BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 2759|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
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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 17:28:28


                                   ****  END  ****


          










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