On January 28, 2020, Judge Dean D. Pregerson of the United States District Court for the Central District of California denied defendant's motion to dismiss a putative securities class action brought against a multinational technology and communications corporation headquartered in Tokyo, Japan, in connection with American Depositary Receipts ("ADRs") which were not sponsored by the foreign issuer and were traded on over-the-counter markets. Stoyas v. Toshiba Corp., No. 15-cv-4194 (C.D. Cal. 2020). The Court had previously dismissed plaintiffs' first amended complaint and denied leave to amend. The Court's dismissal of plaintiffs' claims under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder, was based on the Supreme Court's seminal decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which held that Section 10(b) and SEC Rule 10b-5 only apply to (i) the purchase or sale of a security listed on a U.S. securities exchange, or (ii) the purchase or sale of any other security in the United States. On appeal, the Ninth Circuit reversed and remanded the district court's decision. Although the Ninth Circuit found that the over-the-counter market was not a "domestic exchange" for purposes of Section 10(b), the Ninth Circuit held that a foreign issuer that has no involvement in establishing or selling the ADRs can be subject to Section 10(b) as long as the plaintiff purchased or sold the ADRs in a domestic transaction. The Ninth Circuit concluded that, although the first amended complaint had failed to sufficiently allege a domestic or defendant's connection to the ADR transactions, the district court should have granted leave to amend. We previously covered the district court's opinion, the Ninth Circuit's opinion reversing the district court and the denial of defendant's petition for certiorari to the United States Supreme Court.
In their second amended complaint ("SAC"), plaintiffs continued to assert claims under Section 10(b) and Rule 10b-5 and Japan's Financial Instruments & Exchange Act ("JFIEA"). The SAC accused defendant of "improper accounting over a period of at least six years" that allegedly hid "impairment losses at its U.S. nuclear business" and inflated defendant's after-tax profits by over $2 billion. Following remand from the Ninth Circuit, defendant moved to dismiss the SAC on the basis that plaintiffs failed to allege a domestic transaction and that defendant's conduct was "in connection with" the purchase of the securities at issue, for purposes of Section 10(b) of the Exchange Act. Defendant also argued that considerations of comity and forum non conveniens warranted dismissal.
The Court first assessed whether plaintiffs had pled a domestic transaction in connection with the ADRs. ADRs are negotiable certificates issued by a U.S. depositary institution, typically banks, which represent a beneficial interest in a specified number of shares of a non-U.S. company. The Court noted that the relevant standard was adopted by the Ninth Circuit on appeal, in line with the Second Circuit's decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012). Under that standard, the location of a securities transaction is determined by where irrevocable liability is incurred. In moving to dismiss on this issue, defendant focused on an allegation in the SAC that the ADRs were "issued by" the depositary financial institution. According to defendant, this meant that the ADRs were not purchased in the secondary market in the United States, but rather were issued in return for plaintiff depositing common stock previously purchased in a foreign transaction. The Court noted, however, that this was not expressly alleged in the SAC. Instead, the Court found that the SAC sufficiently pled that the ADRs were purchased in domestic transactions by at least one of the plaintiffs, including based on allegations that: (i) the placement of the buy order, payment of the purchase price, and transfer of title took place in the United States; (ii) plaintiff's investment manager placed the buy order through a broker located in New York, which then purchased the ADRs on the over-the-counter market ("OTC"), using "the OTC Link trading platform," both of which are located in New York; and (iii) the depositary financial institution issued the ADRs from New York, payment was made by plaintiff from a New York-based bank, and transfer of title was recorded at the financial institution in New York. The Court found that all of these factual allegations were relevant to and supported holding that the SAC adequately pled that the ADRs were purchased domestically within the meaning of Morrison.
The Court also declined to dismiss the SAC for failure to plead that the alleged fraudulent conduct was "in connection" with the sale of the securities. On appeal, the Ninth Circuit found that plaintiffs failed to plead this necessary element because they had not "not sufficiently set forth [d]efendant's involvement in the establishment of the ADRs in the United States." The Court found that this defect was remedied in the SAC because it alleged that a New York-based bank held 1.3% of the defendant's outstanding common stock, which would have been an "unlikely" prospect on the "open market without the consent, assistance or participation of [defendant]."
The Court then turned to the issue of comity, which it noted required an assessment of three factors: the strength of the U.S.'s interest, the foreign government's interest, and the adequacy of the alternative forum. Applying these elements, the Court declined to dismiss on comity grounds. It first emphasized that comity concerns are "addressed" and "lessened" where plaintiffs were held to have "sufficiently alleged conduct in connection with a domestic transaction"—because, consistent with Morrison, the U.S. "has a significant interest in regulating conduct that occurs in a domestic securities transaction." The Court also noted that the nationality of plaintiffs and proposed class—all U.S. nationals—further strengthened the U.S. interests at issue. Finding that there were no identified foreign interests to the contrary, the Court concluded that the allegations were sufficient for the "case to move forward in this forum."
Finally, defendant argued that the Court should dismiss plaintiffs' JFIEA claims, but only on the grounds that the Court had previously dismissed those claims on comity and forum non conveniens principles. The Court rejected this argument, finding that the Ninth Circuit had plainly contemplated that the Court reconsider the issue on remand, and accordingly allowed the JFIEA claims to proceed in addition to plaintiffs other claims under the Exchange Act.
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