BILL ANALYSIS                                                                                                                                                                                                    



          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 --