Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (USA) LLC ( 2019 )

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IN THE SUPREME COURT OF THE STATE OF WASHINGTON
FEDERAL HOME LOAN BANK OF SEATTLE.
Petitioner, No. 95420-8 (consol. 95436-4)
V.
En Banc
CREDIT SUISSE SECURITIES (USA) LLC
f/k/a CREDIT SUISSE FIRST BOSTON LLC, a
Filed OCT 0 3 2019
Delaware limited liability company; CREDIT
SUISSE FIRST BOSTON MORTGAGE
SECURITIES CORP., a Delaware corporation;
and CREDIT SUISSE MANAGEMENT(USA)
LLC f/k/a CREDIT SUISSE FIRST BOSTON
MANAGEMENT LLC, a Delaware limited
liability company.
Respondents.
FEDERAL HOME LOAN BANK OF SEATTLE,
Petitioner,
V.
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.
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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.
FACTS AND PROCEDURAL HISTORY
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
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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 ofSeattle
V. Credit Suisse Sec.(USA)LLC, No. 75779-2-1, slip op. at 3, 7(Wash. Ct. App. Dec.
11, 2017) (unpublished) (hereinafter Credit Suisse), https://www.courts.wa.gov/
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.
STANDARD OF 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).
ANALYSIS
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, 70
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.
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
FreeYellow.com, Inc., 158 Wn.2cl 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:
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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).'' Indeed, in the commentary to the corresponding (albeit differently
1 RCW 21.20.430(1) states:
(1) Any person, who offers or sells a security in violation of any provisions of RCW
21.20.010, 21.20.140 (1) or (2), or 21.20.180 through 21.20.230, is liable to the
person buying the security from him or her, who may sue either at law or in equity
to recover the consideration paid for the security, together with interest at eight
percent per annum from the date of payment, costs, and reasonable attorneys'
fees, less the amount of any Income received on the security, upon the tender of
the security, or for damages if he or she no longer owns the security. Damages
are the amount that would be recoverable upon a tender less (a) the value of the
security when the buyer disposed of it and (b) interest at eight percent per annum
from the date of disposition.
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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 ROW 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 oV'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
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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 nof 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."
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
Overall, the plain language Is clear: ROW 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.^
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 all, an investor who has not relied on a
misrepresentation can still be harmed by that misrepresentation. "When fraud [or
misrepresentations^ 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, "[ajbout one-third of the firms that are
targets of SEC enforcement actions for misreporting file for bankruptcy." Id. at 1912.
2 A fragmentary piece of tangentiaily relevant legislative history concerns not the Securities Act
itself, but the Franchise Investment Protection Act (FlPA), chapter 19.100 RCW, drafted in 1971,
12 years after the Securities Act. The drafters of the FlPA proposed a definition of fraud and deceit
that did not require the elements of common law fraud. See Comments on the Proposed
Investment Franchise Act, S.B. 755, 42d Leg., 1st Exec. Sess.(Wash. 1971)(on file with Wash.
State Archives). This definition was based on the drafters' understanding of the definition of fraud
and deceit in the Securities Act's iiability provision, section .010. James Fletcher, Franchise
Investment Protection Act 15, 19 n.17 (1971) (unpub. research paper, Univ. of Wash. Sch. of
Law)(on file with the Wash. State Law Library). Thus, the drafters of the FlPA understood the
Securities Act section .010 to have a meaning consistent with the meaning we adopt today.
The proposed definition of fraud and deceit was eliminated from the FlPA before the
legislature adopted it. See S.B. 755 at 4(crossing out definition at H 10). Little, if anything, can be
gleaned about the Securities Act from a drafter's comments about another statute, in a wholly
different title, enacted over a decade later. But the fact remains that the drafters of FlPA
understood fraud and deceit consistently with our plain language analysis.
® Velikonja discusses fraud and other misrepresentations in her article but primarily uses the word
"fraud" as a catchall for both terms. See, e.g., Urska Velikonja, The Cost of Securities Fraud, 54
Wm.& Mary L. Rev. 1887, 1903-12 (2013).
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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.
10
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
Of course, protecting investors is not the only purpose of the Securities Act.
ROW 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 Kittllson, 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 Shermerv. Baker, 2 Wn.
App. 845, 472 P.2d 589 (1970)). In Kittllson, 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 etal., supra, § 12:5.
11
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
111. 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.
12
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
2 Wn. App. at 857-58. This does not hold that reliance Is necessary to make out a
claim. Quite explicitly, Shermer siaies 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 sclenter 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
sclenter, 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 d\scusse6 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. Shermehs 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
13
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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.14
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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.'^ This decision, coming 17
years after Hines, clears up any confusion: \f Hines required reliance, K/nney would
have included reliance when discussing the "essential elements" of an RCW
21.20.010 claim. But Kinneydid 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
As discussed In Part I, supra, with respect to RCW 21.20.010, the inclusion of the word "act"
means that KInney did not require ail of the elements of common law fraud or deceit. Rather, it
merely requires an action be taken by the defendant, not that the plaintiff relied on it.
15
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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.^ 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 tha\ 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.
® The dissent problematically treats unpublished cases as meaningful because they are
unpublished. Dissent at 16 ("The fact that the Court of Appeals declined to publish [a decision
stating reliance is required] shows that it considered the analysis not new, not clarifying, and not
important."). That is paradoxical: because a decision Is not important, it becomes, in the dissent's
eyes, important. This degrades the distinction between published and unpublished decisions.
Similar problems exist with respect to the dissent's treatment of federal cases. For
Instance, the dissent treats the fact that the Ninth Circuit once declined In an unpublished case to
certify the question of whether reliance is required to this court as evidence that the question was
settled. Dissent at 19. But the decision made by a federal court not to certify a question of state
law In an unpublished federal appellate opinion says nothing about the nature of the law itself.
16
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
But FutureSelect 6\6 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.
17
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
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 ROW 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 ROW 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 KIttllson, we rejected the notion that ROW 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
18
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
RCW 21.20.010 is identical to section 101 of the Uniform Securities Act of 1956.®
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 147. Thus, that Rule 10b-5 requires reliance cannot control
here. It would make no sense for us to hold that we must follow federal Rule 10b-5's
reliance requirement when the legislature adopted an act that does not include that
very rule.
Even as we are not compelled to follow federal law, there is no reason to
voluntarily do so, either. The federal courts require reliance in private securities
actions because of federal legislative history. Specifically, the Supreme Court read
reliance into Rule 10b-5 because of statements in a Senate report stating,
unequivocally, that reliance was required. Basic Inc. v. Levinson, 485 U.S. 224, 243,
108 S. Ct. 978, 99 L. Ed. 2d 194 (1988)(citing Ernst & Ernst v. Hochfelder, 425 U.S.
185, 206, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976)("'[T]he burden is on the plaintiff to
show the violation or the fact that the statement was false or misleading, and that he
relied thereon to his damage.'" (quoting S. Rep. No. 792, 73d Cong., 2d Sess., at
® Section 101 of the Uniform Securities Act of 1956 is identical to RCW 21.20.010:
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.
19
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
12-13))). Legislative history was therefore central to the Supreme Court's holding. But
there is no comparable legislative history with respect to our Securities Act. There is
thus no reason to import federal analysis based on federal legislative history into our
own law.
