BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 1058 (Lieu) Hearing Date: April 11,
2012
As Amended: March 26, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would revise and recast the provisions governing
administration of the Victims of Corporate Fraud Compensation
Fund (the Fund) by the Secretary of State, by codifying certain
existing regulations promulgated by the Secretary of State to
administer the Fund, codifying changes to other existing
regulations promulgated by the Secretary of State, and adding
new statutory language to facilitate the approval of valid
claims from the Fund.
DESCRIPTION
1. Would codify existing Secretary of State regulations
governing administration of the Fund, which define
"application," "claimant," "complaint," and "corporation,"
but would expand the definition of "court of competent
jurisdiction" to include small claims, municipal, or
superior courts of any state (not just California), and
United States district courts and bankruptcy courts located
in any state (not just California).
2. Would expand the existing Secretary of State's regulatory
definition of "final judgment" to additionally include, but
not be limited to, any findings of fact, conclusions of law,
jury verdicts, jury special verdicts, statements of
decision, memorandum decisions, or any other indication by a
court of jury, as the case may be, of its decision and the
reasons for the decision. Existing Secretary of State
regulations, which this bill would also codify, provide that
final judgments also include judgments, arbitration awards,
and criminal restitution orders for which the period of
appeal has expired, enforcement of which is not barred by
the order of any court or by any statutory provision, and
which have not been nullified or rendered void by any court
order or statutory provision.
SB 1058 (Lieu), Page 2
3. Would codify existing Secretary of State regulations, which
provide 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,
the aggrieved person may, upon the judgment becoming final,
file an application with the Secretary of State for payment
from the Fund, as specified, for the amount remaining unpaid
on the judgment, which represents an actual and direct loss
to the claimant in the transaction. Would require the
application to be submitted to the Secretary of State within
18 months after the judgment becomes final.
4. Would specify the information that must be included in a
claimant's application, and would codify the following three
specific changes, which are departures from existing
Secretary of State regulations:
a. A copy of a judgment that specifies the facts of the
allegations of the complaint would be satisfactory to
satisfy the requirement that each application contain a
detailed narrative statement of the facts in explanation
of the allegations of the complaint on which the
underlying judgment is based.
b. A court's determination or finding of a
corporation's insolvency or lack of assets to pay the
claimant would be sufficient to satisfy the requirement
that the claimant sought to obtain restitution from the
corporation.
c. Would expressly prohibit the Secretary of State from
conditioning an award of payment from the Fund upon
submission of any additional information by the claimant,
beyond that required in the application.
5. In the event a claimant's application fails to include all
required information, would decrease the length of time the
Secretary of State has in which to mail an itemized list of
deficiencies to the claimant from 21 to 15 days. (This
change is consistent with Real Estate Recovery Fund rules).
6. Would add a requirement that the Secretary of State render
a final written decision to each claimant within 90 days of
receipt of a completed application, unless the claimant
SB 1058 (Lieu), Page 3
agrees in writing to extend the time within which the
Secretary of State may render a decision. This change is
consistent with Real Estate Recovery Fund rules, but differs
from existing Secretary of State regulations, which require
the Secretary of State to render a final written decision on
applications no later than July 31st of the fiscal year
following the fiscal year in which the application was
submitted.
7. Would codify the existing Secretary of State regulation
authorizing the Secretary to deny or grant an application or
enter into a compromise with the claimant to pay less in
settlement than the full amount of the claim, and would
codify the Secretary of State regulation which states that
if a claimant refuses to accept a settlement of the claim
offered by the Secretary of State, the written decision of
the Secretary of State shall be to deny the claim.
8. Would codify the existing Secretary of State regulation
giving claimants whose applications have been denied up to
six months in which to file an application in superior court
for an Order Directing Payment out of the Victims of
Corporate Fraud Compensation Fund, based upon the grounds
set forth in the application submitted by the claimant to
the Secretary of State.
9. Would codify the requirement that the Secretary of State
notify any corporation whose fraudulent activities gave rise
to a claim against the Fund regarding the Secretary of
State's decision on that application, and the existing
regulation that authorizes the Secretary of State to assume
the claimant's interest in the judgment against the
corporation. Would add a new requirement, based on the
provisions of the Real Estate Recovery Fund, which would
give the Secretary of State authority to pursue damages
against the corporation's officers for the amount that was
paid to the claimant from the Fund. This new provision
differs from existing regulations, which require the
claimant to pursue the corporation and all of the
corporation's officers for compensation, before the claimant
is eligible to apply to the Fund for compensation.
