Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (USA), LLC, 194 Wn.2d 253, 449 P.3d 1019 (Wash. 2019)
In a state securities fraud case arising out of investment losses caused by losses on subprime residential mortgage-backed securities, the Washington State Supreme Court held that a plaintiff suing for misrepresentation in a private action under RCW 21.20.010(2), the Washington State equivalent of Rule 10b-5, need not prove “reliance” to recover. The majority, in the face of a spirited dissent, held that federal law (which required reliance) was neither controlling nor helpful, and that its interpretation best satisfied the Washington State Securities Act’s objective of protecting investors. For the majority, RCW 21.20.010(2)’s requirement that the allegedly misrepresented or omitted fact be “material,” combined with a three-year statute of limitations, would ensure floodgates of liability would not open.
Federal Home Loan Bank of Seattle (“Federal Home Loan”) purchased residential mortgage-backed securities (“RMBS”) from Credit Suisse ($248 million in 2005 and 2007) and Barclays ($660 million in 2007 and 2008). Federal Home Loan suffered significant losses when the borrowers defaulted on the underlying mortgages en masse during 2007 and 2008 financial crisis.
In 2009, Federal Home Loan sued Credit Suisse and Barclays separately under the Washington State Securities Act (the “Washington Securities Act”), alleging that Credit Suisse and Barclays had each made untrue or misleading statements in violation of the Washington Securities Act, RCW 21.20.010(2). RCW 21.20.010(2) makes it unlawful for any purchaser or 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 in which they were made, not misleading.” Specifically, Federal Home Loan accused both Credit Suisse and Barclays of overstating the loan-to-value ratio of 30% to 40% of the mortgage loans in the mortgage pool, of making false statements about the occupancy status of the properties in the collateral pool and of misrepresenting the quality of their underwriting standards.
Both Credit Suisse and Barclays successfully moved for summary judgment in the trial court. Credit Suisse prevailed because the trial court concluded that reliance was required to maintain an action under the Washington Securities Act, and there was no genuine dispute of material fact that Federal Home Loan had not relied on statements made by Credit Suisse. Barclays prevailed because, although Federal Home Loan had relied on Barclays’ statements, the trial court held that Federal Home Loan’s reliance on Barclays’ statements was unreasonable as a matter of law.
Federal Home Loan appealed both cases and the court of appeals affirmed both cases. On review, in a 6-3 decision, the Washington State Supreme Court (the “Supreme Court”) reversed the courts of appeal and remanded the case to the trial court, holding that a plaintiff need not prove reliance to prevail under RCW 21.20.010(2).
The majority held that the plain language of RCW 21.20.010(2) did not require a plaintiff to prove reliance because the word reliance is nowhere mentioned. Moreover, while the word “fraud” was not mentioned in subsection .010(2) (but only under subsection 0.10(1), which makes it illegal “[t]o employ any device, scheme, or artifice to defraud), the Supreme Court had previously rejected the argument that the words “fraud” and “misrepresentation” should be given their common law meanings in the context of the Washington Securities Act.
The majority further held that its holding furthered the purpose of the Washington Securities Act, whose purpose is protection of the public because investors can be harmed by misrepresentations, whether or not they have relied on them in purchasing the securities. If reliance is required, investors who cannot prove reliance will suffer similar losses to those who can prove reliance, but with no avenue of recovery.
The majority also rejected the dissent’s contention that reliance was required because RCW 21.20.010 is nearly identical to federal Rule 10b-5, the case law interpreting which clearly requires the plaintiff to prove reliance. Because the Washington Securities Act was based on the Uniform Securities Act, which was not meant to require reliance, and not on federal law, Rule 10b-5’s reliance requirement did not control. Moreover, contrary to federal law, where federal legislative history indicated Congress’s intent to impose a reliance requirement, there was no comparable legislative history with respect to the Washington Securities Act.
Finally, the majority rejected the dissent’s argument that its holding would open the floodgates of liability by rejecting a reliance requirement. First, there was a three-year statute of limitation that began to run at the time the violation was discovered or should have been discovered with reasonable care. Second, RCW 21.20.010(2) requires plaintiffs to prove there was an “untrue statement of a material fact [or an omission of] a material fact.” Because Washington law defines “material fact” as one to which a “reasonable [person] would attach importance in [his or her] choice of action in the transaction in question,” there is a built-in liability check.
The dissent, in contrast, portrayed the majority’s holding as running contrary to both federal and state law requiring that a plaintiff prove reliance to prevail on a fraud claim in a private securities action. Moreover, the dissent argued that the holding would place Washington as an outlier among state securities laws schemes. Finally, the dissent argued that the majority’s interpretation went beyond protecting investors to instead provide a recovery to new investors whose investment choices are either completely unrelated to the defendant’s alleged misconduct, as with Credit Suisse, or insufficiently related to the alleged misconduct to have had any impact on the investment decision, as with Barclays. This, claimed the dissent, would be at the expense of old investors, who would end up footing the bill.
Article courtesy of David P. Simonds (Hogan Lovells US LLP) and Edward McNeilly (Hogan Lovells US LLP).
Link to the full decision: Fed. Home Loan Bank of Seattle v. Credit Suisse