California Amends Its State Securities Fraud Provision

The California legislature recently passed a bill, now signed by Governor Brown, which amends California Corporations Code Section 25401 -- the anti-fraud provision of California's securities laws.  The changes are designed to make California law consistent with federal securities law by causing Section 25401 to track the language of SEC Rule 10b-5, the federal anti-fraud provision promulgated by the SEC under the authority of the Securities Exchange Act of 1934. Federal securities have long permitted private civil suits under Rule 10b-5, but only if the civil plaintiff is able to plead facts sufficient to meet pleading requirements built up through years of case law in the federal courts.  Private plaintiffs must, for example, plead that they relied on the deceptive statement or conduct at issue, that the deceptive statement was made intentionally (or at least with extreme recklessness), and that the deceptive statement caused plaintiffs' losses.  None of these judicially imposed elements are expressly required by the new Section 25401.  The critical question for plaintiffs and defendants in California is whether the state courts will graft these federal requirements from the case law on Rule 10b-5 into the now effectively identical language of Section 25401.  Up to now, those other elements have not been required to bring a securities claim in California.  The case law interpreting the new Section 25401 bears a close watch.