BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1058 (Lieu) - Victims of Corporate Fraud Compensation Fund.
Amended: May 1, 2012 Policy Vote: B&FI 6-0 Jud 5-0
Urgency: No Mandate: No
Hearing Date: May 14, 2012 Consultant: Maureen Ortiz
This bill does not meet the criteria for referral to the
Suspense File.
Bill Summary: SB 1058 revises the provisions governing
administration of the Victims of Corporate Fraud Compensation
Fund by coding existing regulations and facilitating the
approval of valid claims from the fund.
Fiscal Impact: First year costs of $122,990 and ongoing of
$97,990 (Special).
The Secretary of State's office anticipates the need for one PY
analyst to process claims, and will incur expenses associated
with revising the forms, updating the Internet web site and
revising regulations. Costs will be incurred from the Business
Fees Fund.
Background: The Victims of Corporate Fraud Compensation Fund
(VCFCF) is administered by the Secretary of State and provides
restitution to victims of corporate fraud. In order to qualify
for restitution from the fund, a claimant must have a final
court judgment, arbitration award, or criminal restitution order
dated January 1, 2003 or later. The application must be
delivered within 18 months of the judgment becoming final.
Additionally, the claimant must first diligently pursue
collection of the judgment from the corporation.
The concept of corporate fraud is very broad and encompasses a
variety of criminal and civil violations. There is no single
definition in the law. For VCFCF purposes, corporate fraud is
fraud, misrepresentation, or deceit, made with intent to
defraud, and involving a corporation. Some examples of
corporate fraud may include, but are not limited to, fraud or
illegal practice in the issuance or sale of securities, false
reports or entries on corporate documents with intent to
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deceive, or purchase or sale of securities by a person having
access to material information not available to the public
through a special relationship with the issuer (insider
trading).
Since the creation of the fund in 2002, the Secretary of State's
Office has received over 700 claims for restitution.
Approximately 225 claims have been approved or resulted in
victims being offered settlements, 25 claims are pending
resolution, about 300 claims were rejected, and 30 have been
withdrawn. An additional 27 claims have been deemed complete
and are pending a decision. Over 100 claims have been rejected
for reasons such as the victim's application for restitution was
not based on fraud, a judgment was lacking or not final,
applications were against entities that were not corporations,
or the applications were submitted past the 18 month deadline
following final judgment.
Proposed Law: SB 1058 makes the following changes to the VCFCF
program:
1) Codifies regulations relating to the process and
requirements for an aggrieved person who obtained a final
judgment in a court against a corporation for fraud, and
who diligently attempted to recover the judgment from the
corporation, to file an application with the SOS for
payment from the fund;
2) Increases the amount payable from $20,000 to $50,000;
3) Provides specific information that the applicant must
include on the application for restitution including the
name and address of the corporation, the amount of claim
that remains unreimbursed from any source, a copy of the
final judgment, and a description of searches and inquiries
conducted by or on behalf of the claimant with respect to
the corporation's assets;
4) Allows a claimant whose application is denied to
petition the courts;
5) Requires the Secretary of State to provide notice to the
corporation by certified mail that a claimant has submitted
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an application for payment from the fund;
6) Establishes a method by which a corporation may contest
payment from the fund;
7) Allows the Secretary of State to recover money paid to a
successful claimant from the corporations and to suspend
the corporation as specified.
Additionally, SB 1058 prescribes specific timeframes that the
Secretary of State must adhere to when processing applications
for payments from the VCFCF as follows:
1) Requires the Secretary of State to notify a claimant
whose application fails to comply with the filing
requirements within 21 days and to provide an itemized list
of deficiencies to the claimant at that time;
2) Requires the Secretary of State to render a final
written decision on the application within 90 calendar days
after a complete application has been received;
3) Authorizes the SOS to enter into a compromise with a
claimant to pay less in
settlement than the full amount of the claim; and,
4) Grants a claimant 60 calendar days to accept a proposed
award or offer to compromise.
The provisions of SB 1058 will apply only to applications
submitted to the Secretary of State on or after January 1, 2013.
Staff Comments: The Business Fees Fund is funded by a $2.50
annual disclosure fee paid by corporations. Total collections
approximate $1.5 million per year and the current balance is
about $5 million. Due to a significant reserve, $10 million was
borrowed to address General Fund shortfalls during the 2010-11
Budget Act at which time the fund had a balance of approximately
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$15 million. These funds are required to be repaid when needed
to pay claims out of the fund. Since the program's inception
created by AB 55 (Shelley), Chapter 1015/2002, the Secretary of
State's office has approved the payout of approximately $2.1
million in compensation to victims.