What Type Of Crime Is Securities Fraud In California?

Section 25401 of the California Corporations Code, which was modeled on Section 12(a)(2) of the Securities Act of 1933, provides:

"It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading."

Section 25540(b) criminalizes Section 25401 by providing:

"Any person who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code for two, three, or five years, or be punished by both that fine and imprisonment."

So, what type of crime is established by Sections 25401/25540?

  1.    A crime of negligence;
  2.   A specific intent crime;
  3.   Neither (a) or (b).

If you answered (c), you are correct according to the Court in People v. Koenig, 58 Cal. App. 5th 771 (2020).   The Court of Appeal explained that the securities fraud under these sections is a general intent crime.  This does not mean that scienter is not an element.  Scienter requires either (i) knowledge of the false or misleading nature of the representation or of the materiality of the omission, or (ii) criminal negligence in failing to acquire this knowledge.   People v. Simon,  9 Cal. 4th 493, 497 (1995).   The Court noted that

"Critically, criminal negligence in this context refers to an alternative way of proving the knowledge element.  it does not describe how the actus reas [sic] must be committed - and thus it does not convert section 25401 into a crime of criminal negligence."

58 Cal. App. 5th at 796.  

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