10. Would cap the total amount that may be paid to any claimant
for any one action by a corporation at $20,000, with respect
to applications from the Fund that were filed before January
SB 1058 (Lieu), Page 4
1, 2013 (thus codifying existing regulations), and would
increase that amount to $50,000 for applications filed on or
after January 1, 2013 (an increase relative to existing
regulations).
11. Would add a provision based on the Real Estate Recovery
Fund, which states that when multiple corporations are
involved in a transaction, and the conduct of two or more of
the corporations results in a judgment meeting the
requirements of the bill, claimants may seek recovery from
the Fund based on a judgment against any of the
corporations, subject to the limitations in Number 10 above.
12. Would add a new provision, not found in existing Secretary
of State regulations or the Real Estate Recovery Fund,
stating that, when multiple claimants are involved in a
corporate fraud or in misrepresentation or deceit by a
corporation, resulting in a judgment meeting the
requirements of the bill, each claimant may seek recovery
from the fund individually, subject to the limitations in
Number 10 above.
13. Would add a new provision, based on the Real Estate
Recovery Fund, stating that if, at any time, the money in
the Fund is insufficient to satisfy any duly authorized
claim, the Secretary of State shall, when sufficient money
has been deposited into the Fund, satisfy the unpaid claims
or portions thereof, in the order that the claims were
originally filed, plus accumulated interest at a rate of 4%
per year. This differs from existing Secretary of State
regulations, which require the Secretary of State to prorate
the money available in the Fund among eligible applicants,
if there is insufficient money in the Fund to pay all
applicants the full amount to which they are entitled.
14. Would add a new provision, based on the Real Estate
Recovery Fund, making it unlawful for any person or the
agent of any person to file any document with the Secretary
of State in connection with any application for restitution
from the Fund, which is false or untrue or contains any
willful, material misstatement of fact. Penalty for filing
such a document would constitute a public offense punishable
by imprisonment in a county jail for a period of not more
than one year, or a fine of not more than $1,000, or both.
EXISTING LAW
SB 1058 (Lieu), Page 5
15. Establishes the Fund within the State Treasury, authorizes
the Secretary of State to administer the Fund, and directs
the Secretary of State to adopt regulations regarding
administration of the Fund and the eligibility of victims to
receive compensation from the Fund. Provides that the Fund
exists for the sole purpose of providing restitution to the
victims of a corporate fraud (Corporations Code Section
1502.5). Regulations promulgated by the Secretary of State
to administer the Fund are contained in Title 2, Division 7,
Chapter 12, Sections 22500 et seq.)
16. Raises money for Fund by directing 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).
17. Provides for the Real Estate Recovery Program (also known
as the Consumer Recovery Program within the Real Estate
Fund; Business and Professions Code Section 10470 et seq.),
administered by the Department of Real Estate for the
purpose of providing a fund of last resort to compensate
persons who are defrauded by real estate licensees. The
Secretary of State's Office used the Real Estate Recovery
Program rules as a guide, when developing regulations to
administer the Fund.
COMMENTS
1. Purpose: This bill is sponsored by the author, to help
ensure that the Fund works as intended ten years ago, when
it was created, and "to ensure that all corporate fraud
victims collect the restitution to which they are entitled,
without enduring a bureaucratic nightmare."
2. Background and Discussion: This bill is based on an article
authored by Sacramento Bee columnist Dan Morain on October
9, 2011, profiling the challenges faced by the approximately
500 victims of a corporate fraud perpetrated by James Walker
and his now-defunct Senior Care Advocates, Inc. In his
article, Morain detailed the nearly 18-month struggle of
victims scammed by James Walker and Senior Care Advocates to
obtain compensation from the Secretary of State's Office
through the Victims of Corporate Fraud Compensation Fund.
