Statutory Seller Liability under WSSA

WSSA has investor protection purpose.

The Washington State Securities Act (“WSSA”), in contrast to federal law, is designed to protect the individual investors like Plaintiffs:

We note that while the purpose of federal securities laws is to maintain the integrity of the secondary securities markets and to enforce disclosure, the WSSA is intended to protect investors. Comment, Securities Fraud Under the Blue Sky of Washington, 53 Wash. L. Rev. 279, 282 n.10 (1978); Rooks, The Blue Sky of Washington: Registration of Securities of a New Venture, 6 Gonz. L. Rev. 187, 188 (1971). To this end, this court has construed the WSSA broadly. See McClellan v. Sundholm, 89 Wn.2d 527, 533, 574 P.2d 371 (1978).

Haberman v. Washington Pub. Power Supply Sys., 109 Wn.2d 107,126 159, 744 P.2d 1032 (1988).

WSSA Statutory Sellers as defined by Haberman.

If a defendant is a statutory seller, he or she is strictly liable to the purchasers. There is no statutory defense. WSSA provides,

§ 21.20.430. (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, . . . (emphasis added)

 The plain meaning of the statute seemed to be that there must be some sort of privity between the seller and buyer of the security. Just because a seller sold the security to someone, does not make him liable to others who purchased the security from other sellers of the security. That was the argument made by the defendants in Haberman.

The Haberman case involves various bondholders' claims against the Washington Public Power Supply System (“Supply System”) and others for injuries resulting from the Supply System's default on $ 2.25 billion in revenue bonds issued to finance construction of two nuclear power generating plants. The legislature tried to protect the public treasury by passing an emergency amendment to WSSA to require scienter for liability of public officials who could be “statutory sellers” of Supply System bonds. The Haberman court approved the scienter amendment after constitutional challenge and after a contrary federal district court ruling. (In re Washington Pub. Power Supply Sys. Sec. Litig., 673 F. Supp. 411 (W.D. Wash. 1987)).

In this charged political atmosphere, the Washington Supreme Court was asked to decide whether professional advisors like attorneys and accountants, as well as public officials who had some involvement in the issuance of the bonds, could be statutory sellers. None of these individuals “sold” a security to an individual investor and claimed that they could not be liable under the plain meaning of WSSA.

To emphasize the significance of this issue in Haberman, consider the argument in Justice C. J. Pearson’s lone dissent:

First and foremost, the reasonable interpretation of RCW 21.20.430(1) requires privity between plaintiff and defendant. The majority's expansive denomination of parties liable in a private action is without basis under the clear language of the WSSA. [at 127]

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The ordinary and clear meaning of "is liable to the person buying the security from him or her" in RCW 21.20.430(1) requires that the plaintiff bought a security from the defendant -- that is, privity. [at 128]

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I would interpret the WSSA to enforce its plain meaning, affording a civil action to purchasers only against the sellers from whom they purchased. [at 141]

 Justice Pearson’s view was rejected by the majority who held:

In McClellan v. Sundholm, supra at 534, the court held a salesman liable under RCW 21.20.430(1) as a seller although the purchase agreement was between the buyer and the salesman's employer. Without discussing the absence of privity, the court found that because the salesman's actions constituted an "offer" of a security, his disposition of the security through the purchase agreement constituted a sale. McClellan, at 534. Thus, although we have interpreted the offer and sell language in RCW 21.20.430(1) to be broad enough to include face to face "dispositions" of securities where privity is absent, we have not yet decided the scope of liability where privity is lacking. [at 35]

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In a similar fashion, we hold that defendant is liable as a seller under RCW 21.20.430(1) if his acts were a substantial contributive factor in the sales transaction. Considerations important in determining whether a defendant's conduct is a substantial contributive factor in the sales transaction include: (1) the number of other factors which contribute to the sale and the extent of the effect which they have in producing it; (2) whether the defendant's conduct has created a force or series of forces which are in continuous and active operation up to the time of the sale, or has created a situation harmless unless acted upon by other forces for which the actor is not responsible; and (3) lapse of time. See generally Restatement (Second) of Torts §§ 432, 433 (1977). Whether a defendant's conduct was a substantial contributive factor is necessarily a question of fact. [at 45]

Seller liability after Haberman.

In Hines v. Data Line Sys., 114 Wn.2d 127, 787 P.2d 8 (1990), the Washington Supreme Court affirmed the substantial contributory factor test for seller liability and held that an attorney who did not meet investors or advance the selling process was not a statutory seller. Merely doing routine legal work did not make an attorney a substantial contributing factor.

Brin v. Stutzman, 89 Wn. App. 809, 951 P.2d 291, review denied, 136 Wn.2d 1004, 966 P.2d 901 (1998) that the act of giving investment advice, standing alone, does not create a statutory seller. The substantial contributing factor test is not the same as proximate causation. Even the damages would not have occurred “but for” the investment advice, a statutory seller of securities must have some relationship to the issuer of the securities.

Herrington v. Hawthorne, 111 Wn. App. 824, 47 P.3d 567 (2002), demonstrated that even the smallest level of assistance can create a statutory seller. It held that giving a power of attorney to a partner who was a statutory seller created an issue of fact as to whether the grantor of the power of attorney was a substantial contributing factor in the sale of the security.