MINUTES OF THE SENATE COMMITTEE ON JUDICIARY Sixty-eighth Session March 15, 1995 The Senate Committee on Judiciary was called to order by Chairman Mark A. James, at 9:40 a.m., on Wednesday, March 15, 1995, in Room 224 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Mark A. James, Chairman Senator Jon C. Porter, Vice Chairman Senator Maurice Washington Senator Mike McGinness Senator Dina Titus Senator O.C. Lee COMMITTEE MEMBERS ABSENT: Senator Ernest E. Adler (Excused) STAFF MEMBERS PRESENT: Allison Combs, Senior Research Analyst Marilyn Hofmann, Committee Secretary OTHERS PRESENT: Dean Heller, Secretary of State, State of Nevada Donald J. Reis, Deputy Secretary of State for Securities Regulation, State of Nevada, Office of the Secretary of State Frankie Sue Del Papa, Attorney General, State of Nevada David F. Sarnowski, Chief Deputy Attorney General, State of Nevada, Office of the Attorney General Robert (Bob) Barengo, Lobbiest, Securities Industry Association Ben Graham, Nevada District Attorneys Association, Office of the Clark County District Attorney Senator James opened the hearing to a discussion of a proposed amendment to Senate Bill (S.B.) 192. SENATE BILL 192: Makes various changes related to criminal and civil laws pertaining to sexual deviants. Senator James provided the committee members with a copy of an amendment to S.B. 192, which is attached hereto as Exhibit C. He said the amendment was prepared in order to address the concerns raised by the majority leader. Senator James stated the amendment referenced those specific cases where sexual gratification is an element of a crime, which could be proved separately. He said the result would be that community notification under other provisions of the bill would "come into play." Senator James pointed out section 3 of the amendment would be added to outline that condition. He said the section would allow the district attorney discretion, "...if he or she thinks there is enough evidence in a given case...he or she will ask the court for a separate penalty hearing, which will be accomplished before sentencing." SENATOR McGINNESS MOVED FOR APPROVAL OF THE AMENDMENT SET FORTH AS EXHIBIT C. SENATOR WASHINGTON SECONDED THE MOTION. THE MOTION CARRIED. (SENATORS ADLER AND TITUS WERE ABSENT FOR THE VOTE.) * * * * * Senator Lee asked Senator James if he believed a fiscal note would be added to the bill, and Senator James answered he had requested the same. He said it was his understanding the large fiscal impact of the bill had been removed, other than long sentences for child rapists. SENATE BILL 244: Makes various changes relating to violations of statutes governing securities and commodities. The first to testify was Dean Heller, Secretary of State, State of Nevada. Mr. Heller introduced Donald J. Reis, Deputy Secretary of State for Securities Regulation, State of Nevada, Office of the Secretary of State. He then reviewed the provisions of S.B. 244, saying his office was "looking for simple aid and abetting language in the securities law." Secretary of State Heller stated section 1 of the bill was proposed to "codify the vicarious liability provisions of securities case law...and to remove the good faith defense in civil cases against...persons engaged in willful acts of market manipulations...." Mr. Heller indicated section 2 of S.B. 244 was his own proposal, and would allow the office to assist local governments in prosecuting and investigating securities fraud, particularly in rural counties. He said at this time, the Securities Division is located in southern Nevada, however, his office is requesting that a division office can be located in northern Nevada. Mr. Heller said the language contained in section 2 is directed toward rural counties and would provide that county district attorneys could become more actively involved in white collar crime. He added his office would be able to assist local governments in fighting white collar crime, removing the exclusive jurisdiction for such prosecution from the Office of the Attorney General. Mr. Heller added the administrator, who is his deputy, sould have the discretion to refer securities cases to the district attorney of the appropriate county. Mr. Heller stated he had learned recently of the disapproval of the legislation by the Nevada District Attorneys Association, and he expressed disappointment with that outcome. He indicated surprise that there were 14 counties with district attorneys "who are not concerned about white collar crime in their counties...." Senator McGinness asked if a district attorney in a small county did not have the time or expertise to proceed regarding white collar crime, if they could request the Office of the Secretary of State to investigate. Mr. Heller responded they could, but added his office wanted those district attorneys to become involved if at all possible. He stated: "Some of the crimes are not being pursued, because [the district attorneys] know if they become involved the attorney general...says...you have no jurisdiction." Mr. Heller said if the district attorneys know they may become involved, they will be more aware of what is going on in the future. Senator James referred section 3 of S.B. 244 with respect to an increase in penalties. He spoke of the committee's proposed legislation involving "truth-in-sentencing," and asked Mr. Heller if he had any objection to the inclusion of the white collar crimes in the sentencing guidelines. Mr. Heller answered there was no objection. Senator Washington referenced the increase of fines from $20,000 to $100,000 and asked if the Office of the Secretary of State had difficulty in collecting restitution at this time. Mr. Reis answered they have had problems in such collection, but have been successful recently. He said he did not know if an