BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          SB 1058 (Lieu) - Victims of Corporate Fraud Compensation Fund.
          
          Amended: May 1, 2012            Policy Vote: B&FI 6-0  Jud 5-0
          Urgency: No                     Mandate: No
          Hearing Date: May 14, 2012      Consultant: Maureen Ortiz
          
          This bill does not meet the criteria for referral to the 
          Suspense File.
          
          
          Bill Summary: SB 1058 revises the provisions governing 
          administration of the Victims of Corporate Fraud Compensation 
          Fund by coding existing regulations and facilitating the 
          approval of valid claims from the fund.

          Fiscal Impact: First year costs of $122,990 and ongoing of 
          $97,990 (Special).

          The Secretary of State's office anticipates the need for one PY 
          analyst to process claims, and will incur expenses associated 
          with revising the forms, updating the Internet web site and 
          revising regulations.  Costs will be incurred from the Business 
          Fees Fund.

          Background: The Victims of Corporate Fraud Compensation Fund 
          (VCFCF) is administered by the Secretary of State and provides 
          restitution to victims of corporate fraud.  In order to qualify 
          for restitution from the fund, a claimant must have a final 
          court judgment, arbitration award, or criminal restitution order 
          dated January 1, 2003 or later.  The application must be 
          delivered within 18 months of the judgment becoming final.  
          Additionally, the claimant must first diligently pursue 
          collection of the judgment from the corporation.

          The concept of corporate fraud is very broad and encompasses a 
          variety of criminal and civil violations. There is no single 
          definition in the law. For VCFCF purposes, corporate fraud is 
          fraud, misrepresentation, or deceit, made with intent to 
          defraud, and involving a corporation. Some examples of 
          corporate fraud may include, but are not limited to, fraud or 
          illegal practice in the issuance or sale of securities, false 
          reports or entries on corporate documents with intent to 








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          deceive, or purchase or sale of securities by a person having 
          access to material information not available to the public 
          through a special relationship with the issuer (insider 
          trading).

          Since the creation of the fund in 2002, the Secretary of State's 
          Office has received over 700 claims for restitution.  
          Approximately 225 claims have been approved or resulted in 
          victims being offered settlements, 25 claims are pending 
          resolution, about 300 claims were rejected, and 30 have been 
          withdrawn.  An additional 27 claims have been deemed complete 
          and are pending a decision.  Over 100 claims have been rejected 
          for reasons such as the victim's application for restitution was 
          not based on fraud, a judgment was lacking or not final, 
          applications were against entities that were not corporations, 
          or the applications were submitted past the 18 month deadline 
          following final judgment.

          Proposed Law: SB 1058 makes the following changes to the VCFCF 
          program:

             1)   Codifies regulations relating to the process and 
               requirements for an aggrieved person who obtained a final 
               judgment in a court against a corporation for fraud, and 
               who diligently attempted to recover the judgment from the 
               corporation, to file an application with the SOS for 
               payment from the fund;

             2)   Increases the amount payable from $20,000 to $50,000;

             3)   Provides specific information that the applicant must 
               include on the application for restitution including the 
               name and address of the corporation, the amount of claim 
               that remains unreimbursed from any source, a copy of the 
               final judgment, and a description of searches and inquiries 
               conducted by or on behalf of the claimant with respect to 
               the corporation's assets;

             4)   Allows a claimant whose application is denied to 
               petition the courts;
           
             5)   Requires the Secretary of State to provide notice to the 
               corporation by certified mail that a claimant has submitted 








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               an application for payment from the fund;

             6)   Establishes a method by which a corporation may contest 
               payment from the fund;
           
             7)   Allows the Secretary of State to recover money paid to a 
               successful claimant from the corporations and to suspend 
               the corporation as specified. 

          Additionally, SB 1058 prescribes specific timeframes that the 
          Secretary of State must adhere to when processing applications 
          for payments from the VCFCF as follows:

             1)   Requires the Secretary of State to notify a claimant 
               whose application fails to comply with the filing 
               requirements within 21 days and to provide an itemized list 
               of deficiencies to the claimant at that time;

             2)   Requires the Secretary of State to render a final 
               written decision on the application within 90 calendar days 
               after a complete application has been received;

             3)   Authorizes the SOS to enter into a compromise with a 
               claimant to pay less in
                 settlement than the full amount of the claim; and,

             4)    Grants a claimant 60 calendar days to accept a proposed 
               award or offer to compromise.





          The provisions of SB 1058 will apply only to applications 
          submitted to the Secretary of State on or after January 1, 2013. 


          Staff Comments:  The Business Fees Fund is funded by a $2.50 
          annual disclosure fee paid by corporations.  Total collections 
          approximate $1.5 million per year and the current balance is 
          about $5 million.  Due to a significant reserve, $10 million was 
          borrowed to address General Fund shortfalls during the 2010-11 
          Budget Act at which time the fund had a balance of approximately 








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          $15 million.  These funds are required to be repaid when needed 
          to pay claims out of the fund.  Since the program's inception 
          created by AB 55 (Shelley), Chapter 1015/2002, the Secretary of 
          State's office has approved the payout of approximately $2.1 
          million in compensation to victims.