California Attorney General Brings Securities Fraud Action Under California Corporations Code

California's Attorney General recently brought suit against Corinthian College for, among other things, false advertising relating to its graduation and placement rates.  What is interesting about the case, however, is that the Attorney General's lawsuit also focuses on these same alleged misrepresentations as directed to investors in alleging that they also constitute securities fraud under Corporations Code Sections 25400 and 25401.  This expansion of what is at its core a false advertising case to a securities fraud case is unusual and interesting.  While the misrepresentations may be material to investors, it did not appear from the complaint that Corinthian was out in the market selling shares (although it did have an employee stock purchase program).  Accordingly, the alleged misrepresentations did not appear to be made in the sale of a security; rather, the securities were simply generally available to the investing public in California (and elsewhere) on NASDAQ.  The shares available on NASDAQ, however, were not offered by Corinthian but rather by other investors.  California has not traditionally sought to regulate the statements in companies' SEC filings absent the actual sale of securities by such companies into the California market.  This case may represent stepped up enforcement by California of alleged misstatements by companies based in California in their SEC filings.  Whether California can do so depends on whether the Corporations Code is interpreted broadly enough to encompass false statements in public statements and filings without a corresponding sale of securities by the company in California.