increase in the amount of the fines would have an effect on collection. Mr. Reis stated the fine schedule had not been revised since 1989. The next persons to speak were Frankie Sue Del Papa, Attorney General, State of Nevada, and David F. Sarnowski, Chief Criminal Deputy Attorney General, State of Nevada, Office of the Attorney General. Ms. Del Papa submitted a letter dated March 14, 1995, which is attached hereto as Exhibit D, and sets forth opposition to section 2 of S.B. 244. She stated that 8 years ago, it was suggested that the Securities Division be eliminated, and she fought very hard to save it. Ms. Del Papa said one of the reasons the division was placed in Las Vegas was because the majority of problems occurred in the southern part of the state. She said she would welcome an office in Washoe County. Attorney General Del Papa disagreed with the representations made by Mr. Heller and indicated she did not believe it was an issue of whether or not local prosecutors are interested in white collar crimes. She said it is "more an issue of resources and expertise." Ms. Del Papa said their office and the Securities Division has worked with local entities when appropriate. She said her opposition to section 2 of the bill stems from her belief it would be unduly restrictive on the attorney general's office. Ms. Del Papa stated: "What you want is to have a relationship that develops between your investigators and some entity that has primary jurisdiction...not to the exclusion of others...." She said it was her belief that the two largest population areas, Reno and Las Vegas, oppose the shift in primary jurisdiction, "...and would prefer to leave it where it is." Ms. Del Papa pointed out there has been an expansion over the past several years in the jurisdiction of the attorney General's office in the area of fraud. She said she believes her office has shown it is capable and willing to prosecute such cases, and further believes section 2 of the bill would "muddy the water." Senator James asked Ms. Del Papa if she was opposed to the language in the bill which states, "...at the request of the administrator." Ms. Del Papa answered it should not be an "administrator" who determines if a case will be prosecuted. She stated she believes it should be a "prosecutorial decision." Ms. Del Papa added a district attorney now has the right to prosecute if the attorney general's office does not, but she added the district attorneys, particularly in the smaller counties, do not usually have the expertise to do so. Senator Lee asked if there should be a disagreement between the administrator in the Office of the Secretary of State and Attorney General Del Papa concerning the prosecution of a case, "...who wins?" Ms. Del Papa reiterated that is why the language of the bill "muddies the water." She said normally a prosecutor would make the basic legal decision. Mr. Sarnowski indicated at this time, a law enforcement agency presents cases to the Office of the Attorney General for consideration of prosecution. He said if they determine not to prosecute, they have an alternative ability to pursue the same matter civilly, under civil fraud statutes. Mr. Sarnowski stated if the office declines to prosecute a case, the law allows the original law enforcement or investigative agency to go to the local district attorney for prosecution. He said if the language in section 2 of the bill were to be adopted, the law enforcement entity could present the case to his office and to the district attorney in the locale at the same time. Mr. Sarnowski added it was not likely this would happen, but it would be wasteful to have two presentments and two reviews going on simultaneously. He stated he was in constant contact with district attorneys, particularly in Washoe, Douglas, Clark and Carson City counties, and has found they welcome the involvement of the Office of the Attorney General, because of the local heavy criminal caseloads. He also made the point no case has been referred to his office outside of those four counties. Mr. Sarnowski referenced Senator Washington's earlier question regarding the collection of fines and stated the difficulty in the collection of fines was not unique to the Securities Division. He said judges first look to compensating individual victims if there is monetary ability on the part of the defendant. Mr. Sarnowski said in many cases the defendant does not have the assets to compensate victims, particularly if sentenced to prison. Senator James asked Mr. Sarnowski if he had comments regarding the changes between sections 1 and 4 of S.B. 244, regarding controlling personal liability and "aider and abettor" liability and defenses. Mr. Sarnowski answered those were changes which the division supports as it would aid the office in its administration of regulation of the industry. Senator James asked, "How is it that a person occupying a similar status or performing similar functions as the person liable is also liable unless they have a defense?" He suggested that might be a co-employee at the same level who is not a controlling person. Mr. Sarnowski stated this was not his area of expertise but replied: "We see people claiming to be corporate officers and not claiming to be when it suits them to try to avoid liability...this puts the onus upon them to present that defense." The next person to testify was Robert Barengo, Lobbyist, Securities Industry Association, a trade association consisting of 700 security companies across the county. Mr. Barengo stated the association was "not against vigorous enforcement against the bad apples in the industry," but it is concerned about the need for the bill. He said he has not heard any evidence of actual violations or cases that have not been prosecuted which necessitates change in the language