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CALIFORNIA CORPORATE & SECURITIES LAW

Scienter Requirement May Be A Question Of Timing

On several occasions, I have written about whether scienter is required under Corporations Code Section 25401.  That question surfaced again last week in Judge Gonzolo P. Curiel’s ruling on the defendants’ motion to dismiss federal and state securities law claims in Mueller v. San Diego Entm’t Partners, LLC, 2017 U.S. Dist. LEXIS 77643 (S.D. Cal. May 22, 2017).  Judge Curiel’s position is unequivocal:

California securities fraud requires that a plaintiff show that “defendant engaged in a material misrepresentation or omission of fact, with scienter, in connection with the purchase or sale of a security, and economic loss.” Cal. Corp. Code §§ 25401, 25501.

However, neither Section 25401 nor Section 25501 (which imposes liability for violations of Section 25401) requires that the plaintiff allege or prove scienter (Section 25501 does provide a “reasonable care” defense).  Nonetheless, Judge Curiel may be correct.  According to his ruling, the plaintiff purchased the securities at issue in 2014.  Faithful readers may recall that in 2013, the California legislature amended Section 25401.  In doing so, it was my view that the legislature had written scienter into Section 25401.  See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?”.  Presumably recognizing the error of its ways, the legislature returned Section 25401 to its pre 2013 wording.  See California Reverts To Former Securities Anti-Fraud Statute.  Although the fact that the plaintiff purchased in 2014 supports Judge Curiel’s statement, it doesn’t explain why he quotes the current text of the statute (which does not support his ruling).

Matters may become further confused if AB 1517 (Muratsuchi and Chiu) is enacted this year.  See What Do You Know? Bill Proposes To Eliminate Scienter.

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