Court Opinion

ID: 4227682
Source: CourtListenerOpinion
Date Created: 2017-12-11 23:32:52.947729+00
Date Added: 2024-06-11T14:42:53.820354
License: Public Domain

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

 FEDERAL HOME LOAN BANK OF                          No. 75913-2-1
 SEATTLE, a bank created by federal
 law,                                               DIVISION ONE

                     Appellant,

              V.

 BARCLAYS CAPITAL, INC., a                          PUBLISHED
 Connecticut corporation; BCAP LLC, a
 Delaware limited liability company; and            FILED: December 11,2017
 BARCLAYS BANK PLC, a public limited
 company registered in England and
 Wales,

                     Respondents.

      Cox, J. — Under the Washington State Securities Act("WSSA"), an

investor who sues on the basis that a prospectus contains either untrue

statements or omissions of material facts must prove reasonable reliance on

these statements or omissions.1 Here, the Federal Home Loan Bank of Seattle

("FHLBS") purchased tworesidential mortgage backed securities ("RMBSs") in

      1 RCW 21.20.010(2); Hines v. Data Line Sys., Inc., 114 Wn.2d 127, 134,
787 P.2d 8(1990); Stewart v. Estate of Steiner, 122 Wn. App. 258, 264, 93 P.3d
919 (2004), review denied, 153 Wn.2d 1022(2005); Go2Net, Inc. v.
Freeyellow.com, Inc., 158 Wn.2d 247, 251, 143 P.3d 590(2006).
No. 75913-2-1/2

2008 that were described in prospectus supplements. In 2009, FHLBS

commenced this action under the WSSA against Barclays Capital, Inc., BCAP

LLC, and Barclays Bank PLC (collectively, "Barclays"). The essence of its claim

for rescission and other relief is that the prospectus supplements contain untrue

statements or omissions of material facts about the securities FHLBS purchased.

      The trial court granted Barclays's motion for summary judgment. In this

appeal, FHLBS fails in its burden to show that there are genuine issues of

material fact. Barclays is entitled to judgment as a matter of law. We affirm the

summary dismissal of these claims.

      Some background about the nature of the transactions at issue in this

case may be helpful to provide context. In early 2008, FHLBS purchased the two

RMBSs that are the subjects of this action. These securities were created by a

process known as "securitization."2

      The subjects of this securitization are 1,643 loans that IndyMac Bank

made to various residential borrowers throughout the country. IndyMac decided

whether to make each loan by a process called "underwriting." After each loan

approval, each borrower began making monthly payments to IndyMac. For

purposes of securitization, IndyMac was the "originator" of these loans.

       After IndyMac originated these loans, it pooled them together and

transferred them to a Barclays subsidiary. The subsidiary then deposited them in

       2 See Federal Housing Finance Agency v. Nomura Holding America, Inc.,
60 F. Supp. 3d 479, 486 (S.D.N.Y. 2014).

                                            2
No. 75913-2-1/3

a trust in exchange for investment certificates. The trust issued certificates that

were then sold to FHLBS.

       In sum,the stream of income from the monthly payments by borrowers for

the loans from IndyMac, the originator, was transferred to FHLBS,the investor.

       On February 13, 2008, FHLBS purchased the first security for

$189,416,000. This RMBS is comprised of 951 of the 1,643 loans originated by

IndyMac. This security is known as BCAP 2008-IND1 ("IND1").

       On April 15, 2008, FHLBS purchased the second security for

$232,438,000. This RMBS is comprised of the remaining 692 of the 1,643 loans

originated by IndyMac. This is known as BCAP 2008-IND2 ("IND2").

       During the underwriting process, most of these loans were characterized

as "Alt-A", falling between "Prime" and "Subprime" loans in terms of

creditworthiness. As their names suggest, Prime loans are those issued to

borrowers who are the most credit worthy. Subprime loans, on the other hand,

are to borrowers at the other end of the creditworthiness spectrum.

       FHLBS purchased these securities at a time that one respected financial

commentator has described as "the mortgage debacle — in 2008. That one

brought world economies to the precipice and wiped out Lehman Brothers and a

raft of troubled banks."3

       3 Gretchen Morgenson, After 20 Years of Financial Turmoil, a Columnist's
Last Shot, N.Y. TIMES (Nov. 10, 2017),
https://www.nytimes.com/2017/11/10/business/after-20-vears-of-financial-turmoil-
a-columnists-last-shot.html?emc=eta1 [https://perma.cc/SA9J-9FQK].

                                             3
No. 75913-2-1/4

       In 2009, FHLBS commenced this action against Barclays to rescind these

transactions and for further relief. In 2011, the trial court first ruled that

reasonable reliance on the statements in the prospectus supplements is an

element of an investor's claim under the WSSA. In 2016, following extensive

discovery by the parties, the trial court granted Barclays's motion for summary

judgment on lack of reasonable reliance as to the IND1 and IND2 transactions.

The court necessarily decided that FHLBS failed to show any genuine issue of

material fact on this element and that Barclays was entitled to judgment as a

matter of law.

