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CALIFORNIA CORPORATE & SECURITIES LAW

The Securities Fraud Device That The Legislature Devised To Omit

Last year, Senator Jerry Hill authored a bill, SB 538, which rewrote Corporations Code Section 25401.  As I posted, the underlying premise was fanciful at best – that California’s statute “has failed to keep up with similar language in federal anti-fraud statutes”.   By metamorphosing Section 25401 from a statute based on Section 12(a)(2) of the Securities Act into a statutory mimic of Rule 10b-5 under the Securities Exchange Act, the legislature has introduced the argument that plaintiffs must now allege scienter and causation just as they do in federal Rule 10b-5 suits.

The legislature copied Rule 10b-5 but not exactly word-for-word.  Perhaps unwittingly, it substituted the word “devise” for “device”.  Thus, it is now unlawful to employ “a devise, scheme or artifice to defraud”.  In fact, the words are very closely related and entered the English language from Old French in the 14th century.  “Devise” is derived from “deviser” which meant to dispose of or plan.  “Device” comes from “devis” which meant to intend or wish. Geoffrey Chaucer used the word “devise,” which he spelt “devys”, in this sense in the General Prologue to The Canterbury Tales: “And we wol reuled been at his devys” (And we will be ruled at his wish).  Both words can be traced back to the Latin word “divisus” which is the singular perfect participle of “divido” meaning to divide.  Anyone who has ever taken second year Latin will recognize the word from the famous opening to Julius Caesar’s De Bello Gallico (About The Gallic War):

Gallia est omnis divisa in partes tres . . . (All Gaul is divided into three parts . . .)

The legislature now has a bill, SB 1461, that would, among other things, change “devise” to “device”.

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