Fall-out from Bernie Madoff’s Ponzi scheme continues. The Washington Supreme Court yesterday affirmed the reinstatement of an action brought by a group of Washington investors (FutureSelect) against an investment firm (Tremont) that pooled and fed money into Madoff “feeder funds.” Having lost all of the $195 million it invested with Tremont, FutureSelect also sued Tremont’s corporate parent (Oppenheimer), corporate grandparent (Massachusetts Mutual), and auditor (Ernst & Young), asserting claims for violation of the Washington State Securities Act (WSSA), and various torts. The trial court dismissed the claims on the pleadings. The Court of Appeals reversed in part and affirmed in part; the Washington Supreme Court affirmed the Court of Appeals.
The Washington Supreme Court rejected Oppenheimer’s CR 12(b)(2) challenge, holding that at this stage of the litigation, the allegations in the complaint sufficiently established the requisite minimum contacts for specific jurisdiction under Washington’s long arm statute. Applying the factors listed in Shute v. Carnival Cruise Lines, 113 Wn.2d 763, 767 (1989), the Court found that the complaint adequately alleged that Tremont acted as Oppenheimer’s agent, that Tremont’s misrepresentations were made on Oppenheimer’s behalf and received in Washington, and that as a result of the misrepresentations, FutureSelect invested millions of dollars in the Madoff feeder funds. The allegations were sufficient to establish that Oppenheimer transacted business with FutureSelect in Washington through its agent. The Court also considered other factors and concluded that the assumption of jurisdiction over Oppenheimer, a Delaware corporation, did not offend traditional notions of fair play and substantial justice. Ultimately deciding that dismissal had been granted prematurely, the Court left the door open for Oppenheimer to renew its jurisdictional motion after discovery.
For the CR 12(b)(6) challenge, the Court started by addressing the choice of law dispute. The preliminary question of whether there is an actual conflict between the laws of Washington and the laws of another state was answered affirmatively in light of the fact that the WSSA provides for a private right of action, while New York’s state security law does not. Turning next to which law should apply, the Court noted that Washington applies the most significant relationship test as articulated by § 145 of the Restatement (Second) of Conflict of Laws. The Court then took the opportunity to adopt § 148, which it described as “refin[ing] the § 145 factors for the fraud and misrepresentation context.” Explaining that § 148 does not alter the court’s “two-step analysis,” the Court first evaluated the contacts with each interested jurisdiction and considered which are “most significant.” It determined that the contacts pleaded by FutureSelect were sufficient to survive the CR 12(b)(6) motion on the choice of law issue. Next, the Court evaluated the interests and public policies of the jurisdictions, and decided there was no clear evidence that New York has the more significant relationship to the dispute.
On the final question of whether Ernst & Young could be considered a “seller” under the WSSA, the Court stuck with its “expansive definition” of a seller as including any party whose acts were a “substantial contributing factor” to the sale. It acknowledged that plaintiffs are required to establish “something more” than the provision of routine professional services, but found that because FutureSelect might be able to establish “the requisite ‘something more,’” dismissal on the pleadings was inappropriate.
Reversing the dismissal, the Court remanded with instructions for follow up proceedings.