BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 2759 (Levine) - Corporations:  agents:  victims of corporate  
          fraud compensation fund
          
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          |Version: August 2, 2016         |Policy Vote: B. & F.I. 7 - 0,   |
          |                                |          JUD. 7 - 0            |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date:  August 8, 2016   |Consultant: Jolie Onodera       |
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          This bill meets the criteria for referral to the Suspense File.


          Bill  
          Summary:  AB 2759 would extend the authority of victims of  
          corporate fraud to pursue compensation from the Victims of  
          Corporate Fraud Compensation Fund (VCFCF), administered by the  
          Secretary of State (SOS), beyond claims against a corporation to  
          include fraudulent acts committed by an agent of a corporation,  
          as well as attorney's fees if ordered by a court in the final  
          judgment, as specified. 


          Fiscal  
          Impact:  
            Secretary of State  :  Potential increase in administrative  
            costs, likely minor and absorbable (General Fund) to (1)  
            revise and distribute forms and notices, (2) process a greater  
            number of claims for reimbursement against agents of  
            corporations, and, (3) enforce and collect repayments to the  
            VCFCF for claims paid on individual restitution orders. 







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            VCFCF payments  :  Potentially significant to major increase in  
            future payments made from the VCFCF due to extending  
            compensation eligibility to include claims against agents of  
            corporations and the payment of attorney's fees. For every 10  
            to 20 claims paid at the $50,000 cap per claim, costs would be  
            $0.5 million to $1 million (Special Fund*). The VCFCF is  
            projected to receive revenues of $1.7 million in FY 2016-17,  
            with an ending reserve balance of $12.4 million. Annual  
            payments out of the VCFCF have been in the range of $1.5  
            million to $1.8 million. Staff notes the current level of fee  
            revenues, in the absence of regular repayments to the VCFCF,  
            will be insufficient to sustain future increases in payments  
            from the VCFCF. Repayments to the SOS on claims paid from the  
            VCFCF are rare, with no repayments provided over the last  
            three years. Additionally, authorizing payment for attorney's  
            fees, potentially retroactively, will place additional  
            pressure on the VCFCF. 
            Repeal of interest  :  Minor future reductions to VCFCF claim  
            payment amounts that will no longer have interest applied to  
            the outstanding award payment during the period that the VCFCF  
            balance is insufficient to fully satisfy the award. To date,  
            no interest has been assessed or paid on VCFCF payments.
           
           *Victims of Corporate Fraud Compensation Fund


          Background:  Existing law establishes the Victims of Corporate Fraud  
          Compensation Fund (VCFCF) within the State Treasury, which is  
          administered by the SOS, for the sole purpose of providing  
          restitution to the victims of corporate fraud. Existing law  
          requires foreign and domestic corporations to pay a $5  
          disclosure fee when filing specified statements with the SOS,  
          one-half of which must be deposited into the VCFCF.  
          (Corporations Code  1502, 2117, 2280.) 
          Existing law provides that, when an aggrieved person obtains a  
          final court judgment 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 a specified application with the SOS within 18 months after  
          judgment has become final, for payment from the VCFCF for the  
          amount unpaid on the judgment which represents the awarded  
          actual and direct loss, any awarded compensatory damages, and  
          awarded costs to the claimant in the final judgment, excluding  








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          punitive damages. (Corporations Code  2282(a)-(c).)


          Existing law caps the liability of the VCFCF at $50,000 per any  
          one claimant per single judgment finding fraud,  
          misrepresentation, or deceit, made with intent to defraud,  
          regardless of the number of persons aggrieved in an instance of  
          corporate fraud, or misrepresentation or deceit resulting in a  
          judgment qualified for recovery under the VCFCF, as specified,  
          or the number of judgments against a corporation. (Corporations  
          Code  2289 (a).) 


          Under existing law, if, at any time, the money deposited in the  
          VCFCF is insufficient to satisfy any duly authorized award or  
          offer of settlement, the SOS is required to, 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,  
          not to exceed 2 percent per year. (Corporations Code  2290.)  

          This bill seeks to allow victims of corporate fraud to pursue  
          compensation from the VCFCF for fraudulent acts committed by a  
          corporation's officer or director, as specified. 


