California Overhauls State Anti-Securities Fraud Statute

On September 23, 2013, Governor Jerry Brown signed into law Senate Bill 538which overhauls the anti-fraud provision of the California Securities Law of 1968, and will likely make it more difficult for would-be plaintiffs to maintain lawsuits for securities fraud. Specifically, SB 538 revises California Corporations Code § 25401 to make it unlawful, in connection with the offer, sale, or purchase of a security, to: (a) employ a device, scheme, or artifice to defraud; (b) make an untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.1 In its historic form, the statute did not include clauses (a) and (c).2 According to bill sponsor Senator Jerry Hill (San Mateo County), the changes were intended to bring California's anti-fraud provision in line with federal law.3 And, indeed, the U.S. Securities and Exchange Commission's Rule 10b-5an essential anti-securities fraud rule promulgated under Section 10(b) of the Securities Exchange Act of 1934is fundamentally identical to the modified California statute.4 Interestingly, however, the original version of § 25401 was already based on federal law.5 Section 12(a)(2) of the Securities Act of 1933 creates liability for any person who offers or sells a security through a prospectus or an oral communication containing a material misstatement or omission6virtually the same as clause (b), which more or less survived the recent rewrite of § 25401, with the exception that clause (b) also imposes liability on buyers and those who offer to buy. To sue under Section 12(a)(2) and the previous version of § 25401, a plaintiff in a civil case would not have to allege that the defendant made a material misstatement or omission intentionally or negligently.7 Similarly, a plaintiff would not have to allege that he or she relied on the misstatement or omission when determining whether to buy or sell a security, or that there was a causal connection between the material misstatement or omission and any damage suffered.8 Now that the California legislature has remodeled § 25401 based on Rule 10b-5, it stands to reason that courts may interpret the new version in a way consistent with how the federal courts have interpreted Rule 10b-5. Unlike for Section 12(a)(2)...