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Federal Home Loan Bank of Seattle v. Credit Suisse Securities (USA) LLC

Supreme Court of Washington, En Banc

October 3, 2019

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.

          WIGGINS, J.

         The question before the court is whether the Securities Act of Washington requires a plaintiff suing for a violation of RCW 21.20.010(2) to prove reliance. We hold that a plaintiff need not prove reliance to prevail under RCW 21.20.010(2). We therefore reverse the decisions of the Court of Appeals and remand to the trial court for further proceedings consistent with this opinion.


         This case emerges out of the financial crisis and ensuing "Great Recession of 2007-2009." In 2005 and 2007, Federal Home Loan Bank of Seattle purchased certificates for residential-mortgage-backed securities (RMBS) from Credit Suisse, an investment bank, for a total of $248 million. Federal Home Loan also purchased, in 2007 and 2008, certificates for RMBS from Barclays, for a total cost of over $660 million.

         RMBS are based on payments made by borrowers into a mortgage pool; nothing backs an RMBS other than payments made by mortgagors. In the run-up to the Great Recession, mortgage-backed securities (MBS), including the RMBS at issue here, were pooled with other securities into collateralized debt obligations (CDOs). Michael Legg & Jason Harris, How the American Dream Became a Global Nightmare: An Analysis of the Causes of the Global Financial Crisis, 32 U.N.S.W. L.J. 350, 353 (2009). Many of these MBS were subprime, but their poor credit ratings were effectively concealed when they were pooled with other securities in the CDOs. Id. at 353-54. This structure could not hold, and the losses caused by the subprime mortgages in the MBS helped to precipitate the Great Recession of 2007-2009. Id. at 354-57; see also John C. Coffee, Jr., What Went Wrong: An Initial Inquiry into the Causes of the 2008 Financial Crisis, 9 J. Corp. L. Stud. 1, 4-7 (2009).

         In 2009, Federal Home Loan separately brought suit under the Securities Act against Credit Suisse and Barclays. Federal Home Loan alleged that Credit Suisse and Barclays each had made untrue or misleading statements in violation of the Securities Act, RCW 21.20.010(2). RCW 21.20.010(2) makes it unlawful for any seller or purchaser of securities, in connection with a sale, "[t]o 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."

         Federal Home Loan's allegations were lengthy. Federal Home Loan claimed that Credit Suisse made false statements concerning the loan-to-value ratios (LTVs) for at least 2, 392 of the 6, 884 mortgage loans in in the mortgage pool, overstating their value by at least 105 percent. Federal Home Loan similarly alleged that Barclays overstated the LTVs of 2, 810 of the 6, 481 mortgage loans in its pool by at least 105 percent. Federal Home Loan also alleged that both Credit Suisse and Barclays made false statements about the occupancy status of the properties in the collateral pool and misrepresented the quality of their underwriting standards.

         In each case, Credit Suisse and Barclays moved for summary judgment. The trial court granted Credit Suisse's motion because, it concluded, reliance was a requirement of an action under the Securities Act, RCW 21.20.010(2), and there was no dispute of material fact there: Federal Home Loan had not relied, the court concluded, on any statements made by Credit Suisse. The trial court granted Barclays' motion because, although Federal Home Loan had relied on Barclays' statements, that reliance was unreasonable as a matter of law.

         Federal Home Loan appealed both cases, and the Court of Appeals affirmed in each, holding that reasonable reliance was required. Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (USA) LLC, No. 75779-2-I, slip op. at 3, 7 (Wash.Ct.App. Dec. 11, 2017) (unpublished) (hereinafter Credit Suisse), opinions/pdf/757792.pdf; Fed. Home Loan Bank of Seattle v. Barclays Capital, Inc., 1 Wn.App. 2d 551, 556, 576-77, 406 P.3d 686 (2017) (hereinafter Barclays).

         Federal Home Loan sought review of each case in this court, arguing that reliance is not a requirement. We consolidated the cases and granted review.


         We review grants of summary judgment de novo. Folsom v. Burger King, 135 Wn.2d 658, 663, 958 P.2d 301 (1998). We also review the meaning of statutes de novo. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1, 9, 43 P.3d 4 (2002).


         Our Securities Act was passed in 1959. The legislature modeled the Securities Act on the Uniform Securities Act of 1956. Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 125, 744 P.2d 1032 (1987); see also Unif. Sec. Act of 1976, 7C U.L.A. 475-76 (2018) (Table of Jurisdictions) (listing the states that have adopted the Uniform Securities Act of 1956 and including Washington); Go2Net, Inc. v., Inc., 158 Wn.2d 247, 257, 143 P.3d 590 (2006) ("The [Securities] Act is patterned after the Uniform Securities Act of 1956.").

