. Yet, that august power is subject to
almost no independent checks and balances to prevent errors and abuse in any particular case.
The only independent check is the ultimate disposition of the merits by the judiciary. Few
individuals and small businesses, however, have the financial resources to effectively defend
through to a final judgment on the merits, and, even when they prevail on the merits, their
families, finances, livelihoods, businesses, and reputations might already have been irreparably

        The varying “Wells processes” of the Securities and Exchange Commission (“SEC”), the
Commodity Futures Trading Commission (“CFTC”), and the Federal Energy Regulatory
Commission (“FERC”), however, if faithfully and liberally employed, can provide a meaningful
measure of protection against unwarranted or ill-advised enforcement actions by enhancing the
quality of the information and analysis that informs prosecutorial judgments and discretion.
Through Wells submissions, Commissioners can directly receive the targets‟ best analysis about
the undesirable and unintended consequences of a contemplated enforcement action, factual
misconceptions, the weakness of the evidence, and legal infirmities, stated in ways and with a
conviction that even the best efforts of the Enforcement Division cannot be expected to provide.
Without a vibrant and robust Wells process, Commissioners deny themselves the opportunity to
make fully informed decisions.

  The Arthur Andersen case is a dramatic example–a global company was destroyed and the lives of its
employees severely harmed by the indictment of the company, which alleged misconduct by a few
individuals with respect to one audit client. The indictment itself virtually shut down the company. The
Supreme Court‟s reversal of the company‟s conviction years later could not repair the damage. Arthur
Andersen LLP v. United States, 544 U.S. 696 (2005).
        The enforcement culture of the SEC, which originated the Wells process over 35 years
ago, has long revered a robust Wells process as a cornerstone of its enforcement program. Much
of this owes to the fact that the Commissioners themselves originated and galvanized the process
out of a desire for a fair, informed and sophisticated enforcement decision-making process. A
recent speech made by SEC Commissioner Paul Atkins evidences the SEC‟s continuing
commitment to a strong Wells process:
               The Commission‟s 1970 memorandum [to assure a target‟s right to
               provide its view on a contemplated enforcement action] . . . is
               viewed as the foundation for what we now call the “Wells
               process.” * * * The Wells process was one of the many
               recommendations presented to the Commission by the Wells
               Committee in 1972. The Committee was a formal advisory
               committee created by Chairman William Casey and led by John A.
               Wells and former SEC Chairmen Manuel F. Cohen and Ralph
               Demmler. The SEC charged these lions of the SEC bar with
               undertaking a broad consideration of the SEC's enforcement
               policies and practices.* * * Although not all of the
               recommendations proposed by the Wells Committee in its report
               were adopted by the Commission, the Wells process remains the
               SEC's central due process mechanism in enforcement matters.2

      Further, Commissioner Atkins embraced the idea of appointing new advisory
committees, like the original Wells Committee, that might play “a key role” in the review and
improvement of SEC enforcement processes:

               I believe that advisory committees like the Wells Committee can
               play a key role in the review and improvement of SEC rules and
               processes, and in fact they have performed such a function many
               times over the years. I would welcome new committees to review
               the functions of our divisions and offices. Indeed, the contributions
               of advisory committees could be particularly valuable in helping us
               to analyze and make changes in response to the recommendations
               made by the various capital markets committees.3

        The Wells processes at the CFTC and the FERC have not had an equally strong tradition.
Over the years, the CFTC‟s process has unevenly waxed and waned with the shifting sensibilities
of the Enforcement Division. The CFTC certainly has had robust Wells processes in many
cases, but in other cases, even some cases involving new or unsettled legal ground, potential
targets have been denied the opportunity to make Wells submissions. In addition, there has not
been a pronounced interest in the Wells process expressed at the Commission level.

 Paul S. Atkins, Commissioner, U.S. Securities and Exchange Commission, Remarks Before the Security
Traders Association of New York 71st Annual Conference (Apr. 19, 2007), available at: (emphasis added).

