BILL ANALYSIS Ó SENATE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Senator Steven Glazer, Chair 2015 - 2016 Regular Bill No: AB 2759 Hearing Date: June 15, 2016 ----------------------------------------------------------------- |Author: |Levine | |-----------+-----------------------------------------------------| |Version: |May 27, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- Subject: Corporations: agents: victims of corporate fraud compensation fund SUMMARY Authorizes victims of corporate fraud to pursue compensation from the Victims of Corporate Fraud Compensation Fund (compensation fund) for fraudulent acts committed by an officer or director of a corporation, as specified. DESCRIPTION 1. Defines an agent for purposes of the compensation fund as a person who was an officer or director of a corporation at the time fraudulent acts occurred and who was acting in the person's capacity as the corporation's officer or director when committing the fraudulent acts. 2. Amends the definition of a final judgment for purposes of the compensation fund to include a criminal restitution order issued by a court of competent jurisdiction against a corporation or agent of the corporation, for fraud, misrepresentation, or deceit, with the intent to defraud, as specified (this bill would add the italicized language). 3. Provides 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, or obtains a criminal restitution order against an agent AB 2759 (Levine) Page 2 of ? based upon the agent's fraud, misrepresentation, or deceit, made with intent to defraud while acting in the agent's capacity as the corporation's officer or director, the aggrieved person may, upon the judgment becoming final and after diligent collection efforts are made, file an application with the Secretary of State for payment from the compensation fund, as specified (this bill would add the italicized language). 4. Provides that nothing in the aforementioned provision shall be interpreted to authorize the collection of attorney's fees, and includes legislative findings that this clarification does not constitute a change in, but rather is declaratory of, existing law. 5. Adds to the documentation that must be provided by an applicant for compensation from the compensation fund by providing that, if the final judgment is a criminal restitution order, the claimant must provide the charging document and restitution order, and if the defendant is an agent, the claimant must also provide documentation showing that the defendant named in the restitution order is an agent, as defined. 6. Provides that, if the final judgment is a criminal restitution order against an agent, the petitioner has the burden of proving that the defendant named in the criminal restitution order qualifies as an agent, as defined. Authorizes an active corporation, which has submitted a response to the application for restitution from the compensation fund, to appear in court in the action regarding the sole issue of whether the defendant named in the criminal restitution order qualifies as its agent, as defined. 7. Deletes the requirement for the state to pay interest on amounts awarded from the compensation fund, when money in the fund is insufficient to satisfy any duly authorized award or offer of settlement. 8. Makes conforming changes to other provisions of the compensation fund statutes. EXISTING LAW AB 2759 (Levine) Page 3 of ? 9. Establishes the compensation fund within the State Treasury, administered by the Secretary of State, and provides that the fund exists for the sole purpose of providing restitution to the victims of a corporate fraud (Corporations Code Section 2280). 10. Provides that, when an aggrieved person obtains a final judgment, as defined, 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 may, upon the judgment becoming final and after diligent collection efforts are made, file an application with the Secretary of State for payment from the compensation fund (Corporations Code Section 2282). 11. Prescribes a series of rules that must be followed by persons seeking to apply to the Secretary of State seeking payment from the fund and imposes a series of requirements on the Secretary of State regarding the steps he or she must take once an application for payment from the fund is submitted; the timeframes within which he or she must render a final written decision; and the steps that may be taken by claimants whose applications for payment from the fund are denied, and who wish to appeal those denials (Corporations Code Sections 2281 through 2288). 12. Caps the liability of the fund at $50,000 per claimant per single judgment finding fraud, misrepresentation, or deceit, made with intent to defraud (Corporations Code Section 2289). 13. 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 Secretary of State 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, as specified, not to exceed 2% per year (Corporations Code Section 2290). 14. Directs to the fund 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 AB 2759 (Levine) Page 4 of ? (Corporations Code Sections 1502 and 2117). COMMENTS 1. Purpose: This bill is intended to expand access to the compensation fund by victims of corporate fraud, by authorizing the fund to be used to compensate victims of corporate fraud that is perpetrated by an officer or director of a corporation, who was acting in his or her official capacity as officer or director when committing that fraud. 