         The sole question in this case is whether a private plaintiff bringing an action for a violation of RCW 21.20.010(2) must prove reliance. We answer this question in the negative: reliance is not an element of a private securities claim under subsection .010(2).

         In so doing, we first turn to the bedrock principle of statutory interpretation: plain language. Concluding that the plain language of .010(2) does not require proof of reliance, we next move on to the purpose of the Securities Act. We then resolve the remaining arguments of Credit Suisse and Barclays (the Respondents).

         I. The plain language of RCW 21.20.010(2) does not require a private plaintiff to prove reasonable reliance

         The objective of statutory interpretation is to ascertain and carry out the intent of the legislature. Campbell & Gwinn, 146 Wn.2d at 9-10. "[I]f the statute's meaning is plain on its face, then the court must give effect to that plain meaning as an expression of legislative intent." Id. Additionally, because the purpose of the Securities Act is to protect the public, "it is appropriate to construe the statute broadly in order to maximize the protection offered." McClellan v. Sundholm, 89 Wn.2d 527, 533, 574 P.2d 371 (1978). Any plain language analysis of the Securities Act must be undertaken with this in mind.

         As is immediately clear, the plain language of RCW 21.20.010 does not require reasonable reliance:

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 defraud;
(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; or
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

         No reliance-neither term nor concept-appears in RCW 21.20.010(2). Indeed it appears nowhere in the entirety of .010. Nor does reliance appear in the identical section in section 101 of the Uniform Securities Act of 1956, on which this provision is modeled. The plain language of this provision thus does not include reliance as part of any claim made under it. On the face of the statute, proof of reliance is not required.

         We also look to additional and related sections of the act in which RCW 21.20.010 is found to ascertain its meaning. Campbell & Gwinn, 146 Wn.2d at 11-12. Other sections of the Securities Act do not require proof of reliance. Crucially, in the section that establishes a private right of action against sellers of securities-the very kind of action brought here-the legislature did not require reliance. RCW 21.20.430(1).[1] Indeed, in the commentary to the corresponding (albeit differently structured and worded) provision in the Uniform Securities Act of 1956, the drafters expressly ruled out reliance as a requirement for a private cause of action. Louis Loss, Commentary on the Uniform Securities Act 148 (1976) (stating unequivocally that language in section 410 of the 1956 Act "is not intended as a requirement that the buyer prove reliance on [an] untrue statement or . . . omission" (reproducing the original drafters' comments to the 1956 act)).

         Barclays argues that the use of the word "fraud" in RCW 21.20.010(1) and (3) indicates that we must read reasonable reliance into the statute, including into subsection .010(2). Leaving aside that Federal Home Loan sued Barclays and Credit Suisse under subsection (2), not subsection (1) or (3), this reading does not withstand close scrutiny. Subsection (1) prohibits the act of employ[ing] any device, scheme, or artifice to defraud"-not common law fraud. RCW 21.20.010(1) (emphasis added). In other words, subsection (1) does not take into account whether fraud was committed-only whether an act that could defraud was undertaken. The same is true of subsection (3), which similarly prohibits "engag[ing] in any act. . . which operates or would operate as a fraud or deceit upon any person." Id. at (3) (emphasis added).

         Barclays' argument flies in the face of both precedent and the history of the act. In Kittilson v. Ford, we expressly rejected the argument that the words "fraud" and "misrepresentation," present in the original version of RCW 21.20.430, should be given their common law meanings. 93 Wn.2d 223, 225, 608 P.2d 264 (1980). Although Kittilson dealt with whether the Securities Act requires proof of scienter, not reasonable reliance, the same principle applies here: we do not necessarily read common law fraud requirements into the word "fraud" in the Securities Act. See id. That the current version of section .430 lacks any reference to fraud or misrepresentation reinforces this point. Had the legislature wanted to require all of the elements of fraud in private Securities Act claims, it would have expressly done so when revising the portion of the statute devoted to private causes of action. It did not. Instead, it removed references to fraud altogether. See Laws of 1977, 1st Ex. Sess., ch. 172, § 4.