       FHLBS appeals.

                             REASONABLE RELIANCE

       Whether reasonable reliance is a necessary element of an investor's claim

under the WSSA is a core issue in this case. FHLBS argues that the WSSA

does not require that it prove that it reasonably relied on the statements in the

prospectus supplements that it now challenges. We disagree and hold that such

reliance is an essential element of an investor's claim under RCW 21.20.010(2).

       We will affirm an order granting summary judgment where there is no

genuine issue of material fact and the moving party is entitled to judgment as a

matter of law.4 A material fact is one on which the outcome of the litigation

       4McPherson v. Fishing Company of Alaska, 199 Wn. App. 154, 157, 397 -
P.3d 161, review denied, 189 Wn.2d 1021 (2017).

                                               4
No. 75913-2-1/5

depends.5 We review de novo orders of summary judgment.° We also review de

novo a trial court's legal conclusions.7

       In construing a statute, we seek to ascertain and carry out the legislature's

intent.° When the legislature enacts a state statute substantially verbatim from a

federal statute, "it carries the same construction as the federal law and the same

interpretation as federal case law.m° When the legislature passes an

"amendment to a statute without alteration of a section previously interpreted by

the courts," such action may "evidence[] legislative acquiescence in the

interpretation."10

       Here, FHLBS focuses its arguments on two statements in the prospectus

supplements for the two RMBSs that it purchased.

       The first challenged statement states:

       Mortgage loans that are acquired by IndyMac Bank are
       underwritten by IndyMac Bank according to IndyMac Bank's
       underwriting guidelines, which also accept mortgage loans meeting
       Fannie Mae or Freddie Mac guidelines regardless of whether such
       mortgage loans would otherwise meet IndyMac's guidelines, or

               v. Dep't of Labor & Indus., 181 Wn. App. 788, 795, 321 P.3d 1275
       5 Krliqht
(quoting Ranger Ins. Co. v. Pierce County, 164 Wn.2d 545, 552, 192 P.3d 886
(2008)), review denied, 181 Wn.2d 1023(2014).
       6 Id.

      7 Sunnyside Valley Irrigation Dist. v. Dickie, 149 Wn.2d 873, 880, 73 P.3d
369 (2003).
       8 Thorpe    v. Inslee, 188 Wn.2d 282, 289, 393 P.3d 1231 (2017).
      9 Anfinson v. FedEx Ground Package System, Inc., 174 Wn.2d 851, 868,
281 P.3d 289(2012)(quoting State v. Bobic, 140 Wn.2d 250, 264, 996 P.2d 610
(2000)).
       19   McKinney v. State, 134 Wn.2d 388,403, 950 P.2d 461 (1998).

                                             5
No. 75913-2-1/6

      pursuant to an exception to those guidelines based on IndyMac's
      procedures for approving such exceptions.[]

      The essence of FHLBS's claim is that the statement is untrue or

misleading because IndyMac allegedly did not follow "its own guidelines and

procedures in making [these] loans."12

      The other challenged statement deals with the loan to value ("LTV") ratios

of these loans. FHLBS claims that many appraisals that determined the LTV

ratios were not made in accordance with the Uniform Standards of Professional

Appraisal Practice, the national standard of the appraisal profession. The

numerator of this LTV ratio is the amount of a loan and the denominator is the

appraised value of the property securing that loan. The purpose of this measure

is to evaluate how much equity a borrower has in the property securing the loan.

      RCW 21.20.010 states the elements of a claim under the WSSA:

      It is unlawful for any person, in connection with the offer, sale or
      purchase of any security, directly or indirectly:

      (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.

      The question is whether the legislature intended reasonable reliance to be

an element of a claim under this provision of the WSSA. We hold that it did.

       11   Clerk's Papers at 1554, 1564.
       12 Appellant's   Opening Brief at 9.

                                              6
No. 75913-2-1/7

      We begin our analysis by noting the substantial similarity of this state

provision with its federal counterpart. As the following chart shows, the

provisions of these statutes are substantially the same.

             SEC Rule 10b-5                                RCW 21.20.010

"It shall be unlawful for any person... in    "It is unlawful for any person, in
connection with the purchase or sale of       connection with the offer, sale or
any security...                               purchase of any security, directly
                                              or indirectly:
    (a)To employ any device, scheme, or
       artifice to defraud,                      (1)To employ any device, scheme,
                                                    or artifice to defraud;
    (b) To make any untrue statement
        ofa material fact or to omit to          (2) To make any untrue statement
       state a material fact necessary               of a material fact or to omit to
        in order to make the statements             state a material fact
        made,in the light of the                     necessary in order to make
        circumstances under which they               the statements made,in the
        were made, not misleading, or                light of the circumstances
                                                     under which they are made,
    (c) To engage in any act, practice, or           not misleading;or
        course of business which operates
        or would operate as a fraud or           (3)To engage in any act, practice,
        deceit upon any person....113]              or course of business which
                                                    operates or would operate as a
                                                    fraud or deceit upon any
                                                    person."[141

       The state supreme court has determined that RCW 21.20.010 "is

patterned after and restates in substantial part the language of the federal

       13(Emphasis    added.)
       14 (Emphasis   added.)

