BILL ANALYSIS �
SB 1058
Page 1
Date of Hearing: June 25, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 1058 (Lieu) - As Amended: May 1, 2012
SENATE VOTE : 31-4
SUBJECT : Victims of Corporate Fraud Compensation Fund.
SUMMARY : Revises and recasts the provisions governing
administration of the Victims of Corporate Fraud Compensation
Fund (the Fund) by the Secretary of State (SOS), by codifying
certain existing regulations promulgated by the SOS to
administer the Fund, codifying changes to other existing
regulations promulgated by the SOS, and adding new statutory
language to facilitate the approval of valid claims from the
Fund. Specifically, this bill :
1)Reestablishes the Fund and codifies statutory requirements for
both the administration of the Fund and for the eligibility of
victims to receive compensation from the Fund, under a new
Chapter 22.5 (commencing with Section 2280) of Division 1 of
Title 1 of the Corporations Code.
2)Provides that an aggrieved person who obtains a final judgment
in a court of competent jurisdiction, as specified, against a
corporation for fraud, misrepresentation, or deceit, made with
the intent to defraud, and who diligently attempted to recover
the judgment from the corporation, may file an application
with the SOS for payment from the Fund for the amount unpaid
on the judgment, as specified.
3)Increases the maximum amount that any one claimant could
recover for any single judgment that otherwise meets the
requirements for compensation from the Fund, from $20,000 to
$50,000.
4)Provides various definitions for the purposes of the Fund,
including, among other things that:
a) Claimant means an aggrieved person who resides in the
state at the time of the fraud and who submits an
application pursuant to this chapter;
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b) Corporation means a domestic corporation, as defined, or
a foreign corporation that is qualified to transact
business in California, as specified;
c) Court of competent jurisdiction is a superior court of
any state, or a United States district court or U.S.
bankruptcy court; and
d) "Final judgment" is a judgment, arbitration award, or
criminal restitution order for which appeals have been
exhausted or for which the period for appeal has expired,
enforcement of which is not barred by the order of any
court or by any statutory provision, which has not been
nullified or rendered void by any court order or statutory
provision, or for which the claimant has not otherwise been
fully reimbursed.
5)Specifies the information and documentation required to be
provided in an application, and allows for other relevant
documents as appropriate, including, among other things:
a) The claimant must provide the SOS with a copy of the
final judgment, underlying civil complaint and any
amendments thereto, for a finding of fraud,
misrepresentation, or deceit, made with the intent to
defraud, and may also provide other relevant documentation;
and
b) The claimant must provide the SOS with a description of
searches and inquiries conducted by or on behalf of the
claimant with respect to the corporation's assets liable to
be sold or applied to satisfaction of the judgment, except
that a court's determination or finding of the
corporation's insolvency or lack of assets to pay the
claimant shall be deemed to satisfy this requirement.
6)Requires the claimant to make specific declarations, including
among other things, that he/she:
a) is not a spouse or an immediate family member of an
employee, officer, director, managing agent, or other
principal of the corporation nor a personal representative,
of the spouse or an immediate family member of an employee,
officer, director, managing agent, or other principal of
the corporation; however, being a spouse or immediate
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family member does not alone preclude a claimant from
receiving an award;
b) has complied with specified requirements; and
c) does not have a pending claim and has not collected on
the final judgment from any other restitution fund, or if
the claimant has a pending claim or has collected from
another fund, include a description of the nature of the
pending claim and the recovery amounts from any restitution
fund.
7)Provides certain timelines by which the SOS, claimant, and
corporation must provide specified responses, including, among
other things:
a) the SOS must mail to the claimant an itemized list of
deficiencies, if any, of the claimant's application within
21 days if for a single claimant, or 40 days for multiple
claimants; and
b) the SOS must render a decision on the application within
90 calendar days after receiving a completed application.
8)Requires the SOS to provide notice, as prescribed by the SOS,
to the corporation and claimant with respect to an application
made, for specified purposes, including, among other things:
a) if after 30 calendar days the SOS has not received a
response to the latest list of deficiencies, the SOS shall
notify the claimant that unless the claimant responds to
the deficiencies within a specified period of time of not
less than 15 calendar days, that the application will be
denied; and
b) upon issuance of a proposed decision to award payment or
an offer to compromise, the claimant shall have 60 calendar
days from the date of service of the proposed award or
offer to compromise to accept the proposed award or offer
to compromise, and if the claimant fails to accept the
proposed award or offer to compromise within the specified
time, the application shall be deemed denied.