Nor do the purposes of federal securities law and our Securities Act align in a
way that indicates we should follow federal law. Reliance is important in federal
securities law because those laws are meant to "maintain the integrity of secondary
securities markets." Haberman, 109 Wn.2d at 125-26. Reasonable reliance furthers
that goal because reliance requires that all parties to a securities transaction behave
carefully, helping to keep the market stable. However, the main purpose of our
Securities Act is to protect investors. Id. The lack of a reliance requirement furthers
that protection. We decline to confuse the purpose of the Securities Act with that of
federal securities law. Reliance is not required.
B. Our holding does not open up floodgates of unlimited liability
The Respondents are also concerned that we create some form of "absolute
liability" by holding that reliance is not required. This is not the case. The statute is
already designed to prevent that. There is a three-year statute of limitations for any
such suit, with the clock starting either at the time of discovery of the violation of .010
or when it should have been discovered with reasonable care. RCW 21.20.430(4)(b).
This statute of limitations obviates the Respondents' implicit fear that all purchasers
of securities merely unhappy with their return on investment will be able to use the
Securities Act to get out of any less-than-ideal situation.
20
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95436-4
Further, 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" (emphasis added). A
material fact is one to which a '"reasonable [person] would attach importance in
determining [their] choice of action in the transaction in question.'" Clausing v. DeHart,
83 Wn.2d 70, 73, 515 P.2d 982 (1973) (internal quotation marks omitted) (quoting
Shermer, 2 Wn. App. at 855). This materiality requirement prevents the creation of
open-ended liability for any misstatement of fact by the defendant. As Clausing itself
makes clear, the inquiry into materiality is not one taken lightly—so much so that as
Clausing held, statements do not become material merely because a contract
indicates they are so. Id. at 75.'^ Thus a minor misstatement that is not of actual import
will not provide a plaintiff with grounds for relief.
CONCLUSION
We hold that reliance is not an element of a private suit brought under RCW
21.20.430 alleging violations of RCW 21.20.010(2). Accordingly, the decisions of the
Court of Appeals are reversed, and we remand to trial court for further proceedings
consistent with this opinion.
^ in fact, because the cases before us were decided, on summary judgment, solely on the ground
that Federal Home Loan could not prove reliance, we do not know what the trial court would have
found with respect to the materiality of the Respondents' misrepresentations and omissions. The
searching inquiry that we performed In Clausing was never made.
21
Federal Home Loan v. Credit Suisse, No. 95420-8
Federal Home Loan v. Barclays, No. 95439-4
WE CONCUR.
^C{MhAAM\
/
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
No. 95420-8
(Consolidated with No. 95436-4)
GORDON MCCLOUD,J.(dissenting)—In one of the two consolidated
cases before us, Federal Home Loan Bank of Seattle alleged that it relied on false
or misleading statements by Credit Suisse Securities that induced it to purchase
hundreds of millions of dollars of securities. But the evidence later showed that
such reliance would have been impossible: Federal Home Loan completed its
purchase before it received Credit Suisse's final prospectus, the document that
contained the allegedly false or misleading statements.
In the other case before us. Federal Home Loan alleged that it relied on false
or misleading statements by Barclays Capital that induced it to purchase additional
hundreds of millions of dollars of securities. The superior court ruled that any such
reliance was unreasonable as a matter of law: when Federal Home Loan made its
purchases at the height of the economic crisis in 2008, it "knew too much about the
mortgage, the [residential mortgage-backed securities] market, the types of loans
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
involved, and the specific securitizations at issue ... to reasonably rely" on
Barclays' allegedly false or misleading statements.' The superior court therefore
dismissed both claims on summary judgment, and the Court of Appeals affirmed.
Federal Home Loan challenges part of the Court of Appeals ruling, but not the part
holding that its reliance on Barclays' statements was unreasonable as a matter of
law.
Instead, Federal Home Loan now attempts to unravel those transactions and
recover eight percent interest, along with attorney fees, RCW 21.20.430(1), by
arguing it need not prove reliance at all. Thus, the narrow issue before us is
whether a private plaintiff may recover under the "antifraud provision"^ ofthe
Securities Act of Washington^ even though it did not rely on the allegedly
deceptive conduct of which it now complains.'' The answer, under nearly 50 years
' Clerk's Papers Barclays at 478, 5339-41.
^ RCW 21.20.010; Go2Net, Inc. v. FreeYellow.com, Inc., 158 Wn.2d 247, 253,
143 P.3d 590(2006).
3 Ch. 21.20 RCW.
'' Federal Home Loan does not challenge—or even address—^the Court of Appeals
holding that "reliance" means both actual subjective reliance and objectively reasonable
reliance. See Stewart v. Estate ofSteiner, 122 Wn. App. 258, 265 n.9, 93 P.3d 919(2004)(citing Clausing v. DeHart, 83 Wn.2d 70, 73, 515 P.2d 982(1973)). Additionally,
none of the parties discuss how the reliance element could be established, such as through
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
of case law and legislative acquiescence in these decisions, is no. I therefore
respectfully dissent.
Analysis
I. Overview
We do not write on a blank slate. Our state antifraud provision has
consistently been interpreted by state and federal courts to include the element of
reliance. So while the antifraud provision may have been susceptible to different
a fraud-on-the-market theory or other presumption. Cf. Basic Inc. v. Levinson, 485 U.S.
224, 247, 108 S. Ct. 978, 99 L. Ed. 2d 194(1988)(applying presumption of reliance, for
purposes of federal securities law, under fraud-on-the-market theory); Halliburton Co. v.
Erica P. John Fund, Inc., 573 U.S. 258, 283-84, 134 S. Ct. 2398, 189 L. Ed. 2d 339(2014)(reaffirming Basic)', In re Metro. Sec. Litig., 532 F. Supp. 2d 1260, 1301-02
(E.D. Wash. 2007)(court order)(recognizing that "reliance may . .. be presumed in
several circumstances" when a claim is brought under Washington's Securities Act). In
its two petitions for review. Federal Home Loan challenged only the Court of Appeals
holding that the Securities Act required it to plead and prove reliance as part of its claim.
That is the sole issue briefed in its supplemental brief. And at oral argument. Federal
Home Loan explicitly acknowledged that that was the only argument that it was making
in our court. Wash. Supreme Court oral argument. Fed. Home Loan Bank ofSeattle v.
Credit Suisse Sec. (USA), LLC, No. 95420-8 (Oct. 9, 2018), at 11 min., 56 sec. through
13 min., 7 sec., video recording by TVW, Washington State's Public Affairs Network,
https://www.tvw.org/watch/?eventID=2018101020. As a result, I address only that
narrow issue.
The majority, however, goes beyond the question presented. Even though the
parties have carefully avoided asking us to opine on how reliance would be established,
or whether it could be presumed, the majority mistakenly assumes that a fraud-on-the-
market theory would not be a viable way of proving reliance under our statute and then
relies on that assumption to show why, in its view, a reliance element is harmful to
investors. Majority at 10-11 (posing a hypothetical scenario). The majority cites no
authority in support of that assumption, and I am aware of none.
