FEDERAL HOME LOAN BANK OF SEATTLE, a bank created by federal law, Appellant,
BARCLAYS CAPITAL, INC., a Connecticut corporation; BCAP LLC, a Delaware limited liability company; and BARCLAYS BANK PLC, a public limited company registered in England and Wales, Respondents.
the Washington State Securities Act ("WSSA"), an
investor who sues on the basis that a prospectus contains
either untrue statements or omissions of material facts must
prove reasonable reliance on these statements or
omissions. Here, the Federal Home Loan Bank of
Seattle ("FHLBS") purchased two residential
mortgage backed securities ("RMBSs") in 2008 that
were described in prospectus supplements. In 2009, FHLBS
commenced this action under the WSSA against Barclays
Capital, Inc., BCAP LLC, and Barclays Bank PLC (collectively,
"Barclays"). The essence of its claim for
rescission and other relief is that the prospectus
supplements contain untrue statements or omissions of
material facts about the securities FHLBS purchased.
trial court granted Barclays's motion for summary
judgment. In this appeal, FHLBS fails in its burden to show
that there are genuine issues of material fact. Barclays is
entitled to judgment as a matter of law. We affirm the
summary dismissal of these claims.
background about the nature of the transactions at issue in
this case may be helpful to provide context. In early 2008,
FHLBS purchased the two RMBSs that are the subjects of this
action. These securities were created by a process known as
subjects of this securitization are 1, 643 loans that IndyMac
Bank made to various residential borrowers throughout the
country. IndyMac decided whether to make each loan by a
process called "underwriting." After each loan
approval, each borrower began making monthly payments to
IndyMac. For purposes of securitization, IndyMac was the
"originator" of these loans.
IndyMac originated these loans, it pooled them together and
transferred them to a Barclays subsidiary. The subsidiary
then deposited them in a trust in exchange for investment
certificates. The trust issued certificates that were then
sold to FHLBS.
the stream of income from the monthly payments by borrowers
for the loans from IndyMac, the originator, was transferred
to FHLBS, the investor.
February 13, 2008, FHLBS purchased the first security for
$189, 416, 000. This RMBS is comprised of 951 of the 1, 643
loans originated by IndyMac. This security is known as BCAP
April 15, 2008, FHLBS purchased the second security for $232,
438, 000. This RMBS is comprised of the remaining 692 of the
1, 643 loans originated by IndyMac. This is known as BCAP
the underwriting process, most of these loans were
characterized as "Alt-A", falling between
"Prime" and "Subprime" loans in terms of
creditworthiness. As their names suggest, Prime loans are
those issued to borrowers who are the most credit worthy.
Subprime loans, on the other hand, are to borrowers at the
other end of the creditworthiness spectrum.
purchased these securities at a time that one respected
financial commentator has described as "the mortgage
debacle - in 2008. That one brought world economies to the
precipice and wiped out Lehman Brothers and a raft of
2009, FHLBS commenced this action against Barclays to rescind
these transactions and for further relief. In 2011, the trial
court first ruled that reasonable reliance on the statements
in the prospectus supplements is an element of an
investor's claim under the WSSA. In 2016, following
extensive discovery by the parties, the trial court granted
Barclays's motion for summary judgment on lack of
reasonable reliance as to the IND1 and IND2 transactions. The
court necessarily decided that FHLBS failed to show any
genuine issue of material fact on this element and that
Barclays was entitled to judgment as a matter of law.
reasonable reliance is a necessary element of an
investor's claim under the WSSA is a core issue in this
case. FHLBS argues that the WSSA does not require that it
prove that it reasonably relied on the statements in the
prospectus supplements that it now challenges. We disagree
and hold that such reliance is an essential element of an
investor's claim under RCW 21.20.010(2).
affirm an order granting summary judgment where there is no
genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. A material fact
is one on which the outcome of the litigation
depends. We review de novo orders of summary
judgment. We also review de novo a trial court's
construing a statute, we seek to ascertain and carry out the
legislature's intent. When the legislature enacts a state
statute substantially verbatim from a federal statute,
"'it carries the same construction as the federal
law and the same interpretation as federal case
law.'" When the legislature passes an
"amendment to a statute without alteration of a section
previously interpreted by the courts, " such action may
"evidence legislative acquiescence in the
FHLBS focuses its arguments on two statements in the
prospectus supplements for the two RMBSs that it purchased.
first challenged statement states:
Mortgage loans that are acquired by IndyMac Bank are
underwritten by IndyMac Bank according to IndyMac Bank's
underwriting guidelines, which also accept mortgage loans
meeting Fannie Mae or Freddie Mac guidelines regardless of
whether such mortgage loans would otherwise meet
IndyMac's guidelines, or pursuant to an exception to
those guidelines based on IndyMac's procedures for
approving such exceptions.
essence of FHLBS's claim is that the statement is untrue
or misleading because IndyMac allegedly did not follow
"its own guidelines and procedures in making [these]
other challenged statement deals with the loan to value
("LTV") ratios of these loans. FHLBS claims that
many appraisals that determined the LTV ratios were not made
in accordance with the Uniform Standards of Professional
Appraisal Practice, the national standard of the appraisal
profession. The numerator of this LTV ratio is the amount of
a loan and the denominator is the appraised value of the
property securing that loan. The purpose of this measure is
to evaluate how much equity a borrower has in the property
securing the loan.
