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
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|Author: |Levine |
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|Version: |May 27, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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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
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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
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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
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(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.
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| |Awards |
|Year |Paid To |
| |Victims |
|-----+-----------|
|2015 |$1,844,675 |
|-----+-----------|
|2014 |$3,894,450 |
|-----+-----------|
|2013 |$1,778,933 |
|-----+-----------|
|2012 |$2,445,807 |
|-----+-----------|
|2011 |$0 |
| | |
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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.
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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
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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
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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
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