3
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
interpretations at one time, that is no longer true. As described in greater depth
below, the Court of Appeals first held that reliance is an element of a private state
securities fraud claim 49 years ago. It reiterated that view in a series of published
decisions in 2004 and 2005, before reaffirming that view once more in 2013, and
then again in the instant cases in 2017. Federal courts frequently resolve state
securities fraud claims, and they too have consistently treated reliance as an
element of our state-law claim—since as far back as 1976. And 29 years ago, in
Mines v. Data Line Systems, Inc., 114 Wn.2d 127, 134-35, 787 P.2d 8 (1990), this
court explicitly stated that reliance is an element of a state securities fraud claim.
Through all of this, the legislature has not intervened to correct any purported
misapprehension of the courts.
That is not surprising. The legislature patterned Washington's antifraud
provision after federal law, and federal law has always required a showing of
reliance. The reliance requirement also finds support in our state statute's text and
structure. And finally, our long-standing interpretation complies with the
legislature's directive to interpret the Securities Act to protect investors. The
reliance requirement ensures that new investors, such as Federal Home Loan, do
not unjustifiably recover at the expense of older investors when no aspect ofthe
sellers' allegedly deceptive conduct induced the new buyers' investment. At the
4
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
same time, sellers still have every incentive to avoid deceptive conduct—because
the Department of Financial Institutions may take enforcement action against them
for deceptive conduct, whether anybody relied on it or not.
II. We Have Consistently Identified Washington's Antifraud Provision with
Rule IOb-5
The Washington State Securities Act's antifraud provision states:
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.
ROW 21.20.010.
The legislature took that language from the Uniform Securities Act of 1956,
whose drafters had, in turn, taken the language from "Rule lOb-5."^ Go2Net, Inc.
^ The text of Rule lOb-5 "is identical to RCW 21.20.010 except for" the federal
rule's interstate commerce element. Kittilson v. Ford, 93 Wn.2d 223, 226,608 P.2d 264(1980). Rule 10b-5 states:
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
V. FreeYellow.com, Inc., 158 Wn.2d 247, 257, 143 P.3d 590(2006); LOUISLOSS,
Commentary on the Uniform Securities Act 6-7 (1976). When the legislature
borrows a statute in that manner—from one source that had borrowed it from
another—the meaning ofthe underlying source matters. E.g., Jongeward v. BNSF
Ry. Co., 174 Wn.2d 586, 610-11 &nn.17-18, 278 P.3d 157(2012)(Wiggins, J.,
dissenting). For that reason, and even though the majority is adamant that
Washington "did not adopt Rule lOb-5,'' majority at 19, we have repeatedly
identified our antifraud provision with Rule 1 Ob-5. See Morris v. Int7 Yogurt Co.,
107 Wn.2d 314, 322-23, 729 P.2d 33 (1986); Kittilson v. Ford, 93 Wn.2d 223, 226,
608 P.2d 264(1980); Clausing v. DeHart, 83 Wn.2d 70, 72-73, 515 P.2d 982It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the mails or
of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(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 misleading, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17C.F.R. § 240.10b-5.
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
(1973); see also Shermer v. Baker, 2 Wn. App. 845, 849-50, 472 P.2d 589(1970).
And just as we have done before, we may "look to the federal courts' construction
of the securities rule for guidance in interpreting" our state counterpart.^ Morris,
107 Wn.2d at 329-30.
The United States Securities and Exchange Commission promulgated
Rule lOb-5 in 1942 to implement section 10(b) of the Securities Exchange Act of
1934."^ In enacting the Securities Exchange Act of 1934—25 years before the
Washington Legislature enacted our state Securities Act—Congress intended to
® We are, of course, not bound by the federal courts' interpretation of our state
statute. See, e.g., Kittilson, 93 Wn.2d at 227. The federal cases that 1 cite, however,
show the strong justification for Washington's long-standing reliance requirement.
'Section 10(b) of the Securities Exchange Act of 1934 states:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce or of the mails, or
of any facility of any national securities exchange—
(b) To use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security not so
registered, any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors.
Pub. L. No. 73-291, 48 Stat. 881.
7
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
place the burden on plaintiffs in federal securities fraud claims to plead and prove
reliance. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206,96 S. Ct. 1375,
47 L. Ed. 2d 668 (1976); Basic Inc. v. Levinson, 485 U.S. 224, 257-58, 108 S. Ct.
978, 99 L. Ed. 2d 194(1988)(White, J., concurring in part and dissenting in part).
For that reason, federal courts, including the United States Supreme Court, have
always interpreted Rule lOb-5 to include a reliance requirement.^ That suggests
that our state legislature intended to include a similar reliance requirement when it
patterned RCW 21.20.010 after Rule lOb-5.^
^ See, e.g., Halliburton, 573 U.S. at 263; Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S. Ct. 761, 169 L. Ed. 2d 627(2008);
Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S. Ct. 1456, 31 L. Ed.
2d 741 (1972); List v. Fashion Park, Inc., 340 F.2d 457, 462-63 (2d Cir. 1965); Kohler v.
Kohler Co., 208 F. Supp. 808, 823 (E.D. Wis. 1982), affd,3\9 F.2d 634 (7th Cir. 1983);
Mills V. Sarjem Corp., 133 F. Supp. 753, 767(D.N.J. 1955).
^ Federal Home Loan downplays the significance of the similarity between
RCW 21.20.010 and Rule lOb-5. It urges us to look to RCW 21.20.OlO's similarity to
section 12(a)(2) of the federal Securities Act of 1933, 15 U.S.C. § 77/(a)(2) instead. And
section 12(a)(2) does not require plaintiffs to prove reliance. But our decisions do not
support that approach. We have consistently identified RCW 21.20.010 with Rule lOb-5.
Kittilson, 93 Wn.2d at 226; Morris, 107 Wn.2d at 323, 329-30; Clausing, 83 Wn.2d at 72.
By contrast, we have stated that the legislature "derived" RCW 21.20.430 from
section 12(a)(2). Habermanv. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 125, 744
P.2d mi{\9%iy, see also Hoffer V. State, 113 Wn.2d 148, 151, 776 P.2d 963 (1989).
Because RCW 21.20.430 makes liability contingent on a violation of the antifraud
provision, RCW 21.20.010, we direct our focus to that provision. Laws OF 1977,
Ex. Sess., ch. 172, § 4.
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
III. The Washington Court of Appeals and the Federal Courts Have
Consistently Held That Reliance Is an Element of a Private Claim under
the Securities Act
Recognizing the connection between RCW 21.20.010 and Rule lOb-5 that
this court has previously emphasized, the Court of Appeals in these cases held that
reliance is an element of a private claim for a violation of our state Securities Act's
antifraud provision. Fed. Home Loan Bank ofSeattle v. Barclays Capital, Inc.,
1 Wn. App. 2d 551, 558-59 & nn.15-16, 406 P.3d 686 (2017); Fed. Home Loan
Bank ofSeattle v. Credit Suisse Sec. (USA)LLC, No. 75779-2-1, slip op. at 5-6 &
n.l6(Wash. Ct. App. Dec. 11, 2017)(unpublished),
https://www.courts.wa.gov/opinions/pdf/757792.PDF. It has maintained that view
for nearly 50 years. See infra Section III.A. Likewise, the federal courts have long
recognized that reliance is an element of the state claim. See infra Section III.B.
