Judge Rules Internal Affairs Doctrine Governs California Insider Trading Statute

As I have mentioned on numerous occasions, California has its own insider trading statute - California Corporations Code Section 25402.  The statute is included in the California Corporate Securities Law of 1968.  In general, the jurisdiction of organization of an issuer is irrelevant to the application of the CSL.  Thus, in most instances, the operative issue will be whether the offer and sale of a security occurred "in this state", as defined in Corporations Code Section 25008.

Recently, however, Judge Jon Tigar ruled:

While a close issue, the Court concludes that Plaintiffs claims under Section 25402 are barred by the internal affairs doctrine.  California law codifying the internal affairs doctrine is relatively clear that "[t]he directors of a foreign corporation are liable to the corporation . . . according to any applicable laws of the state or place of incorporation," and not California law. Cal. Corp. Code § 2116.

In re Wells Fargo & Co. S'holder Derivative Litig., 2017 U.S. Dist. LEXIS 164824.  In reaching this conclusion, Judge Tigar sided with the U.S. District Court's decision in In re Sagent Technology, Inc. Derivative Litigation , 278 F. Supp. 2d 1079 (N.D. Cal. 2003) rather than the California Court of Appeal's holding in Friese v. Superior Court, 134 Cal.App.4th 693, 36 Cal. Rptr. 3d 558 (2005).

For more on Section 25402, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (2003) and the following posts:

Not Just Anyone Can Violate California’s Insider Trading Ban
Insider Trading California Style