          Proposed Law:  
           This bill would extend the authority of victims of corporate  
          fraud to pursue compensation from the VCFCF beyond claims  
          against a corporation to include fraudulent acts committed by an  
          agent of a corporation. Specifically, this bill:
                 Provides that, when an aggrieved person obtains a  
               criminal restitution order against an agent 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  
               SOS for payment from the compensation fund, as specified  
               under existing law. This bill would also require further  
               documentation, as follows: 


                  o         if the final judgment is a criminal  








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                    restitution order, the claimant must provide the  
                    charging document and the restitution order; and, 
                  o         if the defendant is an agent, the claimant  
                    must also provide documentation showing the defendant  
                    named in the restitution order is an agent as defined  
                    in this bill.
                 Expands what constitutes a final judgment to also  
               include a criminal restitution order issued by a court of  
               competent jurisdiction against an agent of the corporation  
               for fraud, misrepresentation, or deceit, with the intent to  
               defraud, pursuant to specified state or federal law. 


                 Provides that nothing in the applicable section is to be  
               interpreted to authorize the collection of attorney's fees,  
               unless they are ordered by a court in the final judgment  
               against a corporation or a criminal restitution order  
               against an agent. Additionally provides that the  
               Legislature finds and declares that this paragraph does not  
               constitute a change in, but is declaratory of, existing  
               law.


                 Defines "agent" to mean a person who was an officer or  
               director of a domestic or foreign corporation, as  
               specified, at the time the fraudulent acts occurred, was  
               named in a final criminal restitution order in connection  
               with the fraudulent acts, and was acting in the person's  
               capacity as the corporation's officer or director when  
               committing the fraudulent acts.  This bill would also  
               define "judgment debtor" for the purposes of these  
               statutes.


                 Repeals a requirement for the state to pay interest on  
               amounts awarded from the VCFCF, when money in the fund is  
               insufficient to satisfy any duly authorized award or offer  
               of settlement.  

                 Makes other clarifying or conforming changes to other  
               provisions of the VCFCF statutes. 


          Related  








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          Legislation:  SB 1058 (Lieu) Chapter 564/2012 revises and  
          recasts the provisions governing administration of the VCFCF by  
          the SOS, by codifying certain existing regulations promulgated  
          by the SOS to administer the VCFCF, codifying changes to other  
          existing regulations promulgated by the SOS, and adding new  
          statutory language to facilitate the approval of valid claims  
          from the VCFCF.  
          AB 55 (Shelley) Chapter 1015/2002, among its numerous  
          provisions, created the VCFCF within the State Treasury, for the  
          sole purpose of providing restitution to the victims of  
          corporate fraud who have been otherwise unable to collect on  
          their judgment. 




          Staff  
          Comments:  The SOS has indicated the provisions of this bill  
          could significantly reduce restitution funds available to  
          claimants victimized by corporate fraud by authorizing  
          attorney's fees to be paid from the fund, placing additional  
          pressure on funds intended to help provide relief to victims  
          when corporate fraud occurs, potentially risking the  
          sustainability of the fund. 
          Fees collected from SOS-registered business entities to support  
          the existing fund are insufficient to award court-approved  
          restitution for the actual victims themselves. While there is  
          insufficient information to accurately estimate the overall  
          fiscal impact of authorizing payment for attorney's fees, the  
          SOS notes that in recent cases involving the award of attorney's  
          fees, the fees have increased the VCFCF award by an average of  
          more than 400 percent. The addition of attorney fees will  
          significantly accelerate the depletion of the fund resulting in  
          inordinate delays in the distribution of funds to the victims.


          The SOS indicates that historically the VCFCF had not awarded  
          attorney's fees (until the court decision Kelly Morris v. The  
          Office of the Secretary of State of the State of California,  
          Case No. 34-2014-80001900, judgment October 2015). The reference  
          in the bill stating the payment of attorney's fees awarded by a  
          court are declaratory of existing law may additionally invite  
          claims for attorney's fees in previously awarded cases creating  
          a significant unintended fiscal impact on the VCFCF.








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