BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  SB 1058|
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                              UNFINISHED BUSINESS


          Bill No:  SB 1058
          Author:   Lieu (D)
          Amended:  8/22/12
          Vote:     21

           
           SENATE BANKING & FINANCIAL INST. COMM.  :  6-0, 4/11/12
          AYES:  Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
          NO VOTE RECORDED:  Walters

           SENATE JUDICIARY COMMITTEE  :  5-0, 4/24/12
          AYES:  Evans, Harman, Blakeslee, Corbett, Leno

           SENATE APPROPRIATIONS COMMITTEE  :  5-2, 5/14/12
          AYES:  Kehoe, Alquist, Lieu, Price, Steinberg
          NOES:  Walters, Dutton

           SENATE FLOOR  :  31-5, 5/21/12
          AYES:  Alquist, Berryhill, Blakeslee, Calderon, Cannella, 
            Corbett, De León, DeSaulnier, Emmerson, Evans, Fuller, 
            Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal, 
            Negrete McLeod, Padilla, Pavley, Price, Rubio, Simitian, 
            Steinberg, Strickland, Vargas, Wolk, Wright, Wyland, Yee
          NOES:  Anderson, Dutton, Gaines, La Malfa, Walters
          NO VOTE RECORDED:  Correa, Harman, Huff, Runner

           ASSEMBLY FLOOR  :  60-19, 8/27/12 - See last page for vote


          SUBJECT  :    Victims of Corporate Fraud Compensation Fund

           SOURCE  :     Author

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           DIGEST  :    This bill revises and recasts the provisions 
          governing administration of the Victims of Corporate Fraud 
          Compensation Fund (the Fund) by the Secretary of State 
          (SOS), by codifying certain existing regulations 
          promulgated by the SOS to administer the Fund, codifying 
          changes to other existing regulations promulgated by the 
          SOS, and adding new statutory language to facilitate the 
          approval of valid claims from the Fund.  

           Assembly Amendments  clarify the definition of "court of 
          competent jurisdiction."

           ANALYSIS  :    

          Existing law:

          1. Establishes the Fund within the State Treasury, 
             authorizes the SOS to administer the Fund, and directs 
             the SOS 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 
             (CORP) Section 1502.5).  Regulations promulgated by the 
             SOS to administer the Fund are contained in Title 2, 
             Division 7, Chapter 12, Sections 22500 et seq.

          2. 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 SOS (CORP Sections 1502 and 2117).

          3. 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 SOS's Office used the Real Estate 
             Recovery Program rules as a guide, when developing 
             regulations to administer the Fund.  

          This bill:

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          1. Reestablishes the Fund and codifies statutory 
             requirements for both the administration of the Fund and 
             for the eligibility of victims to receive compensation 
             from the Fund, under a new Chapter 22.5 (commencing with 
             Section 2280) of Division 1 of Title 1 of the 
             Corporations Code. 
           
          2. Provides that an aggrieved person who obtains a final 
             judgment in a court of competent jurisdiction, as 
             specified, against a corporation for fraud, 
             misrepresentation, or deceit, made with the intent to 
             defraud, and who diligently attempted to recover the 
             judgment from the corporation, may file an application 
             with the SOS for payment from the Fund for the amount 
             unpaid on the judgment, as specified. 

          3. Increases the maximum amount that any one claimant could 
             recover for any single judgment that otherwise meets the 
             requirements for compensation from the Fund, from 
             $20,000 to $50,000.

          4. Provides various definitions for the purposes of the 
             Fund, including, among other things that: 

                   claimant means an aggrieved person who resides in 
                the state at the time of the fraud and who submits an 
                application pursuant to this chapter;

                   corporation means a domestic corporation, as 
                defined, or a foreign corporation that is qualified 
                to transact business in California, as specified;

                   court of competent jurisdiction is a superior 
                court of any state, or a United States district court 
                or U.S. bankruptcy court; and

                   "final judgment" is a judgment, arbitration 
                award, or criminal restitution order for which 
                appeals have been exhausted or for which the period 
                for appeal has expired, enforcement of which is not 
                barred by the order of any court or by any statutory 
                provision, which has not been nullified or rendered 
                void by any court order or statutory provision, or 

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                for which the claimant has not otherwise been fully 
                reimbursed.   