SB 1058 (Lieu), Page 6
A review of the correspondence between Mr. Mark Redmond,
representing approximately 500 elderly victims of Senior
Care Advocates, and the Secretary of State's Office,
regarding the claims submitted by Mr. Redmond on the
seniors' behalf, reveals a lengthy saga of frustrated
communication. Following Mr. Redmond's submission of
initial applications on the victims' behalf on May 14th,
2010, the Secretary of State's Office and Mr. Redmond
exchanged no fewer than ten letters back and forth regarding
the applications (the first dated June 4, 2010, and the most
recent dated August 29, 2011). In these letters, each of
which runs for several pages, the Secretary of State's
office details deficiencies it observed in the victims'
applications, and Mr. Redmond, responding on behalf of the
victims, attempts to resolve these deficiencies by providing
explanations and additional documentation. The
correspondence suggests that there is significant room for
improving the rules governing the victims' application
process, as well as the process by which the Secretary of
State evaluates applications, deems them complete, and
disburses money from the Fund. Existing shortcomings seem
to have created procedural hurdles, which blocked timely
access to the Fund by the Senior Care Advocates victims.
After reading the Dan Morain article and the correspondence
between Mr. Redmond and the Secretary of State, several
legislative offices contacted the Secretary of State's
office in an attempt to determine whether the case
summarized in the Bee article and detailed in the lengthy
correspondence between Mr. Redmond and the Secretary of
State's office was an aberration, or was, instead,
representative of a pattern of over-protectiveness toward
the Fund within the Secretary of State's Office. Findings
from those inquiries are summarized immediately below.
3. How Many Claimants Are Receiving Compensation From the Fund?
a. When first contacted, the Secretary of State's
Office indicated that, from the Fund's inception through
August 1, 2011 , the Secretary of State had received 701
claims for restitution from the Fund.
Of these 701 claims, five claims were awarded, one claim
was settled during litigation, and one court appeal by a
victim resulted in a judgment confirming the Secretary of
SB 1058 (Lieu), Page 7
State's settlement offer. When summed, all seven of
these claims resulted in a payout from the Fund of
$92,497.
Of the remaining claims, 102 did not qualify for payment,
because they did not meet the eligibility criteria
established by the Secretary of State, 28 claims were
withdrawn, 3 claims were denied, and 561 claims (most
related to Senior Care Advocates) were pending
resolution.
b. On October 14, 2011 , the Secretary of State's office
responded to legislative requests for a breakdown of the
102 claims which did not qualify for payment, because
they did not meet the eligibility criteria established by
the Secretary of State's office in its regulations (a
number which grew to 103 by the date of the Secretary of
State's response). The 103 claims were rejected for the
following reasons:
--------------------------------------------------------
| Reason for Denial | Number of |
| |Applications|
| | Denied |
|-------------------------------------------+------------|
|The victims applied for compensation based | 52 |
|on judgments that were not based on | |
|corporate fraud | |
|-------------------------------------------+------------|
|A judgment was lacking, or the judgment | 23 |
|was not issued by a court in California | |
|-------------------------------------------+------------|
|Applications were based upon judgments | 14 |
|against entities that were not | |
|corporations | |
|-------------------------------------------+------------|
|Applications were based on judgments that | 5 |
|were not final | |
|-------------------------------------------+------------|
|Applicants demonstrated insufficient proof | 4 |
|regarding their attempts to collect from | |
|the corporation and its corporate officers | |
|prior to filing a claim with the Fund | |
|-------------------------------------------+------------|
|Applications were submitted more than 18 | 3 |
|months following final judgment | |
SB 1058 (Lieu), Page 8
|-------------------------------------------+------------|
|Applicant was not a party to the court | 1 |
|judgment | |
|-------------------------------------------+------------|
|Application was based on a judgment issued |1 |
|prior to January 1, 2003 | |
--------------------------------------------------------
c. By March 28, 2012 , the Secretary of State's office
had resolved a considerable number of its outstanding
applications.
From the Fund's inception through March 28, 2012 , a total
of 225 claims have been approved or resulted in victims
being offered settlements (up from less than ten through
August 1, 2011), and 25 claims are pending resolution
(down from over 550 through August 1, 2011). An
additional 27 claims have been deemed complete and are
pending a decision. 118 claims have been rejected,
because the Secretary of State's office found the victims
did not qualify for payment from the Fund (see reasons
cited immediately above). 294 claims have been denied,
because the applicants could not prove damages. 30
claims have been withdrawn.
