MARK STOYAS, individually and on behalf of all others similarly situated, Plaintiff, and AUTOMOTIVE INDUSTRIES PENSION TRUST FUND; NEW ENGLAND TEAMSTERS & TRUCKING INDUSTRY PENSION FUND, Plaintiffs-Appellants, v. TOSHIBA CORPORATION, Defendant-Appellee.
No. 16-56058
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
July 17, 2018
D.C. No. 2:15-cv-04194-DDP-JC
FOR PUBLICATION
OPINION
Appeal from the United States District Court for the Central District of California
Dean D. Pregerson, Senior District Judge, Presiding
Argued and Submitted November 9, 2017
Pasadena, California
Filed July 17, 2018
Before: Kim McLane Wardlaw and William A. Fletcher,* Circuit Judges, and Wiley Y. Daniel,** District Judge.
Opinion by Judge Wardlaw
SUMMARY***
Securities Fraud
The panel reversed the district court‘s dismissal and remanded to allow amendment of the complaint in an action in which purchasers of American Depository Shares or Receipts alleged violations of §§ 10(b) and 20(a) of the Securities Exchange Act based on Toshiba Corp.‘s fraudulent accounting practices.
ADRs are financial instruments that enable investors in the United States to buy and sell stock in foreign corporations such as Toshiba, whose common stock is publicly traded on the Tokyo Stock Exchange. The district court concluded that under the test set forth in Morrison v. Nat‘l Australia Bank Ltd., 561 U.S. 247 (2010), the Exchange Act, which does not apply extraterritorially, did not apply to the purchase of Toshiba ADRs because the over-the-counter market by which the Toshiba ADRs were sold was not a “national exchange,” and there was no domestic transaction between the ADR purchasers and Toshiba.
Reversing, the panel declined to resolve the question of whether, under Morrison, the Exchange Act applied to “domestic exchanges” or only “national securities exchanges” because the over-the-counter market was not an “exchange” within the meaning of the Exchange Act. The panel nevertheless concluded that the Exchange Act could apply to the Toshiba ADR transactions, as domestic transactions in securities not registered on an exchange. The panel concluded that Toshiba ADRs were “securities” under the Exchange Act. Adopting the Second and Third Circuits’ “irrevocable liability” test, looking to where purchasers incurred the liability to take and pay for securities, and where sellers incurred the liability to deliver securities, the panel further concluded that plaintiffs must be allowed to amend their complaint to allege that the purchase of Toshiba ADRs on the over-the-counter market was a domestic purchase, and that the alleged fraud was “in connection with” the purchase.
COUNSEL
Susan K. Alexander (argued), San Francisco, California, for Plaintiffs-Appellants.
Christopher M. Curran (argued), Washington, D.C., for Defendants-Appellees.
WARDLAW, Circuit Judge:
In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Supreme Court held that the presumption against extraterritorial applicability of congressional legislation renders the U.S. Securities Exchange Act of 1934 (“the Exchange Act“) applicable to deceptive conduct only in connection with the purchases or sales of any securities registered on a national securities exchange or domestic transactions in other securities not so registered. The Court reasoned that “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Id. at 266. Appellants Automotive Industries Pension Trust
Thus, at the heart of this appeal is the question of the nature of ADRs and their transactions, and whether Toshiba ADRs are covered by the Exchange Act through either registry on a national exchange, or through domestic sales and purchases.
I. FACTUAL AND PROCEDURAL BACKGROUND
In the wake of Toshiba‘s admission of substantial institutional accounting fraud and accompanying restatements of pre-tax profits,1 Mark Stoyas filed this securities fraud class action on June 4, 2015, against Toshiba, its current chief executive officer, and its former chief executive officer based on his ownership of thirty-three Toshiba ADRs and a loss of $180.53. Later, AIPTF became lead plaintiff based on its purchase on March 23, 2015, of 36,000 Toshiba ADRs in the United States on an over-the-counter market run by OTC Markets Group and a loss of $196,913.47.2
The Funds filed the first amended complaint (“FAC“) on December 17, 2015. The FAC added New England Teamsters & Trucking Industry Pension Fund as a named plaintiff; unlike AIPTF, it had purchased 343,000 shares of Toshiba common stock on the Tokyo Stock Exchange.
