Remember last year when Larry Ellison decided to settle a civil suit alleging insider trading charges in California even though a similar suit was dismissed in Delaware? I blogged about it here, and Larry Ribstein added much here. At issue was whether the California law (Section 25402 and 25502.5 of the California Corporations Code) that allows issuers to sue insiders for trading on inside knowledge and receive treble damages violates the internal affairs doctrine if applied to corporations incorporated outside of California. Because Ellison settled, we could only speculate. Well, we may know soon.
The litigation trustee of Peregrine Systems, Inc., a Delaware corporation headquartered in California, sued directors and officers under this provision in 2004. The trial court in San Diego threw out the charges, citing the internal affairs doctrine. The plaintiffs filed a petition for writ of mandamus and won (Friese v. Superior Court, 134 Cal.App.4th 693 (2005). The court of appeals issued the writ, reasoning that the California statute was more like a blue sky law, pertaining to securities, than a law articulating fiduciary duties, pertaining to internal affairs. This writ was denied review on March 15, 2006. But wait, it's not over! The defendants filed a petition for a writ of certiorari in the U.S. Supreme Court on June 12, 2006 (Moores v. Friese, No. 05-1590, 74 U.S. Law Week 3704). The petition presents two questions:
(1) With respect to claim of breach of official duty to corporation, does commerce clause permit state to substitute its own substantive law for that of state of incorporation? (2) Does due process clause permit directors and officers of corporation incorporated in one state to be sued under substantive law of another state for breach of official duty to corporation?
I must be a really big nerd to be this excited, but this is exciting! I tend to agree with the California Court of Appeals (shocker). Trading of securities on inside information seems more like a state law we recognize against foreign corporations (blue sky laws) than the ones we don't. Now, the next question that follows is why we have allowed that distinction to go on for so long. Why have we had federal securities laws living parallel to state securities laws for so long? Surely the reason can't just be to make first-year associates lives miserable preparing Blue Sky Memos. How is the line between corporate governance and corporate securities so distinguishable?
I also know that there are some out there (usually me included) that are skeptical of insider trading laws in general. However, this one seems to get at some of the problems because the plaintiff is the issuer. Theoretically, if the trader has usurped some corporate knowledge, then the one with the cause of action is the issuer. All that aside, if we have insider trading laws, and we have a system that allows states to apply laws that govern securities to foreign corporations, then I still agree with the California Court of Appeals.
BTW, the "Moores" is former director and chairman of the board John Moores, founder of BMC Software and owner of the San Diego Padres.
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