United States: Ninth Circuit Reverses Lower Court's Decision Dismissing Securities Claim Regarding American Depository Receipts

On July 17, 2018, the Court of Appeals for the Ninth Circuit in Stoyas v. Toshiba Corp., No. 16-56058, 2018 WL 3431764 (9th Cir. July 17, 2018), reversed and vacated the dismissal of Plaintiffs' securities class action complaint filed on behalf of purchasers of American Depository Shares or Receipts (ADS or ADR)1 of Toshiba Corp. (Toshiba), a Japanese Corporation whose common stock is publicly traded on the Tokyo Stock Exchange and not listed directly on any US exchange. Relying on Morrison v. National Australia Bank, which held that Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) does not apply extraterritorially, the district court dismissed the complaint concluding that the Toshiba ADRs were not sold on a "national exchange" and, therefore, there was no domestic securities transaction.2 In reversing, the Ninth Circuit adopted the irrevocable liability" test that has been propounded by the Second and Third Circuits and was recently addressed in the Second Circuit's decision in Giunta v. Dingman, 2018 WL 3028686 (2d Cir. Jun. 19, 2018),3 strongly implying that foreign companies could be subject to potential liability under US securities laws for the purchase and sale of ADRs. The Ninth Circuit concluded that the Plaintiffs must be provided with an opportunity to amend their complaint to allege that the ADR purchases on the over-the-counter market were domestic purchases of securities and that the alleged fraud was in connection with the purchase of securities.

Background: Stoyas v. Toshiba Corp. District Court Order

The First Amended Complaint (Complaint) in Toshiba alleges violation of the securities laws in light of Toshiba's admission of institutional accounting fraud and accompanying restatements on behalf of class members, including purchasers of Toshiba ADRs on an over-the-counter market and also purchasers of Toshiba common stock on the Tokyo Stock Exchange. The class members who purchased the ADRs, including lead plaintiff Automotive Industry Pension Trust Fund (AITPF), alleged that they acquired them "in reliance upon the truth and accuracy of Toshiba's fraudulent financial statements, paid artificially inflated prices, and suffered economic loss when the ADRs declined in value after the fraud was revealed" and restatements issued.4

The district court dismissed the Complaint with prejudice holding that the over-the-counter market on which Plaintiffs purchased the ADRs was not a "stock exchange" within the meaning of the Exchange Act and the Complaint failed to sufficiently allege Toshiba's involvement in the ADR transactions at issue. The court additionally dismissed the claims regarding the purchase of stock on the Tokyo Stock Exchange on the basis of comity and forum non conviens.

Stoyas v. Toshiba Corp. Ninth Circuit Holding

The Ninth Circuit reviewed the district court's decision de novo analyzing Morrison and relevant Second Circuit cases. 

As a preliminary matter, the Ninth Circuit concluded that Toshiba ADRs qualify as "securities" and "fit comfortably" within the Exchange Act's definition of "stock" because they share many of the five significant characteristics typically associated with common stock.5 The Court further noted that the "economic reality of Toshiba ADRs is closely akin to stock" because investors in Toshiba ADRs have electronic access to material information, including annual reports, financial statements, and press releases, and Toshiba ADRs can be exchanged for legal ownership of Toshiba common stock at any time.6

The Ninth Circuit then analyzed whether the purchase of Toshiba ADRs met the standard laid out in Morrison. Under Morrison, Section 10(b) applies only to (1) "transactions listed on domestic exchanges" and (2) "domestic transactions in other securities."7 The Ninth Circuit first considered Plaintiffs' argument that the over-the-counter markets on which the ADRs were purchased and sold constituted exchanges under the securities laws. In support of this argument, Plaintiffs cited the Second Circuit's decision in Absolute Activist Value Master Fund Limited v. Ficeto,8  however, the Ninth Circuit read Absolute Activist as expressly refusing to take a position regarding whether the first category of Morrison included over-the-counter markets.9

The Ninth Circuit also declined to adopt Toshiba's argument that the term "domestic exchange" in Morrison is the equivalent of "national securities exchange," which is a term of art used in the Exchange Act referring to twenty-one exchanges that are registered with the SEC. The Court nonetheless concluded that the over-the-counter market on which the Toshiba ADRs were traded was not an "exchange" under the Exchange Act.