in section 1 of S.B. 244. He said the language which would be deleted in section 4(4) of the bill "...is fairly common language across the United States, and is uniform in all securities acts. Mr. Barengo stated the burdens are being shifted, and added, "I do not know why." He said there was also concern in the association about why the fines would be raised to $100,000. Mr. Barengo also questioned changing the penalty for "violation of an order of the department" from a misdemeanor to a felony. Senator James asked Mr. Reis to return to the witness table to address questions raised by himself and Mr. Barengo. Mr. Reis stated the division had requested only an "aider and abettor" liability section, which the bill drafters expanded into the language which was placed into the bill. He said he has determined that section 1(1) "...merely codifies what is already in the law in most jurisdictions, based on case law." Mr. Reis said if an officer of a corporation violates the Securities Act, the corporation is also held to be responsible. He reiterated the new language is "...simply the vicarious liability provisions codified," and added he doubted there is anything which would change the law of the State of Nevada. Mr. Reis then indicated regarding section 1(2) that language was taken from Nevada Revised Statutes (NRS) 90.660(4) and added to remove the good faith defense in civil cases against controlling persons, only where market manipulation is involved. Mr. Reis added the good faith defense was taken out by the bill drafter, not at his request. He also referred to the deletion of the language of section 4(4) relating to contribution and said, "Usually you would determine contribution on the basis of tort law, and not on the basis of contract law." Mr. Reis said he asked a member of his staff to attempt to determine how contribution is computed on the basis of breach of contract and added, "He couldn't find a reported case in which contribution had been determined...." Mr. Reis stated the secretary of state had requested a one paragraph provision which would say, "Any person who controls or materially aids a person liable under certain sections of the act, shall be liable jointly and severally with and to the same extent as the person committing the violation." He added, "That was all that we asked for." Senator James stated the language would include an "employee materially aiding," as it does under the existing statute, but a broker, dealer or sales representative would not have to "materially aid." Senator James referenced the statutes set forth in section 4(1) of the bill, and asked Mr. Reis if he could review what those particular statutes covered. Mr. Reis said they were licensing and registration statutes. Senator James stated: "Under that you had a defense of `didn't know' or `couldn't have known' under reasonable care. Under market manipulation you had a defense of `good faith...even if you knew'...do you know why that is being eliminated?" Mr. Reis replied he did not know, and did not ask that it be eliminated, but said he would support such elimination because "market manipulation is one of the most egregious acts violating the statute that you can do...because it affects anyone who is...buying or selling a security." He stated to add a "good faith defense" for that kind of conduct is not appropriate. Senator James stated: "The major change is from due care...to find out if they are doing it...below him. If we change the law, and it goes from the standard now where [a person] does not have to actively go out and find out if this kind of a scheme is going on...as long as he acts in good faith, he is not liable...it seems like a pretty significant change. Mr. Reis responded he reads the language to say a controlling person who did not know what was happening below him, would have "...an additional defense available to controlling persons in subsection 3 violations..." He added he did not read the language as an alternative to "...didn't know and in the reasonable exercise...couldn't know...." Mr. Reis indicated he believed Senator James was "reading it the other way," and added he did not know which was correct. Senator James asked Mr. Reis if he could recall specific cases which the new language would cover "...which are not covered by existing law." Mr. Reis answered he did not believe section 1 the bill would "provide any additional coverage which is not already in the statute." He said the elimination of specific language for "broker/dealer" does not affect the fact they come under the definition, "controlling persons." Senator James referred to Mr. Barengo's objection to changing the penalty from a misdemeanor to a felony for violation of a order. Mr. Reis responded the Office of the Secretary of State frequently issues "cease and desist" orders. He said if they find a person is "continuing to do what they have been ordered to cease and desist doing," they will bring an action to effect punishment. He added he could only think of one occasion where an order was issued which did not accompany other violations of regulations. Senator Porter referenced Exhibit D provided by Attorney General Del Papa, and indicated he wished to address some of the questions set forth in that letter. He indicated the attorney general had stated the bill would conflict with NRS 228.120, because "...it would only allow the attorney general to prosecute if the administrator of the Securities Division requested a prosecution." He asked Mr. Reis how he viewed that statement. Mr. Reis indicated he had not reviewed Exhibit D and was not prepared to respond to the question. He added, "It was not the intent in making this change, to express...any criticism or dissatisfaction with the way our assistant attorney generals are handling cases for us." He