                                             7
No. 75913-2-1/8

Securities Exchange Act of 1934."15 And this court has clarified that RCW

21.20.010 is "related" to Section 10(b) of that act, as well as SEC Rule 10b-5.16

       The words "reasonable reliance" do not appear in Rule 10b-5 or in RCW

21.20.010(2), its state counterpart. But the United States Supreme Court has

long required reliance in Rule 10b-5 actions.17 And Washington law holds that

once a court makes a controlling interpretation of a statute, that interpretation

controls what the statute has always meant's Thus, Rule 10b-5 has always

required a showing of reasonable reliance, and did so when this state's

legislature drew upon it to craft RCW 21.20.010(2).

       Accordingly, we conclude that the state legislature enacted RCW

21.20.010(2) with the intent that it be construed in the same way as Rule 10b-5

and have the same interpretation as federal case law of that rule.19 In short,

reasonable reliance is a necessary element of this state claim.

       It is particularly noteworthy that since Washington courts began

recognizing a reliance requirement in 1970,20 the legislature has amended the

       15   Clausing v. DeHart, 83 Wn.2d 70, 72, 515 P.2d 982(1973).
        Guarino v. Interactive Obiects, Inc., 122 Wn. App. 95, 110, 86 P.3d
       16
1175 (2004).
       17 See, e.a., JanusCapital Group, Inc. v. First Derivative Traders, 564
U.S. 135, 140 n.3, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011); Basic Inc. v.
Levinson, 485 U.S. 224, 242, 108 S. Ct. 978,99 L. Ed. 2d 194 (1988); Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 206,96 S. Ct. 1375,47 L. Ed. 2d 668 (1976)).
       16   In re Pers. Restraint of Johnson, 131 Wn.2d 558, 568, 933 P.2d 1019
(1997).
       19   Anfinson, 174 Wn.2d at 868 (quoting Bobic, 140 Wn.2d at 264).
       29 Shermer   v. Baker, 2 Wn. App. 845, 858, 472 P.2d 589 (1970).

                                             8
No. 75913-2-1/9

WSSA eight times.21 Not once did it modify the requirement that reliance is a

required element. This is telling.

       As the Ninth Circuit Court of Appeals has explained,"the Washington

Legislature may be presumed to have known" about the requirements of Rule

10b-5.22 With this presumed knowledge and no amendment of the WSSA to omit

the reasonable reliance element, we must presume that the legislature intended

that element to remain a part of this state statute.

       FHLBS fails to argue why these principles do not control the determination

of the legislature's intent in enacting this statute. Instead, it rests its arguments

on reading case law and statutes in unpersuasive ways.

       We note that our interpretation of the legislative intent of the statute has

been consistently stated by the state supreme court and other appellate courts of

this state. The supreme court held in Hines v. Data Line Systems, Inc. that

plaintiffs proceeding under RCW 21.20.010 must show that they "relied on the

misrepresentations in connection with the sale of the securities."23 Only "an

investor who is wrongfully induced to purchase a security may recover his

investment."24

       21Laws 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;
and Laws of 1974, Ex. Sess., ch. 77,§ 11.
             v. Skipper's, Inc., 915 F.2d 1324, 1331 (9th Cir. 1990)(quoting
       22 Wade
WPPSS Securities Litigation, 1986 Blue Sky Law Rptr. 1171,675(W.D. Wash.,
MDL 1986)).
       23 114 Wn.2d       127, 134, 787 P.2d 8(1990).
       24   Id. at 135.

                                              9
No. 75913-2-1/10

      Subsequent opinions have consistently followed this holding.25 And in no

case has any Washington court departed from this interpretation of the statute.

       Notably, in Stewart v. Estate of Steiner, this court reiterated the

requirement of reasonable reliance when holding that the investor in that case

did not have a cause of action under the WSSA.26 As this court stated in that

opinion,'The question is whether [the investor] reasonably relied on any of [the

written materials] in making his investment decision."27 If he did not, he failed to

establish "an essential element of his claim."28

       Notably, the supreme court denied review in that case. Had the court

believed that this court had misstated the law by holding that reasonable reliance

is an essential element of a claim under the WSSA, it seems likely that the court

would have granted review to address the issue. It did not.

       FHLBS advances a number of arguments why this statute does not

require reasonable reliance. They are not persuasive.

       FHLBS argues that the decision of the trial court violates the jurisprudence

of this state that the WSSA is to be interpreted to protect investors. We disagree.

       25 See, e.g., Go2Net, Inc., 158 Wn.2dat 251; Guarino, 122 Wn. App. at
110; Helenius v. Chelius, 131 Wn. App. 421, 441, 120 P.3d 954 (2005); Stewart,
122 Wn. App. at 264.
     26 122 Wn. App. 258, 264, 93 P.3d 919(2004), review denied, 153 Wn.2d
1022(2005).
       27 Id. at 265 (emphasis   added).
       28   Id. at 266.

