There has been a noticeable uptick in companies disclosing “Wells Notices” as the SEC is bearing its enforcement teeth. Many of the recent notices target executive compensation, subprime and other areas related to financial services. The recent raft of Wells Notices (notices informing a company or individual that the SEC is considering civil charges, thereby affording the recipient the chance to mount a defense) coincides with general public sentiments and the SEC’s desire to burnish its enforcement bona fides.

Where the SEC wants to take issue with an executive’s compensation, a Wells Notice is the first step to this “clawback”. For example, Ian J. McCarthy, the CEO of Beazer Homes, recently received a Wells Notice. The Notice, according to a Beazer Home disclosure, states the SEC is seeking “certain incentive compensation and other amounts allegedly due" under Section 304 of the Sarbanes-Oxley Act of 2002. The disclosure further elaborates, “The Commission has taken the position in a recently filed civil action against the chief executive officer of another company that the Commission need not allege misconduct by a CEO to maintain such an action.” The related case is Securities and Exchange Commission v. Maynard L. Jenkins. Mr. McCarthy’s Notice brings up the issues of clawbacks, executive liability, and corporate disclosure.

On other fronts, the SEC continues to pursue actors in the subprime fiasco. The SEC had been probing a State Street unit since 2007 for inappropriately steering customers into risky subprime investments. The SEC issued a Wells notice to the company on June 25, 2009. Earlier this month and after discussions with the SEC and other regulatory authorities, State Street set aside an additional $250 million to cover legal claims arising from the subprime securities at the heart of the Wells Notice and other litigation. State Street has already doled out over $450 million of the $625 million in legal reserves it established in 2007 to offset legal claims arising from the subprime securities.

The recent number of Wells Notices isn’t exactly a surprise, and it does seem that financial services industry is particularly prone to receiving them. ICAP PLC, for example, an interdealer brokerage, received a Wells Notice on October 23, 2009. According to Reuters, ICAP’s Notice relates to an investigation into ICAP's fixed income business. According to ICAP’s 2009 Annual report, the investigation has been ongoing since 2005 and involves: ICAP and other interdealer brokers in government and fixed-income securities.

Wells Notices are, in and of themselves, a hot disclosure topic due, in part, to the liability that could stem from them. And this most recent wave of Wells Notices is all the piquant because of their intersection with other hot disclosure topics including executive compensation and subprime lending. We at Westlaw Business recognize that Wells Notices and related disclosures will remain a hot topic in the coming months and have compiled these resources to assist you, should your company be faced with a Wells Notice disclosure.