BILL ANALYSIS                                                                                                                                                                                                    Ó






                  SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
                             Senator Juan Vargas, Chair


          SB 1058 (Lieu)                          Hearing Date:  April 11, 
          2012  

          As Amended: March 26, 2012
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would revise and recast the provisions governing 
          administration of the Victims of Corporate Fraud Compensation 
          Fund (the Fund) by the Secretary of State, by codifying certain 
          existing regulations promulgated by the Secretary of State to 
          administer the Fund, codifying changes to other existing 
          regulations promulgated by the Secretary of State, and adding 
          new statutory language to facilitate the approval of valid 
          claims from the Fund.  
          
           DESCRIPTION
           
            1.  Would codify existing Secretary of State regulations 
              governing administration of the Fund, which define 
              "application," "claimant," "complaint," and "corporation," 
              but would expand the definition of "court of competent 
              jurisdiction" to include small claims, municipal, or 
              superior courts of any state (not just California), and 
              United States district courts and bankruptcy courts located 
              in any state (not just California).  

           2.  Would expand the existing Secretary of State's regulatory 
              definition of "final judgment" to additionally include, but 
              not be limited to, any findings of fact, conclusions of law, 
              jury verdicts, jury special verdicts, statements of 
              decision, memorandum decisions, or any other indication by a 
              court of jury, as the case may be, of its decision and the 
              reasons for the decision.  Existing Secretary of State 
              regulations, which this bill would also codify, provide that 
              final judgments also include judgments, arbitration awards, 
              and criminal restitution orders for which the period of 
              appeal has expired, enforcement of which is not barred by 
              the order of any court or by any statutory provision, and 
              which have not been nullified or rendered void by any court 
              order or statutory provision. 




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           3.  Would codify existing Secretary of State regulations, which 
              provide that, when an aggrieved person obtains a final 
              judgment in a court of competent jurisdiction against a 
              corporation based on the corporation's fraud, 
              misrepresentation, or deceit, made with intent to defraud, 
              the aggrieved person may, upon the judgment becoming final, 
              file an application with the Secretary of State for payment 
              from the Fund, as specified, for the amount remaining unpaid 
              on the judgment, which represents an actual and direct loss 
              to the claimant in the transaction.  Would require the 
              application to be submitted to the Secretary of State within 
              18 months after the judgment becomes final.  

           4.  Would specify the information that must be included in a 
              claimant's application, and would codify the following three 
              specific changes, which are departures from existing 
              Secretary of State regulations:

               a.     A copy of a judgment that specifies the facts of the 
                 allegations of the complaint would be satisfactory to 
                 satisfy the requirement that each application contain a 
                 detailed narrative statement of the facts in explanation 
                 of the allegations of the complaint on which the 
                 underlying judgment is based.  

               b.     A court's determination or finding of a 
                 corporation's insolvency or lack of assets to pay the 
                 claimant would be sufficient to satisfy the requirement 
                 that the claimant sought to obtain restitution from the 
                 corporation.

               c.     Would expressly prohibit the Secretary of State from 
                 conditioning an award of payment from the Fund upon 
                 submission of any additional information by the claimant, 
                 beyond that required in the application. 

           5.  In the event a claimant's application fails to include all 
              required information, would decrease the length of time the 
              Secretary of State has in which to mail an itemized list of 
              deficiencies to the claimant from 21 to 15 days.  (This 
              change is consistent with Real Estate Recovery Fund rules).

           6.  Would add a requirement that the Secretary of State render 
              a final written decision to each claimant within 90 days of 
              receipt of a completed application, unless the claimant 




                                                 SB 1058 (Lieu), Page 3




              agrees in writing to extend the time within which the 
              Secretary of State may render a decision.  This change is 
              consistent with Real Estate Recovery Fund rules, but differs 
              from existing Secretary of State regulations, which require 
              the Secretary of State to render a final written decision on 
              applications no later than July 31st of the fiscal year 
              following the fiscal year in which the application was 
              submitted.

