Auto Ind. Pension Trust Fund v. Toshiba Corp.
896 F.3d 933
| 9th Cir. | 2018Background
- Plaintiffs (AIPTF and New England Teamsters) sued Toshiba and officers after Toshiba admitted a multi-year accounting fraud that caused major declines in Toshiba common stock and ADRs; plaintiffs bought Toshiba ADRs (OTC market) and some common stock (Tokyo).
- Claims: Section 10(b)/Rule 10b-5 (for ADR purchasers), Section 20(a) (control-person), and violation of Japan’s JFIEA Article 21-2 (for ADR and common-stock purchasers).
- District court dismissed with prejudice under Morrison, reasoning OTC-traded ADRs were not securities “registered on a national securities exchange” and the FAC failed to allege domestic transactions by Toshiba; Japanese-law claim dismissed on comity/forum non conveniens grounds.
- On appeal the Ninth Circuit held ADRs are securities under the Exchange Act and adopted the “irrevocable liability” test to determine whether a transaction is domestic for Morrison’s second prong.
- The court concluded the FAC failed to plead sufficient facts tying Toshiba to the domestic ADR transactions or showing where irrevocable liability was incurred, but amendment would likely cure defects; reversed and remanded for leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are ADRs "securities" under the Exchange Act? | ADRs are depository receipts evidencing beneficial ownership and have economic characteristics of stock; thus fall within Exchange Act’s definition. | Toshiba argued ADRs are merely placeholders for foreign shares and not within the Act’s domestic focus. | Held: ADRs are securities (specifically stock/receipts) under the Exchange Act. |
| Does Morrison’s first prong cover OTC markets (are OTC ADRs "listed on a domestic exchange")? | Funds urged OTC-traded ADRs fall within Morrison’s reach. | Toshiba argued OTC Link is not a national securities exchange (it's an ATS) and thus not covered. | Held: OTC Link is an alternative trading system, not a national securities exchange; Morrison’s "listed on a domestic exchange" prong does not reach OTC Link. |
| Can ADR purchases constitute a "domestic transaction" under Morrison’s second prong? (what test applies) | Plaintiffs argued their purchases were made in the U.S. and thus domestic. | Toshiba contended Morrison requires more—connection between defendant and the domestic transaction—and that the FAC lacked facts showing domestic consummation. | Held: Adopted the irrevocable liability test (where purchaser/seller incurred irrevocable liability or title passed) to determine domesticity; FAC lacked sufficient facts but could be amended. |
| Did the FAC plead a sufficient "connection" between Toshiba’s misrepresentations and the ADR purchases ("in connection with")? | Plaintiffs asserted Toshiba’s fraud inflated ADR prices and harmed ADR purchasers. | Toshiba argued FAC failed to allege how Toshiba was involved in the ADR market, depositary arrangements, or that Toshiba’s conduct touched the particular ADR purchases. | Held: FAC did not plead the required factual nexus (contract terms, how purchases were made, which depositary, where liability arose); dismissal with prejudice was improper—remand with leave to amend. |
Key Cases Cited
- Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) (Exchange Act applies only to securities listed on domestic exchanges or domestic transactions)
- Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985) (factors defining "stock" for securities-law purposes)
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (investment contract test; broad meaning of "security")
- Reves v. Ernst & Young, 494 U.S. 56 (1990) (Congress intended broad scope of securities regulation)
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (2006) (Exchange Act’s remedial reach and scope)
- Stoneridge Inv. Partners v. Scientific-Atlanta, 552 U.S. 148 (2008) (requirement that misrepresentation be ‘‘in connection with’’ a securities transaction)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (irrevocable liability test for domestic transactions)
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (deference to agency interpretations when statutory delegation exists)