The FAC alleges three class action claims for relief against Toshiba.3 The first two claims are brought on behalf of a class of all persons who acquired Toshiba ADRs (“ADR class“) between May 8, 2012, and
The second claim alleges violation of
The third claim alleges violation of JFIEA Article 21-2. It is brought on behalf of both the ADR class and a class of “all citizens and residents of the United States who otherwise acquired shares of Toshiba common stock during the Class Period.” Appellants claim that “Toshiba breached its duty to make a reasonable and diligent investigation of the statements” in its financial reports and “to ensure that the statements contained therein were truthful and accurate.” The material false information and omissions artificially inflated the price of Toshiba common stock, and class members were harmed when the value of the stock declined due to the revelation of fraudulent accounting.
The district court dismissed the FAC with prejudice on May 20, 2016. Applying Morrison, the district court held that the over-the-counter market was not a “stock exchange” within the meaning of the Exchange Act, and that the FAC failed to allege Toshiba‘s involvement in the ADR transactions at issue, rendering Section 10(b) inapplicable. Having dismissed the Funds’ Exchange Act claims, the district court dismissed the Japanese law claim on the basis of comity and forum non conveniens. Finding any amendment would be futile, the district court dismissed the case with prejudice. The Funds timely appeal.
II. JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction over the Exchange Act claims pursuant to
We have jurisdiction pursuant to
“We review de novo the district court‘s grant of a motion to dismiss under
Denial of leave to amend is reviewed for abuse of discretion. Airs Aromatics, LLC v. Opinion Victoria‘s Secret Stores Brand Mgmt., Inc., 744 F.3d 595, 598 (9th Cir. 2014). “Dismissal with prejudice and without leave to amend is not appropriate unless it is clear on de novo review that the complaint could not be saved by amendment.” Harris, 682 F.3d at 1331 (quoting Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam)). “A district court‘s failure to consider the relevant factors [set forth in Foman v. Davis, 371 U.S. 178 (1962)] and articulate why dismissal should be with prejudice instead of without prejudice may constitute an abuse of discretion.” Eminence Capital, 316 F.3d at 1052.
III. DISCUSSION
Toshiba‘s common stock is publically traded on the Tokyo Stock Exchange. The Funds’ Exchange Act claims are in connection with Toshiba ADR transactions on the over-the-counter market as opposed to direct purchases of Toshiba common stock. Nevertheless, the Exchange Act applies to Toshiba ADR transactions because Toshiba ADRs are “securities” under the Exchange Act and AIPTF‘s purchase of Toshiba ADRs on the over-the-counter market is a domestic “purchase or sale of ... any security not” registered on a national securities exchange.
A. Toshiba ADRs are “Securities”
The Exchange Act of 1934 applies to “securities,” defined to include “any note, stock, treasury stock, security future, ... transferable share, investment contract, ... any instrument commonly known as a ‘security‘; or any . . . receipt for ... any of the foregoing.”
