{"id":915,"date":"2015-12-02T17:51:32","date_gmt":"2015-12-03T00:51:32","guid":{"rendered":"http:\/\/fiduciarydutiesblog.com\/?p=915"},"modified":"2015-12-02T17:51:32","modified_gmt":"2015-12-03T00:51:32","slug":"chinacast-education-corporation-fraud-of-officer-imputed-to-corporation","status":"publish","type":"post","link":"https:\/\/fresnolawyerblog.com\/?p=915","title":{"rendered":"ChinaCast Education Corporation – Fraud of Officer Imputed to Corporation"},"content":{"rendered":"

Here is a recent decision that is not a surprise under a traditional agent-principal analysis.\u00a0 Even so, it has to sting, because the corporation loses twice \u2013 first, when it was defrauded by the former president, and second when the corporation was sued by shareholders for the diminished value of their securities.<\/p>\n

The fact pattern is straightforward.\u00a0 \u201cChinaCast founder and CEO Ron Chan embezzled millions from his corporation and misled investors through omissions and false statements \u2013 textbook securities fraud.\u201d\u00a0 These were not small losses: \u201cFrom June 2011 through April 2012, Chan \u2018transferred\u2019 $120 million of corporate assets to outside accounts that were controlled by him and his allies.\u201d<\/p>\n

There\u2019s your background.\u00a0 The corporation, recognized by law as a separate \u201cperson,\u201d lost millions of dollars through embezzlement by the former CEO.\u00a0 At the same time, the former CEO made false representations on behalf of the corporation, which false representations caused damage to investors in the corporation.<\/p>\n

\"Fresno<\/a><\/p>\n

Explained the court, \u201cThroughout 2011, Chan signed SEC filings on behalf of ChinaCast and never disclosed the $120 million in transfers and other fraudulent activities afoot.\u201d\u00a0 (Of course Chan made false representations \u2013 otherwise, he would of been admitting his wrongdoing<\/em>.)<\/p>\n

The corporation brought forth a common-law defense: \u201cThe adverse interest doctrine may prevent a court from imputing knowledge of wrongdoing to an employer when the employee has abandoned the employer’s interests, such as by stealing from it or defrauding it.\u201d<\/p>\n

\u201cThe sole question on appeal is a purely legal one and an issue of first impression in this circuit:\u00a0 Can Chan’s fraud be imputed to ChinaCast, his corporate employer, even though Chan’s looting of the corporate coffers was adverse to ChinaCast’s interests?\u201d<\/p>\n

The Ninth Circuit held that the corporation could be sued by investors based on the false representations, even though the corporation suffered its own separate injuries.\u00a0 Explained the court, \u201cwe conclude that Chan’s fraudulent misrepresentations \u2013 and, more specifically, his scienter or intent to defraud \u2013 can be imputed to ChinaCast.<\/p>\n

\u201cSignificantly, imputation is proper because Chan acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.\u201d<\/p>\n

That\u2019s certainly a difficult result.\u00a0 Everyone suffered from the wrongful acts of Chan.\u00a0 In an earlier time, the law probably would have allowed the losses to rest where it found them.\u00a0 In our increasingly urban society, the law reaches out to protect injured persons, even when the defendant has already \u201cpaid once\u201d for the injury.<\/p>\n

In re ChinaCast Education Corporation Securities Litigation<\/strong>, __ F.3d __ (9th Cir. Oct. 23, 2015)<\/p>\n","protected":false},"excerpt":{"rendered":"

Here is a recent decision that is not a surprise under a traditional agent-principal analysis.\u00a0 Even so, it has to sting, because the corporation loses twice \u2013 first, when it was defrauded by the former president, and second when the corporation was sued by shareholders for the diminished value of their securities. The fact pattern […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,4,5],"tags":[],"class_list":["post-915","post","type-post","status-publish","format-standard","hentry","category-case-law","category-corporations","category-developments"],"_links":{"self":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/915"}],"collection":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=915"}],"version-history":[{"count":0,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/915\/revisions"}],"wp:attachment":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=915"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=915"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=915"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}