        Although FERC‟s rules have long provided for a Wells process, it does not appear to
have been a particular focal point in the enforcement program. However, the early signs of its
new Enforcement program indicate that it is committed to a robust Wells process. With the
significant expansion of the scope and mission of FERC‟s enforcement program following the
grant of new anti-manipulation enforcement authority in the Energy Policy Act of 2005, a strong
Wells process will be essential for a sound enforcement program.

       The need for a fulsome, liberally granted Wells process at the CFTC and the FERC has
never been more acute. Those agencies increasingly are asserting their enforcement powers in
markets that they have not previously regulated and in which they have little practical
experience. Developing coherent, consistent and universal legal standards for these previously
unregulated markets is no simple task. These markets are subject to overlapping regulatory
schemes that create an undesirable potential for different and inconsistent legal standards.

         The legal precedent for “manipulation” under the Commodity Exchange Act 7 U.S.C. § 1
et seq., alone has been aptly described in a recent Senate Report as “confusing and
contradictory.”4 FERC‟s new general anti-fraud rules prohibiting manipulation are untested and,
in some important respects, not consistent with the elements for manipulation advocated by the
CFTC. Antitrust laws can and do apply, as well. Furthermore, Sections 811–814 of the recently
enacted Energy Independence and Security Act of 2007 vest yet another federal agency, the
Federal Trade Commission, with civil enforcement anti-manipulation authority “in connection
with the purchase or sale of crude gasoline or petroleum distillates at wholesale.” Finally, the
fact that the CFTC and FERC are intent on pursuing competing enforcement actions against the
same market participants for the same type of violation arising from the same alleged misconduct
further increases the complexity of the legal and policy issues involved.5

        Receiving the “defense perspective,” which typically is the perspective of market
participants, can be critical to the quality of enforcement decision-making as these agencies feel
their way through this legal morass. The participants in the enforcement process that might best

 Staff Report, Excessive Speculation in the Natural Gas Market, at 47, Permanent Subcommittee on
Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate (June 25, 2007).
  In 2007, the CFTC and FERC each filed separate enforcement actions against Amaranth Advisors, LLP
and Energy Transfer Partners, LP. See Order to Show Cause and Notice of Proposed Penalties, Amaranth
Advisors L.L.C., 120 FERC ¶ 61,085 (2007); U.S. Commodity Futures Trading Comm’n v. Amaranth
Advisors, L.L.C., No. 1:07-cv-06682 (S.D.N.Y. filed July 25, 2007); see also Order to Show Cause and
Notice of Proposed Penalties, Energy Transfer Partners, L.P., 120 FERC ¶ 61,086 (2007); U.S.
Commodity Futures Trading Comm’n v. Energy Transfer Partners, L.P., No. 3:07-cv-01301 (N.D. Texas
filed July 26, 2007).
These dueling actions palpably demonstrate each agency‟s claim to enforcement jurisdiction over the
same energy markets. In each case, one of the agencies asserted enforcement authority over a market that
historically it had little or no experience with. With respect to Amaranth, the FERC for the first time
asserted enforcement authority over trading on the NYMEX futures market. With respect to Energy
Transfer Partners, the CFTC asserted enforcement authority over natural gas cash transactions at the
Houston Ship Channel that had no – and the CFTC alleged no – consequential relationship to pricing of
exchange-traded futures, which historically has been the province of the CFTC‟s mission.

articulate the potentially deleterious consequences to the markets and to the public from a
contemplated enforcement action would be the prospective defendants themselves.