           7.  Would codify the existing Secretary of State regulation 
              authorizing the Secretary to deny or grant an application or 
              enter into a compromise with the claimant to pay less in 
              settlement than the full amount of the claim, and would 
              codify the Secretary of State regulation which states that 
              if a claimant refuses to accept a settlement of the claim 
              offered by the Secretary of State, the written decision of 
              the Secretary of State shall be to deny the claim.

           8.  Would codify the existing Secretary of State regulation 
              giving claimants whose applications have been denied up to 
              six months in which to file an application in superior court 
              for an Order Directing Payment out of the Victims of 
              Corporate Fraud Compensation Fund, based upon the grounds 
              set forth in the application submitted by the claimant to 
              the Secretary of State.  

           9.  Would codify the requirement that the Secretary of State 
              notify any corporation whose fraudulent activities gave rise 
              to a claim against the Fund regarding the Secretary of 
              State's decision on that application, and the existing 
              regulation that authorizes the Secretary of State to assume 
              the claimant's interest in the judgment against the 
              corporation.  Would add a new requirement, based on the 
              provisions of the Real Estate Recovery Fund, which would 
              give the Secretary of State authority to pursue damages 
              against the corporation's officers for the amount that was 
              paid to the claimant from the Fund.  This new provision 
              differs from existing regulations, which require the 
              claimant to pursue the corporation and all of the 
              corporation's officers for compensation, before the claimant 
              is eligible to apply to the Fund for compensation.


           10. Would cap the total amount that may be paid to any claimant 
              for any one action by a corporation at $20,000, with respect 
              to applications from the Fund that were filed before January 




                                                 SB 1058 (Lieu), Page 4




              1, 2013 (thus codifying existing regulations), and would 
              increase that amount to $50,000 for applications filed on or 
              after January 1, 2013 (an increase relative to existing 
              regulations).

           11. Would add a provision based on the Real Estate Recovery 
              Fund, which states that when multiple corporations are 
              involved in a transaction, and the conduct of two or more of 
              the corporations results in a judgment meeting the 
              requirements of the bill, claimants may seek recovery from 
              the Fund based on a judgment against any of the 
              corporations, subject to the limitations in Number 10 above.

           12. Would add a new provision, not found in existing Secretary 
              of State regulations or the Real Estate Recovery Fund, 
              stating that, when multiple claimants are involved in a 
              corporate fraud or in misrepresentation or deceit by a 
              corporation, resulting in a judgment meeting the 
              requirements of the bill, each claimant may seek recovery 
              from the fund individually, subject to the limitations in 
              Number 10 above.  

           13. Would add a new provision, based on the Real Estate 
              Recovery Fund, stating that if, at any time, the money in 
              the Fund is insufficient to satisfy any duly authorized 
              claim, the Secretary of State shall, when sufficient money 
              has been deposited into the Fund, satisfy the unpaid claims 
              or portions thereof, in the order that the claims were 
              originally filed, plus accumulated interest at a rate of 4% 
              per year.  This differs from existing Secretary of State 
              regulations, which require the Secretary of State to prorate 
              the money available in the Fund among eligible applicants, 
              if there is insufficient money in the Fund to pay all 
              applicants the full amount to which they are entitled.

           14. Would add a new provision, based on the Real Estate 
              Recovery Fund, making it unlawful for any person or the 
              agent of any person to file any document with the Secretary 
              of State in connection with any application for restitution 
              from the Fund, which is false or untrue or contains any 
              willful, material misstatement of fact.  Penalty for filing 
              such a document would constitute a public offense punishable 
              by imprisonment in a county jail for a period of not more 
              than one year, or a fine of not more than $1,000, or both.  

           EXISTING LAW




                                                 SB 1058 (Lieu), Page 5




           
           15. Establishes the Fund within the State Treasury, authorizes 
              the Secretary of State to administer the Fund, and directs 
              the Secretary of State to adopt regulations regarding 
              administration of the Fund and the eligibility of victims to 
              receive compensation from the Fund.  Provides that the Fund 
              exists for the sole purpose of providing restitution to the 
              victims of a corporate fraud (Corporations Code Section 
              1502.5).  Regulations promulgated by the Secretary of State 
              to administer the Fund are contained in Title 2, Division 7, 
              Chapter 12, Sections 22500 et seq.)