         The dissent argues that the use of the phrase "in connection with" in RCW 21.20.010 "establishes a causal connection requirement." Dissent at 28. The dissent relies on federal case law to make this argument. Id. As discussed below in Section III.B, we should not rely so heavily on federal law while interpreting our own Securities Act. In light of that, there is no reason to read a reliance requirement into the term "in connection with." The phrase clearly demarcates only when .010 applies: when there is a sale or purchase of a security. RCW 21.20.010. In essence, it means that merely misstating or lying about some material fact, outside the context of a securities transaction, does not expose one to liability under RCW 21.20.010. See id. Even when Hines discusses reliance, it discusses it distinctly from the "in connection with" language. Hines v. Data Line Sys. Inc., 114 Wn.2d 127, 134, 787 P.2d 8 (1990) (". . . they relied on the misrepresentations in connection with the sale of the securities" (emphasis added)). The dissent cannot make "in connection with" mean "reliance."

         Overall, the plain language is clear: RCW 21.20.010(2) unambiguously does not require reliance. It is therefore unnecessary to employ legislative history or other aids to statutory construction. See Campbell & Gwinn, 146 Wn.2d at 9-10.[2]

         II. Our holding furthers the purpose of the Securities Act

         We have long acknowledged that the Securities Act "has as its purpose broad protection of the public," McClellan, 89 Wn.2d at 533, and that its main purpose is to protect investors, Haberman, 109 Wn.2d at 125-26. Holding that reliance is not required furthers these goals. After ail, an investor who has not relied on a misrepresentation can still be harmed by that misrepresentation. "When fraud [or misrepresentations[3] are] revealed, the price of [a] firm's equity declines and its shareholders lose money." Urska Velikonja, The Cost of Securities Fraud, 54 Wm. & Mary L. Rev. 1887, 1901 (2013). For instance, "[a]bout one-third of the firms that are targets of SEC enforcement actions for misreporting file for bankruptcy." Id. at 1912. In other words, the misrepresentation itself causes catastrophic loss in the value of the securities. See id. This means that a purchaser of securities need not have relied on a misrepresentation to be harmed by it. Once a misrepresentation is revealed, the investor is harmed. This is simply a consequence of the securities marketplace.

         Such a scenario is easy to imagine. A seller of securities misrepresents the underlying value of a security. Relying on this, a group of sophisticated investors purchases the security. Its value increases. Another investor-sophisticated or not- also purchases the security, simply because its value has gone up, without relying on any misrepresentations (although the same misrepresentations existed with respect to the sale to them, as well). When misrepresentations are revealed, the value declines. The first group of investors, seeing how they were misled, quickly abandon ship. The value of the security declines further. The first group can recover irrespective of a reliance requirement, because they did, in fact, rely on the misrepresentation. The other investor suffers similar losses-but with a reliance requirement, these investors could not recover.

         Recognizing that reliance is not required ensures that those harmed when a seller misrepresents material facts can recover. This tracks the concerns investors, who care about whether they have been harmed by unlawful activity, irrespective of their reliance on that activity. Our refusal to read reliance into the statute therefore furthers the Securities Act's goal of protecting investors. Haberman, 109 Wn.2d at 125-26.

         Of course, protecting investors is not the only purpose of the Securities Act. RCW 21.20.900 states:

This chapter shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of this chapter with the related federal regulation.

         This section is not contravened by our holding today. Uniformity of the states' laws cannot be achieved by our actions: the states employing the Uniform Securities Act are split on the issue of reliance. See 12A Joseph C. Long et al, Blue Sky Law § 12:5 (perm, ed., rev. vol. 2018) (showing a split between states requiring reliance and those not requiring reliance).

         Nor does our holding somehow upset our coordination with federal securities law. As we stated in Kittilson, such coordination "does not require imitation [of federal law] by this court in construing our act, only that our construction not interfere with the federal scheme." 93 Wn.2d at 227 (emphasis added) (citing Shermer v. Baker, 2 Wn.App. 845, 472 P.2d 589 (1970)). In Kittilson, we held that scienter is not an element of a claim under RCW 21.20.010. Id. We made clear that our holding did not interfere with the federal scheme, even though scienter is an element of a federal securities claim. Id. There is no reason to conclude otherwise with respect to reliance- especially given that many other states also lack a reliance requirement. See 12A Long et al, supra, § 12:5.

         III. The Respondents' remaining arguments are unpersuasive

         The Respondents propose three more significant arguments why we must read reliance into the Securities Act: that precedent in our state dictates that result; that we must follow federal securities law, and that failing to require reliance will lead to unlimited liability. None persuades.

         A. Precedent does not require proof of reliance

         The Respondents argue that our precedent requires that a private plaintiff in an RCW 21.20.010 civil action show reasonable reliance in order to recover. This is incorrect.

         Central to the Respondents' arguments are two cases, one from the Court of Appeals and one from our court: Shermer and Hines. Respondents rely on Shermer as the alleged source of nearly 50 years of precedent, holding that reliance is required in a private Securities Act claim. Respondents also argue that in Hines we held that reliance is required in such claims. Neither of these assertions withstands scrutiny.

