California Law Criminalizing False Statements About the Financial Condition of Commercial Banks is Unconstitutional

June 12, 2012

On May 29, 2012, the California Court of Appeal held that California Financial Code section 1327, which criminalizes the dissemination of untrue statements and rumors about the financial condition of commercial banks, is unconstitutional. Summit Bank v. Rogers, No. A129800, 2012 WL 1925535 (Cal. Ct. App. May 29, 2012). Although section 1327 has rarely been enforced since it was enacted nearly a century ago, given the current financial climate, the Occupy Wall Street movement, and the ubiquitous use of the Internet and social-networking apps as a means to disseminate opinions, the decision in Summit Bank v. Rogers reflects a willingness by some courts to give the public “broad latitude to express a wide range of viewpoints on matters relating to the operation and solvency of financial institutions.” Id. at *8.

Summit Bank (the “Bank”) sued Robert Rogers, a former employee, for anonymously posting allegedly defamatory content on a “Rant and Raves” section of about the Bank's practices. Rogers’ posts covered the following topics: (1) The Bank didn’t pay dividends in 2009; (2) the CEO “thinks that the Bank is her personel [sic] Bank to do with as she pleases;” (3) the CEO should not be allowed to provide an executive position to her “worthless,” “lazy” son; (4) depositors should move their accounts immediately, “before its [sic] too late;” (5) the Bank is “screwed up,” “piss poor,” and a “problem Bank;” (6) the FDIC and California Department of Financial Institutions have “look[ed] at Summit Bank” three times in less than one year and that is “not a good thing;” (7) service was poor at the Bank’s Hayward branch and the Bank closed it; (8) after the Hayward branch was closed, the customers “were left high and dry;” and (9) the Bank’s depositors should leave “before they close.”

Rogers moved to strike the Bank’s complaint pursuant to California’s “anti-SLAPP” statute on the ground that the suit was brought for the illegitimate purpose of chilling Rogers’ right to speak freely about the Bank. Under the anti-SLAPP statute, California Code of Civil Procedure section 425.16, the court must analyze whether the defendant’s speech is protected and whether the plaintiff has shown an ability to prevail on its claim. Summit Bank argued that Rogers could not use the anti-SLAPP statute because his underlying conduct allegedly violated California Financial Code section 1327 and was therefore illegal as a matter of law.

California Financial Code section 1327 was enacted in 1917 and has its origins in the Bank Panic of 1907–1908. During that financial crisis, several bank runs were triggered and fueled by published untrue statements concerning the financial condition of banks. As a result, the American Bankers Association lobbied Congress and state legislatures to adopt laws criminalizing defamatory statements about commercial banks’ financial condition. No federal law was passed, but several state legislatures — including California and New York — adopted statutes substantially analogous to the proposed federal law considered by Congress. (See Mathewson, From Confidential Supervision to Market Discipline: The Role of Disclosure in the Regulation of Commercial Banks (1986) 11 J.Corp. L. 139, 147, fn. 53 [citing Act of July 1, 1921, § 1, ILL. REV. STAT. Ch. 17, § 901 (1983); MICH. COMP. LAWS § 750.97 (1979); NEB. REV. STAT. § 8-175 (1983); N.Y. BANKING LAW § 671 (McKinney 1971); OKLA. STAT. Tit. 6, § 1413 (1981); TEX. REV. CIV. STAT. ANN. Arts. 342-907 (Vernon 1973)].) California’s version of the statute, Financial Code section 1327, provides:

Any person who willfully and knowingly makes, circulates or transmits to another or others any statement or rumor written, printed or by word of mouth that is untrue in fact and is directly or by inference derogatory to the financial condition or affects the solvency or financial standing of any bank doing business in this state, or who knowingly counsels, aids, procures, or induces another to start, transmit, or circulate any such statement or rumor, is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1,000) or by imprisonment for not more than one year, or both.

In Summit Bank v. Rogers, the Bank, supported by an amicus filing by the California Bankers Association, argued that because of the growing number of insolvent banks, courts should be especially solicitous of preventing statements “derogatory to, or [that] affect the solvency or financial standing of, a bank.” The Court of Appeal disagreed: “It is precisely because of the current financial climate that we believe the public should be given broad latitude to express a wide range of viewpoints on matters relating to the operation and solvency of our financial institutions. The debate not only contributes ultimately to a proper understanding of the role and function of financial institutions in our society, but also furthers the search for solutions to the strengthening of the banking sector and therefore to our economy as a whole. Therefore, the public interest in the dissemination of this type of information is legitimate and substantial.”

The Court of Appeal held that section 1327 is unconstitutional because it is a criminal libel statute without a malice requirement, which is vague, overbroad and designed to prohibit speech based on its content. The Court of Appeal determined that the statute “fails to give persons of ordinary intelligence fair notice of what is forbidden” and “sets no discernible limits on what types of speech can be criminalized” and therefore “lends itself to arbitrary enforcement.” The Court of Appeal further noted that “[b]ecause of its wording, journalists, politicians and members of the general public who question the financial strength and stability of our banking system or even suggest that a bank is financially unstable, as well as any person who aids in making or circulation of such statements, can only guess as to whether their communications will subject them to criminal liability under Financial Code section 1327.” Of “greatest concern” to the Court of Appeal, section 1327 “has the potential to inhibit persons from engaging in constitutionally protected speech about the financial soundness of our banking system by threatening those who express themselves with a less than optimistic view on this topic with criminal sanctions.”

Although the Court of Appeal stated in a footnote that “we do not question the legitimacy of the government’s interest in preventing runs on our financial institutions, nor do we suggest that other legislation, carefully tailored to curb defamatory speech, may not pass constitutional muster,” its analysis of the facts before it seems to have weighed public criticism of the Bank above the Bank’s concerns that these comments could affect its continued solvency. The court’s approach in Summit Bank v. Rogers is especially interesting given the current financial climate and the defendant’s use of the Internet to disseminate his views. In a period that has witnessed both the Great Recession and the rise of Facebook to 901 million monthly active users, the decision of Summit Bank v. Rogers may reflect a growing willingness by courts to broadly permit individuals who harness the power of the Internet to share opinions and information concerning corporate conduct.

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This article was originally published by Bingham McCutchen LLP.