           16. Raises money for Fund by directing one-half of the $5 
              disclosure fee required to be paid by corporations when they 
              file their annual Statements of Information with the 
              Secretary of State (Corporations Code Sections 1502 and 
              2117).

           17. Provides for the Real Estate Recovery Program (also known 
              as the Consumer Recovery Program within the Real Estate 
              Fund; Business and Professions Code Section 10470 et seq.), 
              administered by the Department of Real Estate for the 
              purpose of providing a fund of last resort to compensate 
              persons who are defrauded by real estate licensees.   The 
              Secretary of State's Office used the Real Estate Recovery 
              Program rules as a guide, when developing regulations to 
              administer the Fund.  

           COMMENTS

          1.  Purpose:   This bill is sponsored by the author, to help 
              ensure that the Fund works as intended ten years ago, when 
              it was created, and "to ensure that all corporate fraud 
              victims collect the restitution to which they are entitled, 
              without enduring a bureaucratic nightmare."   
           
           2.  Background and Discussion:   This bill is based on an article 
              authored by Sacramento Bee columnist Dan Morain on October 
              9, 2011, profiling the challenges faced by the approximately 
              500 victims of a corporate fraud perpetrated by James Walker 
              and his now-defunct Senior Care Advocates, Inc.  In his 
              article, Morain detailed the nearly 18-month struggle of 
              victims scammed by James Walker and Senior Care Advocates to 
              obtain compensation from the Secretary of State's Office 
              through the Victims of Corporate Fraud Compensation Fund.  





                                                 SB 1058 (Lieu), Page 6




          A review of the correspondence between Mr. Mark Redmond, 
              representing approximately 500 elderly victims of Senior 
              Care Advocates, and the Secretary of State's Office, 
              regarding the claims submitted by Mr. Redmond on the 
              seniors' behalf, reveals a lengthy saga of frustrated 
              communication.  Following Mr. Redmond's submission of 
              initial applications on the victims' behalf on May 14th, 
              2010, the Secretary of State's Office and Mr. Redmond 
              exchanged no fewer than ten letters back and forth regarding 
              the applications (the first dated June 4, 2010, and the most 
              recent dated August 29, 2011).  In these letters, each of 
              which runs for several pages, the Secretary of State's 
              office details deficiencies it observed in the victims' 
              applications, and Mr. Redmond, responding on behalf of the 
              victims, attempts to resolve these deficiencies by providing 
              explanations and additional documentation.  The 
              correspondence suggests that there is significant room for 
              improving the rules governing the victims' application 
              process, as well as the process by which the Secretary of 
              State evaluates applications, deems them complete, and 
              disburses money from the Fund.  Existing shortcomings seem 
              to have created procedural hurdles, which blocked timely 
              access to the Fund by the Senior Care Advocates victims.  

          After reading the Dan Morain article and the correspondence 
              between Mr. Redmond and the Secretary of State, several 
              legislative offices contacted the Secretary of State's 
              office in an attempt to determine whether the case 
              summarized in the Bee article and detailed in the lengthy 
              correspondence between Mr. Redmond and the Secretary of 
              State's office was an aberration, or was, instead, 
              representative of a pattern of over-protectiveness toward 
              the Fund within the Secretary of State's Office.  Findings 
              from those inquiries are summarized immediately below.

           3.  How Many Claimants Are Receiving Compensation From the Fund?  
               

               a.     When first contacted, the Secretary of State's 
                 Office indicated that, from the Fund's inception  through 
                 August 1, 2011  , the Secretary of State had received 701 
                 claims for restitution from the Fund.  

               Of these 701 claims, five claims were awarded, one claim 
                 was settled during litigation, and one court appeal by a 
                 victim resulted in a judgment confirming the Secretary of 




                                                 SB 1058 (Lieu), Page 7




                 State's settlement offer.  When summed, all seven of 
                 these claims resulted in a payout from the Fund of 
                 $92,497. 

