On January 7, 2022, Judge Dean D. Pregerson of the U.S. District Court for the Central District of California denied plaintiffs’ motion for class certification in a putative class action against a Japanese manufacturer of electronic and energy products and services (the “Company”) alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Stoyas v. Toshiba Corp.
, No. 2:15-CV-04194 DDP-JC (C.D. Cal. Jan. 7, 2022). Plaintiffs, purchasers of the Company’s unsponsored American Depositary Receipts (“ADRs”), alleged the Company concealed its deliberate use of improper accounting over a period of at least six years to inflate its pre-tax profits by more than $2.6 billion and conceal at least $1.3 billion in impairment losses at its U.S. nuclear business. In a previous decision in the matter covered here
, the Ninth Circuit held that a purchaser of unsponsored ADRs may maintain a cause of action under the Exchange Act so long as the purchaser incurred “irrevocable liability” within the United States to take and pay for a security. After declining to dismiss an amended complaint in a decision covered here
, the Court denied plaintiffs’ motion for class certification, finding that plaintiffs failed to satisfy the typicality requirement for class certification under Rule 23(a) because, unlike the members of the proposed class, plaintiffs acquired the Company’s securities in Japan.
Plaintiffs are pension funds who purchased shares of the Company’s unsponsored ADRs on the over-the-counter (“OTC”) market in the United States through a third-party investment manager (the “Investment Manager”). The Investment Manager placed a buy order for unsponsored ADRs in New York, through its broker (the “Broker”), also in New York. The Broker then executed, on behalf of the Investment Manager, the purchase of the Company’s common stock on the Tokyo Stock exchange for conversion into ADRs. Plaintiffs moved to certify a class defined as all persons who purchased the Company’s securities between May 8, 2012 and November 12, 2015 using the facilities of the OTC market. In opposing class certification, the Company argued that plaintiffs could not satisfy the typicality requirement because they did not acquire the Company’s securities in the United States, but rather in Japan where the Company’s underlying common stock was purchased prior to conversion into ADRs. Plaintiffs argued that, because the Broker was not acting as either the Investment Manager’s or plaintiffs’ agent at the time it acquired the underlying common stock, liability could not have attached until the ADRs were sold in the separate transaction, post-conversion.
In denying plaintiffs’ motion for class certification, the Court applied the “irrevocability test” first articulated by the Second Circuit in Absolute Activist Value Master Fund Ltd. v. Ficeto
, 677 F.3d 60 (2d Cir. 2012). This test focuses on “where [the] purchaser incurred irrevocable liability to take and pay for the securities.” In rejecting plaintiffs’ argument that the securities were purchased in the United States, the Court noted that “[p]laintiffs’ approach ascribes little importance to the first step in the ADR conversion process: the purchase of [the Company’s] common stock.” The Court held that plaintiffs were legally and contractually bound to take and pay for the ADRs, once converted, “[t]he moment [the Broker] completed the transaction for [the Company’s] common stock on the Tokyo Stock Exchange.”
The Court also considered plaintiffs’ contention that the Broker was not acting on the Investment Manager’s or plaintiffs’ behalf when it acquired the underlying common stock, but instead acting as a “riskless principal.” Specifically, plaintiffs argued that the Broker acquired the “ADRs (and underlying common stock) for [the Broker’s] own account, as a principal and counterparty, and thereafter sold the ADRs to [plaintiffs] in a separate transaction.” The Court held, however, that the fact that the Broker “acted in a ‘riskless principal’ capacity only further support[ed] the proposition that [plaintiffs] incurred liability in Japan.” According to the Court, because the Broker already knew that the Investment Manager would purchase the converted ADRs at market price when it executed the common stock transaction, “the triggering event that caused [the Investment Manager] (and by extension, [plaintiffs]) to incur irrevocable liability occurred in Japan when [the Broker] acquired the shares of [the Company’s] common stock on the Tokyo Stock Exchange.”
With respect to plaintiffs’ motion to certify a class concerning claims under Japan’s Financial Instruments & Exchange Act (“JFIEA”), the Court denied plaintiffs’ motion, without prejudice, because it found that the parties had raised “potentially dispositive questions of law” as to whether plaintiffs had standing under the JFIEA. The Court held that these issues were “more appropriate to a motion for summary judgment rather than a class certification motion.”