Readers of this blog will be familiar with my criticism of the 2013 amendment of California’s basic securities fraud statute, Corporations Code Section 25401. See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?”, Die Verwandlung: How The Legislature Likely Raised The Bar On Securities Fraud Actions, When California Copied Rule 10b-5 Did It Shut The State Courthouse Door To Securities Fraud Suits?, and Must Suits/Actions To Enforce Section 25401 Be Brought In The Federal Courts? Apparently, others shared my concerns as the Assembly Committee on Banking and Finance has introduced a bill, AB 1517, to return to the original wording of Section 25401. Below is an excerpt from the Committee’s analysis of the bill prepared by Committee Consultant Kathleen O’Malley explaining the reason for the reversion to the historical text of the statute:
SB 538 (Hill, Chapter 335, Statutes of 2013) amended the Corporations Code to align certain provisions with federal law. However, one amendment inadvertently raised the burden of proof for civil and criminal litigation for DBO attorneys and local prosecutors who try securities fraud cases. There is additional concern that California courts will begin to rely on the federal interpretation of Rule 10b-5, which requires that plaintiffs prove they relied upon any misrepresentations or omissions made by the defendants. This would provide less protection to consumers since the burden of proof would fall on them and their legal representation.
The DBO Enforcement Division has received input from district attorneys that their prosecutors will be negatively impacted if current law in Section 25401 under the Corporations Code remains in place.
The amendment to return to the former wording of Corporations Code Section 25401 in its entirety will return the burden of proof for securities fraud back to its status under long-settled California law for cases involving misrepresentations or omissions of material fact.
Committee sponsored bills are typically non-controversial and technical or clean-up in nature. Therefore, it should be no surprise that the bill passed out of the Assembly Banking and Finance Committee on a 12-0 vote and out of the Assembly on a 78-0 vote (2 members did not vote). The bill is now in the Senate awaiting assignment to a committee.