I.        The SEC’s Wells Process

        The SEC‟s Wells process began in 1970 with a Memorandum from the Commissioners to
all Division Directors and Office Heads that requested that the staff‟s memoranda to the
Commissioners recommending a particular enforcement action set forth separately “any
arguments or contentions as to either the facts or the law . . . advanced by the perspective
respondents and which countervail those made by the staff.”6 Thereafter, however, prospective
targets of potential charges were advised of the opportunity to file a written submission only
when defense counsel requested it, and, as a result, “veterans of the regulatory process filed
written rebuttals to contemplated charges while neophyte counsel never realized they had the
opportunity to present their client‟s position to the Commission before charging decisions were

        In 1972, SEC Chairman William Casey appointed a formal three-member Advisory
Committee on Enforcement Policies and Practices. The Committee subsequently became known
as the “Wells Committee,” for the name of its chairman, John A. Wells, a prominent securities
lawyer and founder of the law firm Rogers & Wells. The other Committee members were
former SEC Chairmen Manuel F. Cohen and Ralph H. Demmler.8 The Wells Committee sent
the SEC forty-three recommendations, which included an outline for the present-day policy of
accepting Wells submissions. The Wells Committee‟s recommendations included giving parties
under investigation (1) notice of the proposed charges of enforcement action; (2) opportunity to
respond to the proposed action with a written (or, later, oral) statement to be submitted to the
SEC along with the staff‟s recommendation for action; and (3) notice when the staff terminated
an investigation and decided not to recommend that the SEC bring an enforcement action against
the party.9

     The SEC responded to the Wells Committee in Release Number 5310 (later codified in
SEC Rule 5(c), 17 C.F.R. Part 202.5). It declined to adopt any of the recommendations formally,

 Memorandum from the Commission, to All Division Directors and Office Heads, re Procedures
Followed in the Institution of Enforcement Proceedings (Sept. 1, 1970) (reprinted in SEC v. National
Student Mktg. Corp, 68 F.R.D. 157, 165 (D.D.C.1975)).
  In re Initial Public Offering Securities Litigation, 2004 WL 60290, *1 (S.D.N.Y. 2004) (“As the Wells
Committee noted, as „a practical matter, only experienced practitioners who are aware of the opportunity
to present their client's side of the case have made general use of these procedures.‟ Arthur F. Mathews,
Effective Defense of SEC Investigations: Laying the Foundation for Successful Disposition of Subsequent
Civil, Administrative and Criminal Proceedings, 24 Emory L.J. 567, 618 n. 172 (1975) (quoting Report of
the Securities and Exchange Commission's Advisory Committee on Enforcement Policies and Practices
(SEC June 1, 1972)).”).
 Richard M. Phillips, et al., “SEC Investigations: The Heart of the SEC Enforcement Practice,” The
Securities Enforcement Manual –Tactics and Strategies, 167–168 (Kirkpatrick & Lockhart Preston Gates
Ellis LLP, 2d ed., American Bar Association 2007).
    Id., see also J. William Hicks, Civil Liabilities: Enforcement & Litigation, Vol. 17, § 2:29 (2006).

but incorporated some of them “on a strictly informal basis in accordance with procedures which
are now generally in effect.”10 The SEC acknowledged the importance of concerns raised by the
Advisory Committee, noting that the proposed procedure would “place before the Commission
prior to the authorization of an enforcement proceeding the contentions of both its staff and the
adverse party concerning the facts and circumstances which form the basis for the staff
recommendation,” thereby enabling the SEC to make a more informed decision as to whether to
support the staff recommendation.11 As one court has explained, “the Wells process was
implemented so that the Commission would have the opportunity to hear a defendant's
arguments before deciding whether to go forward with enforcement proceedings, in every
case.”12 Nonetheless, the SEC has from the outset recognized that the Wells process is not
required where there are “concerns about dissipation of assets, destruction of documents, or any
other situations which may require the Commission to act quickly to protect the public

           The SEC‟s Wells rule–SEC Rule 5(c)–states in relevant part:

                   Persons who become involved in preliminary or formal
                   investigations may, on their own initiative, submit a written
                   statement to the Commission setting forth their interests and position
                   in regard to the subject matter of the investigation. Upon request,
                   the staff, in its discretion, may advise such persons of the general
                   nature of the investigation, including the indicated violations as they
                   pertain to them, and the amount of time that may be available for
                   preparing and submitting a statement prior to the presentation of a
                   staff recommendation to the Commission for the commencement of
                   an administrative or injunction proceeding. * * * In the event a
                   recommendation for the commencement of an enforcement
                   proceeding is presented by the staff, any submissions by interested
                   persons will be forwarded to the Commission in conjunction with the
                   staff memorandum.

