A lawsuit claiming fraud in the packaging of Toshiba Corporation’s American Depositary Receipts (ADRs) may get yet another review by the Ninth Circuit regarding the question of whether the acquisition of Toshiba’s ADRs was a foreign event that failed to meet the criteria for domestic transactions established in the Supreme Court’s Morrison opinion. Two automotive unions have asked the Ninth Circuit to grant their petition for permission to appeal under FRCP 23(f), which confers on the appellate court discretion to hear an appeal from a district court order granting or denying class-action certification. The question is whether irrevocable liability for the ADRs occurred in the U.S. or in Japan where the Toshiba shares underlying the ADRs were purchased by investment professionals facilitating the ADR transaction and on precisely what roles were being played by those multiple layers of investment professionals (Stoyas v. Toshiba Corporation, January 21, 2022 (petition); Stoyas v. Toshiba Corporation, January 31, 2022 (opposition)).
Typicality. The district court’s order denying class certification on typicality grounds described the scenario in which plaintiff Automotive Industries Pension Trust Fund (AIPTF) acquired its unsponsored Toshiba ADRs: AIPTF hired ClearBridge Advisors LLC, which in turn worked with Barclays Capital LE (based in New York), which used OTC Link to purchase the ADRs. More specifically, the court explained that Barclays traders in New York and Japan executed the purchase of Toshiba’s common stock, a precursor event for conversion of those shares into ADRs.
In its class certification order, the district court emphasized Toshiba’s argument that AIPTF was an atypical plaintiff because the shares underlying its ADRs were purchased on a Japanese exchange. AITPF had argued that under prevailing practice under the Supreme Court’s Morrison opinion, the key question was whether there was a domestic transaction (no U.S. exchange was involved regarding the Toshiba ADRs) and whether that transaction resulted in irrevocable liability in the U.S. According to AITPF, irrevocable liability attached at the time ClearBridge could no longer cancel the order for Toshiba ADRs. Toshiba countered that the key event was the purchase by Barclays of Toshiba stock in Japan and, thus, there was no domestic transaction in the U.S.
The district court’s order rejected the notion that Barclays may have acted as a riskless principal in acquiring Toshiba stock because the manner in which Barclays acted can function as a substitute for an agency transaction (i.e., Barclays knew in advance that ClearBridge would go through with the purchase of Toshiba ADRs). In the court’s view, AITPF incurred irrevocable liability in Japan. A series of quotes from the district court, one from the main text, and one from a related footnote further explain the court’s reasoning:
- From the main text of the opinion: “Thus, the triggering event that caused ClearBridge (and by extension, AIPTF) to incur irrevocable liability occurred in Japan when Barclays acquired the shares of Toshiba common stock on the Tokyo Stock Exchange.”
- From the footnote to the above quoted text: The court began by noting that the Ninth Circuit in an earlier appeal in the case had held that an Exchange Act suit may be brought for unsponsored ADRs if irrevocable liability was incurred in the U.S. The court ended the footnote by concluding: “Although Stoyas [the prior appeal in the case] appears to provide for the possibility that a purchaser might acquire unsponsored ADRs in a domestic transaction, the undisputed evidence here demonstrates that the underlying shares of Toshiba common stock were purchased in Japan, on the Tokyo Stock Exchange, prior to conversion. Notably, moreover, Plaintiffs have not identified a single case where the purchase or sale of unsponsored ADRs constituted or qualified as a domestic transaction” (emphasis in original).
AIPTF suggested that the district court’s reasoning could have far ranging consequences. Said AIPTF: “Taken to its logical conclusion the district court’s reasoning would mean that all transactions in newly-issued ADRs (whether sponsored or not) are ‘foreign’ due to their origination via ‘triggering events’ in another country, removing them from the Exchange Act’s strictures.”
AIPTF said the district court’s analysis amounted to a manifest error of class action law, a point Toshiba disputed with equally vigor. In its opposition to AIPTF’s petition, Toshiba characterized the district court’s analysis as an evidentiary finding rather than a conclusion of law and, thus, inappropriate for interlocutory appeal. Toshiba also argued that the district court’s mention of a “triggering event” was nothing more than the court’s “natural-language description of the evidence showing that AIPTF became irrevocably liable” and was not the addition of a “new” Morrison requirement.
Toshiba also disputed AIPTF’s characterization of the potential consequences of the district court’s order. Said Toshiba: “Sponsored ADRs trading on U.S. exchanges automatically satisfy Morrison. And Plaintiffs conceded below that, unlike AIPTF, other purchasers of ADRs, sponsored or unsponsored, could have purchased on the secondary market in the United States or created newly issued ADRs through conversion of Toshiba common stock already present in the United States.”
The case is No. 22-80001 (petition) and Toshiba Opposition.