4. How Much Money Is In The Fund? The Fund collects
approximately $1.5 million per year, through the $2.50
annual disclosure fee paid by corporations pursuant to the
Fund's enabling legislation. At present, the Fund holds
approximately $5 million. Because the Fund went several
years without making any significant payments to victims,
and thus built up a significant reserve, it was raided in
the 2010-11 fiscal year, to help address General Fund
shortfalls. The Fund currently has an outstanding $10
million loan to the General Fund, which is required to be
repaid, with interest, when it is needed to pay claims out
of the Fund. From the Fund's inception to date, the
Secretary of State's office has approved the payout of
approximately $2.1 million in compensation to victims (most,
as cited above, in the last eight months).
5. Summary of Arguments in Support: None received. However,
the Secretary of State submitted a letter in which she
expresses several concerns with the March 26th version of SB
1058, and offers to support the measure if it is stripped
down to do only two things: a) authorize the Secretary of
SB 1058 (Lieu), Page 9
State to make payments from the fund within 90 days after
approving an award, rather than the Secretary of State's
existing process of waiting until the close of each fiscal
year, before making payments to victims; and b) increase the
maximum amount of restitution to victims from $20,000 to
$50,000.
6. Summary of Concerns Raised by the Secretary of State: In
her letter, the Secretary asserts her belief that the Fund
and victims of corporate fraud would benefit from more
statutory direction, and states that she is working on a new
set of regulations to the Fund, which are currently under
review by the Office of Administrative Law (these
regulations were unavailable for review by Committee staff
as of the date this analysis was finalized).
The Secretary is concerned that, as the bill is currently
drafted, it will have the unintended effect of enabling and
encouraging people to defraud a fund set up to assist
victims, which will leave less money is available to assist
those who have truly been victimized. Among the Secretary's
specific concerns:
a. The Fund would become a fund of first resort rather
than one of last resort, because the bill removes the
requirements that claimants show a proof of loss, proof
of final judgment for fraud from a California court
against a corporation registered in California, and proof
of attempts to collect on the judgment before applying to
the Fund.
b. Significantly more people would be able to apply for
restitution from the Fund, because the bill would allow
claims against all United States corporations (not just
corporations doing business in California), would allow
supporting judgments and decisions to come from any court
in the United States (not just courts in California), and
would not require the claimant to demonstrate that he or
she was a California resident at the time of the alleged
act.
c. The bill's definition of a final judgment is too
loose, because it uses language (page 7, line 22), to the
effect that "final judgment shall include, but not be
limited to...,"
SB 1058 (Lieu), Page 10
d. The bill would eliminate the Secretary of State's
ability to request supplementary documents from an
applicant, beyond the basic self-verified information
required in a victim's application.
e. The bill would likely result in more denials of
applications by the Secretary of State, which could
increase the courts' workload, as these denied applicants
take their cases to the courts. At the same time,
Sections 2287 and 2288 of the bill (page 11, beginning on
line 13 through page 12, ending on line 31) could be read
to preclude a court from requiring a claimant to provide
documentation or evidence beyond what was provided to the
Secretary of State in its initial application.
7. Summary of Arguments in Opposition: None received.
8. Amendments:
a. This bill's author is negotiating amendments to the
bill with the Secretary of State's office. However those
negotiations are currently at too early a stage for the
author to offer amendments, when this bill is heard on
April 11th. Staff is refraining from suggesting any
specific amendments at this time, in hopes of allowing
the negotiations between the author and the Secretary of
State's office to move forward unimpeded. Staff notes,
however, that if the bill is stripped down as suggested
by the Secretary of State's office, before leaving this
Committee, and is subsequently amended to include more
substantive changes to the operation of the Fund, this
Committee would likely request that the Senate Rules
Committee return the bill to our Committee to review the
added policy.
9. 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. AB 2454 (Emmerson), Chapter 279, Statutes of 2008:
Increased the amount of money available to claimants from
SB 1058 (Lieu), Page 11
the Real Estate Recovery Account from $20,000 for any one
transaction and $100,000 for acts by any one licensee to
$50,000 for any one transaction and $250,000 for acts by
any one licensee, effective January 1, 2009.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102