A11021-A
STATE OF NEW YORK
________________________________________________________________________
11021--A
IN ASSEMBLY
April 9, 2002
___________
Introduced by COMMITTEE ON RULES -- (at request of M. of A. Lentol) --
read once and referred to the Committee on Codes -- committee
discharged, bill amended, ordered reprinted as amended and recommitted
to said committee
AN ACT to amend the penal law and the general business law, in relation
to misconduct of a corporate director or officer
The People of the State of New York, represented in Senate and Assem-
bly, do enact as follows:
1 Section 1. Section 190.35 of the penal law, as amended by chapter 791
2 of the laws of 1967, is amended to read as follows:
3 § 190.35 Misconduct by corporate [official] director or officer in the
4 fifth degree.
5 A person is guilty of misconduct by corporate [official] director or
6 officer in the fifth degree when:
7 1. Being a director of a stock corporation, he or she knowingly
8 concurs in any vote or act of the directors of such corporation, or any
9 of them, by which it is intended:
10 (a) To make a dividend except in the manner provided by law; or
11 (b) To divide, withdraw or in any manner pay to any stockholder any
12 part of the capital stock of the corporation except in the manner
13 provided by law; or
14 (c) To discount or receive any note or other evidence of debt in
15 payment of an installment of capital stock actually called in and
16 required to be paid, or with intent to provide the means of making such
17 payment; or
18 (d) To receive or discount any note or other evidence of debt with
19 intent to enable any stockholder to withdraw any part of the money paid
20 in by [him] such stockholder on his or her stock; or
21 (e) To apply any portion of the funds of such corporation, directly or
22 indirectly, to the purchase of shares of its own stock, except in the
23 manner provided by law; or
24 2. Being a director or officer of a stock corporation:
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD14698-06-2
A. 11021--A 2
1 (a) He or she issues, participates in issuing, or concurs in a vote to
2 issue any increase of its capital stock beyond the amount of the capital
3 stock thereof, duly authorized by or in pursuance of law; or
4 (b) He or she sells, or agrees to sell, or is directly or indirectly
5 interested in the sale of any share of stock of such corporation, or in
6 any agreement to sell the same, unless at the time of such sale or
7 agreement [he] such director or officer is an actual owner of such
8 share, provided that the foregoing shall not apply to a sale by or on
9 behalf of an underwriter or dealer in connection with a bona fide public
10 offering of shares of stock of such corporation.
11 Misconduct by corporate [official] director or officer in the fifth
12 degree is a class B misdemeanor.
13 § 2. The penal law is amended by adding four new sections 190.36,
14 190.37, 190.38 and 190.39 to read as follows:
15 § 190.36 Misconduct by corporate director or officer in the fourth
16 degree.
17 A person is guilty of misconduct by corporate director or officer in
18 the fourth degree when, as a director or officer of a stock corporation,
19 he or she knowingly allows generally accepted accounting principles to
20 be intentionally or recklessly violated to the detriment of the stock-
21 holders of such corporation.
22 Misconduct by corporate director or officer in the fourth degree is a
23 class A misdemeanor.
24 § 190.37 Misconduct by corporate director or officer in the third
25 degree.
26 A person is guilty of misconduct by corporate director or officer in
27 the third degree when, as a director or officer of a stock corporation,
28 he or she knowingly presents or offers, or permits to be presented or
29 offered, a book, record, statement, or any other product which he or she
30 has knowledge was prepared in, or resulting from, a violation of section
31 190.36 of this article to any person or entity having a financial inter-
32 est in such corporation.
33 Misconduct by corporate director or officer in the third degree is a
34 class E felony.
35 § 190.38 Misconduct by corporate director or officer in the second
36 degree.
