Federal Judge Rules Out Private Cause Of Action Under California Control Person Statute

Some persons may be deemed to violate the Corporate Securities Law of 1968 even though they did not directly violate the law.  Corporations Code Section 25403(a) provides that a person who with knowledge directly or indirectly controls and induces any person to violate any provision of the CSL or any rule or order thereunder is deemed to be in violation of that provision, rule or order to the same extent as the controlled and induced person.  Section 25403(b) imposes the same treatment on persons who knowingly provide substantial assistance to another person in violating the CSL.  If a person is deemed to be in violation "to the same extent" as the primary violator, does that mean that a private right of action exists against that person to the same extent as the primary violator?

United States District Court Judge Jon S. Tigar  recently answered that question in Shaev v. Baker, 2017 U.S. Dist. LEXIS 68523 (N.D. Cal. May 4, 2017).  The ruling came in a consolidated derivative suit filed against the directors and officers of Wells Fargo & Company following allegations of misconduct in connection with its customer cross-selling program.  Judge Tigar found that no private right of action exists:

There is no private right of action under California Corporations Code Section 25403. Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, 158 Cal. App. 4th 226, 233, 255, 70 Cal. Rptr. 3d 199 (2007) ("[T]he civil liability provisions of [Section 25403] do not expressly provide a private right of action for a violation of section 25403, as they do for other specified provisions of the Act."). As a result, Defendants do not face a substantial likelihood of liability for that claim.

Plaintiffs' only response is that "the California Supreme Court has yet to resolve whether Section 25403 of the California Corporations Code affords a private right of action . . ." ECF No. 115 at 30, n. 15. While that may be true, "[a] state appellate court's announcement of a rule of law is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise." Miller v. Cty. of Santa Cruz, 39 F.3d 1030, 1036, n. 5 (9th Cir. 1994), as amended (Dec. 27, 1994) (internal quotation marks omitted). Plaintiffs have failed to point to any such data here.

The Court therefore dismisses Count IX of the Consolidated Amended Complaint.

I agree.