21.20.010 states the elements of a claim under the WSSA:
It is unlawful for any person, in connection with the offer,
sale or purchase of any security, directly or indirectly:
(2) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under
which they are made, not misleading.
question is whether the legislature intended reasonable
reliance to be an element of a claim under this provision of
the WSSA. We hold that it did.
begin our analysis by noting the substantial similarity of
this state provision with its federal counterpart. As the
following chart shows, the provisions of these statutes are
substantially the same.
SEC Rule 10b-5
"It shall be unlawful for any person. . . in
connection with the purchase or sale of any
security. . .
(a) To employ any device, scheme, or artifice to
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person. . . .”
"It is unlawful for any person, in connection
with the offer, sale or purchase of any security,
directly or indirectly:
(1) To employ any device, scheme, or artifice to
(2) To make any untrue statement of a material fact
or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they are made, not
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person."
state supreme court has determined that RCW 21.20.010
"is patterned after and restates in substantial part the
language of the federal Securities Exchange Act of
1934." And this court has clarified that RCW
21.20.010 is "related" to Section 10(b) of that
act, as well as SEC Rule 10b-5.
words "reasonable reliance" do not appear in Rule
10b-5 or in RCW 21.20.010(2), its state counterpart. But the
United States Supreme Court has long required reliance in
Rule 10b-5 actions. And Washington law holds that once a
court makes a controlling interpretation of a statute, that
interpretation controls what the statute has always
meant. Thus, Rule 10b-5 has always required a
showing of reasonable reliance, and did so when this
state's legislature drew upon it to craft RCW
we conclude that the state legislature enacted RCW
21.20.010(2) with the intent that it be construed in the same
way as Rule 10b-5 and have the same interpretation as federal
case law of that rule. In short, reasonable reliance is a
necessary element of this state claim.
particularly noteworthy that since Washington courts began
recognizing a reliance requirement in 1970,  the
legislature has amended the WSSA eight times. Not once did
it modify the requirement that reliance is a required
element. This is telling.
Ninth Circuit Court of Appeals has explained, "'the
Washington Legislature may be presumed to have
known'" about the requirements of Rule
10b-5. With this presumed knowledge and no
amendment of the WSSA to omit the reasonable reliance
element, we must presume that the legislature intended that
element to remain a part of this state statute.
fails to argue why these principles do not control the
determination of the legislature's intent in enacting
this statute. Instead, it rests its arguments on reading case
law and statutes in unpersuasive ways.
that our interpretation of the legislative intent of the
statute has been consistently stated by the state supreme
court and other appellate courts of this state. The supreme
court held in Hines v. Data Line Systems. Inc. that
plaintiffs proceeding under RCW 21.20.010 must show that they
"relied on the misrepresentations in connection with the
sale of the securities." Only "an investor who is
wrongfully induced to purchase a security may recover his
opinions have consistently followed this
holding. And in no case has any Washington court
departed from this interpretation of the statute.
in Stewart v. Estate of Steiner, this court
reiterated the requirement of reasonable reliance when
holding that the investor in that case did not have a cause
of action under the WSSA. As this court stated in that
opinion, 'The question is whether [the investor]
reasonably relied on any of [the written materials]
in making his investment decision." If he did
not, he failed to establish "an essential element of his
the supreme court denied review in that case. Had the court
believed that this court had misstated the law by holding
that reasonable reliance is an essential element of a claim
under the WSSA, it seems likely that the court would have
granted review to address the issue. It did not.
advances a number of arguments why this statute does not
require reasonable reliance. They are not persuasive.
argues that the decision of the trial court violates the
jurisprudence of this state that the WSSA is to be
interpreted to protect investors. We disagree.
FHLBS is correct that a purpose of this act is to protect
investors.With this purpose in mind, we construe
the WSSA liberally. But this general statement of purpose
does not eliminate the clear legislative intent that we have
already discussed in this opinion that reasonable reliance is
a necessary element for a claim under RCW 21.20.010(2).
FHLBS also argues that the legislature intended to eliminate,
not impose, a requirement to prove reasonable reliance. Not
for this argument is that the supreme court has held that
certain elements of common law fraud, on which a WSSA action
is based, are unnecessary to prove. For example, the supreme
court held that a plaintiff need not show scienter in
Kittilson v. Ford. An earlier court of appeals
decision had held otherwise, following the United States
Supreme Court's holding in Ernst & Ernst v.