37 A person is guilty of misconduct by corporate director or officer in
38 the second degree when:
39 1. as a director or officer of a stock corporation, he or she knowing-
40 ly acts to induce, restrict or in any way influence the sale of any
41 share of stock of such corporation, or any agreement thereto, unless he
42 or she is an actual owner of such share, while such director or officer
43 has knowledge that there exists a violation of section 190.36 or 190.37
44 of this article; or
45 2. at least five percent of any class of the outstanding shares of
46 such corporation have been traded, while such director or officer has
47 knowledge that there exists a violation of section 190.36 or 190.37 of
48 this article.
49 Misconduct by corporate director or officer in the second degree is a
50 class D felony.
51 § 190.39 Misconduct by corporate director or officer in the first
52 degree.
53 A person is guilty of misconduct by corporate director or officer in
54 the first degree when:
55 1. as a director or officer of a stock corporation, he or she sells,
56 or agrees to sell, or is directly or indirectly interested in the sale
A. 11021--A 3
1 of any share of stock of such corporation, or in any agreement thereto,
2 while such director or officer has knowledge that there exists a
3 violation of section 190.36 or 190.37 of this article; or
4 2. at least ten percent of any class of the outstanding shares of such
5 corporation have been traded, while such director or officer has know-
6 ledge that there exists a violation of section 190.36 or 190.37 of this
7 article.
8 Misconduct by corporate director or officer in the first degree is a
9 class B felony.
10 § 3. Subdivisions 5 and 6 of section 352-c of the general business
11 law, as added by chapter 146 of the laws of 1982, are amended to read as
12 follows:
13 5. [Any] In addition to the penalties that may be imposed pursuant to
14 sections 190.35, 190.36, 190.37, 190.38 and 190.39 of the penal law,
15 any person, partnership, corporation, company, trust or association, or
16 any agent or employee thereof who intentionally engages in any scheme
17 constituting a systematic ongoing course of conduct with intent to
18 defraud ten or more persons or to obtain property from ten or more
19 persons by false or fraudulent pretenses, representations or promises,
20 and so obtains property from one or more of such persons while engaged
21 in inducing or promoting the issuance, distribution, exchange, sale,
22 negotiation or purchase of any securities or commodities, as defined in
23 this article, shall be guilty of a class E felony.
24 6. [Any] In addition to the penalties that may be imposed pursuant to
25 sections 190.35, 190.36, 190.37, 190.38 and 190.39 of the penal law,
26 any person, partnership, corporation, company, trust or association, or
27 any agent or employee thereof who intentionally engages in fraud, decep-
28 tion, concealment, suppression, false pretense or fictitious or
29 pretended purchase or sale, or who makes any material false represen-
30 tation or statement with intent to deceive or defraud, while engaged in
31 inducing or promoting the issuance, distribution, exchange, sale, nego-
32 tiation or purchase within or from this state of any securities or
33 commodities, as defined in this article, and thereby wrongfully obtains
34 property of a value in excess of two hundred fifty dollars, shall be
35 guilty of a class E felony.
36 § 4. This act shall take effect on the first day of November next
37 succeeding the date on which it shall have become a law.
NEW YORK STATE ASSEMBLY
MEMORANDUM IN SUPPORT OF LEGISLATION
submitted in accordance with Assembly Rule III, Sec 1(e)
RETRIEVE BILL
BILL NUMBER: A11021A
SPONSOR: Rules (Lentol)
TITLE OF BILL: An act to amend the penal law and the general business
law, in relation to misconduct of a corporate director or officer
PURPOSE: To provide criminal sanctions for certain deliberate fraudu-
lent acts of mismanagement by corporate officers which affect stockhold-
ers.
SUMMARY OF PROVISIONS: Section One. Amends § 190.35 of the Penal Law
to redesignate present conducts prohibited as "Misconduct by Corporate
Official," which remain a Class B misdemeanor, as "Misconduct by Corpo-
rate Director or Officer in the Fifth Degree."
Section Two. Adds four new sections to the Penal Law as follows:
* § 190.36 establishes the crime of "Misconduct by Corporate Director or
Officer in the Fourth Degree." This crime, a Class A misdemeanor, arises
when a director or officer knowingly allows generally accepted account-
ing principles (GAAP) to be intentionally or recklessly violated to the
detriment of stockholders.
