Are Misstatements In A Form 10-K Actionable By The California Attorney General?

Last week, the California Attorney General Kamala D. Harris announced that she had filed a complaint for civil penalties, permanent injunction and other equitable relief against Corinthian Colleges and three of its school subsidiaries.  Broadly speaking, the Attorney General is alleging that Corinthian Colleges has violated California consumer protection and securities laws.  Among other things, the complaint points to statements in Corinthian College’s Annual Report on Form 10-K and claims a violation of Corporations Code Section 25401 which currently declares it “unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading”.  The complaint alleges that Corinthian’s common stock “is traded on the Nasdaq National Market System [sic], to investors in California.”  The complaint goes on to allege that the misstatements “were made in connection with the offer and sale of securities within the meaning of Corporations Code section 25017?.

I find these allegations odd in the context of the Corporate Securities Law.  First, when shares trade on an exchange such as NASDAQ, those are offers and sales by existing shareholders, not the issuer.  Second, Section 25401 does not currently include the phrase “in connection with”.  That phrase is found in SEC Rule 10b-5.  As noted in prior posts, the legislature recently amended Section 25401 to conform the statute to Rule 10b-5 (including the phrase “in connection with”).  See California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?” and Die Verwandlung: How The Legislature Likely Raised The Bar On Securities Fraud Actions.


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