               Of the remaining claims, 102 did not qualify for payment, 
                 because they did not meet the eligibility criteria 
                 established by the Secretary of State, 28 claims were 
                 withdrawn, 3 claims were denied, and 561 claims (most 
                 related to Senior Care Advocates) were pending 
                 resolution.

               b.     On October 14, 2011  , the Secretary of State's office 
                 responded to legislative requests for a breakdown of the 
                 102 claims which did not qualify for payment, because 
                 they did not meet the eligibility criteria established by 
                 the Secretary of State's office in its regulations (a 
                 number which grew to 103 by the date of the Secretary of 
                 State's response).  The 103 claims were rejected for the 
                 following reasons:

                    -------------------------------------------------------- 
                   |             Reason for Denial             | Number of  |
                   |                                           |Applications|
                   |                                           |   Denied   |
                   |-------------------------------------------+------------|
                   |The victims applied for compensation based |     52     |
                   |on judgments that were not based on        |            |
                   |corporate fraud                            |            |
                   |-------------------------------------------+------------|
                   |A judgment was lacking, or the judgment    |     23     |
                   |was not issued by a court in California    |            |
                   |-------------------------------------------+------------|
                   |Applications were based upon judgments     |     14     |
                   |against entities that were not             |            |
                   |corporations                               |            |
                   |-------------------------------------------+------------|
                   |Applications were based on judgments that  |     5      |
                   |were not final                             |            |
                   |-------------------------------------------+------------|
                   |Applicants demonstrated insufficient proof |     4      |
                   |regarding their attempts to collect from   |            |
                   |the corporation and its corporate officers |            |
                   |prior to filing a claim with the Fund      |            |
                   |-------------------------------------------+------------|
                   |Applications were submitted more than 18   |     3      |
                   |months following final judgment            |            |




                                                 SB 1058 (Lieu), Page 8




                   |-------------------------------------------+------------|
                   |Applicant was not a party to the court     |     1      |
                   |judgment                                   |            |
                   |-------------------------------------------+------------|
                   |Application was based on a judgment issued |1           |
                   |prior to January 1, 2003                   |            |
                    -------------------------------------------------------- 

                c.     By March 28, 2012  , the Secretary of State's office 
                 had resolved a considerable number of its outstanding 
                 applications.  

               From the Fund's inception through  March 28, 2012  , a total 
                 of 225 claims have been approved or resulted in victims 
                 being offered settlements (up from less than ten through 
                 August 1, 2011), and 25 claims are pending resolution 
                 (down from over 550 through August 1, 2011).  An 
                 additional 27 claims have been deemed complete and are 
                 pending a decision.  118 claims have been rejected, 
                 because the Secretary of State's office found the victims 
                 did not qualify for payment from the Fund (see reasons 
                 cited immediately above).  294 claims have been denied, 
                 because the applicants could not prove damages.  30 
                 claims have been withdrawn.  

           4.  How Much Money Is In The Fund?   The Fund collects 
              approximately $1.5 million per year, through the $2.50 
              annual disclosure fee paid by corporations pursuant to the 
              Fund's enabling legislation.  At present, the Fund holds 
              approximately $5 million.  Because the Fund went several 
              years without making any significant payments to victims, 
              and thus built up a significant reserve, it was raided in 
              the 2010-11 fiscal year, to help address General Fund 
              shortfalls.  The Fund currently has an outstanding $10 
              million loan to the General Fund, which is required to be 
              repaid, with interest, when it is needed to pay claims out 
              of the Fund.  From the Fund's inception to date, the 
              Secretary of State's office has approved the payout of 
              approximately $2.1 million in compensation to victims (most, 
              as cited above, in the last eight months).  

           5.  Summary of Arguments in Support:   None received.  However, 
              the Secretary of State submitted a letter in which she 
              expresses several concerns with the March 26th version of SB 
              1058, and offers to support the measure if it is stripped 
              down to do only two things:  a) authorize the Secretary of 




                                                 SB 1058 (Lieu), Page 9




              State to make payments from the fund within 90 days after 
              approving an award, rather than the Secretary of State's 
              existing process of waiting until the close of each fiscal 
              year, before making payments to victims; and b) increase the 
              maximum amount of restitution to victims from $20,000 to 
              $50,000.