The U.S. Court of Appeals for the D.C. Circuit has construed this rule to mean that “parties at
risk of enforcement actions are entitled to make „Wells submissions‟ to the Commissioners,
presenting arguments why the Commissioners should reject the staff's recommendation for
enforcement, see 17 C.F.R. § 202.5(c), an entitlement obviously based on recognition that staff
advice is not authoritative.”14

     Securities Act Release No. 5310, 38 Fed. Reg. 5457 (Mar. 1, 1973) (“Release No. 5310”).
     In re Initial Public Offering Securities Litigation, 2004 WL 60290 at *1 (emphasis in original).
  William R. McLucas et al., A Practitioner’s Guide to the SEC’s Investigative and Enforcement Process,
70 TEMP. L. REV. 53, 112-113 (1997).
     WHX Corp. v. SEC, 362 F.3d 854, 860 (D.C. Cir. 2004).

        While the SEC‟s Rule secures the foundation for the process, the life blood of its success
lies with the wholehearted commitment of both the Commissioners and the Enforcement staff to
a process that enhances communication, analysis and understanding to the maximum extent
possible. The process begins at or close to the conclusion of an investigation. When an
enforcement recommendation is likely, the staff usually notifies counsel for the proposed
defendants by making a “Wells call.” On the Wells call, “the staff generally identifies the
provisions of the federal securities laws under which the client would be charged in the factual
and legal premises on which the changes would be based.” 15 In addition, the staff typically
“describes both the form that such an enforcement action would take e.g., a civil injunctive
action order administrative proceeding, and the relief the staff would propose that the
Commission seek.”16

        The Wells call is followed by a letter that formally notifies counsel of the statutes and
rules that the staff contends have been violated, the form of action the staff tends to recommend
to the Commission for such violations, and the relief the staff proposes to seek. A due date is set
for the Wells submission, often at least 2 to 3 weeks hence, but that deadline “is often negotiable
and subject to an extension as long as the staff believes that counsel is proceeding in good

        Typically, defense counsel will request and the staff will grant a “Wells meeting” with
counsel prior to the Wells submission. The Wells meeting frequently will include not only the
investigating attorneys, but their immediate supervisors, too. The staff will present “a more
detailed account of its case: their view of the relevant facts, the applicable law, and their theory
of any violations.”18

           Wells meetings have been described as follows:

                   The Wells meetings typically provide an opportunity for
                   counsel to conduct a dialogue with the staff in which both
                   parties exchange views. The staff tends to be most forthcoming
                   if defense counsel also is forthcoming. If counsel approaches
                   the meetings with the staff solely as a way of obtaining
                   discovery of the staff‟s case and is not forthcoming as to the
                   client's defense, he or she should not be surprised if the staff
                   also is less than forthcoming.


     Richard M. Phillips, et. al., The Securities Enforcement Manual – Tactics and Strategies, supra at 169.
     Id. at 171.
  In re Initial Public Offering Securities Litigation, 2004 WL 60290 at *3, citing Gary G. Lynch &
Katherine M. Choo, Wells Submissions: Effective Representation Following the Completion of the Staff's
Investigation, 703 PLI/Corp 373, 381-2 (Advanced Securities Law Workshop 1990).

