Editor’s NotE: CommuNity BaNks’ Capital rEquirEmENtsSteven A. Meyerowitz

kEEp Calm aNd BasEl oN: Capital rEquirEmENts for CommuNity BaNksJohn S. Servidio, Donald J. Gibson Jr., and Ryan D. Taylor

“a talE of thrEE ZoNEs” — promisEs aNd pitfalls of thrEE fiNaNCial ExpErimENtal ZoNEs iN ChiNaShen Wei

italy’s NEw rulEs to fostEr aCCEss to mEdium/loNg-tErm fiNaNCiNgVania Petrella, Claudio Di Falco, Paola Albano, and Bernardo Massella Ducci Teri

uNdErstaNdiNg aNd NavigatiNg thE usE of prE-wElls NotiCE whitE papErs iN formal sEC iNvEstigatioNsRonald S. Betman and Scott M. Ahmad

BEst praCtiCEs for maNagEd doCumENt rEviEw iN rmBs mattErsAndrew Goodman and Philip Algieri

fifth CirCuit providEs a rEmiNdEr that laNguagE providiNg for a prEpaymENt prEmium must BE uNamBiguousRichard F. Hahn, My Chi To, and Shannon Rose Selden

BaNkiNg BriEfsTerence G. Banich

aN a.s. pratt & soNs puBliCatioN may 2014

Editor-iN-ChiEfSteven A. Meyerowitz

President, Meyerowitz Communications Inc.

Board of Editors

Paul BarronProfessor of LawTulane Univ. School of Law

George BrandonPartner, Squire, Sanders &

Dempsey LLP

Barkley ClarkPartner, Stinson Morrison Hecker

LLP

John F. DolanProfessor of LawWayne State Univ. Law School

David F. Freeman, Jr.Partner, Arnold & Porter LLP

Thomas J. Hall Partner, Chadbourne & Parke

LLP

Jeremy W. HochbergCounsel, Wilmer Cutler Pickering

Hale and Dorr LLP

Kirk D. JensenPartner, BuckleySandler LLP

Satish M. KiniPartner, Debevoise & Plimpton

LLP

Douglas LandyPartner, Milbank, Tweed, Hadley

& McCloy LLP

Paul L. LeeOf Counsel, Debevoise &

Plimpton LLP

Jonathan R. Macey Professor of Law Yale Law School

Martin MayerThe Brookings Institution

Stephen J. NewmanPartner, Stroock & Stroock &

Lavan LLP

Sarah L. ReidPartner, Kelley Drye & Warren

LLP

Heath P. TarbertPartner, Allen & Overy LLP

Stephen B. Weissman Partner, Rivkin Radler LLP

Elizabeth C. YenPartner, Hudson Cook, LLP

Bankruptcy for BankersHoward SeifePartner, Chadbourne & Parke

LLP

Regional Banking OutlookJames F. BauerleKeevican Weiss Bauerle & Hirsch

LLC

RecapitalizationsChristopher J. ZinskiPartner, Schiff Hardin LLP

Banking BriefsTerence G. BanichMember, Shaw Fishman Glantz

& Towbin LLC

Intellectual PropertyStephen T. SchreinerPartner, Goodwin Procter LLP

The Banking Law JournaL (ISBN 978-0-76987-878-2) (USPS 003-160) is published ten times a year by Matthew Bender & Company, Inc. Periodicals Postage Paid at Washington, D.C., and at additional mailing offices. Copyright 2014 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. No part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any informa-tion retrieval system without the written permission of the copyright owner. For customer support, please contact LexisNexis Matthew Bender, 1275 Broadway, Albany, NY 12204 or e-mail Customer.Support@lexisnexis.com. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Mey-erowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, 631.331.3908 (phone) / 631.331.3664 (fax). Material for publication is welcomed — articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and au-thoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher.POSTMASTER: Send address changes to The Banking Law JournaL LexisNexis Matthew Bender, 121 Chanlon Road, North Building, New Providence, NJ 07974.

444

Understanding and navigating the Use of Pre-Wells notice White PaPers in formal

sec investigations

RonAlD S. BeTMAn AnD SCoTT M. AHMAD

In this article, the authors discuss an increasing trend in formal SEC investigations — the use of positional “white papers” as part of the pre-Wells

Notice investigation process.