                                             10
No. 75913-2-1/1 1

       First, FHLBS is correct that a purpose of this act is to protect investors.29

With this purpose in mind, we construe the WSSA liberally.39 But this general

statement of purpose does not eliminate the clear legislative intent that we have

already discussed in this opinion that reasonable reliance is a necessary element

for a claim under RCW 21.20.010(2).

      Second, FHLBS also argues that the legislature intended to eliminate, not

impose, a requirement to prove reasonable reliance. Not so.

       A basis for this argument is that the supreme court has held that certain

elements of common law fraud, on which a WSSA action is based, are

unnecessary to prove. For example, the supreme court held that a plaintiff need

not show scienter in Kittilson v. Ford.31 An earlier court of appeals decision had

held otherwise, following the United States Supreme Court's holding in Ernst &

Ernst v. Hochfelder.32

       The Ernst & Ernst court had explained that because Rule 10b-5 derived

from Section 10(b) of the 1934 Securities Exchange Act, and because Section

10(b) speaks of manipulation and deception, a Rule 10b-5 suit "clearly connotes

intentional misconduct."33 Section 10(b) imposed this requirement even though

       29 FutureSelect Portfolio Management, Inc. v. Tremont Group Holdings,
Inc., 180 Wn.2d 954, 970, 331 P.3d 29 (2014).
       30   Id.

       31   93 Wn.2d 223, 225-27, 608 P.2d 264(1980).
       32 Ludwig v. Mutual Real Estate Investors, 18 Wn. App. 33, 41,567 P.2d
658(1977)  (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375,47
L. Ed. 2d 668 (1976)).
       33 425     U.S. at 201.

                                             11
No. 75913-2-1/12

the language of Rule 10b-5, standing alone, reached "any type of material

misstatement or omission, and any course of conduct, that has the effect of

defrauding investors, whether the wrongdoing was intentional or not."34 But

Section 10(b) conveyed to it the scienter requirement.35

       But our state supreme court held that RCW 21.20.010 neither

incorporated nor derived from a statute incorporating Section 10(b)'s scienter

language.36 And the legislative history of RCW 21.20.010 did not suggest a

scienter requirement.37

       Furthermore, the supreme court in Hines concluded that a WSSA plaintiff

need not show loss causation but it did not suggest that liability is strict under the

statute.38 It based this decision on the nature of the remedy the WSSA provided.

The "basic remedy" of that statutory scheme was rescission.39 Under this

scheme, an investor received the same remedy regardless of the size or

occurrence of loss.40 Thus, loss was irrelevant and unnecessary to prove in a

WSSA suit.41

       34   Id. at 212.
       36   Id. at 215.
       36   Kittilson, 93 Wn.2d at 226.
       37 Id.

       38   114 Wn.2d at 135.
       39   Id.
       4° Id.
       41   Id.

                                             12
No. 75913-2-1/13

       These cases do not support the generalized proposition that RCW

21.20.010 is a strict liability statute. They merely illustrate that scienter and loss

causation are not part of the statute. More importantly, they do nothing to

support the argument that reliance is not an essential element of a WSSA claim,

as Hines and other appellate decisions in this state have consistently held.

       Third, FHLB argues that the legislature intended WSSA actions to be strict

liability actions because it borrowed language from Section 12(2) of the 1933

federal Securities Act. We again disagree.

         It is undisputed that Section 12(2) of the 1933 act created a strict liability

cause of action.42 Moreover, the state legislature borrowed language from that

section in crafting the scheme of the WSSA.43 But the legislature only borrowed

Section 12(2)'s remedy to draft the WSSA's remedy provisions in RCW

21.20.430. In contrast, it borrowed the state act's liability provisions from Rule

10b-5.

         We note that RCW 21.20.430 clearly states by cross reference that RCW

21.20.010 defines liability.44 Thus, RCW 21.20.430 and Section 12(2) are

irrelevant to whether RCW 21.20.010 requires a plaintiff to show reliance to

establish liability.

         42 Gustafson   v. Alloyd Co., Inc., 513 U.S. 561, 576, 115 S. Ct. 1061, 131
L. Ed. 2d 1 (1995).
         43 See   RCW 21.20.430; 15 U.S.C.§ 771.
         44 RCW 21.20.430(1).

                                                13
No. 75913-2-1/14

        Fourth, FHLBS contends that the statutes of other states persuasively

suggest that RCW 21.20.010 is a strict liability statute. But the statutes of other

states are largely irrelevant to determining the legislative intent of Washington's

legislature.