As the majority correctly notes, decisions of the Court of Appeals do not
have controlling authority in our court.''^ Majority at 16. But as the majority fails
to note, our practice—one that is driven by the values of stability and efficiency—
is to give those decisions respectful consideration. See, e.g., Belling v. Emp't Sec.
Dep't, 191 Wn.2d 925, 931-33, 427 P.3d 611 (2018)(declining to overrule
See, e.g.. Fast v. Kennewick Pub. Hasp. Dist., 187 Wn.2d 27, 40, 384 P.3d 232(2016)("A Court of Appeals decision has no stare decisis effect on this court.").
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
13-year-old Court of Appeals holding without a "compelling" reason to do so).
That is especially true where, as here, those decisions come to consensus on the
meaning of a state statute." Such consensus on the meaning of a statute—when
maintained over a long period of time and without legislative objection—"argues
significantly in favor" of our adopting the established interpretation. Blue Chip
Stamps V. Manor Drug Stores, 421 U.S. 723, 733,95 S. Ct. 1917, 44 L. Ed. 2d 539(1975). The majority not only fails to recognize this stability-favoring rule in an
area of business and commercial law, it also fails to give numerous published
decisions of the Court of Appeals any consideration.'^ Finally, the majority
misinterprets our decision in Hines in 1990, which actually played a key part in
strengthening that consensus interpretation of the antifraud provision.
" Cf Inre Pers. Restraint ofArnold, 190 Wn.2d 136, 154, 410 P.3d 1133 (2018)
("[0]ur current system of rigorous debate at the intermediate appellate level creates the
best structure for the development of Washington common law.").
The decisions that the majority declines to address are FutureSelect Portfolio
Management, Inc. v. Tremont Group Holdings, Inc., 175 Wn. App. 840, 867 n.67,
309 P.3d 555 (2013), aff'd on other grounds, 180 Wn.2d 954 (2014); Stewart, 122 Wn.
App. at 264-66 & n.7 (2004); Guarino v. Interactive Objects, Inc., 122 Wn. App. 95, 109,
86 P.3d 1175 (2004); and Helenius v. Chelius, 131 Wn. App. 421, 439-44, 120 P.3d 954(2005)(resolving whether reliance was reasonable as a matter of law).
10
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
A. Decisions of the Washington Court of Appeals before Mines
The Washington Court of Appeals first stated that reliance is an element of a
private claim in Shermer in 1970. 2 Wn. App. 845; see also Barclays,
1 Wn. App. 2d at 559(recognizing as much). In that case, the court rejected the
notion that a plaintiff bringing a state securities fraud claim must prove scienter.
Upon reaching that conclusion, the court provided guidance about what a plaintiff
must prove instead. The court stated—as a holding;
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.
Shermer, 2 Wn. App. at 857-58 (emphasis added).
Federal Home Loan and the majority contend that that guidance constitutes
dictum and urge us to disregard it. They overlook two key points, however. First,
rejecting a standard or legal test often goes hand in hand with stating the correct
standard or legal test. Second, the Court of Appeals itself later characterized its
statement in Shermer as a holding. Reviewing Shermer, that court stated,"[W]e
previously . . . held that proof of the scienter element of common-law fraud was
not necessary and that a damages action would lie under RCW 21.20.010 so long
as the plaintiff relied upon a misrepresentation or omission of a material fact."
11
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
Ludwigv. Mut. Real Estate Inv'rs, 18 Wn. App. 33, 40, 567 P.2d 658(1977)
(emphasis added), overruled by Kittilson, 93 Wn.2d at 225-26.
The majority grabs on to ShermeEs use of the term "sufficient." In its view,
Shermer "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." Majority
at 13 (citing Shermer, 2 Wn. App. at 858). The majority is here relying on a
formal logician's nuanced distinction, rather than taking Shermer as it has been
commonly understood: it was distinguishing intent to deceive, which it rejected as
an element, from reliance, which it retained. Indeed, decisions following Shermer
did not take the formal logician's approach that the majority takes, either. Ludwig
read Shermer to mean that reliance (of some sort) is an element of a Securities Act
claim. 18 Wn. App. at 40. The Ninth Circuit read Shermer the same way in
Reeves v. Teuscher, 881 F.2d 1495, 1501 & n.l2 (9th Cir. 1989).
Although Ludwig went on to overrule ShermeEs other holding, that scienter
need not be proved, it never overruled Shermer's holding that reliance is an
element of a state securities fraud claim. 18 Wn. App. at 41-42. This court later
overruled Ludwig's scienter holding, thus reverting to the Shermer approach on
that element. Kittilson, 93 Wn.2d at 227. We broadly stated,"The interpretation
of RCW 21.20.010 first announced in Shermer is the better rule. The legislature
12
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
has not seen fit to disturb it and neither do we." Id. As the Court of Appeals had
already recognized in Ludwig, the Shermer rule was a no-scienter, reliance-only
rule. 18 Wn. App. at 40.
B. Decisions of Federal Courts before Mines
As mentioned immediately above, the Ninth Circuit also recognized that
Shermer stood for the proposition that plaintiffs "were required to prove reliance to
establish their .. . [Washington] securities fraud claims." Reeves, 881 F.2d at 1501
& n.l2. The Ninth Circuit thus agreed as early as 1989 that reliance is an element
of a private claim for violation of the Securities Act's antifraud provision.
Thirteen years earlier, the United States District Court for the Western
District of Washington had come to the same conclusion. It stated,"The question
of reliance is, of course, a vital one in establishing liability under both the
[Washington] and federal securities laws." In re Boise Cascade Sec. Litig.,
420 F. Supp. 99, 101 (W.D. Wash. 1976). Similarly, the United States District
Court for the Eastern District of Washington noted that the elements of federal and
state securities fraud claims differed only with respect to scienter. Kinsey v. Nestor
Expl. Ltd., 604 F. Supp. 1365, 1372-73 (E.D. Wash. 1985).
We decided Mines shortly thereafter in 1990. 114 Wn.2d 127. I discuss that
decision in greater depth in Part IV below. For now,I simply note that the
13
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
question in Mines was whether a private plaintiff suing under the Securities Act's
antifraud provision must plead and prove loss causation. Id. at 134. We held that a
plaintiff need not do so. Id. But in the course of deciding that issue, we looked at
the statute's requirements holistically and stated,just as the Court of Appeals had
in Shermer, 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.(emphasis added). That means we did not use the fine
distinction of formal logic, necessary to the majority's decision, of finding a
complete difference between "sufficient," Shermer, 2 Wn. App. at 857-58, and
"necessary," majority at 13. We used "necessary" or "need only show" to convey
what we meant.
C. Decisions of the Washington Court of Appeals after Mines
The Court of Appeals took this court at its word. Citing Mines, it has
adhered to the view that reliance is an element of a private claim in several
14
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
published Securities Act decisions dating back to 2004." That court's nine
unpublished decisions on this topic come to exactly the same conclusion.
