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Is There Securities Fraud Without Reliance And Causation?

Section 25401 of the Corporations Code is California's securities fraud statute.  Readers of this space will know that that scienter was not required under the former version of the statute but that the legislature rewrote Section 25401 to conform to federal Rule 10b-5 which does require scienter.  At the time, I pointed out that the legislature had likely made it tougher for plaintiffs to plead and prove securities claims.  See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?”.  Then in 2015, the legislature returned to the former language of Section 25401 (effective January 1, 2016).

In a recent appeal, a criminal defendant argued that this legislative seesaw evidenced an attempt to write requirements of reliance and causation into Section 25401.  People v. Lester, Case No. C083333 (July 20, 2019).  The Court of Appeal found this argument bootless:

"This argument fails to persuade. Nothing in the legislative history of section 25401 supports this argument. There is no mention of adding the elements of reliance and causation to an action under section 25401. To accept Lester's argument, we would have to find that the Legislature intended a significant change in the elements of the offense from existing caselaw (Bowden [v. Robinson, 67 Cal. App. 3d 705 (1977)] and [People v.] Baumgart [218 Cal. App. 3d 1207 (1990) without so much as a mention of the change in either the legislative history or the language of the statute. Lester offers no authority to show that reliance or causation have ever been elements of a violation of section 25401."

The case is an unpublished decision and under Rule 8.1115 of the California Rules of Court may not be cited or relied upon except as permitted by that rule.

Note to readers: Yesterday's post included an embarrassing misspelling of "initialism" as "initialization".  Initialization refers to putting something in the start or initial position.  An initialism, as described in the post, is an abbreviation based on the first or initial letters of a word.

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