This article discusses an increasing trend in formal Securities and Ex-change Commission (“SEC”) investigations — the use of positional “white papers” as part of the pre-Wells Notice investigation process.1

A “white paper,” in the context of an SEC civil investigation, is a detailed position paper submitted to the SEC by a participant in the investigation2 ad-vocating why the SEC should take no action against the participant. Prior to this fairly recent development, investigation participants only made written submissions to the SEC after receiving a Wells Notice, and were governed by the procedural and temporal rules regarding written Wells submissions. As this article explains, white papers can be very resource intensive, but provide a useful mechanism to avoid a Wells Notice in the first place. However, as with Wells submissions, practitioners should fully understand all the poten-

Ronald S. Betman is a partner in the Chicago office of Winston & Strawn llP, focusing his practice on securities litigation and SeC investigations, as well as other class action and complex litigation. Scott Ahmad is a litigation associate at the firm, and works on securities matters as well as a broad range of other commercial disputes. The authors may be contacted at rbetman@winston.com and sahmad@winston.com, respectively

Published by Matthew Bender & Company, Inc. in the May 2014 issue of The Banking Law Journal. Copyright © 2014 Reed elsevier Properties SA.

445

UnDeRSTAnDInG AnD nAVIGATInG THe USe oF PRe-WellS noTICe WHITe PAPeRS

tial implications — both positive and negative — before participating in the voluntary submission of a white paper to the SEC.

thE iNCrEasiNg trENd

In the recent past, the SEC in formal investigations tended to closely follow the Wells process outlined in the SEC Enforcement Manual.3 Under the Wells process, in the course of a formal investigation, an investigation participant is issued a notice of alleged securities violations, and the SEC “in its discretion, may advise such persons of…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.”4 The SEC retains “discretion to allow the recipient of the notice to review portions of the investigative file that are not privileged.”5 Further, Wells Notices attract significant media at-tention if disclosed, and can spur immediate stock price and sales declines as well as investor and consumer disdain.6 With the SEC’s encouragement, investigation participants are becoming more active in the pre-Wells investigation process through the submission of written “white papers.”7 It is not clear whether this shift is part of a formal mandate or just simply favored by current senior enforcement officials. From our experience, there are at least three factors at play:

sEC’s Broad Enforcement authority

The SEC’s broad civil enforcement powers are well-established.8 Perhaps recognizing the severe negative effects of a Wells Notice, the SEC could be al-lowing or even affirmatively asking participants to take control of their own fate earlier in the process. Recent empirical data reported in the Wall Street Journal has suggested that approximately 80 percent of Wells recipients are eventually prosecuted by the SEC.9 Thus, avoiding a Wells Notice in the first place is of critical importance for potential participants in SEC investigations.

THe BAnKInG lAW JoURnAl

446

speedy prosecution statutes

Some recent statutes require speedy prosecutions after issuance of a Wells Notice. For example, Section 929U(a) of the Dodd-Frank Act specifies that within 180 days of providing a Wells notification to any person, “the Com-mission staff shall” either bring an action against that person or provide writ-ten notice to the Director of the Division of Enforcement of its intent not to do so.”10 Though the speedy prosecution provisions usually allow the SEC to petition for extensions, they still bring a sense of urgency to the filing of an enforcement action.

aiding the investigative process

Active involvement in the formal investigation process by the partici-pants aids the SEC’s investigative efforts, including identifying other poten-tial participants. Indeed, if the SEC issues a Wells Notice, its investigation is supposed to be “substantially complete.”11

kEy distiNguishiNg fEaturEs of thE whitE papEr proCEss

White papers differ from Wells submissions in several material and note-worthy ways:

Timing

Aside from occurring before a Wells Notice is issued, white papers are submitted under deadlines negotiated with the SEC staff. As explained above, once the SEC issues a Wells Notice, there is pressure to move forward as expeditiously as possible. Accordingly, white papers can often be submit-ted under less time-sensitive deadlines.