Among the unpublished decisions, Kunkle v. Western Wireless Corp. stands
out. Noted at 133 Wn. App. 1023, 2006 WL 1673549, at *8. The plaintiff-
appellants in that case "theorize[d] that RCW 21.20.010 imposes strict liability
regardless of reliance." 2006 WL 1673549, at *8. Relying on Hines, Guarino}^
See Fed. Home Loan Bank ofSeattle v. RBS Sec., Inc., 3 Wn. App. 2d
642,644 nn.1-2, 418 P.3d 168 (2018),per.Tor reviewfiled. No. 95991-9(Wash. June 20,
2018);see also Barclays, 1 Wn. App. 2d at 560; FutureSelect Portfolio Mgmt.,
175 Wn. App. at 867 n.67; Stewart, 122 Wn. App. at 264-66 & n.7(2004); Guarino,
122 Wn. App. at 109; cf. Helenius, 131 Wn. App. at 439-44 (resolving whether reliance
was reasonable as a matter oflaw).
See Yanlu Lin v. Great Ocean Capital Holding, LLC, No. 76576-1-1, slip op.
at 6, 8-11 (Wash. Ct. App. Oct. 15, 2018)(unpublished),
https://www.courts.wa.gov/opinions/pdf/765761.pdf, review denied, 193 Wn.2d 1008(2019); Credit Suisse, No. 75779-2-1, slip op. at 6; Newcomer v. Cohen, No. 48233-9-11,
slip op. at 18(Wash. Ct. App. May 16, 2017)(unpublished),
https://www.courts.wa.gov/opinions/pdf/D2%2048233-9-
ll%20Unpublished%200pinion.pdf, review denied, 189 Wn.2d 1029(2017); Walker v.
Serven, No. 44063-6-11, slip op. at 11 (Wash. Ct. App. Mar. 19, 2014)(unpublished),
https://www.courts.wa.gOv/opinions/pdf/D2%2044063-6-
ll%20%20Unpublished%200pinion.pdf; Stonebridge Sec., LLC v. Devine, noted at 138
Wn. App. 1047,2007 WL 1464431, at *5; Alexander v. Cadaret, Grant & Co., noted at
137 Wn. App. 1059, 2007 WL 1041380, at *4; Trimble v. Holmes Harbor Sewer Dist.,
noted at 137 Wn. App. 1055,2007 WL 959899, at *5; Kunkle v. W. Wireless Corp., noted
at 133 Wn. App. 1023, 2006 WL 1673549, at *8; Ogdon v. Byron Nelson Co.,, noted at
123 Wn. App. 1009,2004 WL 1932661, at *3.
Guarino v. Interactive Objects, Inc., 122 Wn. App. 95, 109, 86 P.3d 1175(2004).
15
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
and Shermer, the Court of Appeals rejected that theory. Id. at *8 n.34. The
"[ajppellants also argue[d] that their claims parallel Section 12(2) of the Securities
Act of 1933, . . . which makes sellers liable to buyers for misrepresentation and
which does not require proof of reliance to establish a claim"—an argument that
Federal Home Loan repeats in this case.'^ Id. at =^8; see supra p. 8 n.8. The Court
of Appeals rejected that argument; it explained that the antifraud provision more
closely resembles Rule lOb-5 than section 12(2). Kunkle, 2006 WL 1673549, at
*8. The fact that the Court of Appeals declined to publish that decision shows that
it considered the analysis not new, not clarifying, and not important. RAP 12.3(d)
(identifying criteria for publishing decisions and expressly stating that the court
should consider whether "the decision determines an unsettled or new question of
law"; whether the decision "modifies, clarifies or reverses an established principle
oflaw"; whether the decision is "importan[t]"; and whether the decision stands "in
conflict with a prior [decision]").'"^
Section 12(2) was "later renumbered section 12(a)(2)." Appellant's Opening
Br. at 14, No. 75779-2-1(Wash. Ct. App.(2017)).
The majority argues that our observation that the Court of Appeals believed that
this point of statutory interpretation was well-settled law is problematic because it
"degrades the distinction between published and unpublished decisions." Majority
at 16 n.5. But it is RAP 12.3(d), cited and partly quoted in text, that establishes the
16
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
At the time, the Court of Appeals had over 35 years of case law holding that
reliance is an element of an RCW 21.20.010 claim. Now it has nearly 50."
D. Decisions of Federal Courts Hines
The federal courts' decisions say the same thing. They uniformly recognize
that Washington law requires a plaintiff alleging a violation of the state Securities
Act's antifraud provision to prove reliance.
distinction between published and unpublished decisions. Under that rule, the appellate
court assesses preexisting law and determines whether its decision is new, clarifying, or
important against the backdrop of that preexisting law. As to Kunkle in particular, there
is nothing problematic with my crediting the Court of Appeals for its recognition of what
is undeniably tme: against the backdrop of the existing Securities Actjurisprudence,
there was nothing new, clarifying, or important in the court's analysis of the legal issues
in that case.
Appearing as aniicus curiae, the Department of Financial Institutions, which
oversees state securities regulation and enforcement, argues that the Court of Appeals'
long-standing mle could hamper its ability to protect investors. "[BJecause the
Department uses the same language in RCW 21.20.010(2) for its administrative
enforcement actions, Division One's interpretation could have an unintended impact on
the Department's ability to pursue fraud actions before investors have relied to their
detriment." Br. of Amicus Curiae Wash. State Dep't of Fin. Inst. at 4-5. The problem
with the department's argument is that it relies on a faulty premise—^namely, that the
Court of Appeals holding below is new. As explained above, it is not. And as amicus
curiae North American Securities Administrators Association further points out, "it is
universally accepted across all federal and state jurisdictions that reliance is never
required when a governmental plaintiff brings a public enforcement action under a
federal or state securities law." Br. of N. Am. Sec. Adm'rs Ass'n at 4.
See, U.S. Bank Nat'I Ass'n v. Sterne, Agee & Leach, Inc., 281 F. App'x 740,742
(9th Cir. 2008)(court order); Nuveen Quality Income Mun. Fund v. Prudential Equity
Grp., LLC,262 F. App'x 822, 825 (9th Cir. 2008)(court order); Moore v. Thornwater
17
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
Co., 155 F. App'x 257, 258 (9th Cir. 2005)(court order); Johnson v. Riviera, noted at
77 F.3d 489, 1996 WL 56169, at *1 (9th Cir. 1996)(court order); Andresen v. Hunt,
noted at 951 F.2d 358, 1991 WL 268716, at *3 (9th Cir. 1991)(court order)(reading
Kittilson as affirming Shermer's reliance holding); Braddock v. Zaycon Foods LLC,No.
C16-1756 TSZ,2017 WL 5989487, at *2(W.D. Wash. Apr. 21, 2017)(court order);
Somerset Commc'ns Grp., LLC v. Wall to Wall Advert., Inc., No. C13-2084-JCC,2014
WL 1794676, at *8(W.D. Wash. May 6, 2014)(court order); Sung v. Mission Valley
Renewable Energy, LLC,No. CV-11-5163-RMP,2013 WL 790509, at *2, *4-7(E.D.