              [I]n most instances, the staff will provide counsel with a
              sufficiently detailed account of its perception of the facts and
              applicable law and with a response to counsel's version of the
              facts and law so that counsel can determine the material issues
              to be addressed in the Wells Submission. In the event the staff
              attorney is less than forthcoming as to the basis of the staff's
              recommendation, counsel should not hesitate to speak with the
              more senior members of the staff assigned to the

       Thus, the Wells meeting is “less a forum for defense counsel to obtain discovery of the
Commission's case than it is a dialogue in which defense counsel can appreciate whether there
are any issues-factual, legal, or otherwise-that may affect the Commission's deliberative
process.”20 The exchange of information in a Wells meeting is critical to the success of the
SEC‟s process because it is the receipt of the staff‟s evidentiary and legal analysis that allows
defense counsel to prepare an informative and responsive Wells submission that can specifically
expose any evidentiary flaws or legal infirmities within the staff‟s proposed case, if they exist.
The exchange provides the foundation for both sides to better understand the differences between
them, which facilitates better decision-making and ultimately can provide the Commissioners
with the clearest understanding of and ability to evaluate the potential merits the staff‟s

        SEC Wells submissions are limited to 40 pages but may be single spaced, which typically
provides an ample length to address even complicated cases. The staff has granted relief from
this limitation in some cases. Following receipt of a Wells submission, the staff often will agree,
upon request, to meet with counsel to discuss the contemplated enforcement action. This process
has a certain amount of fluidity and can lead to multiple meetings, sometimes advancing up the
chain to increasingly senior staff members.21 Based on the course of discussions with the staff,
the staff will alter the factual and/or legal premises of its case and thereafter will permit the
potential defendant to submit a supplemental or revised Wells submission. Moreover, the Wells
process may cause the staff to undertake additional investigation in recognition of weaknesses in
the investigatory record.

  Richard M. Phillips, et. al., The Securities Enforcement Manual – Tactics and Strategies at 170–171.
In some cases, the Staff will exercise its discretion to permit counsel for targets to review parts or all of
the investigatory record, which can be exceedingly helpful in preparing an effective Wells submission. Id.
  In re Initial Public Offering Securities Litigation, 2004 WL 60290 at *3, citing Gary G. Lynch &
Katherine M. Choo, Wells Submissions: Effective Representation Following the Completion of the Staff's
Investigation, 703 PLI/Corp 373, 381-2 (Advanced Securities Law Workshop 1990).
  “It is almost axiomatic that the staff members directly responsible for the investigation frequently are
focused on „making their case.‟ Higher-level staff and staff from other SEC divisions and offices often
have greater perspective on significant legal and policy issues and on litigation risks that may affect the
decision whether or not to proceed.” Richard M. Phillips, et. al., The Securities Enforcement Manual –
Tactics and Strategies at 177.

        The Wells process provides a valuable service to the SEC Enforcement staff. Wells
submissions “may disclose defenses which the SEC can counter with other material or further
investigation, and weaknesses in the SEC‟s case which the staff may cure in those ways or by
shifting its theories.”22 The SEC also might be able to utilize material disclosed in a Wells
submission “for impeachment purposes or as an admission against interest” under the Federal
Rules of Evidence.23

        The Wells process, by better informing each side of the strengths and weaknesses of its
case, also can facilitate settlements. Potential defendants can glean from the process a “sense of
what is likely to be considered a reasonable settlement offer,”24 as can the Enforcement staff.
Administrative Law Judges have explicitly recognized that Wells submissions were created in
part to encourage settlement, with one judge noting that the purpose of the Wells process was “to
encourage submissions in the interest of resolving or settling the basic question whether
enforcement action should be instituted.”25

        The SEC process encourages staff discipline and diligence because Wells submissions
are reviewed with care at the Commission level, and the staff can expect probing questions from
Commissioners when Wells submissions raise important issues and make telling points.