          5. Specifies the information and documentation required to 
             be provided in an application, and allows for other 
             relevant documents as appropriate, including, among 
             other things:

                   the claimant must provide the SOS with a copy of 
                the final judgment, underlying civil complaint and 
                any amendments thereto, for a finding of fraud, 
                misrepresentation, or deceit, made with the intent to 
                defraud, and may also provide other relevant 
                documentation; and 

                   the claimant must provide the SOS with a 
                description of searches and inquiries conducted by or 
                on behalf of the claimant with respect to the 
                corporation's assets liable to be sold or applied to 
                satisfaction of the judgment, except that a court's 
                determination or finding of the corporation's 
                insolvency or lack of assets to pay the claimant 
                shall be deemed to satisfy this requirement. 

          6. Requires the claimant to make specific declarations, 
             including among other things, that he/she: 

                   is not a spouse or an immediate family member of 
                an employee, officer, director, managing agent, or 
                other principal of the corporation nor a personal 
                representative, of the spouse or an immediate family 
                member of an employee, officer, director, managing 
                agent, or other principal of the corporation; 
                however, being a spouse or immediate family member 
                does not alone preclude a claimant from receiving an 
                award;

                   has complied with specified requirements; and 

                   does not have a pending claim and has not 
                collected on the final judgment from any other 
                restitution fund, or if the claimant has a pending 
                claim or has collected from another fund, include a 
                description of the nature of the pending claim and 

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                the recovery amounts from any restitution fund.

          7. Provides certain timelines by which the SOS, claimant, 
             and corporation must provide specified responses, 
             including, among other things: 

                   the SOS must mail to the claimant an itemized 
                list of deficiencies, if any, of the claimant's 
                application within 21 days if for a single claimant, 
                or 40 days for multiple claimants; and 

                   the SOS must render a decision on the application 
                within 90 calendar days after receiving a completed 
                application. 

          8. Requires the SOS to provide notice, as prescribed by the 
             SOS, to the corporation and claimant with respect to an 
             application made, for specified purposes, including, 
             among other things: 

                   if after 30 calendar days the SOS has not 
                received a response to the latest list of 
                deficiencies, the SOS shall notify the claimant that 
                unless the claimant responds to the deficiencies 
                within a specified period of time of not less than 15 
                calendar days, that the application will be denied; 
                and

                   upon issuance of a proposed decision to award 
                payment or an offer to compromise, the claimant shall 
                have 60 calendar days from the date of service of the 
                proposed award or offer to compromise to accept the 
                proposed award or offer to compromise, and if the 
                claimant fails to accept the proposed award or offer 
                to compromise within the specified time, the 
                application shall be deemed denied.

          9. Provides that if, at any time, the money deposited in 
             the Fund is insufficient to satisfy any duly authorized 
             award or offer of settlement, the SOS shall, when 
             sufficient money has been deposited in the Fund, satisfy 
             the unpaid awards or offer of settlement, in the order 
             that the awards or offers of settlement were originally 
             filed, plus accumulated interest at the rate set by the 

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             Federal Reserve Bank of San Francisco on advances made 
             to member banks, not to exceed 2% per year.

          10.Permits a claimant whose application for compensation 
             from the Fund is denied by the SOS to petition a court, 
             as specified, for de novo review of the merits of the 
             application based on the administrative record.  This 
             bill provides that the burden is on the claimant to 
             prove that the cause of action against the corporation 
             was for fraud, misrepresentation, or deceit, if final 
             judgment in the underlying action in favor of the 
             petitioner was by default, stipulation, consent or 
             pursuant to Section 594 of the Civil Procedure Code, or 
             if the action against the corporation was defended by a 
             trustee in bankruptcy.