Toshiba ADRs fit comfortably within the Exchange Act‘s definition of “security,” specifically as “stock.” To constitute “stock” under the Exchange Act, an instrument must possess “some of the significant characteristics typically associated” with common stock: “(i) the right to receive dividends contingent upon an apportionment
ADRs “allow U.S. investors to invest in non-U.S. companies and give non-U.S. companies easier access to U.S. capital markets.” Sec. & Exch. Comm‘n, Office of Inv‘r Education and Advocacy, “Investor Bulletin: American Depository Receipts” at 1 (August 2012) [hereinafter “ADR Bulletin“]; see Waggoner v. Barclays PLC, 875 F.3d 79, 84 n.3 (2d Cir. 2017). Specifically, ADRs are negotiable certificates issued by a United States depositary institution, typically banks, and they represent a beneficial interest in, but not legal title of, a specified number of shares of a non-United States company.5 See Pinker v. Roche Holdings Ltd., 292 F.3d 361, 367 (3d Cir. 2002). The depositary institution itself maintains custody over the foreign company‘s shares.6 Id.; ADR Bulletin at 1. There are four depositary institutions for Toshiba ADRs: Bank of New York Mellon, Citibank N.A., Deutsche Bank Trust Company Americas, and Convergex Depositary, Inc.
Toshiba ADRs are registered with the Securities and Exchange Commission through the filing of Form F-6.7
Toshiba ADRs share many of the five significant characteristics typically associated with common stock. See Landreth Timber, 471 U.S. at 686. First, depositary institutions transfer the dividends they receive on deposited Toshiba common stock to the corresponding Toshiba ADR owner.9 Second, Toshiba ADRs are negotiable: they are traded through U.S. broker-dealers; collectively, the depositary institutions have registered 205 million Toshiba ADRs; Toshiba ADRs are owned “by hundreds of thousands of persons“; and Toshiba ADR holders may split or combine Toshiba ADRs into new instruments as they see fit. Pinker, 292 F.3d at 367 (“ADRs are tradeable in the same manner as any other registered American security.“); In re Hawaii Corp., 829 F.2d 813, 815 (9th Cir. 1987) (defining negotiability). Third, nothing in the Toshiba ADRs restricts pledging or hypothecation. Fourth, each of the four Toshiba ADR depositary institutions is willing to exercise the voting rights associated with the deposited Toshiba common stock as directed by the Toshiba ADR owners. Fifth, Toshiba ADRs have the same “interest ... in the management, profit and assets” of Toshiba as investors in Toshiba common stock, Comm‘r of Internal Revenue v. Scatena, 85 F.2d 729, 732 (9th Cir. 1936), because ADR value is directly linked to the value of Toshiba common stock: Toshiba ADRs decreased in value “in tandem” with the decrease in Toshiba common stock price.10
Accordingly, ADRs are consistently referred to and treated as securities by the parties, depositary institutions, the Securities and Exchange Commission, courts, and scholars. See, e.g., Bank of New York Mellon Corp. v. Comm‘r of Internal Revenue, 801 F.3d 104, 116 (2d Cir. 2015); Reese, 747 F.3d at 563 n.1 (analyzing Exchange Act claim based on purchase of ADRs); Reese v. BP Expl. (Alaska) Inc., 643 F.3d 681, 684-85 (9th Cir. 2011) (same); City of Monroe, 399 F.3d at 655-56 (same); Pinker, 292 F.3d at 367; Compaq Computer Corp. & Subsidiaries v. Comm‘r of Internal Revenue, 277 F.3d 778, 779-80 (5th Cir. 2001); IES Indus., Inc. v. United States, 253 F.3d 350, 351 (8th Cir. 2001);
1991 SEC ADR Release at 24,421 n.5; Nanda et al., American Depository Shares, 2 Litigation of International Disputes in U.S. Courts § 8:38 (April 2018 update); Dickerson et al., Open questions after Morrison—American Depository Receipts, Litigating International Torts in U.S. Courts § 7:7 (August 2017 update); Amendola et al., American Depository Receipt, 18 C.J.S. Corporations § 251 (March 2018 update); Lewkow, American depositary shares, Marans et al., 1 Manual of Foreign Investment in the U.S. § 6:26 (3d ed. & December 2013 update); see also United States v. Martoma, No. 12 CR 973 PGG, 2013 WL 6632676, at *3 n.1 (S.D.N.Y. Dec. 17, 2013) (collecting post-Morrison securities fraud actions that proceeded based on ADRs).11
The Exchange Act of 1934 “anchor[s] federal regulation of vital elements of our economy.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78 (2006) (“The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated.“). Exchange Act Section 10(b) makes it “unlawful for any person, directly or indirectly ... [t]o use or employ ... any manipulative or deceptive device or contrivance in contravention” of Securities and Exchange Commission rules and regulations “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.”