         As a Court of Appeals case, Shermer cannot bind us. Just as importantly, Shermer does not meaningfully support the Respondents' arguments. In Shermer, the Court of Appeals stated that:

We . . . hold that in an action brought under RCW 21.20.010, a plaintiff need neither plead nor prove that defendant intended to deceive him by the misrepresentation or omission. It is sufficient that the plaintiff relied upon the misrepresentation or omission of a material fact.

2 Wn.App. at 857-58. This does not hold that reliance is necessary to make out a claim. Quite explicitly, Shermer states that reliance is sufficient to make out a claim. Id. at 858.

         Shermer did not provide any support or reasoning to impose a reliance requirement in an RCW 21.20.010 case. See id. at 857-58. The reason for this becomes apparent when looking to the procedural posture of the case. Shermer was concerned with the permissibility of a jury instruction. Id. at 856. The question was whether proof of scienter was necessary, as the jury instruction omitted that requirement. Id. & n.6. Whether reliance was required was not at issue. Id. However, the jury instruction itself included reliance as a requirement. Id. & n.6. Thus, when the court stated that reliance was sufficient, it was merely indicating that without proof of scienter, the jury instruction was nevertheless permissible. Id. at 858. It did not purport to announce reliance was required for all claims brought under RCW 21.20.010. See id. This procedural nuance makes clear that Shermer did not hold that reliance is a requirement of a private securities claim.

         Finally, Shermer discussed reliance in the context of whether an implied private cause of action against a securities buyer existed under RCW 21.20.010-a cause of action that Shermer created. Id. at 847, 850. Shermer's implied private cause of action no longer exists. It was superseded by the 1975 amendments to the Securities Act, which replaced the old version of RCW 21.20.430 and added a statutory private right of action against buyers of securities, not only sellers, as had been the case when Shermer was decided in 1970. Laws of 1975, 1st Ex. Sess., ch. 84, § 24. The current version of .430 contains an express statutory right of action against both sellers and buyers for violations of .010. RCW 21.20.430(1), (2). Thus any light that Shermer might shed on the modern, statutory cause of action under .010 and .430 is limited, if not entirely inapplicable, originating as it did in a wholly different context.

         Nor does Hines support the Respondents' arguments. We did not hold in Hines that proof of reliance is required. See 114 Wn.2d at 134-35. At issue in Hines was whether a plaintiff must prove that the defendant's misrepresentations proximately caused the decline in the value of stock in order to make out a claim under RCW 21.20.010. Id. at 134. In answering that question in the negative, the Hines court stated that "[t]he investors need only show that the misrepresentations were material and that they relied on the misrepresentations in connection with the sale of the securities." Id. Hines provided no authority for this statement, nor any analysis supporting this assertion. It is simply there, unadorned.

         Contrary to the assertions of the Respondents, this statement is not a holding of the case; it is dictum. It had nothing to do with the issue of the case, which was whether proximate cause must be proved. Hines, 114 Wn.2d at 134. Further, just as in Shermer, Hines never stated that reliance is necessary-rather, it indicates only that reliance is sufficient. Id. "Need only show" is not the same as "must show." The Respondents cannot use Hines to argue that we have long held that reliance is a requirement. Indeed, Hines went on to make clear that only misrepresentation is required: "The violation is in the misrepresentation itself." Id. at 135. The act of the defendant matters, not whether the plaintiff relied on that act. See id.

         We reaffirmed that Hines did not create a reliance requirement in subsequent cases. In Go2Net, we repeated that "[s]imply put, a seller's 'violation [of the Securities Act] is in the misrepresentation itself.'" 158 Wn.2d at 253 (quoting Hines, 114 Wn.2d at 135). This dovetails with the plain language reading of RCW 21.20.010: it is the misrepresentation that violates the law. More significantly still, in Kinney v. Cook, we stated unequivocally that RCW 21.20.010 "has two essential elements: (1) a fraudulent or deceitful act committed (2) in 'connection with the offer, sale or purchase of any security.'" 159 Wn.2d 837, 842, 154 P.3d 206 (2007) (emphasis added) (quoting RCW 21.20.010). Reliance is never mentioned.[4] This decision, coming 17 years after Hines, clears up any confusion: if Hines required reliance, Kinney would have included reliance when discussing the "essential elements" of an RCW 21.20.010 claim. But Kinney did no such thing. Today we reaffirm this line of cases: reliance is not required in a private Securities Act claim brought under RCW 21.20.010.