       Washington courts strive to "construe [the WSSA]as to effectuate its

general purpose to make uniform the law of those states which enact" and adapt

the Uniform Securities Act." That uniform act also provided the basis for the

WSSA. But this "does not mean our courts must imitate" the example of other

states when Washington law differs." Simply stated, the legislatures of other

states do not decide what the Washington legislature intended by the WSSA. It

is Washington law, in the end, that governs.47

       Finally, FHLBS argues that the language in Hines, stating that reliance is

an element under the WSSA, was mere dicta, which this court should not have

followed in two previous decisions and should not follow now. We disagree with

reading Hines and the cases that follow in this way. To the contrary, they clearly

establish that reasonable reliance is an essential element of this claim.

       Even if we were persuaded that the statement in Hines regarding reliance

was dicta, that would not change our conclusion that the legislature intended

reasonable reliance to be an essential element of a claim under RCW

       45   RCW 21.20.900.
       46   Go2Net, Inc., 158 Wn.2d at 258 (quoting Kittilson, 93 Wn.2d at 227).
       47 In   re Petersen, 138 Wn.2d 70, 80-81, 980 P.2d 1204(1999).

                                             14
No. 75913-2-1/15

21.20.010(2). That is the core question, not whether the statement in Hines is

dicta.

         For the reasons we have explained, we are convinced that the legislature

intended that an investor must prove reasonable reliance in a claim under the

WSSA.

                       GENUINE ISSUES OF MATERIAL FACT

         Having concluded that reasonable reliance is an essential element that

FHLBS must prove in this case, the question that follows is whether it met its

burden to show the existence of any genuine issue of material fact on that

element in response to Barclays's motion for summary judgment. We conclude

that it failed in this burden.

         It is not enough that a plaintiff relied upon the defendant's statements in

purchasing securities. The WSSA requires that such "reliance must be

reasonable under the surrounding circumstances."48

         Reasonable reliance is generally a factual question." However, if

reasonable minds could reach only one conclusion, summary judgment on this

element is proper.8°

         Our inquiry focuses on determining the existence of genuine issues of

material fact whether FHLBS reasonably relied on the two statements it

          FutureSelect Portfolio Management, Inc. v. Tremont Group Holdings,
         48
Inc., 175 Wn. App. 840, 868, 309 P.3d 555 (2013).
         48   Morgan v. Irving, 8 Wn. App. 354, 356,506 P.2d 316(1973).
         M.A. Mortenson Co., Inc. v. Timberline Software Corp., 140 Wn.2d 568,
         88
579, 998 P.2d 305 (2000).

                                               15
No. 75913-2-1/16

challenges. After carefully reviewing the extensive record before us, we

conclude that FHLBS failed to show any genuine issue of material fact supporting

the argument that it reasonably relied on these statements.

       FHLBS is, without question, a sophisticated investor in RMBSs. Yet

minutes of its risk management committee dated February 2008 warn that all but

three of the regional FHLB banks, the Seattle branch within this minority, had

stopped purchasing securitized "Alt-A" loans.51 The minutes also report that

another regional bank---Boston---was advised not to buy any additional mortgage

backed securities for its portfolio. Credit Analysis Manager Len Reininger alerted

his colleagues at the meeting to "how rapidly housing prices have plummeted

and foreclosures and delinquencies have increased."52 But at that time, Joel

Adamo, Portfolio Manager on both the IND1 and IND2 transactions, was already

considering purchase of IND2.

       The risk management committee decided on February 29, 2008 that "with

the uncertainty in the markets and the issues discussed that it would be desirable

to look at alternative investment opportunities to those the Bank had been

utilizing recently."53

       The committee thus directed Reininger and Adamo to develop together "a

proposal for the[RMBS]investment criteria that would be used in the current

       51   Clerk's Papers at 662.
       52 Id. at 663.

       53 Id. at 662-63.

                                           16
No. 75913-2-1/17

market conditions."54 Until then, the committee directed a ban on the purchase of

such securities.

       Reininger preferred to maintain a total ban, until "the market settle[d]

down."55 But senior FHLBS staff differed and sought a compromise that would

let them "still make some money."56 Adamo and Reininger reached such a

compromise to recommend lifting the ban for certain RMBS purchases.

       In spite of these internal warnings, FHLBS continued purchasing IndyMac

originated securities, comprised of Alt-A loans.

       The record also shows that FHLBS initially made an internal decision not

to purchase further securities of this type, only to change that decision to use

available funds to purchase IND1 and IND2.

       A November 2007 internal FHLBS memorandum also provides notice

about IndyMac, the originator of the loans that were securitized and purchased

by FHLBS. The memo states in relevant part:

       "IndyMac, the second-largest independent U.S. mortgage lender,
       lost $202.7 million in the third quarter, five times bigger than the
       company predicted. The company stated,'We are in the midst of
       the most severe downturn our industry has experienced in modern
       times.'"[571

       54   Id. at 663.
       55   Id. at 690.
       56   Id.
       57 Id. at   1706.

                                             17
No. 75913-2-1/18

      Three months later and despite this and other information, FHLBS

proceeded with the purchase of securities that were originated by IndyMac, the

author of this warning.

       Notably, the record shows that FHLBS was deeply involved in selecting

the loans originated by IndyMac that ultimately constituted the two securities the

bank purchased. This record also shows the selections occurred during

communications directly between FHLBS and IndyMac, without involvement of

Barclays.