In 1942, the Securities and Exchange Commission promulgated Rule 10b-5 to implement Section 10(b). Sec. & Exch. Comm‘n Release Notice, Release No. 3230, 1942 WL 34443 (May 21, 1942). Rule 10b-5 makes it unlawful for any person, directly or indirectly, . . .
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
Section 10(b) and Rule 10b-5 “may well be the most litigated provisions in the federal securities laws.” Sec. & Exch. Comm‘n v. Nat‘l Sec., Inc., 393 U.S. 453, 465 (1969). However, it was not until 2010 that the Court first addressed whether Section 10(b) and Rule 10b-5 apply extraterritorially. Morrison, 561 U.S. at 265.
In Morrison, three Australian individuals sought to bring Exchange Act securities fraud claims in the Southern District of New York against National Australia Bank Limited (“Australia Bank“), then the largest bank in Australia. Id. at 251-53. One of Australia Bank‘s subsidiaries, headquartered in Florida, and its executives had allegedly engaged in deceptive conduct and publically made misleading statements, which were repeated
Analyzing the text of Section 10(b), the Court found “no affirmative indication” that it applied extraterritorially. Id. at 265; see also id. at 262 (“On its face, § 10(b) contains nothing to suggest it applies abroad.“). Unless Congress “clearly expressed” its “affirmative intention” of extraterritorial effect “we must presume it is primarily concerned with domestic conditions.” Id. at 255 (quotation omitted). Therefore, the Court held that Section 10(b) does not apply extraterritorially. Id. at 265.
To define what constitutes the permissible, non-extraterritorial application of Section 10(b) and Rule 10b-5, the Court articulated a transactional test rooted in the text of Section 10(b). Id. at 266-70 & 267 n.9; see also id. at 261-62 (“Rule 10b-5... was promulgated under § 10(b), and does not extend beyond conduct encompassed by § 10(b)‘s prohibition.” (quotation omitted)). Section 10(b) focuses “not upon the place where deception originated, but upon purchases and sales of securities in the United States.” Id. at 266. In other words, “Section 10(b) does not punish deceptive conduct, but only deceptive conduct ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.‘” Id. (quoting Section 10(b),
The Court drew a line delineating categories of transactions Congress sought to regulate and parties whom Congress sought to protect: in its view, Section 10(b) applies to “only transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” Id. at 267. The transactional test the Morrison Court adopted—whether the purchase or sale (1) involves a security listed on a domestic exchange or (2) takes place in the United States—avoided “the interference with foreign securities regulation” that application of the Exchange Act to foreign transactions would produce. Id. at 269.
Thus, the Court squarely held that the Exchange Act did not apply where Australia Bank‘s shares were not listed on a United States exchange and “all aspects of the purchases” took place outside the United States, even though a subsidiary of Australia Bank and its executives “engaged in the deceptive conduct” in the United States. Id. at 252-53, 273. Deceptive domestic conduct or the presence of other, non-transactional domestic activity cannot substitute for Morrison‘s requirement of a security‘s presence on a domestic exchange or of a security‘s domestic transaction. As the Court reasoned, “it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.” Id. at 266.
The Court derived its first category of transactions to which
Facially, the terms are distinct: “national security exchange” is a term of art referring to a subset of “exchanges” that are registered with the Securities and Exchange Commission and that abide by the requirements set out in
Toshiba urges us to eliminate any discrepancy by reading the term “domestic exchange” as used in Morrison as the equivalent of “national securities exchange.” But Toshiba incorrectly characterizes Morrison‘s discussion of “domestic exchange” as mere shorthand for what Toshiba believes the Court must have meant to write—national securities exchange. The Court uses the term “domestic exchange” interchangeably both when defining the first category of transactions to which
We need not and do not resolve this argument, although from our reading the Funds have the better of it. The over-the-counter market on which Toshiba ADRs trade is simply not an “exchange” under the Exchange Act.
