BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2759|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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THIRD READING
Bill No: AB 2759
Author: Levine (D)
Amended: 8/17/16 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 6/15/16
AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: 5-0, 8/11/16
AYES: Lara, Beall, Hill, McGuire, Mendoza
NO VOTE RECORDED: Bates, Nielsen
ASSEMBLY FLOOR: 80-0, 6/1/16 - See last page for vote
SUBJECT: Corporations: agents: victims of corporate fraud
compensation fund
SOURCE: Author
DIGEST: This bill 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.
Senate Floor Amendments of 8/17/16 strike the provision of the
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bill that states nothing shall be interpreted to authorize the
collection of attorney's fees, unless they are ordered by a
court, as specified.
ANALYSIS:
Existing law:
1)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).
2)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).
3)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).
4)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).
5)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
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offers of settlement were originally filed, plus accumulated
interest, as specified, not to exceed 2% per year
(Corporations Code Section 2290).
6)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
(Corporations Code Sections 1502 and 2117).
This bill:
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, was named in a final criminal
restitution order in connection with the fraudulent acts, and
was acting in his or her 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 adds 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 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 adds the italicized language).
4)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
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also provide documentation showing that the defendant named in
the restitution order is an agent, as defined.
5)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.
6)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.
7)Makes conforming changes to other provisions of the
compensation fund statutes.
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, Chapter 564)
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.
---------------------------
|Year |Awards Paid To |
| |Victims |
|-----+---------------------|
|2015 | $1,844,675 |
|-----+---------------------|
|2014 | $3,894,450 |
|-----+---------------------|
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|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.
Comments
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.
This 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,
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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.
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 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.
Related/Prior Legislation
AB 55 (Shelley, Chapter 1015, Statutes of 2002) enacted the
California Corporate Disclosure Act, created the 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.
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
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.
FISCAL EFFECT: Appropriation: Yes Fiscal
Com.:YesLocal: Yes
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According to the Senate Appropriations Committee, this bill will
result in a potential increase in administrative costs, likely
minor and absorbable, to revise and distribute forms and
notices, process a greater number of claims for reimbursement
against agents of corporations, and enforce and collect
repayments to the compensation fund for claims paid on
individual restitution orders. The bill will result in minor
future reductions to claim payment amounts, which will no longer
have interest applied to the outstanding award payment during
the period that the compensation fund balance is insufficient to
fully satisfy the award. The bill will result in a potentially
significant to major increase in future payments made from the
compensation fund. For every 10 to 20 claims paid at the
$50,000 cap per claim, costs would be $0.5 million to $1
million. The compensation fund 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 compensation fund
have been in the range of $1.5 million to $1.8 million. The
current level of fee revenues, in the absence of regular
repayments to the compensation fund, will be insufficient to
sustain future increases in payments from the fund. Repayments
to the Secretary of State on claims paid from the compensation
fund are rare, with no repayments provided over the last three
years.
SUPPORT: (Verified8/12/16)
Crime Victims United of California
11 individuals
OPPOSITION: (Verified8/12/16)
Department of Finance
ARGUMENTS IN SUPPORT: Crime Victims United of California
"strongly supports closing the loophole with regard to those
victims who are permitted to access the Fund. But for the fact
that it was an individual within a corporation rather than the
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corporation itself that committed the fraudulent act(s) against
the victim, they would have access to funds that could be
critically important in helping to rebuild their lives. This is
a common sense measure that will provide particular benefit for
elderly victims who have relied on their savings for retirement
and their golden years and who may not otherwise be able to
cover their living expenses."
ARGUMENTS IN OPPOSITION: Prior to the August 17, 2016
amendments, the Department of Finance observed that "in recent
cases where the award of attorney fees was granted, the attorney
fees have increased the compensation fund award by an average of
more than 400 percent. The addition of attorney fees, as
specified in this bill, would significantly accelerate the
depletion of the fund resulting in inordinate delays in the
distribution of funds to the victims." It is unknown whether
the August 17, 2016 amendments will remove the Department's
opposition to the bill.
ASSEMBLY FLOOR: 80-0, 6/1/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,
Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,
Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,
Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,
Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim,
Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis,
Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte,
O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
8/18/16 16:11:10
**** END ****
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