February 28, 2021

Volume XI, Number 59

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February 26, 2021

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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.  

Nomina stultorum parietibus haerent?

Toquima Cave, Nevada

Pictographs on the wall of Toquima Cave, Nevada

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© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 19
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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