Wash. Mar. 4, 2013)(court order)(denying motion for summary judgment because of
genuine issue of material fact about reliance); Graham-Bingham Irrevocable Tr. v. John
Hancock Life Ins. Co. USA,827 F. Supp. 2d 1275, 1284(W.D. Wash. 2011); King
County V. Merrill Lynch & Co., No. C10-1156 RSM,2011 WL 643166, at *2,5(W.D.
Wash. Feb. 18, 2011)(court order); Malone v. Clark Nuber, PS, No. C07-2046RSL,2008
WL 2545069, at *14-15(W.D. Wash. June 23, 2008)(court order);In re Metro. Sec.
Litig, 532 F. Supp. 2d at 1297, 1301-03; Becker v. Allcom, Inc., No. C04-0958L, 2005
WL 1654524, at *3-5(W.D. Wash. July 12, 2005)(court order); Goelv. Jain, 259 F.
Supp. 2d 1128, 1139(W.D. Wash. 2003);In relntermec Corp. Sec. Litig., No. C90-7832,
1991 WL 207370, at *3(W.D. Wash. June 17, 1991)(court order); cf. Swartz v. KPMG
LLP,476 F.3d 756, 764, 766-67(9th Cir. 2007)(permitting plaintiff to add state
securities fraud claims on remand given the court's holding that plaintiff pleaded
"allegations that, if proven, could potentially ground a finding of reasonable reliance");
McGonigle v. Combs,968 F.2d 810, 823-24(9th Cir. 1992)(describing plaintiffs
proposed instruction that stated that plaintiff must prove transaction causation).
Likewise, Massachusetts's Appeals Court has recognized that Washington law
requires a showing of reliance. Eagle Fund, Ltd. v. Sarkans,63 Mass. App. Ct. 79, 84,
823 N.E.2d 783 (2005)(citing Hines, 114 Wn.2d 127). Although this out-of-state
citation may appear superfluous at first, it is actually quite persuasive because it
demonstrates that our decisions make clear to a jurist unacquainted with Washington law
that private claims brought under RCW 21.20.010 do require a showing of reliance.
A national treatise has also recognized that Washington law requires a showing of
reliance. 12A JOSEPH C.LONG,MICHAEL J. KAUFMAN & JOHN M.WUNDERLICH, Blue
Sky Law § 12:5 n.21 (2018)("State-by-State Charts for State Securities Acts")(citing
Hines).
18
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
In one case, the Ninth Circuit even declined to certify the reliance question
to this court, explaining,"Washington appellate courts have held that reliance is an
element of a claim under the Washington State Securities Act." Nuveen Quality
Income Mun. Fund v. Prudential Equity Grp., LLC,262 F. App'x 822, 825
(9th Cir. 2008)(citing Mines, 114 Wn.2d 127; Stewart, 122 Wn. App. 258). Those
holdings "clearly determined that reliance is an element of a claim under the
[Securities Act]." Id. "Certification is therefore inappropriate," the court
concluded. Id.The majority argues that the Ninth Circuit's certification decision "says
nothing about the nature of the law itself." Majority at 16 n.5. The majority fails
to appreciate, however, that a federal court's certification decision necessarily
requires an assessment of state law. Certification is appropriate only when "the
local law has not been clearly determined." RCW 2.60.020. As of 10 years ago,
the Ninth Circuit believed that our state law had been clearly determined.
19
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
IV. We Interpreted the Antifraud Provision in Hines and Stated That
Transaction Causation—Meaning Reliance—Is an Element of a Private
Claim under the Securities Act
A. Hines Stated That Transaction Causation—That Is, Reliance—Is an
Element of a Private Claim under the Securities Act
As noted, we have spoken on this topic, too. In 1990, in Hines, we
considered an issue closely related to today's issue: Must a plaintiff plead and
prove loss causation when bringing a private claim under the Securities Act's
antifraud provision? The answer, we held, was no.
In Hines, investors sued the officers and directors of a corporation. They
claimed that the defendants had violated the Securities Act's antifraud provision by
failing to disclose the CEO's medical condition. 114 Wn.2d at 130. The
defendants did not deny that the CEO's health was a material fact. Id. at 134.
Instead, they "argue[d] that before they can be liable under RCW 21.20.010, the
investors must establish that defendants' misrepresentations were the proximate
reason for their investments' decline in value." Id. (footnote omitted). In other
words, they argued that plaintiffs had to prove loss causation.
We rejected the defendants' argument to adopt the element ofloss causation.
We stated,"The investors need only show that the misrepresentations were
material and that they relied on the misrepresentations in connection with the sale
20
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
of the securities." Id. (emphasis added). We added,"The violation is in the
misrepresentation itself; it is not how the misrepresentation affected the price of
the stock. RCW 21.20.430(1) provides rescission as the basic remedy. Thus an
investor who is wrongfully induced to purchase a security may recover his
investment without any requirement of showing a decline in the value of the
stock." Id. at 135 (emphasis added).
In other words, we rejected the argument for loss causation and instead
endorsed a rule of transaction causation.
Critically, transaction causation means reliance. Dura Pharm., Inc. v.
Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 161 L. Ed. 2d 577(2005); Currie
V. Cayman Res. Corp., 835 F.2d 780, 785 (11th Cir. 1988).
B. Mines Accurately Reflected the Established Interpretation of the
Securities Act in 1990 and Remains Persuasive Today
Federal Home Loan urges us to disregard our statement that plaintiffs "need"
to prove "reli[ance]" and "induce[ment]" as "just dictum." Mines, 114 Wn.2d
at 134-35; Suppl. Br. of Appellant at 2. The majority agrees, calling Mines'
statement "simply there, unadorned." Majority at 14.
But our statement in Mines reflected the uncontroversial and well-established
understanding at the time that a plaintiff must prove reliance. See supra pp. 8-13.
21
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
And as discussed above, rejecting a legal standard often goes hand in hand with
stating the correct standard or legal test. See supra,p. 11. Indeed, other state and
federal courts understood us to do exactly that in Mines. They relied on Mines for
the rule that the Securities Act requires a plaintiff to plead and prove reliance in a
private claim for violation of the antifraud provision. See supra pp. 13-18.
V. Our Cases Following Mines Also State That Reliance Is an Element of a
Private Claim under the Securities Act
Our subsequent Securities Act cases recite the same rule. For example, in
Go2Net, a case about equitable defenses, the Jury found that the plaintiff had
"relied on [the defendant's] material misrepresentation or omission regarding the
ownership of his company" when purchasing the stock of that company.
158 Wn.2d at 250. We then stated that those findings "established" that the
defendant had violated the Securities Act's antifraud provision. Id. Later in the
decision, we again characterized those findings as establishing a violation of the
Securities Act. Id. at 251.
FutureSelect Portfolio Management, Inc. v. Tremont Moldings, a case
presenting questions about jurisdiction and choice of law, used the same rule.
180 Wn.2d 954, 331 P.3d 29(2014). In the choice-of-law portion of our analysis,
we adopted section 148 of the Restatement(Second) ofConflict ofLaws for claims
22
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
alleging violations of the antifraud provision. Id. at 968. By its terms, section 148
applies only when the plaintiff has relied on the defendant's misrepresentations.