II.       The Wells Process at the CFTC

        The CFTC‟s provision for a Wells process is highly similar in substance to the SEC‟s–on
paper. This process is detailed in “Appendix A – Informal Procedure Relating to the
Recommendation of Enforcement Proceedings,” to the CFTC‟s Rules Relating to Investigations,
17 C.F.R. part 11. Appendix A provides that the Division of Enforcement “in its discretion, may
inform persons who may be named in a proposed enforcement proceeding of the nature of the
allegations pertaining to them. The Division, in its discretion, may advise such persons that they
may submit a written statement prior to the consideration by the Commission of any staff
recommendation for the commencement of such proceeding.”26 Appendix A also requires that

     Steinberg & Ferrara, 25 SECURITIES PRAC. FED. & STATE ENFORCEMENT § 3:59 (2005).
  Kevin J. Harnisch & Natasha Colton, When the SEC Comes Knocking, BUS. LAW TODAY (Sept./Oct.
  In re Allied Stores Corporation and George C. Kern, Jr., 52 S.E.C. Docket 451, 1988 WL 357006
(Mar. 21, 1988).
  In 1986, the CFTC rejected a petition to adopt a rule guaranteeing Wells submissions to parties under
investigation. Alan R. Bromberg & Lewis D. Lowenfels, 5 BROMBERG & LOWENFELS ON SECURITIES
FRAUD §12:177. The proposed rule would have provided “that persons who are the subject of an
investigation by the Commission be given a timely opportunity, in advance of the institution of any
enforcement proceedings, to communicate their position to the Commission as to relevant matters of fact
and law.” Denial of Petition for Rulemaking and Adoption of Interim Informal Procedure Relating to the
Recommendation of Enforcement Proceedings, 51 Fed. Reg. 13548 (April 21, 1986). In its rejection, the
Commission noted that the proposed rule would be “unduly burdensome and would not be in the public
interest,” and was not required from a Constitutional or statutory standpoint to ensure due process rights.

any statement of facts included in the Submission must be sworn to by a person with personal
knowledge of such facts. In the event the Division recommends the commencement of an
enforcement action, “any written statement will be forwarded to the Commission if so

         The CFTC has explained that the procedure is intended “to make information available to
assist in the Division [of Enforcement]‟s determination to recommend [a proposed enforcement]
action and, ultimately, in the Commission‟s determination whether and in what manner it is in
the public interest to commence an enforcement proceeding.” 52 Fed. Reg. 19500, 1987 WL
135789 (1987). However, perhaps indicative of an undercurrent of antagonism to the Wells
process, Appendix A also declares that: “The Commission may, in its discretion, consider all,
any portion or none of the submission when it considers the staff‟s recommendation to
commence an enforcement proceeding.”

        Further, Appendix A sets a short deadline for a Wells submission of only 14 days after
the Division provides notice of its proposed allegations, an unnecessarily short time period in
which to prepare an important, detailed submission. Similarly, CFTC Wells submissions are
limited to 20 pages, double spaced, a length that can inadequate to address complex factual and
legal issues. The Division may give relief from the 20 page limit, but it does not appear that that
is often granted.

        While the CFTC‟s Appendix A formally provides for a Wells process, the objective of a
uniformly strong Wells process has not been a part of its Enforcement culture. It has been noted
that even when Wells submissions are accepted, such submissions have had little impact on the
CFTC‟s decisions, in large part because the Commission “has been composed entirely of non-
lawyers [who] have deferred to the recommendations of the Division of Enforcement concerning
enforcement proceedings.”28 More importantly, however, the CFTC Wells process has suffered
in a number of cases from a seeming aversion of the Enforcement staff to identify and share the
evidentiary basis for and legal theories that support a contemplated enforcement
recommendation. In a number of cases, the Division often effectively puts the target in the
position of having to make its case without the benefit of a fulsome disclosure by the Division.
If defense counsel lacks a relatively detailed knowledge and understanding of the Division‟s
evidentiary analysis and legal theory, counsel lacks the ability to prepare a Wells submission that
can serve as a targeted rebuttal, which typically is the essential value of a Wells submission.
Consequently, without a candid exchange of information about the evidence and legal theory
supporting the Division‟s case, the ability for a Wells submission to effectively inform the
Commission of any weaknesses with respect to that evidence or legal theory can be greatly