The Exchange Act defines “exchange” as
any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise
performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.
Toshiba ADRs trade on OTC Link,15 an over-the-counter market operated by OTC Markets Group.16 Since May 2012, OTC Link has registered with the Securities and Exchange Commission as a “broker-dealer” alternative trading system.17
As an alternative trading system, OTC Link is separately regulated by the Securities and Exchange Commission and is specifically exempt from the Exchange Act‘s definition of “exchange.” See
The Funds present the Exchange Act‘s definition of “exchange” but do not respond to Toshiba‘s argument that OTC Link is an alternative trading system, not an exchange. Instead, they urge us to follow Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), in which the Second Circuit noted that in Ficeto the Securities and Exchange Commission “successfully argued that the first prong of Morrison is satisfied because the case involves securities traded on the over-the-counter securities market, not securities sold on foreign exchanges.” Id. at 66 n.3 (citing Ficeto, 839 F. Supp. 2d at 1112). As Absolute Activist expressly took no position on whether Morrison‘s first category included over-the-counter markets, the Funds are actually asking us to adopt Ficeto. See id. at 66 (“The case at hand does not concern the first prong of Morrison.“). But Ficeto‘s analysis failed to consider whether over-the-counter market trades fell within Morrison‘s second category of regulated transactions, and incorrectly assumed that over-the-counter market trades must be regulated, if at all, only if they come within Morrison‘s first category.
The Funds also urge us to follow the Eleventh Circuit‘s decision in United States v. Isaacson, 752 F.3d 1291 (11th Cir. 2014), which they argue had “no trouble” holding that over-the-counter markets such as OTC Link are “exchanges.” But Isaacson‘s brief discussion of Morrison actually had “no trouble” concluding that the criminal conduct at issue satisfied Morrison‘s requirement of a U.S. nexus. Isaacson, 752 F.3d at 1299. Isaacson mentioned expert testimony explaining that over-the-counter “exchanges were ‘similar to’ the New York Stock Exchange and NASDAQ, but did not state that such evidence established that they were domestic exchanges under Morrison. Instead, after citing evidence supporting the inference that the securities at issue were purchased in the United States, Isaacson concluded that Morrison‘s requirements were satisfied. Isaacson, 752 F.3d at 1299. As discussed below, we agree with Isaacson and the Funds that the Exchange Act regulates over-the-counter markets, but nothing in Isaacson convinces us that OTC Link is an “exchange” under the Exchange Act.
2. “Or any Security not so Regulated”
The Court‘s second category of transactions reached by
Cases since Morrison have articulated an “irrevocable liability” test to determine when a securities transaction is domestic. The test originated in the Second Circuit‘s decision in Absolute Activist, which held that “a securities transaction occurs when the parties incur irrevocable liability.” Absolute Activist, 677 F.3d at 67. Because irrevocable liability determines the timing of a transaction, it also determines the location: a plaintiff must plausibly allege “that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security.” Id. at 68. The Second Circuit also found an alternative means of alleging a domestic transaction: alleging that title to the shares was transferred within the U.S. Id. (citing Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, 1310–11 (11th Cir. 2011) (reversing dismissal under Morrison when the complaint alleged domestic transfer of title)). The Second Circuit detailed factual allegations in a complaint that could sufficiently allege a domestic transaction: “facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.” Id. at 70. The irrevocable liability test has been adopted by the Third Circuit.19 See Georgiou, 777 F.3d at 137.
