1REGULATORY AGENCY ACTION

tion with the organization of First securities sold in . "Securities" Property Brokers Law, Health Care Ser- Interstate Central Bank and the pur- are defined quite broadly, and may vice Plan Law, Escrow Law, Check chase and assumption transaction: an include business opportunities in Sellers and Cashiers Law, Securities application by First Interstate Bancorp addition to the traditional stocks and Depositor Law, California Finance for authority to organize the bank with bonds. Many securities may be "quali- Lenders Law and Security Owners Pro- capital of $4 million was filed and fied" through compliance with the tection Law. approved; a certificate of authorization Federal Securities Acts of 1933, 1934 A Consumer Lenders Advising Com- permitting the bank to transact commer- and 1940. If the securities are not under mittee advises the commissioner on cial banking at the location of the head federal qualification, the commissioner policy matters affecting regulation of office of First National Bank was issued; must issue a "permit" for their sale consumer lending companies licensed by and First Interstate Central Bank's in California. the Department of Corporations. The purchase of part of the business of First The commissioner may issue a "stop committee is composed of leading execu- National Bank under the purchase and order" regarding sales or revoke or tives, attorneys and accountants in con- assumption transaction was approved. suspend permits if in the "public inter- sumer finance. All depositors of First National Bank est" or if the plan of business underlying became depositors of First Interstate the securities is not "fair, just or MAJOR PROJECTS: Central Bank, and there was an orderly equitable." Proposed Exemption. On March 10, transition of banking services without The commissioner may refuse to grant 1986, Commissioner Tom published a financial loss or delay to the public. a permit unless the securities are prop- notice of proposed changes concerning Counterfeiting. The superintendent erly and 'publicly offered under the the adoption of section 260.105.37 of warned all bankers that counterfeit cash- federal securities statutes. A suspension Title 10 of the California Administra- ier's checks drawn on Imperial Bank are or stop order gives rise to Administrative tive Code. being used to obtain property by fraud- Procedure Act notice and hearing rights. Section 260.105.37 was proposed to ulent means. The perpetrator of the The commissioner may require that exempt transactions in certain securities scheme answers newspaper ads for expen- records be kept by all securities issuers, included in the NASO's National sive cars and visits the seller to inspect may inspect those records, and may Market System from the registration the car and set the price. He then returns require that a prospectus or proxy requirements of the law. A significant with the counterfeit check, usually after statement be given to each potential feature of the proposed exemption re- the close of business. The checks, buyer unless the seller is proceeding quired that the outstanding voting secur- numbered 090589, are green with a under federal law. ities of an issuer eligible for the basket weave background. The protec- The commissioner also licenses agents, exemption meet specified voting rights tographed amount does not say "Imperi- broker-dealers and investment advisors. standards. As indicated in the Initial al Bank." There are outstanding Those brokers and advisors without a Statement of Reasons, the proposal warrants. For further information, place of business in the state and oper- arose as a result of a request for regula- please call Imperial Bank at (213) ating under federal law are exempt. tory parity between National Market 417-5747. Deception, fraud or violation of any System securities and securities listed LEGISLATION: regulation of the commissioner is cause on the American Stock Exchange and AB 2 (Reyes) calls for a ceiling on for license suspension of up to one year the New York Stock Exchange. The credit card interest rates on all credit or revocation. voting rights standards rights of the pro- cards issued by California banks. If The commissioner also has the author- posed exemption were patterned after enacted, the ceiling will be five points ity to suspend trading in any securities the voting rights rules of the New York above the current six-month treasury bill by summary proceeding and to require and American Stock Exchanges. Subse- rate. securities distributors or underwriters to quent to the public notice of the file AB 4 (Brown) will allow out-of-state all advertising for sale of securities proposed exemption, however, the New with the banks to acquire any California bank Department before publication. York Stock Exchange announced an The with assets of $50 billion or more. commissioner has particularly important amendment to its voting broad civil investigative discovery pow- rights standards. ers; he/she can compel the deposition of In view of this substantial change, the witnesses and require production of commissioner solicited additional com- documents. Witnesses so compelled may ments on the concept of the voting rights DEPARTMENT OF be granted automatic immunity from standards included in proposed rule CORPORATIONS criminal prosecution. 