Page Limits

Wells submissions are generally limited to 40 pages, excluding exhibits.12 White papers, on the other hand, can have very lengthy page limits or no pages limits at all.

447

UnDeRSTAnDInG AnD nAVIGATInG THe USe oF PRe-WellS noTICe WHITe PAPeRS

Iterative Process

After a Wells notice is issued, the recipient can make its Wells submission and request a meeting with the SEC to discuss the charges. The white paper process, by comparison, can be much more iterative. After the initial white paper submission, the SEC may have follow-up questions that require further submissions, and may also allow the participant to appear before SEC staff members and make oral presentations.

pros & CoNs

The white paper process is, generally speaking, voluntary. Agreeing to submit a white paper may be advantageous for some clients, and not for oth-ers. Accordingly, the pros and cons should be understood. The pros include:

Less Publicity

The case law is still evolving on disclosure rules relating to SEC inves-tigations. Recently, a federal court in New York held that Goldman Sachs did not violate the federal securities laws by failing to disclose its receipt of a Wells Notice in connection with the SEC’s investigation of Goldman’s spon-sorship of a synthetic CDO transaction.13 Still, Wells Notices in high profile investigations are sometimes voluntarily disclosed or otherwise reported on by the media,14 whereas the white paper process is less public. Indeed, public searches on Internet search engines reveal very little coverage or mention of white papers.

Ability to Explain Complex Facts

The white paper process allows the participant to highlight exonerating facts and legal positions. This is especially helpful in very complex or esoteric securities areas, where the white paper affords the participant the opportunity to address the SEC staff ’s legal and factual position head-on, allowing for market context and pragmatic flavor that could lead the SEC to a differing view of the case.

THe BAnKInG lAW JoURnAl

448

Better Sense of What You Are Up Against

The SEC staff may ask very specific questions about its concerns in terms of the participant’s legal and factual positions. These questions can give the participant a better sense of the scope and direction of the investigation. Also, generally speaking, there is no affirmative right during a formal investigation to gain access to record evidence in the SEC’s investigative file. White paper participants, in connection with their cooperation in the SEC’s investigation, may potentially seek access to portions of the SEC’s investigative file such as non-privileged testimony and documents of other market participants. The cons include:

Cost

White papers can be very lengthy and can include appendices and expert reports. Accordingly, the white paper process can be very costly, in terms of time, legal fees, and human capital costs.

Cooperation

The white paper process places an increased burden on the participant to be very cooperative and forthcoming. That may not necessarily be ideal for clients with difficult witnesses and “questionable” documents or clients just hoping to adopt a damage-control strategy.

Moving Target/Iterative Process

The iterative nature of the process can lead to many follow-up and clari-fication questions. And, more significantly, practitioners should be careful to neither assume nor believe that their submissions will convince the SEC staff to go away. Rather, the SEC staff could use the white paper to refine its thinking about legal and factual issues, and potentially strengthen its positions.

Bound by Positions

As with Wells submissions, the SEC’s position may be that statements made in white paper submissions are admissible as admissions against interest or for impeachment purposes in later proceedings.15 The case law in still evolv-

449

UnDeRSTAnDInG AnD nAVIGATInG THe USe oF PRe-WellS noTICe WHITe PAPeRS

ing in this area. In In re Initial Public Offering Securities Litigation,16 a federal district court ruled that Wells submissions — even if viewed as settlement ma-terials — can be admissible if used for purposes other than proving direct liabil-ity, including showing bias or motive, or for impeachment purposes.17 Based on the foregoing, the cautious practitioner may try to bargain with the SEC staff to reach an understanding that all materials are to be submitted for settle-ment purposes only and without prejudice. But participants should anticipate the possibility that: (1) any statements made in a white paper could be used in later proceedings to show bias or motive, or for impeachment purposes at a minimum; (2) could likely be used as admissions against interest and direct proof of liability as well, assuming no prior agreement can be reached with the SEC staff regarding the use of the white paper.

