Saturday, May 7, 2005
Berekshire Hathaway's quarterly earnings release discloses that the SEC has given a "Wells" notice to a current vice president at its General Re subsidiary that it plans to file civil charges alleging violations of the federal securities laws. The earnings release (here) states: "On May 2, 2005, a Senior Vice President of General Reinsurance received a 'Wells' notice from the staff of the SEC in connection with its ongoing investigation. The Wells notice states that the staff of the SEC is considering recommending that the SEC bring a civil injunctive action and seek civil penalties against this individual, alleging that the individual violated or aided and abetted violations of the Securities Exchange Act of 1934." A Wells notice is a preliminary step toward filing a lawsuit in which the Commission invites the person(s) to submit a statement about the possible charges, and is often an invitation to initiate settlement negotiations. The SEC's Rules of Practice (here) state: "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 reparing and submitting a statement prior to the presentation of a staff recommendation to the Commission for the commencement of an administrative or injunction proceeding." According to a MarketWatch report (here), the Wells notice may involve the General Re-AIG finite insurance contract, which sparked a wide-ranging federal and state probe of AIG's accounting practices.
While Wells notices are usually quite general, they do indicate that the Enforcement Division staff is ready to move forward with its case, often in conjunction with other regulators and, if necessary, federal prosecutors. Moreover, in most cases, notices are sent out to all potential defendants and not just a few at a time because the Commission wants to bring the entire case, if possible. Therefore, I suspect that we will hear about more individuals who have received the notices, including AIG executives, and the companies themselves may be notified that they could be named as defendants in the Commission's civil action. The heat is being turned up even higher, and over the next few weeks I think we will see one or more deals announced with individuals connected with the two companies, including possible plea agreements. (ph)
UPDATE (5/9): A New York Times article (here) identifies the General Re executive who received the Wells notice as Richard Napier. One of the AIG executives with whom Napier worked on the transaction is Christian Milton, who was fired by AIG for not cooperating in the government's investigation of the transaction.