Federal Court Holds That Unsponsored American Depository Receipts Of An Unlisted Foreign Company Are Not Subject To Section 10(b) Claims
On May 20, 2016, Judge Dean Pregerson of the United States District Court for the Central District of California dismissed with prejudice a putative securities class action against Toshiba Corporation. Stoyas v. Toshiba Corporation, No. CV 15-04194 DDP, 2016 BL 163950 (C.D. Cal May 20, 2016). Plaintiffs alleged that Toshiba violated Section 10(b) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and Japan’s Financial Instruments & Exchange Act by making accounting misstatements that led to the restatement of six years of financial results and the elimination of approximately one-third of the company’s profits from 2008 to 2014. The Court rejected these arguments, holding that the American Depository Receipts (“ADRs”) were not subject to Section 10(b) claims, and that comity and a lack of connection to the United States compelled dismissing the Japanese law claims.
The claims at issue were brought on behalf of purchases of Toshina ADRS and the Japanese law claim also was brought on behalf of purchases of Toshiba stock. The Court first addressed defendants’ argument that the Exchange Act claims were precluded by the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which established that only transactions involving securities listed on domestic exchanges or otherwise domestic transactions can be brought under Section 10(b) of the Exchange Act. Because the over-the-counter (“OTC”) market where plaintiffs acquired Toshiba ADRs did not qualify as an “exchange” under the Exchange Act, the Court held that these transactions did not satisfy Morrison’s first prong. The Court then reasoned that to allow ADRs (which are securities of foreign companies that are listed on foreign exchanges and that are resold by a third party as a different kind of security in the United States) to be subject to Section 10(b) “would create essentially limitless reach of Section 10(b) claims because even if the foreign defendant attempted to keep its securities from being sold in the United States, the independent actions of depositary banks selling on OTC markets could create liability.” In addition, the Court held that the ADRs at issue in this case were particularly unsuitable to being subject to Section 10(b) claims because they were not listed on a domestic exchange and Toshiba was not alleged to have played any role in selling these securities in the United States, such as by sponsoring the ADRs, soliciting transactions in them, or taking any other affirmative step to be involved in the their purchase or sale.
Having dismissed plaintiffs’ Exchange Act claims, the Court went on to consider their Japanese securities law claim. The Court first held that respect for the Japanese legal system under principles of comity supported the dismissal of this claim for the same reasons described above as to the Exchange Act claims. Moreover, the Japanese law claim was even more prone to dismissal because related cases had been filed in Japan and the U.S. securities law claims were already dismissed because of an insufficient connection to the U.S. Alternatively, the court held, the Japanese law claim should be dismissed for forum non conveniens because Japan has a significantly stronger interest in the claim based on events that took place in Japan and because of the challenges involved in litigating a claim where most of the evidence is in Japan.