       This and other evidence in the record before us supports our conclusion

that FHLBS did not reasonably rely on the statements it now claims induced it to

buy IND1 and IND2. Reasonable minds could only reach this conclusion.

       An alternative analysis further supports our conclusion that there are no

genuine issues of material fact on reasonable reliance. In Stewart v. Estate of

Steiner, this court utilized eight factors for considering whether reliance was

reasonable under the circumstances of that case.58 Stewart borrowed this test

from an opinion of the First Circuit Court of Appeals, Jackvonv v. RIHT Financial

Corp., authored by then Judge Stephen Breyer.58

       58 122 Wn. App. 258, 274, 93 P.3d    919 (2004).
       89 873 F.2d   411 (1st Cir. 1989).

                                             18
No. 75913-2-1/19

       The First Circuit's test has been widely applied by the federal courts,

including the Second, Fourth, Sixth, Eighth, Tenth, and Eleventh circuits, in

considering Rule 10b-5 claims.60

       We again apply these factors, as we did in Stewart, to determine whether

there are any genuine issues of material fact, recognizing that no such issue

exists where reasonable minds could reach only one conclusion.61 FHLBS

provides only cursory mention of these factors in a footnote in its brief. We

consider this footnote, as well as the record generally, in applying these factors.

       No individual factor of this test is necessarily dispositive.62 The factors

are:

       (1)[T]he sophistication and expertise of the plaintiff in financial and
       securities matters;(2) the existence of long standing business or
       personal relationships;(3) access to the relevant information;(4)
       the existence of a fiduciary relationship;(5) concealment of the
       fraud;(6)the opportunity to detect the fraud;(7) whether the
       plaintiff initiated the stock transaction or sought to expedite the
       transaction; and (8) the generality or specificity of the
       misrepresentations.[63]

       60 Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1032(2d Cir. 1993);
Davidson v. Wilson, 973 F.2d 1391, 1400 (8th Cir. 1992); Myers v. Finkle, 950
F.2d 165, 167(4th Cir. 1991); Molecular Technology Corp. v. Valentine, 925 F.2d
910, 918 (6th Cir. 1991); Bruschi v. Brown, 876 F.2d 1526, 1529 (11th Cir. 1989);
Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1516 (10th Cir. 1983).
       61   M.A. Mortenson Co., Inc., 140 Wn.2d at 578.
       62 Stewart, 122 Wn. App. at 274.

       63 Id.

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No. 75913-2-1/20

                              Plaintiff's Sophistication

       As for the first factor, "a sophisticated investor requires less information to

call a Imislrepresentation into question' than would an unsophisticated

investor."64

       Here, FHLBS is indisputably sophisticated in the purchase of RMBSs.

Along with other Federal Home Loan Banks, it was established by federal charter

to facilitate mortgage lending.65 By its own admission, it serves more than 300

members,"mainly community banks and credit unions" throughout the Western

United States and the Pacific Territories.66 It invests, including in RMBSs,to

provide mortgage loan financing to borrowers. In doing so, it amassed an $8

billion portfolio of RMBSs.

       Importantly, Joel Adamo,the portfolio manager for these two transactions,

when testifying at deposition, was asked whether he was a sophisticated

mortgage backed securities purchaser. He answered that he was "really

knowledgeable about all the different securities types that are out there in the

market."67 He identified himself as an "expert on mortgage-backed securities."68

       Reasonable minds could not differ that FHLBS is a sophisticated

purchaser of these two RMBSs. FHLBS does not argue otherwise.

       64 Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d 1017, 1028
(4th Cir. 1997).
       65   12 C.F.R.§ 1265.2.
       66   Clerk's Papers at 159.
       67 Id. at   1654.
       68   Id. at 1657.

                                             20
No. 75913-2-1/21

                            Longstanding Relationships

       FHLBS and Barclays lacked a longstanding business or personal

relationship prior to these two transactions. Thus, reasonable minds could not

differ whether Barclays was in a position to more easily defraud FHLBS.

       Nothing in FHLBS's briefing suggests otherwise.

                          Access to Relevant Information

       FHLBS argues that it lacked access to information necessary to avoid

relying on Barclays's alleged statements in the prospectus supplements. This is

an unproven assertion that fails to create a genuine issue of material fact.

       A plaintiff relies unreasonably when he "possesses information sufficient

to call [a mis-]representation into question,' but nevertheless 'close[s] his eyes to

a known risk.'"69 A plaintiff conscious of such risk relies unreasonably when he

refuses to make necessary further investigations."

       We have already explained why FHLBS was warned both about IndyMac

and the Alt-A loans that comprised the securities it purchased. Yet, despite

these prior warnings, it proceeded with these transactions. FHLBS fails to point

to any evidence in the record to show that it asked for any additional information

it believed material to either of the two statements it now challenges.

       A fair reading of the relevant portions of the supplements further undercuts

this claim of lack of access to information.

