The California Corporate Securities Law has long declared a number of manipulative devices to be unlawful. See Cal. Corp. Code § 25400. Now, a California legislator wants to add to the list. As amended last week, SB 726 (Hueso) would insert a new Section 25401.2 to the Corporations Code declaring:
It is unlawful for any person, directly or indirectly, in this state to knowingly make an untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which the statements are made, not misleading, to any state government official with the intention of inducing an investigation of a publicly traded company for the purpose of manipulating the value of a security of that publicly traded company for financial gain.
According to a fact sheet issued by Senator Hueso’s office, the bill is targeting hedge fund managers with short positions who either directly or indirectly try to manipulate stock prices by instigating governmental investigations:
Short sellers have improperly targeted several public companies either located or doing business in California, including Herbalife, Overstock.com, Lennar Corporation, and Medifast, among others.
The bill does appear to suffer a few technical difficulties. For example, it doesn’t define “publicly traded company” and that term does not appear in the Corporate Securities Law. The General Corporation Law does define the term, but only for purposes of Section 1502.1 which imposes an additional annual report requirement on publicly traded corporations.
“Just when I thought I was out . . .”
The bill presents some geographical questions. First, it requires that an offender be “in this state” either “directly or indirectly”. I’m not quite sure how someone can be indirectly in California. The bill also refers to “any state government official”. Thus, statute, if enacted, would seem to apply to a person in California who makes a false statement to a Nevada state official, but not a person in Nevada making a false statement to a California state official.
“If what thou speak’st speak not of remedy.”
The bill does not include a remedy. The proposed statute would be included in Part 5 of the CSL, which is dedicated to defining various fraudulent and prohibited practices. Part 6 of the CSL sets forth remedies. Unless a remedy for violation is included in Part 6, enforcement would be up to the Commissioner of Business Oversight and the Attorney General.