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 SB 1058 (Lieu) Page 1 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victims being offered settlements, 25 claims are pending resolution, about 300 claims were rejected, and 30 have been withdrawn.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 SB 1058 (Lieu) Page 2 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 SB 1058 (Lieu) Page 3 $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.