       69
        Banca Cremi, S.A., 132 F.3d at 1028 (quoting Teamsters Local 282
Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985)).
       70   id.

                                               21
No. 75913-2-1/22

      First, Barclays provided information regarding the relevant risks in the

prospectus supplements themselves. Regarding internal IndyMac guidelines

adherence, the IND1 prospectus supplement explained that the loans were

originated "generally" in accordance with described underwriting guidelines. It

explained that IndyMac used both traditional and electronic underwriting. But it

also explained that IndyMac had processes to override its guidelines and make

exceptions. It stated that IndyMac determined a borrower's FICO credit score by

selecting the middle score of those provided by each of the major credit

repositories and then choosing the lowest of these, making exceptions when a

borrower had higher income or assets. And it explained that IndyMac could

consider "compensating factors that would allow mortgage loans not otherwise

meeting IndyMac Bank's guidelines."71

       Barclays provided similar statements in the prospectus supplement for

IN02, explaining that IndyMac approves loans under six different documentation

programs. These vary, ranging from full verification of employment, income, and

asset verification, to programs requiring no documentation or verification for

borrowers with better credit scores and more valuable collateral property.

       It also explained that loans failing to meet IndyMac guidelines could be

"manually re-underwritten and approved under an exception to those

underwriting guidelines."72 It explained the compensating factors that would

support an exception might include "significant financial reserves, a low loan-to-

       71   Clerk's Papers at 1554.
       72 Id. at   1555, 1566.

                                            22
No. 75913-2-1/23

value ratio, significant decrease in the borrower's monthly payment[,] and long-

term employment with the same employer."73 Thus, the prospectus supplements

alerted FHLBS to possible divergences from the mortgage approval and

guidelines.

      In sum,this unproven claim that FHLBS lacked access to information it

needed is without any support in the record.

      Adamo himself expressed similar sentiments. He testified at his

deposition that he "monitor[ed] market developments impacting the mortgage-

related assets[he] bought."74 He further testified that there was "turmoil in the

RMBS market" at the time he made the relevant purchases.78 During that

discussion, he stated that"RMBS bonds backed by collateral pools of 2006

vintage collateral would never fully recover in price."78 Further, he knew that any

problems regarding subprime loans in the market could "leak into the rest of the

market."77 Bluntly, he testified that the "market was just plummeting" in late

2007.78

       But, after purchasing IND1, FHLBS still had several hundred million

dollars to invest. As discussed above, risk managers at FHLBS repeatedly

       73 Id. at   1556, 1567.
       74   Id. at 1655.
       75   Id. at 534.
       76   Id. at 537.
       77   Id. at 580.
       78   Id. at 527.

                                            23
No. 75913-2-1/24

warned about the riskiness of investing in RMBS based on loans originated with

IndyMac. These warnings appear in the minutes of the risk management

committee and in internal FHLBS memos from the relevant times. The record

thus clearly indicates that FHLBS knew that these transactions carried great risk.

       FHLBS possessed access to similar information regarding LTV ratios.

This information was less extensive but that which was available was explicitly

concerning. This information was provided in the prospectus supplements.

These explained that IndyMac appraised the relevant mortgaged property in

accordance with the Uniform Standards of Profession Appraisal Practice, and

would either do a traditional inspection appraisal or else employ the algorithmic

automated valuation model. But it also noted that "the determination of the value

of a mortgaged property used in the calculation of the loan-to-value ratios of the

mortgage loans may differ from the appraised value of such mortgaged

properties or the actual value of such mortgaged properties."78

       FHLBS was further aware that "appraisals are an art and not an exact

science."8° Vice President Gregory Teare explained that "Mypically, most

appraisers will state the an [sic] appraisal of +/- 10% of the actual value."81 This

is relevant to the second challenged statement in the prospectus supplements.

       79   Id. at 1548, 1562.
       80 Id. at 1422.
       81   id.

                                            24
No. 75913-2-1/25

                                  Fiduciary Relationship

          FHLBS and Barclays lacked a fiduciary relationship that might have

enabled Barclays to defraud FHLBS. Reasonable minds could not differ on this

factor.

          FHLBS does not argue otherwise in its briefing on appeal.

                                      Concealment

          FHLBS fails to point to anything in this record to indicate any concealed

fraud. As explained previously in this opinion, the prospectus supplements

warned FHLBS about the integrity of the underlying collateral. They alerted

FHLBS to possible variances from guideline adherence and LTV accuracy. And

FHLBS cannot show that Barclays barred it from accessing the loan files. Thus,

reasonable minds could not differ on this factor.

                              Opportunity to Detect the Fraud

          As discussed above, FHLBS fails to demonstrate it lacked an opportunity

to detect that alleged fraud. Adamo claimed that he could not obtain the loan

files, but he never claimed to have asked for them. Similarly, the record indicates

that neither Adamo nor anyone else at FHLBS asked for the underwriting or

appraisal guidelines or information on possible divergences therefrom.