         The dissent, in addition to agreeing with the Respondents' arguments, also cites appellate and federal cases that employ a reliance requirement in deciding Securities Act claims, arguing that we too should require reliance because many courts have employed a reliance requirement in the past. Dissent at 9-19. These citations cannot disturb the plain meaning of RCW 21.20.010. Appellate court opinions are, as the dissent notes, not binding on us. Dissent at 9. Unpublished Court of Appeals decisions, as well as federal decisions, cannot bind courts of this state when interpreting Washington statutes.[5] In re Elliott, 74 Wn.2d 600, 602, 446 P.2d 347 (1968) ("[S]tate courts are not bound by federal court interpretations of state statutes.").

         More importantly, just because a number of state appellate courts and federal courts have acted on their belief that the Securities Act requires proof of reliance in private suits does not make it so. Statutory interpretation is not a numbers game in which the number of nonbinding courts that have assumed an inaccurate meaning of a statute matters more than what a statute actually says. Our purpose is to arrive at the correct interpretation-even if that requires our correcting the course of nonbinding courts. And the statutory language indicates that these nonbinding courts, as well as the dissent, are wrong.

         Finally, the dissent relies heavily on FutureSelect Portfolio Management, Inc. v. Tremont Group Holdings, Inc., 180 Wn.2d 954, 331 P.3d 29 (2014), to argue that we have, since Hines, expressly indicated that reliance is required. Dissent at 22-23. But FutureSelect did nothing of the sort. In FutureSelect, we adopted section 148 of Restatement (Second) of Conflict of Laws (Am. Law Inst. 1971) to resolve choice of law questions with respect to securities claims. 180 Wn.2d at 967-68. Section 148 sets out various factors used to conduct that choice-of-law analysis. Id. at 969. One of these factors, as the dissent points out, is "the place where the plaintiff acted in reliance on the representations." Id. The dissent concludes that "[o]ur adoption of that provision makes the most sense if reliance is indeed an element of a private claim under the Securities Act." Dissent at 23. This is incorrect. The relevance of reliance to choice-of-law analysis does not make it an element of a Washington securities claim. Although we held in FutureSelect that we "must consider" where the plaintiff's reliance occurred, that determines only what law applies, not whether a violation of the Securities Act occurred. 180 Wn.2d at 969. The dissent attempts to jury-rig an entirely different doctrine into our securities law. We decline to follow this approach.

         In light of this, the Respondents' and the dissent's arguments that the legislature has acquiesced to a reliance requirement also lack merit. When looking at the decisions of this court, it is clear that the legislature has not acquiesced in an interpretation that requires reasonable reliance. We did not hold that reliance was required in Hines. See 114 Wn.2d at 134. Cases since Hines have also shown we do not require reliance. Go2Net, 158 Wn.2d at 254; Kinney, 159 Wn.2d at 842. What the legislature has acquiesced in, if anything, is our court's not adopting a requirement of reasonable reliance. Legislative acquiescence does not salvage the Respondents' or the dissent's argument. We need not and should not follow federal securities law.

         The Respondents also argue that we should follow federal securities law. They claim that "[b]y incorporating the [Securities and Exchange Commission] Rule 10b-5 standard for liability, the legislature made reliance an element of a [Securities Act] claim." This is incorrect. Nothing demands that we follow the federal courts' construction of Rule 10b-5.

         It is of course true that RCW 21.20.010 is nearly identical to Rule 10b-5. See Kinney, 159 Wn.2d at 843 (discussing the similarity). Compare 17 C.F.R. § 240.10b-5, with RCW 21.20.010. Respondents argue that this means we must follow federal interpretations of Rule 10b-5 when construing our own law because, they claim, whenever our legislature adopts verbatim a federal statute, any federal interpretations of the federal statute flow into our case law.

         Irrespective of whether their rule about following federal law is correct as a general matter (an issue we need not decide today), the Respondents' conclusion here is wrong. In Kittilson, we rejected the notion that RCW 21.20.010 must track federal interpretations of Rule 10b-5. 93 Wn.2d at 225-26. We reaffirm that conclusion today. Rule 10b-5 is a federal rule, not a federal statute-the cases cited by the Respondents have no bearing on it. Further, and more importantly, our legislature did not adopt Rule 10b-5. "Washington's securities fraud laws are modeled after the Uniform Securities Act." Haberman, 109 Wn.2d at 125. Specifically, the language of RCW 21.20.010 is identical to section 101 of the Uniform Securities Act of 1956.[6]While the Uniform Act did model section 101 on Rule 10b-5, we adopted the former, not the latter. Loss, supra, at 6-7. And, as noted above, the Uniform Act was not meant to require reliance. Id. at ...

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