Confidentiality

Participants hoping to keep white paper submissions out of the public eye can appropriately mark the submission “confidential” for purposes of the Free-dom of Information Act (“FOIA”).18 Participants should also be aware that the SEC’s stated position is that a “FOIA request is required to obtain non-public records, such as records compiled in investigations, consumer complaints, and staff comment letters. We will release non-public records, unless the record is protected by one of nine FOIA exemptions.”19 In other words, for non-public materials to ultimately be shielded by a FOIA request, they must fall under one of the nine exemptions. There are number of exemptions that apply to protect materials in ongoing investigations. Outside of ongoing investigations, materi-als in white papers can still be potentially exempt from FOIA if they contain “trade secrets” or “confidential commercial or financial information,” or within other exemptions.20 Cautious counsel should carefully analyze which portions of its submissions could arguably fall outside of FOIA exemptions, which could be fair game for a FOIA request, and advise their clients accordingly.

Discoverability in Third Party Litigation

The case law is scant on this point. One court confronting a compa-rable situation ruled that Wells submissions were discoverable in third party civil litigation where the propounding party made a “particularized” showing

THe BAnKInG lAW JoURnAl

450

that the submission was potentially relevant to show bias or had “impeach-ment value.”21 Practitioners should assume the same reasoning would apply equally to white papers.

Parallel Investigations

SEC investigations can often be accompanied by parallel investigations by the Department of Justice or other government agencies. Accordingly, practitioners should be careful to analyze how their white paper submission to the SEC could affect any ongoing or looming parallel investigations.

CoNClusioN

Overall, assuming a client has strong facts and legal positions, the white paper process can offer an extremely beneficial opportunity to avoid the po-tentially significant negative effects of a Wells Notice. However, practitio-ners should weigh the above factors on a case-by-case basis and strategically determine the optimal path for protecting their clients’ interests.

NotEs1 A special thanks is extended by the authors to Zachary Sorman and Winston & Strawn LLP. 2 The “SEC investigative process does not have targets… Although some parties involved in investigations eventually may be named as defendants or respondents in subsequent litigation, the SEC does not have targets of its inquiries or investigations.” SEC Enforcement Manual at 71. 3 Available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf. 4 Id. at 22. 5 Id. at 24-25. 6 See, e.g., Nick Turner, “CSC Shares Tumble After Employees Get Wells Notices From SEC,” Bloomberg News (Oct. 31, 2013), available at http://www.bloomberg.com/news/2013-10-31/csc-shares-tumble-after-employees-receive-wells-notices-from-sec.html. 7 These “white papers” can include a wide variety of supporting information, including legal authority, documents, articles and policy statements, expert reports,

451

UnDeRSTAnDInG AnD nAVIGATInG THe USe oF PRe-WellS noTICe WHITe PAPeRS

graphical illustrations, affidavits, and witness transcripts. 8 S.E.C. v. Jerry T. O’Brien, Inc., 467 U.S. 735, 749-50 (1984). 9 Jean Eaglesham, “SEC Drops 20% of Probes After ‘Wells Notice,’” Wall St. J. (Oct. 9, 2013), available at http://online.wsj.com/news/articles/SB10001424052702304500404579125633137423664. 10 Notably, these speedy enforcement provisions are not deemed to be statutes of limitation. For example, in SEC v. The NIR Group, LLC, a federal magistrate judge in New York held that the expiration of the 180-day period under Section 929U “does not create a jurisdictional bar to SEC enforcement actions.” No. 2:11-cv-04723, slip op. at 8 (E.D.N.Y. Mar. 24, 2013). The court noted that “[t]he targets of an SEC probe that extended beyond the deadline may well be entitled to initiate administrative proceedings or file a declaratory judgment action to compel agency action.” Id.11 SEC Enforcement Manual at 23. 12 Id.13 Richman v. Goldman Sachs, 868 F. Supp. 2d 261, 273-74 (S.D.N.Y. 2012). 14 See supra at note 5. 15 SEC Enforcement Manual at 23. 16 2004 WL 60290 (S.D.N.Y. Jan. 12, 2004). 17 Id.18 http://www.sec.gov/foia/nfoia.htm. 19 http://www.sec.gov/foia.shtml. 20 Id.21 In re Initial Public Offering Securities Litigation, 2004 WL 60290 (S.D.N.Y. Jan. 12, 2004).