November, 1996
Revised 8/6/96: Minor wording changes subsequent to court action.
Many Californians contribute to private and public pension and retirement funds that invest in securities (stocks and bonds). In addition, many Californians individually invest their retirement savings or other assets in such securities. To help protect investors, current law prohibits people from making false or misleading statements or omitting facts which (1) influence the purchase or sale of the security by others or (2) affect the price of the security. These illegal activities are known as securities fraud.
The measure makes various changes regarding securities fraud with respect particularly to retirement savings (as defined by the measure). It also would make it more difficult to change state laws concerning attorney-client fee agreements in all types of cases.
Prohibited Conduct. Current law regarding securities fraud applies to people buying or selling a security (such as a broker). For securities fraud regarding retirement savings, the measure broadens the law by applying it to any person involved in the buying or selling of securities (such as accountants or lawyers). (The measure exempts government officials from this provision.)
Liability Resulting From Prohibited Conduct. In many cases, the buying or selling of securities is done by retirement groups and plans that invest retirement savings for individuals. Because these groups or plans buy and sell securities, they are the parties who can sue for securities fraud. The individuals whose retirement savings are invested by these plans must rely on them for such lawsuits.
Under the measure, it would be easier for individuals to sue for securities fraud involving their retirement savings rather than having to rely on a retirement plan or group to initiate such lawsuits. This is because the measure makes anyone who commits securities fraud liable to any person whose retirement investments suffered a loss because of securities fraud.
Punitive Damages. Punitive damages are damages awarded by the court in addition to actual damages, in order to punish the wrongdoer. Under current law, any punitive damages awarded go to the winning party. Under this measure, any punitive damages awarded (less legal fees and expenses) in a retirement savings-related fraud suit would go to the state General Fund.
Fraud-on-the-Market Doctrine. Under current law, those who sue for securities fraud must prove that they relied on fraudulent information to purchase or sell the security and that the false information directly affected the value of their investment. Thus, under current law the burden of proof is placed on those who sue for securities fraud.
In securities fraud cases, this measure shifts the burden of proof to the person accused of fraud. It does this by applying a legal doctrine called "fraud on the market." Under this doctrine, it is presumed that the people who are suing relied on the fraudulent information and that this information affected the value of the investment.
Individual Liability for Fraud. Current law allows a business to pay for any legal actions taken against any executive (such as a director or chief executive officer) whose fraudulent actions are found to have caused a loss of money to investors. Under the measure, a business could no longer pay these costs. Instead, any executive of a business who is found liable for the fraudulent actions must pay these amounts. A business, however, could purchase insurance on behalf of these executives to cover such potential liability.
Attorneys' Fees. Under the measure, attorney fees for any legal matter (not just those for retirement savings-related cases) would be subject to the laws in effect on January 1, 1995. As a result, any changes to these state laws by the Legislature would require a vote of the electorate.
Potential Court Costs. The measure would result in an increase in lawsuits against persons committing securities fraud. This, in turn, would increase court-related costs to state and local governments. These costs probably would not be significant.
Potential General Fund Revenue. The measure also could result in additional revenue to the state from the provision that allows the courts to assess punitive damages in a retirement savings-related fraud suit and deposit the monies in the state General Fund. As these damages would be decided on a case-by-case basis by the courts, it is difficult to estimate the impact of this provision. The annual revenue gain to the state, however, probably would not be significant.