In 2002, the Legislature enacted AB 55 creating the victims of corporate fraud fund.  Since the fund was created, it has collected about $15 million and nearly 800 claims have been submitted.  In a devastating article published last fall by the Sacramento Bee, Dan Morain reported that only 10 people had been paid with a total payout of $112,496.  His verdict on the fund was “little more than a lie sanctioned by the state of California . . .”.   To make matters even worse, the state in the last budget year borrowed $10 million of the fund’s balance.

The state funds the fund with one-half of the $5 fee imposed on annual statements filed with the Secretary of State by California by corporations and foreign corporations qualified to transact intrastate business here.  Cal. Corp. Code §§ 1502(i) and 2117(d).  This brings in approximately $1.5 million annually.

Recently, I reported that the Secretary of State has proposed amending its regulations governing the fund. Senator Ted Lieu has also introduced a bill, SB 1058, that is intended to codify the claims process currently set forth in the Secretary of State’s regulations.

The bill is not without its technical oddities.  For example, it would define “corporation” as a “domestic corporation as defined by Section 162″.  The Corporations Code defines “corporation” in Section 162 and “domestic corporation” in Section 167.  Even more interestingly, the bill defines “court of competent jurisdiction” as “state or federal court or United States bankruptcy court situated in California and applying California law”.  Apparently, this is an attempt to limit pay-outs to victims of corporate fraud in California.  However, it confuses choice of law with the location of the victim.

A more fundamental question is why the state has a victims of corporate fraud fund at all. People are victimized by fraud committed by individuals, limited liability companies, partnerships and limited partnerships.  Yet the legislature has seen fit only to protect victims of corporate fraud. Further, a claimant has to be “lucky” enough to have been defrauded by a corporation that has incorporated in California or qualified to transact intrastate business here.  Anyone unfortunate enough to have been swindled by a corporation that transacts purely interstate business or that simply ignored the qualification is out of luck.

The Sacramento Bee unfairly blamed the Secretary of State’s office for the fund’s problem.  The real fault rests with the legislature that allowed AB 55 to be gutted and amended in the last few days of the session.  Sudden and complete metamorphosis may have been good for Ovid but it does little good for legislation.

For more information on the fund, see this post.