Are criminal statements under general company law subject to prosecution?

California Corporations Section 2254 declares a crime for any director, officer, or agent of any corporation, whether domestic or foreign, to knowingly concur in making, publishing, or displaying, generally or privately, to shareholders or to ‘other people :

  • a written report, exhibit, statement of his affairs or pecuniary condition or notice containing a material statement that is untrue;
  • a false or deliberately or fraudulently false report, prospectus, account, statement of operations, values, activities, earnings, expenses or outlook; Where
  • other paper or document intended to produce or give, or tending to produce or give, to the shares of this company a greater value or an apparent or market value less than that which they actually possess.

Notably, this provision is included in the General Companies Act and not in the Corporate Securities Act. Although the law clearly establishes criminal liability, it does not specify whether shareholders or others may exercise a private right of action.

The only court that squarely addressed the issue concluded:

“Section 2254 makes no reference, either in the statute itself or in the statutory structure, to any intent to create a private right of action. In fact, the wording of the statute itself refers to violation as criminal.”

In re ZZZZ Best Sec. Dispute., 1989 US Dist. LEXIS 8083, *33, fed. Second. L.Rep. (CCH)P94,485.

Many older securities lawyers will remember the famous rise and fall of prodigy Barry Minkow who went public with his carpet cleaning company ZZZZ Best based on false disclosures and eventually went to jail. For those who don’t remember the case, this is an excellent cautionary tale for lawyers and accountants doing due diligence. See Minkow Empire: ZZZZ Best: House of Cards Falls (Los Angeles Times (September 6, 1987).

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IX, Number 171

Luisa D. Fuller