Id. Instead, the CFTC adopted an interim informal procedure, made “permanent but still informal” a year
later, permitting the CFTC enforcement division to request such submissions at its discretion. Id.
     17 C.F.R. part 11, Appendix A.
     Markham, 13A Commodities Reg. §22:6.

        The Division also has shown a strong aversion to providing reasonable access to
evidentiary materials. Such access could greatly aid the quality of the Wells process to scrutinize
the soundness of an Enforcement recommendation. Indeed, the Division has even limited access
to a witnesses‟ own investigative testimony. To receive a transcript, the Division requires a
witness and his or her counsel to agree that no person other than the witness and counsel may
review the transcript. The Division also requires that the witness may receive only one copy of
the transcript and has forbidden the making of additional copies. In circumstances where
multiple lawyers in the same firm may be involved in preparing a Wells submission and
analyzing the evidence or where the witness is located in a different city from his or her counsel,
the limitation to one copy of the transcript is highly burdensome to preparing an effective Wells
submission. It prevents multiple lawyers in the same case from working with the transcript at the
same time. It also effectively requires the witness (client) unnecessarily to travel to counsel‟s
office in order to read and discuss the transcript with counsel. Moreover, when counsel jointly
represents several witnesses, the Division‟s restrictions impinge on the right to counsel by
effectively preventing one client from being advised of all of the information available to counsel
that may affect that client‟s representation. There does not appear to be any public interest in the
Division‟s restrictions on transcripts. The SEC does not impose such restrictions in its
Enforcement program.

       All of the foregoing areas leave room for improvement in the CFTC‟s Wells process.
Apropos of Commissioner Atkins‟ remarks about the value of the formation of new advisory
committees to advise the SEC on its Enforcement process, the flaws in the CFTC‟s Wells
process suggest that a CFTC advisory committee to review its Enforcement processes could
provide a valuable service to all parties concerned--the Commissioners; the Division of
Enforcement; those subject to CFTC investigations, and the public.

III.   The Wells Process at the FERC

        The FERC‟s longstanding rules relating to investigations, at 18 C.F.R. §1b-18, and §1b-
19, expressly provide for a Wells process and are intended to be “similar to rules relating to
investigations used by other Federal agencies with regulatory mandates similar to those of the
Commission.” Rules Relating to Investigations, 43 Fed. Reg., 27174, 27175 (June 23, 1978)
(codified at 18 C.F.R. pt. 1b).

       The relevant provisions are as follows:

               § 1b.18 Right to submit statements.
               Any person may, at any time during the course of an investigation,
               submit documents, statements of facts or memoranda of law for the
               purpose of explaining said person's position or furnishing evidence
               which said person considers relevant regarding the matters under

               § 1b.19 Submissions.
               When the Investigating Officer determines it is appropriate in the
               interest of the proper administration of the law, he may inform any

                                               - 10 -
                  person that a recommendation may be made to the Commission
                  that said person be a defendant in a civil action to be brought by
                  the Commission. In such case, said person may submit a statement
                  of fact, argument, and/or memorandum of law, with such
                  supporting documentation as said person chooses showing why
                  said person should not be a defendant in any civil action brought
                  by the Commission. The investigating officer shall inform said
                  potential defendant of the date by which such statement may be
                  submitted to said officer, and if such statement is submitted by
                  such date, it shall be presented to the Commission together with
                  any recommendation for enforcement action by the office
                  responsible for the investigation.29