          11. Makes it unlawful for any person or the agent of any 
             person to file with the SOS any notice, statement, or 
             other document required under the provisions of this 
             chapter that is false or untrue or contains any willful, 
             material misstatement of fact, and specifies that such 
             conduct shall constitute a public offense punishable by 
             imprisonment and fine, as specified. 

          12.Permits the SOS to attempt to recover the amount paid to 
             a successful claimant from the corporation and suspend 
             that corporation, as specified, and requires that any 
             sums received by the SOS pursuant to these provisions be 
             deposited in the State Treasury and credited to the 
             Fund.

          13. Requires that the SOS adopt regulations in furtherance 
             of the administration of the Fund.

           Background 
           
          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 SOS's Office through the Fund.  

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          A review of the correspondence between Mr. Mark Redmond, 
          representing approximately 500 elderly victims of Senior 
          Care Advocates, and the SOS'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 SOS'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 SOS'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 SOS 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 SOS, several legislative 
          offices contacted the SOS'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 SOS's office was an aberration, or was, 
          instead, representative of a pattern of over-protectiveness 
          toward the Fund within the SOS's Office.  Findings from 
          those inquiries are summarized immediately below.

           How Many Claimants Are Receiving Compensation From the 
          Fund?  
           
          1. When first contacted, the SOS's Office indicated that, 
             from the Fund's inception through August 1, 2011, the 
             SOS had received 701 claims for restitution from the 
             Fund.  

             Of these 701 claims, five claims were awarded, one claim 

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             was settled during litigation, and one court appeal by a 
             victim resulted in a judgment confirming the SOS'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 SOS, 28 claims were 
             withdrawn, three claims were denied, and 561 claims 
             (most related to Senior Care Advocates) were pending 
             resolution.

          2. On October 14, 2011, the SOS'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 SOS's 
             office in its regulations (a number which grew to 103 by 
             the date of the SOS's response).  The 103 claims were 
             rejected for the following reasons:


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

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             |-----------------------------------------------+----------|
             |Applications were submitted more than 18       |          |
             |months following final judgment                |3         |
             |-----------------------------------------------+----------|
             |Applicant was not a party to the court         |    1     |
             |judgment                                       |          |
             |-----------------------------------------------+----------|
             |Application was based on a judgment issued     |          |
             |prior to January 1, 2003                       |1         |
             |                                               |          |
              ---------------------------------------------------------- 

          3. By March 28, 2012, the SOS'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 SOS'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.  

           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 SOS's 
          office has approved the payout of approximately $2.1 
          million in compensation to victims (most, as cited above, 
          in the last eight months).  


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           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes   
          Local:  Yes

           SUPPORT  :   (Verified  8/28/12)

          Secretary of State Debra Bowen
          AFSCME
          Congress of California Seniors
          Los Angeles County District Attorney's Office


           ASSEMBLY FLOOR  :  60-19, 8/27/12
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Bill Berryhill, Block, Blumenfield, Bradford, Brownley, 
            Buchanan, Butler, Charles Calderon, Campos, Carter, 
            Cedillo, Chesbro, Cook, Davis, Dickinson, Eng, Feuer, 
            Fletcher, Fong, Fuentes, Furutani, Galgiani, Gatto, 
            Gordon, Gorell, Hall, Hayashi, Roger Hernández, Hill, 
            Huber, Hueso, Huffman, Jeffries, Lara, Bonnie Lowenthal, 
            Ma, Mendoza, Mitchell, Monning, Nestande, Olsen, Pan, 
            Perea, V. Manuel Pérez, Portantino, Skinner, Smyth, 
            Solorio, Swanson, Torres, Wieckowski, Williams, Yamada, 
            John A. Pérez
          NOES:  Conway, Donnelly, Beth Gaines, Garrick, Grove, 
            Hagman, Halderman, Harkey, Jones, Knight, Logue, Mansoor, 
            Miller, Morrell, Nielsen, Norby, Silva, Valadao, Wagner
          NO VOTE RECORDED:  Bonilla


          JJA:k  8/28/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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