We 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). There, we cited Absolute Activist and the irrevocable liability rule as support for holding that, where “the undisputed evidence . . . shows that far more than $5 million in investor transactions took place in the United States,” the district court properly rejected the argument that application of the Exchange Act was impermissibly extraterritorial. Id. at 1008. While we avoided explicitly adopting the test, we deemed Absolute Activist “instructive.” Id. at 1008 n.11 (“We have yet to address what constitutes a domestic transaction under Morrison.“). Consistent with World Capital Market and the irrevocable liability test, in Securities and Exchange Commission v. Levine, 462 F. App‘x 717 (9th Cir. 2011), we held that the Securities Act governed particular transactions “because the actual sales closed in Nevada when [the individual] received complete stock purchase agreements and payments.” Id. at 719 (citing Morrison); see Morrison, 561 U.S. at 268-69 (indicating that the Exchange Act extraterritoriality analysis applies to the Securities Act). And in Securities and Exchange Commission v. Fujinaga, 696 F. App‘x 203 (9th Cir. 2017), we held that the Exchange Act applied because the “sales of securities were ‘made’ in the United States.” Id. at 206 (citing Morrison, 561 U.S. at 269–70). We elaborated that “to complete an investment, investors’ funds were wired to [a] United States bank account, their paperwork was forwarded to [an] office in Nevada,” which “issued the Certificate of Investment.” Id.
We are persuaded by the Second and Third Circuits’ analysis and therefore adopt the irrevocable liability test to determine whether the securities were the subject of a domestic transaction. Looking to where purchasers incurred the liability to take and pay for securities, and where sellers incurred the liability to deliver securities, Absolute Activist, 677 F.3d at 68, hews to
As Toshiba acknowledges, the FAC alleges that AIPTF‘s Toshiba ADRs were purchased in the United States. The FAC also alleges that Bank of New York, one of the depositary institutions, sold Toshiba ADRs in the United States. Missing from the FAC, however, are specific factual allegations regarding where the parties to the transaction incurred irrevocable liability. Cf. In re Petrobras Sec., 862 F.3d at 263, 273 (identifying the relevant facts as including who sold the relevant securities and how those transactions were effectuated, as evidenced by documentation such as confirmation slips). But AIPTF is a United States entity; its executives direct, control, and coordinate its activities in the United States; and its headquarters are in Alameda, California. OTC Markets Group operates OTC Link in the United States. And the four Toshiba ADR depositary institutions’ principal executive offices, agents for service, and offices where ADR holders can exchange their ADRs for Toshiba common shares are all in New York. Accordingly, an amended complaint could almost certainly allege sufficient facts to establish that AIPTF purchased its Toshiba ADRs in a domestic transaction.20 See Morrison, 251 U.S. at 273 & 251 n.1 (indicating that at least some aspects of an ADR transaction for an ADR listed on the New York Stock Exchange occur in the United States).
Rather than challenging whether the transactions were domestic, Toshiba argues that the existence of a domestic transaction is necessary but not sufficient under Morrison, relying on the Second Circuit case Parkcentral Global Hub v. Porsche Automobile Holdings, 763 F.3d 198 (2d Cir. 2014). Specifically, Toshiba argues that because the Funds did not allege any connection between Toshiba and the Toshiba ADR transactions, Morrison precludes the Funds’ Exchange Act claims. But this turns Morrison and
Parkcentral is distinguishable on many grounds.21 First, Parkcentral did not involve ADRs but instead involved “securities-based swap agreements.” Parkcentral, 763 F.3d at 205. Unlike ADRs, those entirely private agreements do not constitute investments in the company on whose securities they are based nor do they confer any ownership interest in those reference securities. Id. at 205-07. Furthermore, the swap agreements’ value is wholly unconstrained by the amount of reference security available and is not directly pegged to the value of the reference security. Id. at 205–07 & 206 n.8. Second, the private swap agreements are not traded on Securities and Exchange Commission-regulated platforms, systems, or exchanges. Id. at 207. Third, the reference securities in the company at issue, Volkswagen, were traded entirely on foreign exchanges, implicating concerns that incompatible U.S. and foreign law would almost certainly regulate the same security. Id. at 207, 215–17. Fourth, there was no allegation that Volkswagen knew about or facilitated the swap agreements. Id. at 207, 215.