       These procedures are highly similar to the SEC‟s. Despite this similarity, however, there
have been calls to align the FERC procedure even more closely with that used by the SEC. In
2005, in response to a Notice of Proposed Rulemaking, in connection with the promulgation of
FERC‟s Market Behavior Rules, the Interstate Natural Gas Association of America (INGAA)

                  In addition, FERC should adopt a “Wells submission” rule like that
                  of the SEC. That process, set out in SEC regulation 5(c), 17
                  C.F.R. 202.5(c), generally entitles persons who are the subject of
                  an SEC investigation to receive from the enforcement staff at the
                  conclusion of an investigation notice of any charges and
                  enforcement action the SEC staff intends to recommend to the SEC
                  Commissioners for authorization and provides such persons an
                  opportunity to submit written statements and materials explaining
                  why enforcement action or a particular charge is unwarranted.
                  Such Wells submissions then are forwarded to the Commissioners
                  with the staff‟s enforcement recommendation. This process should
                  help to avoid unwarranted enforcement actions and often provides
                  a basis for both sides to better understand the facts and issues and
                  resolve them without litigation.

FERC, however, noted in its response, its belief that the existing process was adequate:

                  Turning to INGAA‟s suggestion that the Commission adopt what
                  is referred to as a „„Wells submission‟‟ to permit entities under
                  investigation to submit material to refute staff findings and
                  recommendations prior to Commission action, we find that no new
                  process need be adopted here. The Commission already has a
                  regulation in place that provides a company under investigation
                  with an opportunity to present its views, and staff‟s existing
                  practice is to present the company‟s views to the Commission as

     18 C.F.R. §§1b-18, 19.

                                                 - 11 -
                  part of any report or recommendation made by staff following an

        The FERC staff, however, appears to embrace a robust Wells process. The FERC
recently held a Conference on Enforcement Policy designed for the Commissioners to receive a
full range of views on FERC‟s enforcement program and areas where improvements could be
made. As part of that conference, the Office of Enforcement prepared its own “Report on
Enforcement” which appears to reflect a commitment to a strong Wells process:

                  If staff reaches the conclusion that a violation occurred, staff
                  shares its views, including both the relevant facts and its legal
                  theories, with the company. This may be done either orally or in
                  writing, and staff will provide the company with an opportunity to
                  respond and to furnish staff with any additional relevant
                  information before staff confirms its conclusion. This exchange
                  can result in new and relevant information being provided to staff,
                  upon which staff may reconsider its view of the matter. In some
                  situations, this process has resulted in staff closing an investigation
                  without seeking sanctions, or substantially altering staff‟s position
                  with respect to the appropriate sanction…. Where DOI [the Office
                  of Enforcement’s Division of Investigations] staff reaches a
                  conclusion that a violation has occurred but the company
                  continues to maintain that there is no violation, the company may
                  be given the opportunity to make a submission directly to the
                  Commission prior to action being taken against the company.
                  Only after completing a full exchange of facts and views with the
                  company does staff recommend that the Commission issue an
                  order to show cause.31

         It is hoped that, as FERC‟s new Enforcement program develops, this commitment to the
Wells process will become ingrained in its culture. A strong Wells process would appear to be
critical to achieving fairness in the context of FERC‟s particular enforcement procedures. FERC
commences enforcement actions with “show cause orders” that actually enter preliminary
findings of wrongdoing, prior to a formal response by the target. Before entering such findings,
Commissioners should embrace a process that gives them the opportunity to be as fully advised
of the evidence and laws as possible. In practice, the strength of the FERC‟s Wells process will
depend on the extent to which the staff will share with defense counsel the particulars of its
evidentiary and investigatory record and the legal theories supporting its enforcement

  Order No. 670, Prohibition of Energy Market Manipulation, 114 FERC ¶ 61,047 at ¶ 74, 71 Fed. Reg.
4244, 4256 (2006).
     FERC Report on Enforcement, page 20 (emphasis added) (footnotes omitted).

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