Not Just Anyone Can Violate California's Insider Trading Ban

Yesterday, I discussed California's approach to insider trading.  The offense is defined in Section 25402 of the California Corporations Code while the remedy (in the case of certain corporations) can be found in Section 25502.5.

Unlike the judicially developed, federal law of insider trading, Section 25402 is quite specific about who may be an offender.  The statute enumerates the following five classes of persons:

  • The issuer
  • Officers
  • Directors
  • Controlling persons; and
  • Any other person whose relationship to the issuer gives him access, directly or indirectly, to material information about the issuer not generally available to the public.

"Issuer" is defined in Section 25010.  The next three categories are relatively straightforward even though the Corporate Securities Law (unlike the General Corporation Law) does not define "control".  Further, the statute does not refer specifically to managers or general partners in the case of issuers that are limited liability companies or limited partnerships.  However, the last category may cover these persons.

The last category perhaps admits some ambiguity, but it is clear on at least one point - the person must have a relationship with the issuer.  In addition, at least one federal district court has held that mere titles are not adequate indicators of control.  Wanetick v. Mel's of Modesto, Inc., 811 F. Supp. 1402 (N.D. Cal. 1993).