          Rather, Adamo stated that:

          [he]!bi[ied] on the securitization people who are making this — on
          their due diligence and their writings in the security. There is [sic]
          weaknesses and strengths with every factor, and I would try to take
          those into account. But I had limited knowledge as to what exactly
          happened between a loan officer and the security.(82]

          82   Id. at 4300.

                                               25
No. 75913-2-1/26

Adamo recognized there could be fraud in the pool but explained that he was not

buying the pool but rather its securitization. He "relied on the representations

given to [him] by the securitizer" despite "[r]ecognizing that there are risks in an

investment."83

       But Adamo's reliance on Barclays does not imply he lacked the

opportunity to detect any possible fraud. Thus, reasonable minds could not differ

whether FHLBS had an opportunity to detect the alleged fraud.

                         Initiation or Expedition of Transaction

       The parties hotly dispute this seventh factor. Each alleges that the other

drove the purchases of IND1 and IND2. Because this nondispositive factor does

not appear to us to create a genuine issue of material fact, we need not decide

who, Barclay or FHLBS, initiated this transaction.

       After careful review of the record, we conclude that nothing in the

discussion about this factor is material in determining the dispositive question:

whether FHLBS reasonably relied on the quoted statements in the prospectus

supplements regarding variances in IndyMac guideline adherence and the

accuracy of LTV ratios. At no point does either party reference IndyMac's

alleged divergence from loan underwriting guidelines. Nor does either party call

into question the accuracy of LTVs. For these reasons, we conclude that any

factual dispute on this factor is not material for summary judgment purposes.

       83 Id. at 4304.

                                              26
No. 75913-2-1/27

                                 Specificity of Statements

       Regarding this factor, FHLBS only challenges two statements in the

prospectus supplements. The question here is how general or specific these

statements were, not whether they were untrue or misleading.

      The first challenged statement reads:

       Mortgage loans that are acquired by IndyMac Bank are
       underwritten by IndyMac Bank according to IndyMac Bank's
       underwriting guidelines, which also accept mortgage loans meeting
       Fannie Mae or Freddie Mac guidelines regardless of whether such
       mortgage loans would otherwise meet IndyMac Bank's guidelines,
       or pursuant to an exception to those guidelines based on IndyMac
       Bank's procedures for approving such exceptions.[84]

       The second statement noted that the appraisals underlying the LTVs were

made in accordance with the Uniform Standards of Professional Appraisal

Practice.

       These statements, especially when accompanied by certain qualifying

language, were highly general. The first statement did not purport to explain

what the underwriting guidelines were, or the procedures for overriding them.

But both prospectus supplements explained that IndyMac could make exceptions

from its guidelines if a loan application included compensating factors. Such

factors might include "significant financial reserves, a low loan-to-value ratio,

significant decrease in the borrower's monthly paymentm and long-term

employment with the same employer."85

       84   Id. at 1554, 1564.
       85   Id. at 1556, 1567.

                                               27
No. 75913-2-1/28

      The statement regarding appraisal practice standards was similarly

general and qualified. The statement itself made no claim as to the accuracy of

the appraisals, only naming the standards employed. But the prospectus

supplements also stated that "the determination of the value of a mortgaged

property used in the calculation of the loan-to-value ratios of the mortgage loans

may differ from the appraised value of such mortgaged properties or the actual

value of such mortgaged properties."86

       Read alone or in the context of the respective prospectus supplements,

these statements were highly generalized and subject to qualifications. They did

not provide FHLBS any specific assurance or detail regarding the nature or

quality of the collateral. They noted only the general procedure for acquiring

loans and appraising properties, both subject to wide variances.

       Reasonable minds could not differ that these statements were highly

general and provided no specific assurances.

       Applying the Stewart factors, we conclude that FHLBS fails to meet its

burden in showing a genuine issue of material fact whether it reasonably relied

on the challenged statements.

       FHLBS also argues for the existence of other minor genuine issues of

material fact. We disagree with its unconvincing arguments.

       FHLBS argues that statements in the supplements that the readers should

only rely on information in those documents creates an issue of fact. FHLBS

similarly argues that Barclays assured investors that it was meticulous in

       86   Id. at 1548, 1562.

                                            28
No. 75913-2-1/29

preparing the supplements. But these arguments are directly contrary to settled

law that reasonable reliance is determined by considering all the circumstances,

not just what is in a prospectus supplement.

       FHLBS also argues that Barclays's statements were specifically about the

1,643 loans constituting these two securities, and not the general climate of

RMBS investments. That is true. But it does not create a genuine issue of

material fact, given there were both internal and external warnings that put

FHLBS on notice that it could not solely or reasonably rely merely on the

supplements.

       And FHLBS also argues that it had no access to loan files and that it was

therefore unable to detect whether the prospectus supplements contained untrue

or misleading statements. But, given the information that was available, FHLBS

was on notice that the loans constituting the securities were risky and that the

originator of those loans was also troubled. It could have asked for more

information, but there is no evidence that it did.

       We affirm the summary dismissal of these claims.
                                                                     J.
WE CONCUR:

                   1

                                             29