260.105.37. The comment period ended Commissioner: Franklin Tom The commissioner can also issue on November 28, 1986. Presently, sec- (916) 445-7205 "desist and refrain" orders to halt unli- tion 260.105.37 is undergoing in-house (213) 736-2741 censed activity or the improper sale of drafting by the Department. securities. A willful violation of the Proposed Changes to California The Department of Corporations is a securities law is a felony, as is securities Credit Union Law Regulations. A public part of the cabinet-level Business and fraud. These criminal violations are hearing was held by Commissioner Tom Transportation Agency. A Commis- referred by the Department to local dis- on the proposed amendments to section sioner of Corporations, appointed by the trict attorneys for prosecution. 922, regarding investments, as well as Governor, oversees the Department. The commissioner also enforces a proposed new section 932, regarding The Department administers several group of more specific statutes involving investments in fixed assets and service major statutes. The most important is similar kinds of powers: Franchise corporations, under the California the Corporate Securities Act of 1968, Investment Statute, Credit Union Credit Union Law (Financial Code sec- which requires the "qualification" of all Statute. Industrial Loan Law, Personal tion 14000 et seq.) (see CRLR Vol. 6,

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No. 4 (Fall 1986) p. 60 for background should be limited to the projected resid- Perez and has yet to be returned. The information). The hearings were held in ual value of a motor vehicle at the time commissioner cautioned investors to be on October 1 and in Sacra- the loan or obligation is made (the wary of making investments with un- mento on October 2, 1986. Presently, the amendment to subsection (b) of section known promoters based upon newspaper amendments to the proposed sections 1162). By tying the balloon payment to advertisements. are pending in-house review at the the projected residual value, it is believed On September 16, Vesper Corporation Department of Corporations. that the value of the security for the loan was ordered to cease its offer and sale of ProposedChanges to the Escrow Law. or obligation (i.e., the motor vehicle) will unqualified securities in the form of Commissioner Tom has given notice to approximate the sale price of the motor promissory notes and limited partner- amend section 1714.1 of Subchapter 9, vehicle should the borrower ship interests. Vesper Corporation does Chapter 3, Title 10 of the California default. Therefore, upon sale, an indus- business under the name Clergy Tax and Administrative Code. Presently, section trial loan company should not incur a Financial Services. A large number of 1714.1 provides that an accountant will loss on the transaction. investors with the company were cler- not be considered independent if he/she A consistent calculation of projected gymen. Typically, investors would come performs bookkeeping services for the residual values is essential to the opera- to the company for tax preparation escrow agent. This rule does not state a tion of section 18206 as applied to bal- assistance, and were then solicited to positive standard by which an account- loon payment loans or obligations invest in the company or in offerings in ant who prepares the audited financial secured by motor vehicles. The Special which it had a financial interest. The statement required to be submitted as Administrator has recommended the use company is currently delinquent in its part of an escrow agent application may of the Kelley Blue Book Residual Value payments to investors, and further inves- be determined to be independent from Guide in determining the projected tigation is being conducted. California the escrow agent. Accordingly, section residual value of a motor vehicle based residents were cautioned to be wary of 1714.1 is proposed to be amended to on its longstanding acceptance and use investment solicitations by tax preparers provide a reference to the regulations of by other financial institutions. and financial planners, some of whom the California State Board of Accoun- The proposed amendments to Section are not registered with the state as tancy for determining independence. 1162 have been submitted for approval investment advisors. The proposal was submitted to the to the Office of Administrative Law. On September 16, Dynamic Energy- Office of Administrative Law (OAL). If Proposed Changes to the Franchise Access Products, Inc. and its president, approved by OAL, it will become effec- Investment Law. Section 310.100, Edward Vezirian, were ordered to stop tive in early March 1987. which set forth an exemption to the reg- offering and selling securities in the form Proposed Changes in the Industrial istration requirements of section 31110 of investment contracts and stock unless Loan Law. Commissioner Tom has of the Franchise Investment Law for the they first obtained a permit from the given notice to amend section 1162, offer and sale of franchises, was commissioner. Investors had been soli- Chapter 3, Title 10 of the California amended to further specify the condi- cited to invest in a company Vezirian Administrative Code. Chapter 296, tions which