* § 190.37 establishes the crime of "Misconduct by Corporate Director or
Officer in the Third Degree." This crime, a Class E felony, arises when
a director or officer distributes accounting information known to
violate GAAP.
* § 190.38 establishes the crime of "Misconduct by Corporate Director or
Officer in the Second Degree." This crime, a Class D felony, arises when
a director or officer acts to induce or restrict the sale of other
person's stock, or at least five percent of any class of the corpo-
ration's stock is traded, while the director or officer is aware of an
existing violation of Misconduct by Corporate Director or Officer in the
Fourth or Third Degree.
* § 190.39 establishes the crime of "Misconduct by Corporate Director or
Officer in the First Degree." This crime, a Class B felony, arises when
a director or officer acts to induce or restrict the sale of stock they
own or have an interest in, or at least ten percent of any class of the
corporation's stock is traded, while the director or officer is aware of
an existing violation of Misconduct by Corporate Director or Officer in
the Fourth or Third Degree.
Section Three. Amends Subdivisions 5 and 6 of § 352-c of the General
Business Law to provide that penalties thereunder are in addition to
those imposed pursuant to Sections 190.35, 190.36, 190.37, 190.38 and
190.39 of the Penal Law.
Section Four. Effective date ninety days after it shall have become a
law.
EXISTING LAW: Misconduct by Corporate Official (Penal Law § 190.35)
prohibits, except in the manner provided for in law, acts to: distribute
dividends or capital to stockholders; use debt to pay for or withdraw
payment for stock; use corporate funds to purchase it's own shares;
votes to issue capital stock in excess of that authorized; and, except
in a public offering, have an interest in the sale of stock of the
corporation unless they are the actual owner.
JUSTIFICATION: Investment in corporate stocks is routinely done by
New Yorkers for essential purposes such as providing retirement income,
amassing a down payment for a home, or expenses of higher education.
Such investments do not carry the security of, for example, bank
accounts or government bonds, but they can offer higher yields which
would permit the investor to attain their financial goals. For a person
to assess the risk and reward of becoming or remaining a stockholder in
a company, it is essential that they have access to honest information
concerning it's finances.
The recent, well-publicized failure of certain large corporations has
come with allegations that high-ranking officers of those firms engaged
in accounting practices designed to conceal the actual condition of
their balance sheet. Hiding such essential facts prevents the market
from fairly pricing a stock, enabling those with knowledge of the true
situation to unfairly profit by trading in the stock, and preventing
investors from reacting to negative, or positive, trends.
This legislation would reinforce the existing fiduciary duty which
corporate management has to it's investors by establishing a series of
crimes which elevate as a pattern of fraud impacts on stockholders or
benefits corporate officers. Underlying these new crimes is the deliber-
ate violation of generally accepted accounting principles (GAAP), so
that stockholders are detrimentally affected. That act, a Class A misde-
meanor, is elevated to a Class E felony if the director or officer know-
ingly allows the fraudulent accounting record to be distributed, where-
upon the market could misvalue the stock. Should the officer try to
influence the sale of another person's stock, or if five percent of any
class of the company's stock trades, while the officer is aware of an
existing GAAP violation or distribution of records in violation of GAAP,
it is a Class D felony. Finally, if the officer trades their own stock,
or if ten percent of any class of the company's stock trades while such
officer is aware of an existing GAAP violation or distribution of
records in violation of GAAP, it is a Class B felony.
The deliberate violation of honest accounting can influence market
capitalization, and investor equity, for a corporation by millions of
dollars. The sanctions provided for in this bill are commensurate with
the harm that can be visited upon investors.
LEGISLATIVE HISTORY: New bill.
FISCAL IMPLICATIONS: None.
EFFECTIVE DATE: 90 days after it shall have become a law.