Why Can’t Government Play By The Same Rules As Hoi Polloi?


The State of California doesn’t like persons who commit securities fraud.  Persons who mislead others by means of a written or oral misstatement of a material fact or omission of a material fact can be held liable for rescission or damages.  Cal. Corp. Code § 25501.  They can be enjoined.  Cal. Corp. Code § 25530.  They can be subject to civil penalties.  Cal. Corp. Code § 25535.  They can even be criminally fined and imprisoned.  Cal. Corp. Code § 25540.

The law doesn’t aim its wrath at just individuals.  Under the Corporate Securities Law of 1968, a “person” includes business entities such as corporations, partnerships and limited liability companies.  Cal. Corp. Code § 25013.  The definition even includes “a government, or a political subdivision of a government.”  One would therefore expect that when a city offers municipal bonds it could face the same penalties as any other person.

Governments are different from you and me, however.  They get to make the rules and one rule that the State of California has made is Government Code Section 818.8 which provides:

A public entity is not liable for an injury caused by misrepresentation by an employee of the public entity, whether or not such misrepresentation be negligent or intentional.

The question therefore becomes whether the Corporate Securities Law, which expressly applies to governments, overrides this general grant of governmental immunity.  One argument against immunity is that Section 818.8 immunizes a public entity from its employees’ prevarications but not those made by the entity in its own official statement.   Another argument is that the CSL withdraws the general statutory immunity created by Section 818.8.  According to the Ninth Circuit Court of Appeals, both of these arguments are losers.

For a discussion of Judge Susan Illston’s ruling that was the subject of the appeal, see Federal Court Says City Is Immune From State Securities Law Claims.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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