BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2759


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          Date of Hearing:  April 18, 2016


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          AB 2759  
          (Levine) - As Introduced February 19, 2016


          SUBJECT:  Corporations:  agents:  victims of corporate fraud  
          compensation fund


          SUMMARY:  Seeks to compensate victims of corporate fraud  
          committed by corporate officers.  Specifically, this bill: 





          1)Allows an individual who is a victim of corporate fraud and  
            who wins a judgment against a corporate officer, but is unable  
            to collect the judgment from the officer after diligent  
            efforts to do so, to collect damages from the Corporate Fraud  
            Compensation Fund (Fund) as a similarly situated victim of  
            corporate fraud with a judgment against a corporation would be  
            able to do.



          EXISTING LAW:  


           1) Establishes the Fund in the State Treasury, administered by  
             the Secretary of State (SOS) for the sole purpose of  








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             providing restitution to the victims of a corporate fraud.   
             (Corporations Code Section 2280.  All further statutory  
             references are to this code, unless otherwise indicated.)


           2) Requires the SOS to adopt regulations in furtherance of the  
             administration of the Fund.  (Ibid.)


           3) Allows an aggrieved person who obtains a final judgment in a  
             court of competent jurisdiction against a corporation based  
             upon the corporation's fraud, misrepresentation, or deceit,  
             made with intent to defraud, the aggrieved person to, upon  
             the judgment becoming final and after diligent collection  
             efforts are made, file an application with the SOS for  
             payment from the Fund.  (Section 2282 (a).)


           4) Limits the amount of recovery by a person described in 3),  
             above, to the amount unpaid on the judgment that represents  
             the awarded actual and direct loss, any awarded compensatory  
             damages, and awarded costs to the claimant in the final  
             judgment, excluding punitive damages.  (Section 2282 (a).)


           5) Raises money for the Fund by directing one-half of the five  
             dollar disclosure fee required to be paid by corporations  
             when they file their annual Statements of Information with  
             the SOS.  (Sections 1502 and 2117.)


          FISCAL EFFECT:  Unknown


          COMMENTS:  


          Currently, the Fund is structured by statute to provide relief  
          to victims of corporate malfeasance when the convicted entity is  








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          a corporation.  In cases where an individual, acting in their  
          capacity of an agent of the corporation is convicted of fraud  
          the victim is unable to access the Fund because it is limited to  
          corporations, and not individuals.  For example, the CEO of AGA  
          Financial and two accomplices were convicted of running the  
          largest Ponzi scheme in California history.  The many victims of  
          the fraud perpetrated by AGA Financial are unable to get relief  
          from the Fund because the individual officers of AGA were  
          convicted, not the corporation.


          In 2002, in response to well-publicized scandals involving Enron  
          and other corporations, the Legislature created the Fund.  (See  
          AB 55 (Shelley (Chap. 1015, Stats. of 2002).)  The purpose was  
          to help innocent victims of corporate fraud who had won  
          judgments but were unable to collect judgment, either because  
          the corporation was bankrupt, had disappeared, or was otherwise  
          unable or unwilling to pay up.  The Fund was financed by a fee  
          on corporate filings, held in the State Treasury, and  
          administered by and pursuant to rules promulgated by the SOS.   
          In order to collect money from the Fund, the victim must have  
          won a judgment and been unable to collect from the corporation  
          despite diligent efforts to do so.   


          In 2012, the Legislature updated and revised the law regarding  
          the Fund, codifying the SOS regulations in SB 1058 (Lieu-Chapter  
          564, Statutes of 2012).  SB 1058 also sought to improve the  
          claim process to make it more likely that valid claims would be  
          compensated.  Among other things, SB 1058 established a new  
          deadline of 90 days for a victim to receive a determination;  
          increased the recovery cap for a single applicant from $20,000  
          to $50,000; and restricted the ability of the fraudulent  
          corporation to contest payments or block appeals by prohibiting  
          consideration of issues and fact already established by the  
          judgment. 











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          According to the SOS, the Fund had a balance of approximately  
          $11,900,000 as of January 2016.  According to information  
          provided by the author: 


               The Victims of Corporate Fraud Compensation Fund has not  
               received any applications based upon a criminal restitution  
               order against AGA Financial Inc.  However, the Victims of  
               Corporate Fraud Compensation Fund has received numerous  
               claims based upon four criminal restitution orders naming  
               James Koenig and Asset Real Estate and Investment Company  
               in a related criminal proceeding.  The first three criminal  
               restitution orders named victims who testified at trial.   
               Administrative review has been completed for all of the  
               submitted Applications based upon the first three  
               restitution orders and the Victims of Corporate Fraud  
               Compensation Fund has paid out more than $1.1 million  
               dollars to victims named in the three orders.


                The court issued its fourth restitution order, on June 24,  
               2015, naming victims who had not testified at trial.  The  
               Victims of Corporate Fraud Compensation Fund received  
               nearly 300 claims based upon the June 24, 2015 criminal  
               restitution order.  Unfortunately, James Koenig has filed a  
               Notice of Appeal with respect to the June 24, 2015 criminal  
               restitution order which is still pending.  California  
               Corporations Code sections 2281(f) and 2282(a) preclude the  
               payment of claims while an appeal is pending.  Therefore,  
               the Victims of Corporate Fraud Fund is statutorily  
               precluded from awarding applications based upon the June  
               24, 2015 criminal restitution order until the appeal has  
               run its course.


          According to the author:  










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                We know that there are victims of corporate fraud that are  
               unable to access the victims of corporate fraud  
               compensation fund.  That is because to access the fund an  
               individual must have been a victim of a corporation that  
               has been convicted.  Very rarely are corporations charged  
               with crimes almost always it is an individual who is  
               charged with a crime.  AB 2759 will correct this problem  
               and allow many individuals who should have access to the  
               fund access.



          REGISTERED SUPPORT / OPPOSITION:




          Support


          5 Individuals




          Opposition


          None on file.




          Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081













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