stated he worked in the area of securities regulation in Michigan and found that if they worked with prosecutors, the prosecutors would develop an interest in pursuing white-collar cases. Mr. Reis stated he felt he could "leverage the resources of his agency" by being able to solicit the help and cooperation of the county prosecutors. He added they were going to conduct a training program in April, with special invitations to the county prosecutors and sheriffs, "...in the hopes we can get them active in prosecuting white- collar crime." Mr. Reis stated S.B. 244 was proposed to "augment that effort." Senator Porter asked Mr. Sarnowski to come forward and explain the conflict between the current legislation and NRS 228.120. Mr. Sarnowski stated: By the normal rules of statutory construction, this being a later enacted and more specific statute addressing a specific area, would arguably trump the general statute in chapter 228 of NRS, which governs the operation of our office as a whole. ... The attorney general has never invoked the provision of walking in and taking over a case from a district attorney, which by statute we would be authorized to do...the statute gives the attorney general wide latitude right now to file a case of any kind. However, there are limitations on resources and we do not step on district attorneys' toes...they have their areas of expertise and we have ours. Mr. Sarnowski stated he did not take the proposal by the secretary of state as a criticism. He said he hoped "they can expand their presence in the north." In response to a question posed by Senator Porter regarding item 2 on page 3 of Exhibit D, Mr. Sarnowski indicated the language of the new legislation, the Office of the Attorney General could not prosecute a violation of the Uniform Securities Act if another law enforcement agency presented the case. He indicated he did not believe that was the intent of the secretary of state. Mr. Reis stated he thought the language "could be more artfully drafted", so it would provide an option but not put them in a situation where it would appear they were trying to control what the attorney general did. He added he believed the language "went beyond what we had any intention of doing." Mr. Reis stated the language did not come from the Uniform Securities Act and he suggested they study that act further. He continued: "We can cooperate with the county prosecutor; we can cooperate with the sheriff's department; we can work with them and encourage them to develop expertise if they have an interest...and not be in any kind of jurisdictional conflict." Senator Porter suggested that Mr. Reis review items 1 through 5 on page 3 of Exhibit D and respond at a later time to the committee regarding possible changes to the language of the bill. He added he knew the agencies involved could help the committee make the right decision. Senator Titus stated: We have heard from the advocates of this bill that they don't really know what is in the bill; they don't really know why it is in there; they don't even know where it came from, except from some mysterious legal person down there in LCB [Legislative Counsel Bureau]; they don't know of any cases that may have warranted this; they don't know if we really even need it because it is probably already in common law...what I don't know is why we are even pursuing it...I don't think we need this and I don't think we need to spend more time trying to redraft it so that maybe it will look like we need it. Senator James stated he did not necessarily agree, because they have heard there is a problem with white-collar crime and in obtaining resources to prosecute the cases in the rural areas. He said he would like those who have testified to pursue the problem areas and return for a work session on the bill. The last person to testify on S.B. 244 was Ben Graham, Nevada District Attorneys Association and Clark County District Attorney's Office. Mr. Graham stated he had high regard for the secretary of state and his staff and commended their desire to protect the integrity and interest of the public in the securities industry. He said his office was also vitally interested in curbing white-collar crime. Mr. Graham said the problem has been set forth as "a very complex area." He stated these crimes were "paper cases" and became bogged down in a "paper battle." Mr. Graham added: "If you have paper cases submitted, and you have 13 other preliminary hearings dealing with rapes, robberies and murder...and the 14th one is a paper case...they pile up." He said the association wanted to make sure the interests of the secretary of state and the attorney general are addressed and indicated he would be communicating with all 17 district attorneys today to see how they can help in prosecuting the white-collar cases. Senator Titus asked Mr. Graham if he was supporting or opposing the bill. Mr. Graham answered: "We would rather not get involved any more than we are currently with the prosecution of these cases...I think that can be interpreted as opposition." Senator James commended both constitutional officers for appearing before the committee in order to address their concerns. He then closed the hearing on S.B. 244 and opened a work session on S.B. 154. SENATE BILL 154: Makes various changes to provisions governing securities. Senator James asked if the amendments proposed by the Office of the Secretary of State had been received, and it was indicated they had not. The chairman indicated he would hold the bill for a later work session. There being no further business to come before the committee, the meeting was adjourned at 10:45 a.m. RESPECTFULLY SUBMITTED: Marilyn Hofmann, Committee Secretary APPROVED BY: Senator Mark A. James, Chairman DATE: Senate Committee on Judiciary March 15, 1995 Page