On September 23, 2013, Governor Jerry Brown signed into law Senate Bill 538—which 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.1In 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-5—an essential anti-securities fraud rule promulgated under Section 10(b) of the Securities Exchange Act of 1934—is fundamentally identical to the modified California statute.

SeeCalifornia Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?” Although I identified a host of issues, my fundamental concern was that by rewriting California Corporations Code Section 25401, the legislature had raised the bar for securities fraud suits. Apparently, the legislature got the message.

Judge Curiel’s position is unequivocal:California securities fraud requires that a plaintiff show that “defendant engaged in a material misrepresentation or omission of fact, with scienter, in connection with the purchase or sale of a security, and economic loss.” Cal. Corp. Code §§ 25401, 25501.However, neither Section 25401 nor Section 25501 (which imposes liability for violations of Section 25401) requires that the plaintiff allege or prove scienter (Section 25501 does provide a “reasonable care” defense). Nonetheless, Judge Curiel may be correct.

According to the complaint, Mr. Shapiro was sentenced in October to 25 years in prison.The trustee's complaint caught my eye because it was filed in the Los Angeles Superior Court and alleges violations of California Corporations Code Sections 25401 and 25504.1. Readers of this blog will know that Section 25401 was originally based on Section 12(a)(2) of the Securities Act of 1933.

According to the complaint, Mr. Shapiro was sentenced in October to 25 years in prison.The trustee's complaint caught my eye because it was filed in the Los Angeles Superior Court and alleges violations of California Corporations Code Sections 25401 and 25504.1. Readers of this blog will know that Section 25401 was originally based on Section 12(a)(2) of the Securities Act of 1933.

With the availability of a private cause of action under SEC Rule 10b-5, is there any reason to include a cause of action under California Corporations Code Sections 25401 and 25501? Until the most recent legislative session, there were significant differences between the federal rule and the California’s securities laws.

Section 25401 of the California Corporations Code declares generally declares unlawful to make false statements of a material fact or or omit material facts when buying or selling a security. It is therefore similar to Rule 10b-5 under the Securities Exchange Act of 1934. As originally enacted, however, Section 15401 was based on Section 12(a)(2) of the Securities Act of 1933.Several years ago when the California legislature amended Section 25401 to mirror Rule 10b-5 more closely, I posed the question of whether California had effectively closed the state courthouse door to securities fraud suits because of the federal courts' exclusive jurisdiction over claims under the Securities Exchange Act of 1934. That question became less acute when the legislature reverted Section 25401 to its original form. Nonetheless, Section 25401 remains similar to Rule 10b-5(b).Recently, the defendants in a securities lawsuit attempted to remove the suit to federal court in part on this basis:Defendants contend that Plaintiff “also alleges what would be

Part 5 of the California Corporate Securities Law of 1968 sets forth a number of fraudulent and prohibited practices. One of these practices is to "to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading". Cal. Corp. Code § 25401. Part 5 does not specify any remedies for engaging in prohibited practices. The remedies are found in Part 6. The remedy for violating Section 25401 is either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security). Cal. Corp. Code § 25501.InFerry v. DF Growth REIT, LLC, 2024 WL 1298074, the plaintiffs alleged a violation of Section 25401 and that they continued to hold the securities. Because they sought damages rather than rescission, U.S. District Court JudgeAnthony J. Battaglia ruledsua sponte that the plaintiffs lacked statutory standing. Accordingly, he dismissed the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure.[View source.]

Five months after investing over $300,000 in the fund, the Alan Kalin was told that that the fund had lost over 50% of its value. Mr. Kalin filed a lawsuit in the U.S. District Court alleging violations of Section 25401 of the California Corporations Code. That statute declares it unlawful for any person to offer or sell a security in California, or to buy or offer to buy a security in California, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.Kalen v. Semper Midas Fund, Ltd,2021 U.S. Dist. LEXIS 239179. Among other things, Mr. Kalin alleged that alleges that the fund's offering memorandum assured safety and security by highlighting statements such as "thoughtful qualitative analysis," "disciplined investment management," and "dynamic cross risk allocation."

A few years back, I criticized the amendment of California Corporations Code Section 25401 to conform to Rule 10b-5 under the Securities Exchange Act of 1934. See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We? At the time, I observed: Apparently, the legislature didn’t recognize that Section 25501 was based on Section 12(a)(2) of the Securities Act of 1933 while Rule 10b-5 was adopted under Section 10(b) of the Securities Exchange Act of 1934.Fortunately, the legislature reconsidered its handiwork and in 2015 returned Section 25401 to its former text.