must be met to hold a fran- had planned to form, Dynamic Energy- Statutes of 1986 (effective January 1, chise exempt. Additionally, section Access Products, Inc. The company has 1987) amended, among other things, sec- 310.100.1 was amended to specifically been formed, but has not yet begun bus- tion 18206 of the Financial Code to require that the offer and sale of the iness operations. The Department has authorize an industrial loan company to franchise not be in violation of any law determined that Vezirian's offering make or acquire loans secured by motor of the . does not qualify for a section 25102(f) vehicles, repayable in other than equal The proposals were submitted to the limited offering exemption (non-public periodic payments (i.e., balloon Office of Administrative Law and subse- offering exemption). payments typically found in motor vehi- quently approved. The amendments be- On September 24, American Board of cle leases) up to 50% of all consumer came effective on November 5, 1986. Trade, Inc. and American Board of loans and obligations which are secured Enforcement. On September 15, a Trade Services Corporation were by motor vehicles or 20% of an industrial desist and refraining order was issued ordered to desist and refrain from the loan company's assets, whichever is less. against Dennis Perez. Perez was ordered offer or sale of unqualified, non-exempt The Department of Corporations' to stop offering and selling unqualified securities in California in the form of Special Administrator for the Industrial securities in the form of investment con- interests in commercial paper. Loan Law has expressed two concerns tracts. Investors were solicited through On October 6, two cease and desist with respect to the new authority granted an advertisement in a Los Angeles area orders were issued to two corporations, to industrial loan companies by Chapter Spanish newspaper, La Opinion. Inves- Gold'n Links, Inc. and Avon Service 296: first, the definition of "balloon tors' funds were to be used to finance Corporation, for violations of the Fran- payment" under section 1162 should be unspecified loans within the Hispanic chise Investment Law. The companies amended to track statutory language, community. The Commissioner found are prohibited from offering and selling which refers to "periodic payments," the investment to be a security in franchises in California without first reg- while maintaining the term "installment" the form of an investment contract. No istering the offerings with the Depart- to cover circumstances where an indus- permit had been issued by the Depart- ment of Corporations. The companies trial loan company purchases retail ment of Corporations authorizing the had distributed brochures advertising installment contracts (the amendment to investment to be offered or sold within the availability of investment opportuni- subsection (a) of section 1162). the state. ties to attendees of a franchise expo Second, the number of balloon pay- One investor, after being promised a show held in Orange County in August. ments should be limited to one in the return of 20% on his money in one year, The advertised investments were deter- case of loans or obligations secured by placed $6,000 in an account with Perez. mined to be franchises by the Commis- motor vehicles, and the balloon payment The whole amount was withdrawn by sioner and they had not been registered.

The California Regulatory Law Reporter Vol. 7, No. 1 (Winter 1987) REGULATORY AGENCY ACTION

On October 7, Diablo Development matter of Commissioner v. Cal State 422, 423, 509, 705, 1302, 1303, 1305, #1, a California limited partnership, was Properties Fund-85, Lid. (Cal State). 2115,2201, 2251, 5342, 5515, 7515, 9414, issued a desist and refraining order for The administrative law judge found that 12465, and 25117, and adds sections violating the Corporate Securities Law. the Department's refusal to issue a per- 109.5, 156.1, 171.1, 191.1, and 12446 to Securities in the form of limited partner- mit to Cal State to sell limited partner- the Corporations Code. ship interests in an oil and gas program ship interests in a real estate syndication This bill deleted provisions of the were offered and sold to the public with- to the public was appropriate. Cal State Commercial Code which specified that: out first obtaining a permit from the had failed to file an accurate application, (1) the priority of a secured party is Department of Corporations. Although. made untrue statements of fact, and unaffected by a bona fide purchaser of no permit had been issued, a Limited omitted to provide material facts in an interest in a security free from Offering Exemption Notice under sec- its application. The evidence showed adverse claims, and (2) the first person to tion 25102(f) of the California Corpora- that Cal State was unable or unwilling perfect a security interest using specified tions Code had been filed. A review of to comply with the applicable statutes registration has priority over other the transactions disclosed that the com- and regulations. secured parties. pany did not qualify for the exemption. On November 4, a desist and refrain Certain provisions of a corporation's On October 16, Paul Weil, an attorney order was issued to McMurry Com- articles of incorporation may now be for and