A WSSA Put Option? Our State Supreme Court’s Decision in Federal Home Loan Bank of Seattle v. Credit Suisse (USA) LLC Exacerbates Risk Asymmetry for Securities Issuers and Investors in Washington State
by Timothy B. Fitzgerald and Jordan V. Rood
In Federal Home Loan Bank v. Credit Suisse Securities (USA) LLC, 194 Wn.2d 253 (2019) (hereinafter, "Credit Suisse"), the Washington Supreme Court altered the landscape for civil claims pursued under the anti-fraud provision of the Washington State Securities Act (WSSA), RCW 21.20.010, ruling that plaintiffs in Washington State are not required to show that they relied upon misrepresentations or omissions made to them in connection with the purchase or sale of securities. In particular, the Credit Suisse court ruled that a WSSA claim could move forward even though it was predicated upon material misrepresentations contained in a version of an offering memorandum the plaintiff had not even received (let alone reviewed or relied upon) before making its investment. Id. at 273.
In so doing, Credit Suisse emphatically reaffirmed that Washington remains one of the most plaintiff-friendly jurisdictions in the nation for investors, and one of the toughest for issuers. That ruling is impacting the way investors and issuers interact with one another, and the way we, as lawyers, evaluate and litigate WSSA claims.
But in reality, this is nothing new: Washington State has long been one of the most investor-friendly jurisdictions in the nation, with courts here consistently construing WSSA much more expansively than its state and federal counterparts. In fact, the Washington Supreme Court has recognized that WSSA is “unique” by comparison to the securities regimes of other jurisdictions, and has admonished lower courts to do exactly what the Credit Suisse court itself recently did – namely, to interpret WSSA broadly so as to fulfill its salutary purpose of protecting investors. See Kinney v. Cook, 159 Wn.2d 837, 844 (2007). Thus, well before Credit Suisse, Washington courts had already established that WSSA barred defendants from asserting due diligence, reasonable care, or equitable defenses. And, unlike claims asserted under federal securities laws, Washington courts have also long established that WSSA plaintiffs are not required to demonstrate scienter, loss causation, or even damages. Credit Suisse, at 294.
Now, with the removal of any reliance requirement, the Washington Supreme Court has taken yet another significant step in the same direction, further widening the path to WSSA liability. Post-Credit Suisse, plaintiffs pursuing WSSA claims need demonstrate only three elements – namely, (1) a misrepresentation or omission, (2) in connection with the purchase or sale of securities, and (3) materiality. Upon proof of those elements, WSSA entitles investors to avail themselves of powerful remedies, including: (a) rescission of the transaction in question, (b) 8% pre-judgment interest, and (c) reasonable attorneys' fees and costs. In certain instances, plaintiffs may also recover monetary damages. No other jurisdiction in America has cleared a wider path for aggrieved investors.
Needless to say, Credit Suisse emphatically escalates the risk asymmetry issuers have long faced in the State of Washington. Some local securities lawyers have even gone so far as to analogize WSSA, post-Credit Suisse, to a constructive put option – one that allows aggrieved investors to file suit, to search in discovery for any material misrepresentation or omission that may have been made (regardless of whether the investor actually received or relied upon the misrepresentation or omission, and regardless of whether the investor was actually harmed by it), and to then rescind their investments (and/or recover monetary damages) and collect 8% prejudgment interest, together with reasonable attorneys' fees and costs, in the event they are able to locate any such misstatement or omission. The mere threat of such a claim is quite a powerful hedge against investment loss.
Obviously, and as the Credit Suisse majority was quick to point out, WSSA does not preordain that any investor, in any case, can automatically force any issuer to rescind any securities transaction – the particular facts and circumstances of any given case continue to matter. Credit Suisse, 194 Wn.2d at 271 ("Our holding does not open up floodgates of unlimited liability."). With that being said, following the court's ruling in Credit Suisse, the facts and circumstances that happen to matter are now dramatically different than they were just six months ago – a development that undoubtedly makes it easier for investors to pursue, and harder for issuers to defend, claims under WSSA.
Indeed, elimination of any reliance requirement essentially reduces the WSSA analysis, in the vast majority of cases, down to just one pertinent question for those prosecuting or defending such claims: When the plaintiff is permitted to take discovery, and to have access to all of the various documents issuers and their affiliated persons will have created in connection with their securities offerings – stock purchase agreements, prospectuses, offering memoranda, marketing materials, emails, text messages, social media content, and the like – will the investor be able to locate something (anything) that might reasonably be construed as a material misstatement or omission? If the answer to that question is "yes" or "potentially yes," Credit Suisse significantly amplifies the significant risks that already existed under WSSA – and not just to the particular investor in question, but to all similarly situated investors.
Thus, whether it intended to do so or not, the Credit Suisse court provided issuers with further motivation to promptly and amicably resolve disputes with aggrieved investors, rather than risking a potentially existential parade of horribles under WSSA. That is why some local securities lawyers have begun referring to WSSA, post-Credit Suisse, as a proverbial "put option."
That "option," if we can call it that, has obvious and significant value. In an arms-length negotiation, investors frequently negotiate (i.e., pay for) the ability to sell their shares back to the issuer at a pre-determined price. Such options generally increase in value as an asset declines in price, thereby creating a valuable hedge to mitigate the investor's downside risk. Post-Credit Suisse, the local market for negotiated put options may be shrinking. Indeed, many Washington issuers and investors now seem to proceed from the assumption that a put option of sorts (plus a right to recover 8% interest and attorneys' fees and costs) is actually or at least potentially baked into the deal already. This new reality is impacting the way investors and issuers interact with one another, and the way we, as lawyers, evaluate WSSA cases.
Looking ahead, we anticipate a flood of COVID-19-related WSSA claims, with investors taking the position that issuers – from restaurants, to commercial real estate owners, to cryptocurrency companies, to cannabis and marijuana companies, to start-ups of all stripes – misrepresented or did not properly disclose the business risks that might arise in the event of a global pandemic. At McNaul, we have a diverse securities practice in which we represent issuers and investors alike, and are closely following legal developments in this space. Our Supreme Court's removal of any reliance requirement inevitably will lead aggrieved investors to pursue their COVID-19-related WSSA claims in Washington State to the extent possible, as the path to WSSA liability in this jurisdiction has never been wider. And, we should add, the stakes for issuers in the State of Washington have never been higher.