9)Provides that if, at any time, the money deposited in the Fund
is insufficient to satisfy any duly authorized award or offer
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of settlement, the SOS 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 offers of
settlement were originally filed, plus accumulated interest at
the rate set by the Federal Reserve Bank of San Francisco on
advances made to member banks, not to exceed 2% per year.
10)Permits a claimant whose application for compensation from
the Fund is denied by the SOS to petition a court, as
specified, for de novo review of the merits of the application
based on the administrative record. This bill provides that
the burden is on the claimant to prove that the cause of
action against the corporation was for fraud,
misrepresentation, or deceit, if final judgment in the
underlying action in favor of the petitioner was by default,
stipulation, consent or pursuant to Section 594 of the Civil
Procedure Code, or if the action against the corporation was
defended by a trustee in bankruptcy.
11)Makes it unlawful for any person or the agent of any person
to file with the SOS any notice, statement, or other document
required under the provisions of this chapter that is false or
untrue or contains any willful, material misstatement of fact,
and specifies that such conduct shall constitute a public
offense punishable by imprisonment and fine, as specified.
12)Permits the SOS to attempt to recover the amount paid to a
successful claimant from the corporation and suspend that
corporation, as specified, and requires that any sums received
by the SOS pursuant to these provisions be deposited in the
State Treasury and credited to the Fund.
13)Requires that the SOS adopt regulations in furtherance of the
administration of the Fund.
EXISTING LAW
1)Establishes the Fund within the State Treasury, authorizes the
SOS to administer the Fund, and directs the SOS 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 (CORP) Section 1502.5). Regulations
promulgated by the SOS to administer the Fund are contained in
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Title 2, Division 7, Chapter 12, Sections 22500 et seq.
2)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 SOS (CORP
Sections 1502 and 2117).
3)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 SOS's Office
used the Real Estate Recovery Program rules as a guide, when
developing regulations to administer the Fund.
FISCAL EFFECT : According to Senate Appropriations Committee
analysis, 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.
COMMENTS :
This bill is based on an article authored by Sacramento Bee
columnist Dan Morain on October 9, 2011, Fund Victims Fund is a
Travesty, 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 SOS's Office through the Fund.
Subsequent to the Dan Morain article and the correspondence
between Mr. Redmond and the SOS, several legislative offices
contacted the SOS'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 SOS's office
was an aberration, or was, instead, representative of a pattern
of over-protectiveness toward the Fund within the SOS's Office.
Findings from those inquiries are summarized immediately below.
How Many Claimants Are Receiving Compensation From the Fund?
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1. When first contacted, the SOS's Office indicated that, from
the Fund's inception through August 1, 2011, the SOS 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 SOS'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 SOS, 28 claims were withdrawn, three
claims were denied, and 561 claims (most related to Senior
Care Advocates) were pending resolution.
2. On October 14, 2011, the SOS'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 SOS's office in its
regulations (a number which grew to 103 by the date of the
SOS's response). The 103 claims were rejected for the
following reasons:
---------------------------------------------------------
| |Number of |
| Reason for Denial |Applicatio|
| |ns Denied |
|----------------------------------------------+----------|
|The victims applied for compensation based on | |
|judgments that were not based on corporate | 52 |
|fraud | |
|----------------------------------------------+----------|
|A judgment was lacking, or the judgment was | |
|not issued by a court in California | 23 |
|----------------------------------------------+----------|
|Applications were based upon judgments | |
|against entities that were not corporations | 14 |
| | |
|----------------------------------------------+----------|
|Applications were based on judgments that | 5 |
|were not final | |
|----------------------------------------------+----------|
|Applicants demonstrated insufficient proof | |
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|regarding their attempts to collect from the | |
|corporation and its corporate officers prior | 4 |
|to filing a claim with the Fund | |
|----------------------------------------------+----------|
|Applications were submitted more than 18 | |
|months following final judgment | 3 |
|----------------------------------------------+----------|
|Applicant was not a party to the court | 1 |
|judgment | |
|----------------------------------------------+----------|
|Application was based on a judgment issued | |
|prior to January 1, 2003 |1 |
---------------------------------------------------------
3. By March 28, 2012, the SOS'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 SOS'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.
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
SOS's office has approved the payout of approximately $2.1
million in compensation to victims (most, as cited above, in the
last eight months).
Prior Legislation : AB 55 (Shelley, Ch. 1015, Stats. 2002),
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established the Fund to provide restitution to victims of
corporate crime by requiring corporations to pay a $2.50 fee
when filing their annual disclosures.
REGISTERED SUPPORT / OPPOSITION :
Support
Secretary of State, Debra Bowen
Los Angeles District Attorney's Office
American Federation of State, County and Municipal Employees
(AFSCME)
Congress of California Seniors (CCS)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081