But the principal reason that we should not follow the Parkcentral decision is because it is contrary to
C. The Sufficiency of the Funds’ Exchange Act Allegations
Toshiba argues forcefully that applying the Exchange Act to these unsponsored ADRs would undermine Morrison‘s animating comity concerns. Nevertheless, that is not a basis for declining to follow the Court‘s clear instructions in Morrison. And it may very well be that the Morrison test in some cases will result in the Exchange Act‘s application to claims of manipulation of share value from afar.
Toshiba‘s argument, however, is directly relevant to whether the Funds have sufficiently alleged an Exchange Act claim.23 Morrison delineates the transactions to which the Exchange Act can theoretically apply without being impermissibly extraterritorial, but while applicability is necessary,
First and foremost, sufficiently pleading Toshiba‘s connection to the ADR transactions requires clearly setting forth the transactions. However, the FAC omits basic details about ADRs. It also fails to include factual allegations regarding the over-the-counter market on which Toshiba ADRs are listed, whether Toshiba ADRs are sponsored, the depositary institutions that offer Toshiba ADRs, the Form F-6‘s they used to register the Toshiba ADRs, the trading volume of Toshiba ADRs, and the Toshiba ADRs’ contractual terms (along with relevant variants between depositary institutions). And it lacks detail regarding AIPTF‘s purchase of the Toshiba ADRs, including how the purchase was made and which particular depositary institution holds the corresponding Toshiba common stock. Instead, the FAC erroneously ignores the distinction between ADRs and common stock, alleging simply that AIPTF “acquired Toshiba common stock during the Class Period through the purchase on March 23, 2015 of 36,000 shares of [Toshiba ADRs] in the United States,” that OTC Link is a “highly efficient and automated market,” and that “shares of Toshiba common stock and [ADRs] are owned by hundreds of thousands of persons.”
Second, before the district court and on appeal, the Funds argued that “it is likely that Toshiba was indeed involved in the establishment” of the ADRs. In support, the Funds rely on (1) a letter sent by Deutsche Bank (one of the Toshiba ADR depositary institutions) to the Securities and Exchange Commission during ADR rulemaking in 2008 stating that “in practice, depositary banks typically obtain the issuer‘s consent before establishing an unsponsored ADR facility,” 2008 SEC ADR Rulemaking at 52,762 n.113; (2) a Paul, Weiss memorandum about the 2008 rulemaking which states that depositary issuers of unsponsored ADRs “typically request[] a letter of non-objection” from the foreign company; and (3) the fact that Toshiba made it possible for depositary
Third and finally, the FAC alleges that Bank of New York Mellon is one of Toshiba‘s largest ten shareholders and that during the Class Period institutional investors in the United States owned “at least 485 million shares of Toshiba common stock, representing more than 11% of the Company‘s outstanding shares.” Absent from the FAC, however, is the Funds’ assertion at oral argument that Bank of New York Mellon is unlikely to have acquired over fifty million Toshiba shares without Toshiba‘s involvement. Oral Arg. at 27:36–28:30 (Nov. 9, 2017), https://tinyurl.com/ydfsrvyw.
IV. CONCLUSION
The district court misapplied Morrison. And, without significant analysis, it concluded that leave to amend would be futile. It therefore dismissed the Funds’ case with prejudice. For the reasons discussed above, we believe the FAC does not sufficiently allege a domestic violation of the Exchange Act, but that allowing leave to amend would not be futile. Therefore, we reverse and remand to allow the Funds to amend their complaint. See Doe I v. Nestle USA, Inc., 766 F.3d 1013, 1028 (9th Cir. 2014).25
REVERSED; REMANDED.