           6.  Summary of Concerns Raised by the Secretary of State:   In 
              her letter, the Secretary asserts her belief that the Fund 
              and victims of corporate fraud would benefit from more 
              statutory direction, and states that she is working on a new 
              set of regulations to the Fund, which are currently under 
              review by the Office of Administrative Law (these 
              regulations were unavailable for review by Committee staff 
              as of the date this analysis was finalized).  

          The Secretary is concerned that, as the bill is currently 
              drafted, it will have the unintended effect of enabling and 
              encouraging people to defraud a fund set up to assist 
              victims, which will leave less money is available to assist 
              those who have truly been victimized.  Among the Secretary's 
              specific concerns:

               a.     The Fund would become a fund of first resort rather 
                 than one of last resort, because the bill removes the 
                 requirements that claimants show a proof of loss, proof 
                 of final judgment for fraud from a California court 
                 against a corporation registered in California, and proof 
                 of attempts to collect on the judgment before applying to 
                 the Fund.

               b.     Significantly more people would be able to apply for 
                 restitution from the Fund, because the bill would allow 
                 claims against all United States corporations (not just 
                 corporations doing business in California), would allow 
                 supporting judgments and decisions to come from any court 
                 in the United States (not just courts in California), and 
                 would not require the claimant to demonstrate that he or 
                 she was a California resident at the time of the alleged 
                 act.

               c.     The bill's definition of a final judgment is too 
                 loose, because it uses language (page 7, line 22), to the 
                 effect that "final judgment shall include, but not be 
                 limited to...,"





                                                 SB 1058 (Lieu), Page 10




               d.     The bill would eliminate the Secretary of State's 
                 ability to request supplementary documents from an 
                 applicant, beyond the basic self-verified information 
                 required in a victim's application.  

               e.     The bill would likely result in more denials of 
                 applications by the Secretary of State, which could 
                 increase the courts' workload, as these denied applicants 
                                          take their cases to the courts.  At the same time, 
                 Sections 2287 and 2288 of the bill (page 11, beginning on 
                 line 13 through page 12, ending on line 31) could be read 
                 to preclude a court from requiring a claimant to provide 
                 documentation or evidence beyond what was provided to the 
                 Secretary of State in its initial application.  

           7.  Summary of Arguments in Opposition:    None received.

           8.  Amendments:  
            
                a.     This bill's author is negotiating amendments to the 
                 bill with the Secretary of State's office.  However those 
                 negotiations are currently at too early a stage for the 
                 author to offer amendments, when this bill is heard on 
                 April 11th.  Staff is refraining from suggesting any 
                 specific amendments at this time, in hopes of allowing 
                 the negotiations between the author and the Secretary of 
                 State's office to move forward unimpeded.  Staff notes, 
                 however, that if the bill is stripped down as suggested 
                 by the Secretary of State's office, before leaving this 
                 Committee, and is subsequently amended to include more 
                 substantive changes to the operation of the Fund, this 
                 Committee would likely request that the Senate Rules 
                 Committee return the bill to our Committee to review the 
                 added policy.  
           
          9.  Prior and Related Legislation:   

               a.     AB 55 (Shelley), Chapter 1015, Statutes of 2002:  
                 Enacted the California Corporate Disclosure Act, created 
                 the Victims of Corporate Fraud Compensation Fund, and 
                 directed the Secretary of State to promulgate regulations 
                 regarding administration of the Fund and the eligibility 
                 of victims to receive compensation from the Fund.  

               b.     AB 2454 (Emmerson), Chapter 279, Statutes of 2008:  
                 Increased the amount of money available to claimants from 




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                 the Real Estate Recovery Account from $20,000 for any one 
                 transaction and $100,000 for acts by any one licensee to 
                 $50,000 for any one transaction and $250,000 for acts by 
                 any one licensee, effective January 1, 2009.


           LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           
          None received
           
          Opposition
               
          None received

          Consultant: Eileen Newhall  (916) 651-4102