Who is the “Seller” of a Security?

Who is the “seller” of a security?  Although the question may seem straightforward, a recent decision from the Washington Supreme Court suggests that the possibilities continue to grow.

The Washington State Securities Act (“WSSA”)[1] regulates the buying and selling of securities in Washington state.  Like its federal counterparts, one of the WSSA’s primary purposes is “to protect investors from speculative or fraudulent schemes.”[2] More specifically, the WSSA protects investors from fraud and misrepresentations made by sellers of securities, and it imposes a civil liability on those who sell a security in violation of certain provisions of the Act.[3]  The critical question, therefore, is who is a “seller” under the WSSA.

Under the WSSA, a “seller” includes “any party whose acts were a substantial contributive factor to the sale.”[4]  In light of the Act’s remedial nature, Washington courts have construed this already broad definition of “seller” liberally to include far more than just issuers and their officers.

For example, the Washington Supreme Court recently held that that the auditing firm Ernst & Young could be liable as a “seller” under the WSSA in connection with its auditing of a hedge fund associated with Bernard (“Bernie”) Madoff’s Ponzi scheme.[5]  According to the complaint, Ernst & Young knew its audits would be used to solicit investors, knew that current investors would rely on its audits when deciding to maintain or increase their investments, and addressed its audits to individual investors including plaintiff.[6]  The complaint further alleged that it would not have invested in the fund but for Ernst & Young’s audits.[7]

Although the provision of routine professional services does not qualify one as a seller, proof of “something more” in addition to providing such services does.  The Court held that the facts alleged in the complaint qualified as “something more” and thus were sufficient to state a claim against Ernst & Young as a “seller” under the WSSA.  In doing so, the Court reversed the trial court, which had dismissed the complaint for failure to state a claim against Ernst & Young.[8]

Futureselect serves as a valuable reminder of the broad reach of the WSSA.  In effect, the ruling emphasizes that accounting firms and other professionals cannot assume that they are not in the business of selling securities when their clients are—especially where the professional’s services (or in this case, even the brand) are being used to appeal to investors.  The equally broad definition of “security” compounds the concern,[9] and may extend liability to those who least expect it. Avoiding such liability may require distancing, disclaimers, more due diligence, or all of the above.

–Ryan Solomon