Restatement § 148. Our adoption of that provision makes the most sense if
reliance is indeed an element of a private claim under the Securities Act. As we
stated then,"Under § 148,... we must consider(1)the place where plaintiffacted
in reliance on the representations . . . ." 180 Wn.2d at 969(emphasis added)
(citing Restatement § 148). Moreover, we observed that in the case before us,
"Washington was the place where [the plaintiff] acted in reliance on the
representations." Id.
Thus, our decisions—like those of the Court of Appeals and the federal
courts—consistently treat reliance as an element of a state securities fraud claim.^°
The majority contends that Kinney v. Cook, 159 Wn.2d 837, 842, 154 P.3d 206(2007) is to the contrary. Majority at 15-16. This is incorrect. In Kinney, we analyzed
whether a trial court correctly granted a defendant's CR 12(b)(6) motion to dismiss. 159
Wn.2d at 842-46. Tracking the language of RCW 21.20.010, we stated,"The statute has
two essential elements:(1) a fraudulent or deceitful act committed (2) in 'connection with
the offer, sale or purchase of any security.'" Id. at 842(quoting RCW 21.20.010). As
with the language of RCW 21.20.010 itself, the first prong of that test—"a fraudulent or
deceitful act"—has a broad reach capable of incorporating reliance. We also noted that
the fraudulent act at issue in that case—an omission about the financial condition of a
corporation—induced the plaintiffs payment. Id. at 845; see also id. at 839 (stating that
the plaintiffs claimed that the defendant "wrongfully induced their payment"). Thus, it is
incorrect to read Kinney as having silently overruled the reliance requirement.
23
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
VI. The Legislature Never Disagreed with this Judicial Consensus That
Reliance Is an Element of a Private Claim under the Securities Act
The legislature has not reacted to that consensus. Indeed,"since Washington
courts began recognizing a reliance requirement in 1970, the legislature has
relevantly amended the [Securities Act] eight times. Not once did it modify the
requirement that reliance is a required element. This is telling." Barclays, 1 Wn.
App. 2d at 559-60 & nn.20-21 (footnotes omitted)(citing Shermer, 2 Wn. App. at
858; Laws of 1998, ch. 15, § 20; Laws of 1986, ch. 304, § 1; Laws of 1985,
ch. 171, § 1; Laws OF 1981, ch. 272, § 9; Laws of 1979,Ex. Sess., ch. 68, § 30;
Laws of 1977,Ex. Sess., ch. 172, § 4; Laws of 1975,1st Ex. Sess., ch. 84, § 24;
Laws of 1974,Ex. Sess., ch. 77, § 11).
This is telling because our court has long recognized that the legislature's
silence is an indication of acquiescence in a judicial interpretation of a statute. See,
e.g., Buchanan v. Int'l Bhd. ofTeamsters, 94 Wn.2d 508, 511,617 P.2d 1004(1980). We presume that the legislature is aware of published appellate court
decisions.^' Because we presume that the legislature is aware of published
Buchanan, 94 Wn.2d at 511; Friends ofSnoqualmie Valley v. King County
Boundary Review Bd., 118 Wn.2d 488, 496, 825 P.2d 300(1992)("The Legislature is
presumed to be aware ofjudicial interpretation of its enactments." (citing Glass v. Stahl
Specialty Co., 97 Wn.2d 880, 887, 652 P.2d 948 (1982))); State v. J.P., 149 Wn.2d 444,
24
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
appellate court decisions, the legislature's failure to amend a statute after an
appellate court has interpreted that statute demonstrates acquiescence in its
interpretation. Buchanan, 94 Wn.2d at 511; State v. Ervin, 169 Wn.2d
815, 825-26, 239 P.3d 354(2010)(recognizing legislative acquiescence in
published Court of Appeals decision).
That rule applies with greater force when the legislature subsequently
amends the interpreted statute but declines to alter the inteipreted portion.
1000 Friends of Wash. v. McFarland, 159 Wn.2d 165, 181-82, 149 P.3d 616(2006)(plurality opinion); Friends ofSnoqualmie Valley v. King County Boundary
Review Bd., 118 Wn.2d488, 496-97, 825 P.2d300 (1992).
Applying those rules to this case, the legislature has certainly acquiesced in
the Washington courts' interpretation of the antifraud provision. Forty-nine years
have passed since the Court of Appeals first held that reliance was an element of a
claim in Shermer. Twenty-nine years have passed since this court held that
reliance was an element of such a claim in Mines. Both of those periods far exceed
the 17-year period that had passed in Buchanan and that counseled against
454,69 P.3d 318 (2003)(stating that the legislature was "on notiee" of published Court
of Appeals decision)(collecting cases).
25
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
reexamination of our prior ruling in that case." See 94 Wn.2d at 511. And the
legislature's eight amendments to other provisions of the Securities Act indicate
that it "has had ample opportunity" to express its disagreement with the reliance
requirement. 1000 Friends of Wash, 159 Wn.2d at 181."
VII. The Statute's Text, Context, and History Support Retaining Reliance as
an Element of a Private Claim under the Securities Act; The Majority's
Conclusion to the Contrary Undermines the Purpose of the Securities Act
A. The Statute's Text, Context, and History Support Retaining Reliance
as an Element of a Private Claim under the Securities Act
The majority overturns this settled law. It holds that purchasers such as
Federal Home Loan—which purchased securities from Credit Suisse before even
Even if Shermer and Hines did not set out authoritative statements of law about
the reliance requirement, as the majority contends, Stewart certainly did. See 122 Wn.
App. at 264-66 & nn.7, 9(holding that reasonable reliance is an element of a private state
Securities Act claim). The majority does not ask whether the legislature acquiesced to
that authoritative holding. Instead, the majority announces that only this court matters,
majority at 18, ignoring the fact that the public, "[sjtatewide agencies[,] and other entities
cannot choose to ignore a published judicial decision," Arnold, 190 Wn.2d at 154.
This case concerns statutory interpretation in the commercial transaction
context, two factors that favor stability. See Deggs v. Asbestos Corp. Ltd., 186 Wn.2d
716, 729 n.9, 381 P.3d 32(2016); accord Key Design, Inc. v. Moser, 138 Wn.2d 875,
880-84, 983 P.2d 653, 993 P.2d 900 (1999). The value of stability in the law in this
context is certainly weightier than in some other contexts. For example, erroneous
interpretations of individual rights and protections cannot be upheld simply because the
deprivation of the right or protection is long-standing. See, e.g.. In re Pers. Restraint of
Andress, 147 Wn.2d 602, 604, 56 P.3d 981 (2002)(revisiting long-standing interpretation
of criminal statute based in part on "illogic" of the established interpretation). And
legislative acquiescence has no place in constitutional interpretation.
26
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
hearing Credit Suisse's alleged misrepresentations, and which purchased securities
from Barclays despite "both internal and external warnings that put [Federal Home
Loan] on notice that it could not solely or reasonably rely" on Barclays' alleged
misrepresentations—are entitled to prevail. Barclays, 1 Wn. App. 2d at 577.
The first problem with the majority's approach is, as I explained above, that
it basically ignores the prior decisions of this court, the Court of Appeals, and the
federal courts.
