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."
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