The Ninth Circuit then analyzed whether the Toshiba ADRs satisfied the second prong of Morrison that Section 10(b) applies to "domestic transactions in other securities." Again, the Ninth Circuit turned to the Second Circuit for guidance and, here, adopted the "irrevocable liability" test articulated in Absolute Activist.10 Absolute Activist provides that in order to sufficiently allege a "domestic transaction in other securities" when seeking relief under the securities laws, plaintiffs must assert that (1) irrevocable liability is incurred in the United States, or (2) title passes within the United States.11 In analyzing the purchases of the Toshiba ADRs, the Court noted that the Complaint alleges that the ADRs were purchased and sold in the United States and the Bank of New York was one of the depositary institutions, however the Court concluded that the Complaint lacked specific allegations regarding where the parties to the transaction incurred irrevocable liability.12 The Court then granted leave to amend, concluding that because plaintiff AIPTF is a United States entity with headquarters and executives in California; the over-the-counter market on which the ADRs were purchased was in the United States; and the four Toshiba ADR depositary institutions' principal executive offices and agents are all in New York, an amended complaint could establish a domestic transaction.13

Finally, the Ninth Circuit rejected Toshiba's argument that the existence of a domestic transaction was necessary, but not sufficient under Morrison. In addressing this argument, the Court considered and then sharply rejected the Second Circuit's approach in Parkcentral Global HUB Ltd v. Porsche Automobile Holdings SE,14 which concluded that in certain cases, the facts may be so predominantly foreign as to render the application of Section 10(b) impermissibly extraterritorial. 


Although Morrison stands for the proposition that Section 10(b) does not apply extraterritorially, what constitutes a domestic transaction continues to be defined and has frequently been expanded by the lower courts. The Ninth Circuit's recent decision in Toshiba suggests that foreign companies may be subject to liability for ADRs traded on domestic over-the-counter markets under certain circumstances. In determining what constitutes a "domestic transaction," the Ninth Circuit adopted the Second and Third Circuit's irrevocable liability test and sharply criticized the Second Circuit's alternate test that examines on a fact-by-fact basis whether a transaction is "predominantly foreign." These varying interpretations of Morrison will likely be the subject of further lower court opinions and may potentially reach the Supreme Court for resolution.


1 ADRs are financial instruments that enable investors in the United States to buy and sell stock in foreign corporations. ADRs are receipts that show evidence of "American Depository Shares" or "ADSs," which are the negotiable certificates. The two terms are used interchangeably. See Toshiba, 2018 WL 3431764 at *4.

2 561 U.S. 247 (2010). For more information on Morrison, please see Arnold & Porter Advisories 
"The Second Circuit Clarifies the US Supreme Court's Ruling on the Extraterritorial Reach of US Securities Laws" and "Second Circuit Addresses Whether Cross-Border Swaps Fall Within the Territorial Jurisdiction of Federal Securities".

3 For more information on Giunta v. Dingman, please see the Advisory, "Second Circuit Reverses Lower Court's Dismissal of Securities Fraud Complaint Under Morrison", which also analyzes the Second Circuit's decisions in Absolute Activist and Parkcentral  that are discussed herein.

4 Toshiba, 2018 WL 3431764 at *2.

5Id.  at *4-5.

6 Id.  at *6.

7 561 U.S.  at 267.

8 677 F.3d 60, 62 (2d Cir. 2012).

9 Toshiba, 2018 WL 3431764 at *10 (citing Absolute Activist, 677 F.3d at 66 n.3).

10 The Court notes that it had "recently indicated approval" of the irrevocable liability test in Securities and Exchange Commission v. World Capital Market, Inc., 864 F.3d 996 (9th Cir. 2017).

11 Toshiba, 2018 WL 3431764 at *11 (citing Absolute Activist, 677 F.3d at 68).

12 Id.  at *12.

13 Id.

14 763 F.3d 198 (2d Cir. 2014).

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