Ernst & Ernst court had explained that because
Rule 10b-5 derived from Section 10(b) of the 1934 Securities
Exchange Act, and because Section 10(b) speaks of
manipulation and deception, a Rule 10b-5 suit "clearly
connotes intentional misconduct." Section 10(b)
imposed this requirement even though the language of Rule
10b-5, standing alone, reached "any type of material
misstatement or omission, and any course of conduct, that has
the effect of defrauding investors, whether the wrongdoing
was intentional or not." But Section 10(b) conveyed to
it the scienter requirement.
state supreme court held that RCW 21.20.010 neither
incorporated nor derived from a statute incorporating Section
10(b)'s scienter language. And the legislative history of
RCW 21.20.010 did not suggest a scienter
the supreme court in Hines concluded that a WSSA
plaintiff need not show loss causation but it did not suggest
that liability is strict under the statute. It based this
decision on the nature of the remedy the WSSA provided. The
"basic remedy" of that statutory scheme was
rescission. Under this scheme, an investor received
the same remedy regardless of the size or occurrence of
loss. Thus, loss was irrelevant and
unnecessary to prove in a WSSA suit.
cases do not support the generalized proposition that RCW
21.20.010 is a strict liability statute. They merely
illustrate that scienter and loss causation are not part of
the statute. More importantly, they do nothing to support the
argument that reliance is not an essential element of a WSSA
claim, as Hines and other appellate decisions in
this state have consistently held.
FHLB argues that the legislature intended WSSA actions to be
strict liability actions because it borrowed language from
Section 12(2) of the 1933 federal Securities Act. We again
undisputed that Section 12(2) of the 1933 act created a
strict liability cause of action. Moreover, the state
legislature borrowed language from that section in crafting
the scheme of the WSSA. But the legislature only borrowed
Section 12(2)'s remedy to draft the WSSA's remedy
provisions in RCW 21.20.430. In contrast, it borrowed the
state act's liability provisions from Rule 10b-5.
that RCW 21.20.430 clearly states by cross reference that RCW
21.20.010 defines liability. Thus, RCW 21.20.430 and
Section 12(2) are irrelevant to whether RCW 21.20.010
requires a plaintiff to show reliance to establish liability.
FHLBS contends that the statutes of other states persuasively
suggest that RCW 21.20.010 is a strict liability statute. But
the statutes of other states are largely irrelevant to
determining the legislative intent of Washington's
courts strive to "construe [the WSSA] as to effectuate
its general purpose to make uniform the law of those states
which enact" and adapt the Uniform Securities
Act. That uniform act also provided the basis
for the WSSA. But this "does not mean our courts must
imitate" the example of other states when Washington law
differs. Simply stated, the legislatures of other
states do not decide what the Washington legislature intended
by the WSSA. It is Washington law, in the end, that
FHLBS argues that the language in Hines. stating
that reliance is an element under the WSSA, was mere dicta,
which this court should not have followed in two previous
decisions and should not follow now. We disagree with reading
Hines and the cases that follow in this way. To the
contrary, they clearly establish that reasonable reliance is
an essential element of this claim.
we were persuaded that the statement in Hines
regarding reliance was dicta, that would not change our
conclusion that the legislature intended reasonable reliance
to be an essential element of a claim under RCW 21.20.010(2).
That is the core question, not whether the statement in
Hines is dicta.
reasons we have explained, we are convinced that the
legislature intended that an investor must prove reasonable
reliance in a claim under the WSSA.
ISSUES OF MATERIAL FACT
concluded that reasonable reliance is an essential element
that FHLBS must prove in this case, the question that follows
is whether it met its burden to show the existence of any
genuine issue of material fact on that element in response to
Barclays's motion for summary judgment. We conclude that
it failed in this burden.
not enough that a plaintiff relied upon the defendant's
statements in purchasing securities. The WSSA requires that
such "reliance must be reasonable under the surrounding
reliance is generally a factual question. However, if
reasonable minds could reach only one conclusion, summary
judgment on this element is proper.
inquiry focuses on determining the existence of genuine
issues of material fact whether FHLBS reasonably relied on
the two statements it challenges. After carefully reviewing
the extensive record before us, we conclude that FHLBS failed
to show any genuine issue of material fact supporting the
argument that it reasonably relied on these statements.
is, without question, a sophisticated investor in RMBSs. Yet
minutes of its risk management committee dated February 2008
warn that all but three of the regional FHLB banks, the
Seattle branch within this minority, had stopped purchasing
securitized "Alt-A" loans. The minutes also report
that another regional bank-Boston-was advised not to buy any
additional mortgage backed securities for its portfolio.
Credit Analysis Manager Len Reininger alerted his colleagues
at the meeting to "how rapidly housing prices have
plummeted and foreclosures and delinquencies have
increased." But at that time, Joel Adamo, Portfolio
Manager on both the IND1 and IND2 transactions, was already
considering purchase of IND2.
risk management committee decided on February 29, 2008 that
"with the uncertainty in the markets and the issues
discussed that it would be desirable to look at alternative
investment opportunities to those the Bank had been utilizing
committee thus directed Reininger and Adamo to develop
together "a proposal for the [RMBS] investment criteria
that would be used in the current market
conditions." Until then, the committee directed a ban
on the purchase of such securities.
preferred to maintain a total ban, until "the market
settle[d] down." But senior FHLBS staff differed and
sought a compromise that would let them "still make some
money." Adamo and Reininger reached such a
compromise to ...