Papers in Stock Case May Be Sealed

A state judge, acting on a request by Controller Kathleen Connell, is considering resealing documents central to allegations that the state sold millions of dollars worth of small investors’ stock in the 1990s without making any attempt to notify the rightful owners.

Connell’s attorney declines to characterize the documents’ significance. Rather, the attorney charges, the documents were misappropriated and never should have become public.

The development is the latest twist in a years-long drama involving hundreds of small-business owners who owned stock in the old Blue Chip Stamp Co. and have come to discover that the state sold their shares for a fraction of what they were worth.

California law says the state must repay people who can prove they have unclaimed property, even if the state has spent the money.

Blue Chip Stamp stock soared after Berkshire Hathaway, the investment vehicle controlled by billionaire Warren Buffett, took over the company in 1983. After the merger, Berkshire Hathaway lost track of many rightful owners of the old Blue Chip stock.

Following the law, Buffett’s company turned the shares over to California’s unclaimed property fund, overseen by the state controller. The state sold the stock in the early 1990s, when California was in the midst of the worst recession since the Great Depression and state coffers were billions in the red.

“This is the tip of the tip of the tip of the iceberg,” said Sacramento attorney Jeff Tochterman, who is urging Superior Court Judge Charles Kobayashi to keep the documents public. “For five years, no one got notice. It is a straight-up attempt to cover up a theft. The state stole people’s money for five years, and now they’re trying to cover it up.”

The documents appear to show that for five years starting in 1989, the state failed to make any attempt to contact owners of Berkshire Hathaway stock and alert them that the stock had fallen into the unclaimed property fund. Although the documents deal only with Berkshire Hathaway stock, the state evidently followed the same practice with stock in other companies, selling it without attempting to notify the rightful owners, Tochterman said.

“No one is participating in a cover-up,” countered Richard Chivaro, chief counsel to Connell. Rather, he said, state controllers go out of their way to publicize the unclaimed property fund.

In the early 1990s, Gov. Gray Davis, who was controller at the time, decried the decision by the lawmakers and the governor to cut money earmarked for notifying owners of unclaimed property. Still, restrictions then on notification were “pretty severe because the state was facing a major budget gap,” said Chivaro, who also worked for Controller Davis.

“There were a lot of restrictions,” Chivaro said. “We were prohibited from doing any advertising or sending out notices.”

The unclaimed property fund is made up of money from old bank accounts, stock and other property that people abandon or forget about. In some instances, people move and fail to receive stock or bank statements in the mail, or simply neglect to respond to notices sent by financial institutions. After a few years, the institutions turn the money over to the state.

A small industry has developed involving bounty hunters who locate people with unclaimed property and charge them a finder’s fee of 10% to help recover it. There has been particular interest in owners of Berkshire Hathaway stock because of its value.

In a closed hearing in Sacramento earlier this week, Connell’s lawyer urged that Kobayashi reseal the documents, arguing that the papers should be shielded from public disclosure because they are state lawyers’ work product and are privileged attorney-client documents.

“He has misappropriated those documents,” Chivaro said of Tochterman. “He got them somehow; I have no idea how.”

Kobayashi has already issued a tentative ruling saying he intends to reseal the documents: “The law is clear that whether the plaintiff obtained the documents through misappropriation or inadvertent production, the doctrine of waiver does not apply. Waiver does not include accidental, inadvertent disclosure of privileged information by the attorney.” The judge did not say when he would issue his final ruling.

One of the documents that Kobayashi is considering resealing is a spreadsheet apparently showing that the state failed to give notice to people who owned 713 shares of Berkshire Hathaway stock from 1989 to 1992. The state sold at least 516 shares of the stock during that period, the document shows.

In the years before 1989, the state would publish lists of people who had unclaimed property and use the state Franchise Tax Board to help locate individuals. But a summary of the history of the unclaimed property fund prepared by state officials shows that in 1989, the state cut all money for those efforts. Partial funding was restored in 1994, but not enough to run individual names. Rather, the ads were general descriptions of the fund. Kobayashi also is considering resealing the summary.

Tochterman said the documents were placed in public court files, perhaps inadvertently by state lawyers who are fending off lawsuits by former Blue Chip stock owners. He acknowledged that the state policy was debated in the early 1990s. But the documents nonetheless are important to his case because they clearly summarize the issue, he said.

“It’s the cleanest, best piece of evidence,” Tochterman said. “Standing by itself, it proves my case.”

He represents three former Blue Chip stock owners who, as a result of the 1983 merger, were entitled to 17 shares in Berkshire Hathaway. At times, the firm’s stock has traded at more than $80,000 per share. One of Tochterman’s clients, Benny Fong, an elderly Palos Verdes man, held 15 shares, or more than $1 million if his stock had been sold at the top of the market. As it turned out, the state sold Fong’s stock in 1990 for $7,082 a share. On Friday, Berkshire Hathaway stock closed at $69,600 per share.

In his lawsuit, Fong is asking that the state be required to pay him the difference between the price at which the state sold the stock and the price he would have received if he had sold it at its higher levels.

“There is a potentially huge liability for the state,” Tochterman said. “There are billions of dollars in this fund. My theory is that that’s why the state stopped giving notice. There was an intentional decision to not give notice in the early ‘90s when the state was desperate for money. The state started pillaging this fund.”

People can find out whether the state is holding their unclaimed property by going to the controller’s Web site at https://www.sco.ca.gov, and clicking on “Unclaimed Property.”