Many state securities laws, known as blue sky laws, are patterned after Section 12(a)(2) of the Securities Act of 1933. The interpretation of these state blue sky laws, however, may diverge significantly from the interpretation of analogous federal securities statutes. The recent Washington Court of Appeals opinion in FutureSelect Portfolio Management, Inc. et al. v. Tremont Group Holdings, Inc. et al., No. 68130-3-1 (Wn. Ct. App. Aug. 12, 2013), highlights one such divergence in which the scope of potential primary liability for secondary actors under the Washington State Securities Act extends beyond the scope of the federal law on which it was based.
In FutureSelect, a group of Washington state investors (“FutureSelect”) lost millions of dollars after purchasing interests in the Rye Funds, a “feeder fund” that invested in Bernie Madoff’s Ponzi scheme. The investors sued Tremont Group Holdings, Inc., the general partner in the Rye Funds and its affiliates, as well as the audit firm Ernst & Young LLP. The plaintiffs’ claims against EY were based primarily on the allegation that EY misrepresented that it had conducted its audit of the Rye Funds’ financial statements in conformity with generally accepted auditing standards when issuing its unqualified audit opinion on these financial statements. The trial court dismissed the plaintiffs’ claims against EY for failure to state a claim, but the Washington State Court of Appeals reversed that decision on appeal.
In reaching this decision, the Washington Court of Appeals primarily relied on Haberman v. Washington Public Power Supply System, 109 Wn. 2d 107, 131 (1987), a Washington Supreme Court case that followed then-existing federal case law interpreting an analogous federal claim under Section 12(a)(2) to hold that a defendant could be liable as a “seller” under the Washington State Securities Act if its conduct was a “substantial contributive factor” in the securities sale transaction. Shortly after Haberman, the United States Supreme Court rejected the substantial contribution test in Pinter v. Dahl, 486 U.S. 622, 654 (1988), and instead adopted a more narrow privity-based standard for defining “seller.” Despite this development in federal securities law, Washington adhered to the substantial contribution test, reasoning that the WSSA had a more far-reaching purpose than federal securities law and should be construed more broadly. EY argued that professionals who provide routine professional services in connection with an offer cannot be a “substantially contributing factor” and incur seller liability under the WSSA. Hines v. Data Line Systems, Inc., 114 Wn.2d 127, 134-35 (1990). Nonetheless, the court of appeals held that the plaintiffs had adequately alleged that EY’s audit-related services went beyond the type of “routine” professional services that are excluded from liability.