Readers of this blog will recall my chariness of a 2013 amendment to California’s basic securities anti-fraud statute. See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?” Although I identified a host of issues, my fundamental concern was that by rewriting California Corporations Code Section 25401, the legislature had raised the bar for securities fraud suits. Apparently, the legislature got the message. Last week, Governor Jerry Brown signed AB 1517 (Committee on Banking & Finance) into law. In addition to making numerous technical corrections to the Corporations Code and other codes, the bill returns Section 25401 to its pre 2013 text.
The Assembly Floor Analysis prepared by Kathleen O’Malley, the principal consultant to the Assembly Committee on Banking & Finance, provides a background summary of the legislative volte-face
SB 538 (Hill), Chapter 335, Statutes of 2013, a bill whose language originated with DOC [Department of Corporations], amended Corporations Code Section 25401. According to DBO [Department of Business Oversight], the language of Corporations Code Section 25401 in SB 538 was intended to mirror federal Securities and Exchange Commission Rule 10b-5. “However, the amendments inadvertently raised the burden of proof for civil and criminal litigation for Department attorneys and local prosecutors who try such cases. There is a substantial body of case law in California that may be disrupted if Section 25401 of the Corporations Code remains as is, potentially making enforcement and prosecution of securities fraud more difficult. There is additional concern that California courts will begin to rely on the federal interpretation of Rule 10b-5, which requires that plaintiffs prove scienter (i.e., that an offending party has knowledge of the wrongness of an act prior to committing it). This would provide less investor protections, since the burden of proof would fall on them and their legal representation.” This bill returns the wording of Section 25401 to the way in which it read prior to enactment of SB 538. DBO does not believe that language is needed to clarify the way in which Section 25401 should be interpreted during the period of time in which the changes enacted pursuant to SB 538 were operative.