The next problem with the majority's approach is that it dismisses the
antifraud provision's historical context that supports those decisions. As explained
above, the text of RCW 21.20.010 is patterned after Rule lOb-5. Rule lOb-5 has
always been understood to have a reliance requirement. As the United States
Supreme Court has recognized, common law fraud claims and statutory securities
fraud claims, although distinct, share a general antifraud character. Basic Inc., 485
U.S. at 243 (Blackmun, J., majority), 253 (White, J., concurring in part and
dissenting in part)("In general, the case law developed in this Court with respect to
§10(b) and Rule lOb-5 has been based on doctrines with which we, as judges, are
familiar: common-law doctrines offraud and deceit."); see also Dura Pharm., 544
U.S. at 341. As the United States Supreme Court further recognized,"reliance is
and has long been an element of common-law fraud." Basic Inc., 485 U.S. at 243
27
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
(citing Restatement(Second)of Torts §525(Am.Law.Inst. 1977); W.Page
Keeton et al.,Prosser and Keeton on Law of Torts § 108 (5th ed. 1984)).
Given that that is true of common law fraud in Washington, RCW 21.20.0lO's use
of"fraud" and "defraud" certainly could incorporate the reliance element
embedded in those terms' common law background.
Additionally, the phrase "in connection with," which introduces all three
subsections of RCW 21.20.010 (and Rule lOb-5), establishes a causal connection
requirement. See Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017,
1025-27(9th Cir. 1999)(surveying cases and concluding that the phrase means
that "[t]he court should consider whether the plaintiff has shown some causal
connection between the fraud and the securities transaction in question"(emphasis
added)(citing In re Fin. Corp. ofAm. S'holder Litig., 796 F.2d 1126, 1130 (9th
Cir. 1986))); Barbara Black, Commentary, The Second Circuit's Approach to the
'in Connection with'Requirement ofRule lOb-5, 53 Brook. L. Rev. 539, 541
(1987)(explaining that the effect of Rule lOb-5's "in connection with" requirement
is that "the court may determine that the fraud did not cause the injury complained
of, and therefore it was not 'in connection with' the securities transaction" and
describing how the Second Circuit has applied that rule with respect to loss
causation).
28
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
Finally, even if none of the above were true, problems remain in the
majority's statutory interpretation. Despite the majority's claim that it follows
Department ofEcology v. Campbell & Gwinn LLC, 146 Wn.2d 1, 12, 43 P.3d 4(2002), the majority improperly relies on commentary to interpret the plain
meaning of RCW 21.20.010. See majority at 7. It then takes pains to note another
nonlegislator's commentary. But the commentary is not to the Securities Act; it is
commentary to a proposed—and rejected—^part of a separate law, enacted 12 years
after the Securities Act, that the majority itself admits offers "[Ijittle, if anything."
Ld. at 9 n.2.
To be sure, there is a split of authority among the state courts on whether
private claims under statutes containing the exact same language—^patterned after
Rule lOb-5—contain a reliance element. See 12A Joseph C. Long, Michael J.
Kaufman & JohnM. Wunderlich, Blue Sky Law § 12:5 (2018)("State-by-
State Charts for State Securities Acts"). So if we were addressing this issue for the
first time, we could depend a lot more on dictionaries and we would have a hard
job. But we are writing based on a long history of statutory interpretation of words
that have clearly, and justifiably, been construed to incorporate an element of
reliance. There is no compelling reason to overturn this settled law.
29
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCloud, J., dissenting)
B. The Majority's Interpretation Undermines the Purpose of the
Securities Act
There is one more reason to reject the majority's interpretation: it runs
counter to the legislature's mandate that we interpret the Securities Act "to make
uniform the law of[the] states . . . and to coordinate the interpretation and
administration of[the Securities Act] with the related federal regulation."
RCW 21.20.900.
The long-standing interpretation that the majority discards used to advance
uniformity and coordination with other jurisdictions. The coordination with the
related federal regulation, Rule lOb-5, is clear—our holding maintains consistency
between state and federal law with respect to the reliance element of a securities
fraud claim.
As to uniformity with other states, the majority correctly notes that there is a
split of authority among the states with respect to reliance as an element. Majority
at 11. Thus, if we look solely at reliance's status as an element ofthe claim,
neither affirming nor reversing the Court of Appeals in this case would have much
effect on uniformity.
The defendants, however, urge us not to look at that element alone when we
compare our statutory scheme to those of other states. They point out that although
30
No. 95420-8 (consolidated with No. 95436-4)
(Gordon McCIoud, J., dissenting)
considerable variation exists in the details of state securities laws, most states have
established a carefully balanced scheme that pairs exposure to liability with various
defenses to liability. See generally 12A Joseph C.Long,Michael J. Kaufman &
John M.Wunderlich,supra, at 29. If Washington discards the reliance element,
exposure to liability in Washington would, in their view, greatly outstrip potential
exposure in other states. Washington would become an outlier.
I agree with the defendants that we must consider the parties' arguments in
the context of our other decisions interpreting the elements of and defenses to a
state securities fraud claim. To begin, our statute bars defendants from asserting
due diligence or reasonable care defenses. RCW 21.20.010,.430; cf. \5 U.S.C.
§ 77/(a)(2). Our court has held that equitable defenses are not available either.
Go2Net, 158 Wn.2d at 250. Our court has further held that a plaintiff does not
have to prove scienter or loss causation. Kittilson, 93 Wn.2d at 227; Mines, 114
Wn.2d at 134-35. By rejecting the reliance requirement today, the majority takes
Washington out of the ranks of states that have maintained carefully balanced
statutory schemes.
That interpretation goes beyond "protecting investors," our other interpretive
guide. Kinney v. Cook, 159 Wn.2d 837, 844, 154 P.3d 206(2007)(citing Hoffer v.
State, 113 Wn.2d 148, 152,776 P.2d 963 (1989)). It would instead provide a
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recovery to new investors whose investment choices are either completely
unrelated to the defendant's alleged misconduct, as in Credit Suisse, or
insufficiently related to the alleged misconduct to have had any impact on the
investment decision, as in Barclays. And it will be at the expense of old investors,
who will be left footing the bill.^"^ Roberta S. Karmel, When Should Investor
Reliance Be Presumed in Securities Class Actions?, 63 Bus. Law. 25, 30(2007).
That outcome is especially unnecessary in light of the authority of the Department
of Financial Institutions to police misconduct within the securities industry. See
RCW 21.20.390,.395.
Conclusion
The majority overturns settled law requiring private plaintiffs to plead and
prove reliance in state securities fraud claims. As a result of this upheaval, if
Federal Home Loan proves its case, it will recover an eight percent annualized
The majority argues that fraud hurts all investors because allegations of fraud
drive down stock prices. Majority at 10 (citing Urska Velikonja, The Cost ofSecurities
Fraud, 54 Wm.&Mary L. Rev. 1887, 1901 (2013)). But interpreting a reliance element
out of the Securities Act privileges new investors over old investors despite the fact that
all have been harmed by the loss to the corporation's value. The incongruity makes no
sense. By contrast, it makes sense for the legislature to have chosen to privilege investors
who would not have been made their investments but for the corporation's deceptive
conduct.
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(Gordon McCloud, J., dissenting)
return on bad investments that it alone decided to make—and it will do so at the
expense of other investors.
I respectfully dissent.
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(Gordon McCloud, J., dissenting)
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