director of Southwest Bancorp, panies, Johanna Southwest Corpor- made dependent upon facts ascertain- stipulated to a desist and refrain order ation, Kimkel Corporation, and Gene able outside the articles or terms of an issued on August 11. Mr. Weil is prohi- McMurry for violation of the Califotnia agreement of a merger. The bill also bited from acting as securities counsel to Corporate Securities Law. McMurry changes the requirements for foreign Southwest Bancorp for five years. The approached investors sometimes as an corporations to be exempt from certain order was issued in reference to a 1984- insurance salesman, and sometimes as a provisions of the Corporations Code. 85 transaction in which Southwest Ban- "certified financial planner," and The 45-day notice required for an corp offered its preferred shareholders induced them to invest in oil and gas dril- amendment to the bylaws or articles of a an exchange of common stock for their ling programs to be conducted by the public benefit corporation that would preferred stock. Under section 25120 of above-mentioned companies. Others terminate memberships may now be the California Corporate Securities Law, were induced to invest in arbitrage waived, if all members entitled to vote such an exchange requires approval of agreements, and their money was used to recieve prior written notice and sign the the commissioner. This offer and ex- invest in trading in commodities and waiver. Existing law provided for the change was carried out despite the fact securities. At least 21 investors invested escheat to the state of certain property; that Mr. Weil had been previously noti- over $240,000. No investor has received under this bill, a proprietary interest in a fied by the Department of Corporations any of the promised interest payments, consumer cooperative corporation shall that approval was required. Because at a rate of 24% to 36%, or any of their become the property of the corporation. the exchange offer constituted the offer principal. Exemptions from constitutional usury and sale of a security which was neither On December 1, the Los Angeles provisions has been extended to evidence qualified nor exempt from qualification, Superior Court issued a temporary re- of indebtedness that has a rating by an the commissioner considered the order straining order and an ex parte agency or system that has been certified necessary for the protection of existing appointment of receiver over Marlin by rule or order of the commissioner. and potential investors in Southwest Properties, Inc., Marlin industries, Inc., This bill has passed both houses and has Bancorp. and Marlin Equities, Inc. These corpora- been chaptered. On October 24, the Department of tions were acting as general partners of SB315 (Montoya). (See CRLR Vol. 6, Corporations obtained a preliminary 18 limited partnerships formed for the No. 2 (Spring 1986) p. 63.) As amended injunction in Los Angeles Superior purpose of rehabilitating historical in July, this bill would have required Court against Corporate Guarantee, landmarks for tax shelter investments. financial planners to be subject to licen- Inc. The defendant was enjoined from The Marlin entities allegedly did not per- sure pursuant to the existing require- offering or selling securities without a form the rehabilitation work, and inves- ments in the Corporations Code for permit or on the basis of fraud and tors' funds were used for other purposes. investment advisors. The commissioner misrepresentation, and from operating Because of the use of funds for other would have been required to establish as a broker-dealer without a license. purposes, there were insufficient funds to specified standards, procedures, and fees Investors were solicited through adver- meet the debt service obligations of the for regulation of financial planners. Dis- tisements in the , partnerships, resulting in foreclosure of closure requirements would have been and were promised a 21% return on their some of the buildings. The unusual imposed on financial planners, and they money through high quality bonds which remedy of seeking a receivership and would be subject to civil and criminal would be purchased by the defendant. At temporary restraining order without penalties. SB 315, however, was vetoed least $300,000 has been invested, and to notice to the defendants was viewed as by the Governor. date, no investor has received any return. necessary because of extensive comming- The complaint alleges that the defendant ling and abuse of investor funds, and FUTURE MEETINGS: violated the Corporations Code by fear that books and records might be To be announced. transacting business as a broker-dealer destroyed and additional funds diverted. DEPARTMENT OF INSURANCE without the required license, and that Acting Commissioner: it used false statements in order to LEGISLATION: Roxanni Gillespie induce investors. AB 3837 (Stirling) amends sections On November 4, Commissioner Tom 8302, 8304, and 8321 of the Commercial (415) 557-0366 adopted a proposed decision from the Code, and amends section 163, 174, 183, Insurance is the only interstate busi- Office of Administrative Hearings in the 313, 407, 409, 411, 412, 416, 417, 418, ness wholly regulated by the several

The California Regulatory Law Reporter Vol. 7, No. 1 (Winter 1987)