August 13, 2020

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Implied Causes Of Action Under The California Corporate Securities Law

As has been widely reported, the United States Supreme Court has dismissed as improvidently granted the writ of certiorari in Emulex Corporation v. Varjabedian.  This action leaves standing, at least for the time being, the Ninth Circuit Court of Appeal's finding of an implied right of action under Section 14(e) of the Securities Exchange Act of 1934 based on a negligence standard.   Varjabedian v. Emulex Corp., 888 F.3d 399 (2018).

In my view, the problem with implied causes of action is that it gives courts license to make up the rules as they go along.  The most egregious example of this is insider trading, an area in which the courts are still developing theories under which defendants can be imprisoned.  At the extreme, this is tantamount to the Queen of Heart's famous assertion of "sentence first - verdict afterwards".  

In contrast to the federal model, the drafters of California's Corporate Securities Law of 1968 "the Legislature chose to specify the elements of a statutory cause of action in detail and decided to make it clear that the judiciary is not authorized to invent causes of action inconsistent with or additional to those provided in the statute.”  AREI II Cases, 216 Cal. App. 4th 1004, 1013-14 (2013) quoting Marsh & Volk, Practice Under the California Securities Law.  Thus, Section 25510 of the Corporations Code provides:

"Except as explicitly provided in this chapter, no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder.  Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect."

If Congress had adopted the same approach in drafting the federal securities law, much mischief could have been avoided.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IX, Number 114


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...