Expansion of Securities Litigation Proposed Again

By CMTA Staff

Capitol Update, April 8, 2005

AB 310 (Tom Umberg, D-Santa Ana) would expand liability for securities fraud by overturning two state court decisions that limit claims to individuals who are market participants and who knowingly and intentionally make false statements.

The language in the bill states that a person may be found liable for securities fraud even if that individual did not directly engage in market activity. Also, it states that a person may be found liable for participating in the making of a false statement if he or she is only "reckless", a lower standard than "knowingly and intentionally." Additionally, the bill  adds provisions creating personal liability for CEOs, officers, directors, partners in firms, employees, or agents who are connected to the breach of fiduciary duty.

AB 310 is very similar to last session’s SB 766 (Dean Florez, D-Shafter) except that this session’s bill focuses on defined contribution plans for public employees and the claim that they are too risky and not good for the public sector. This language will have the support of labor unions.

AB 310 would exacerbate and expand abusive securities litigation in California. The plaintiffs' securities bar routinely files frivolous "strike suits" against corporations, officers and directors whose stock price has significantly decreased. Corporations and individuals are forced to settle to avoid costly litigation. This bill would create a wider net of potential targets and a lower standard for liability, making this practice even more lucrative for the firms bringing these suits.

CMTA opposed the previous version and will oppose AB 310. CMTA’s Corporate Counsel Committee will discuss this and other related bills on the next conference call Monday, April 18th.

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