2. Background: The compensation fund was created in 2002 (SB 55, Shelley, Chapter 1015, Statutes of 2002) on the heels of the Enron scandal, but was largely untapped until 2011. Administrative changes implemented by the Secretary of State's Office beginning in 2011, together with enactment of SB 1058 (Lieu) in 2012, helped facilitate payment from the fund to victims. To date, the fund has paid out 603 claims, totaling $10.6 million. The following chart shows payouts from the fund during each of the past five calendar years, using data provided by the Secretary of State's Office. ----------------- | |Awards | |Year |Paid To | | |Victims | |-----+-----------| |2015 |$1,844,675 | |-----+-----------| |2014 |$3,894,450 | |-----+-----------| |2013 |$1,778,933 | |-----+-----------| |2012 |$2,445,807 | |-----+-----------| |2011 |$0 | | | | ----------------- The fund receives approximately $1.7 million per year, through a $2.50 disclosure fee paid by for-profit corporations. The fund balance is currently $12 million. AB 2759 (Levine) Page 5 of ? 3. Discussion: This bill allows an individual who is a victim of corporate fraud and who wins a judgment against a corporate officer or director, but is unable to collect the judgment from the officer or director after diligent efforts to do so, to collect damages from the compensation fund, in the same way a similarly situated victim of corporate fraud with a judgment against a corporation could do. The bill contains language that requires the corporate officer to have engaged in the fraudulent acts while acting in his or her official capacity as a corporation's officer or director. This language ensures consistency with the original intent of the compensation fund, and ensures that victims may not pursue restitution from the fund, if they are defrauded by someone who happens to be a corporate officer, but who was not acting in his or her official capacity as an officer or director of a corporation when perpetrating that fraud. The Secretary of State's office estimates that this bill will increase payments from the compensation fund by about 50%. This large increase reflects the fact that people, rather than corporations, are typically charged in cases involving corporate fraud. In Ponzi schemes, especially, the corporation is typically defunct by the time the case goes to trial. Attorneys who prosecute these types of cases assert that there is often no value in prosecuting the corporation, because it no longer exists; instead, they prosecute the people who ran the Ponzi scheme and served as the face of the corporation. Although these prosecutions can result in convictions, they rarely result in compensation being paid out from the compensation fund, because the corporations are rarely named in the restitution orders that stem from these convictions. This bill amends the law to more clearly reflect the entities that are prosecuted in connection with corporate fraud. 4. To Which Applications Will This Bill Apply? Under existing law, an application is not timely until a final judgment has been issued. Once a judgment becomes final, existing law also provides victims 18 months in which to submit their applications for restitution. According to the Secretary of State's Office, this bill will apply to applications filed prospectively on and after the effective date of this bill AB 2759 (Levine) Page 6 of ? and to applications that were filed prior to the effective date of this bill, but which are within the law's 18-month timeframe. Thus, if an application pending with the Secretary of State's Office on January 1, 2017 is within the 18-month timeframe, that application will be reviewed using the rules contained in this bill. If a victim's 18-month timeframe ends prior to the effective date of the bill, that application will be reviewed using the rules in effect before January 1, 2017. 5. Summary of Arguments in Support: Crime Victims United of California and three private individuals support the bill, because it will allow people who have been defrauded by corporate officers, and who are currently ineligible to see restitution from the Victims of Corporate Fraud Compensation Fund, to apply for restitution. 6. Summary of Arguments in Opposition: None received. 7. Amendments: a. The author's office has agreed to the following technical amendment: Page 2, line 6, after "occurred" insert a comma and the following: was named in a final criminal restitution order in connection with the fraudulent acts, 8. 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. SB 1058 (Lieu), Chapter 564, Statutes of 2012: Codified a series of rules for victims seeking to apply to the Secretary of State for compensation from the fund, imposed a series of requirements on the Secretary of State regarding the steps he or she must take once an application for payment from the fund is submitted; the timeframes within which he or she must render a final AB 2759 (Levine) Page 7 of ? written decision; and the steps that may be taken by claimants whose applications for payment from the fund are denied, and who wish to appeal those denials. Made additional changes intended to help facilitate the payment of money out of the fund to victims of corporate fraud. LIST OF REGISTERED SUPPORT/OPPOSITION Support Crime Victims United of California Three private individuals Opposition None received -- END --