Metropolitan News-Enterprise


Tuesday, December 12, 2017


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Ninth Circuit Told California Law Authorizes Invalid ‘Cease and Refrain’ Orders

Lawyer Insists Notice to Halt Sale of Securities Must Tell of 30-Day Limit on Right To Demand Hearing and Provide Guidance as to How Obtain It


By a MetNews Staff Writer


Pending before the Ninth U.S. Circuit Court of Appeals is the question of whether a provision of the California Corporations Code is facially unconstitutional in permitting the state corporations commissioner to issue an order barring the proposed issuance of securities without disclosing in the notice that any judicial review is barred after 30 days and without spelling out how to mount a challenge.

Circuit Judge Milan Smith clearly signaled at Friday’s oral argument that he sees no constitutional impediment. However, questioning by Circuit Judge Sandra Segal Ikuta and District Judge Diane Humetewa of the District of Arizona, who was sitting by designation, seemingly presaged that Smith would be penning a dissent.

At issue is the validity Corporations Code §25532 which authorizes the commissioner to order someone “to desist and refrain from the further offer or sale” of a security “until qualification has been made under this law” and if the person “fails to file a written request for a hearing within 30 days from the date of service of the order, the order shall be deemed a final order of the commissioner and is not subject to review by any court or agency.”

Due Process Violation

Sacramento attorney Paul Asterlin argued that when the Department of Corporations (now known as the “Department of Business Oversight”) in 2008 purportedly served a notice on his client, Jason Shurnas, the receipt of which was disputed. Even assuming it was received, he said, that notice did not tell enough of what was going on to comport with due process.

He asserted in “every case that the state has cited” where an administrative action is judicially unreviewable based on a hearing not having been timely requested, there was a forewarning of that unreviewability.

“But in this case,” he declared, “after 30 days, that order is like it’s been handed down by the Supreme Court. There’s absolutely no way to challenge it, no way to go around it, if you do not request a hearing.”

Smith asked Asterlin if he were not, then, in violation of the statute by arguing before the panel. Ikuta interjected that it was a collateral attack on the constitutionality of the statute.

Not Previously Challenged

Noting that the statute was enacted in 1968, Smith remarked:

“There have probably been tens of thousands of these orders issued. Nobody’s complained about them before.

“Does that tell us anything about whether due process and notice is actually being denied here?”

Asterlin said it was also the view of the district judge that “It’s never been challenged, so it had to be good law.” He insisted there is a need to determine the “reasonableness” of the statute.

He asserted that the state “set this up because they don’t want to get these things challenged.”

Smith demanded to know what evidence he has of that intent.

“My evidence is the fact that if you want to challenge an order there’s really no way to know how to do it for the average person.”

Deputy Attorney General Craig Rust said the notice to “cease and refrain” is accompanied by a letter which says there is a right to an administrative hearing if the recipient wants to challenge the order. He acknowledged, under questioning by Ikura, that there is no indication in the letter as to how to request a hearing or there being a time limit, but said that copies of the relevant statutes are attached.

He opined that an expeditious approach is necessary in halting unauthorized sales of securities.

“The commissioner had to act swiftly,” he said, “to stop Mr. Shurnas from selling what it viewed as illegal securities, in an unlawful manner, to protect the public.”

The case is Shurnas v. Owen, No. 16-17277.


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