Institutional investors in the U.S. may have lost their ability to sue foreign stock issuers in U.S. courts after a pivotal 2010 Supreme Court decision, but they are finding some success with American depository receipts, and a case now up for Supreme Court review could potentially expand their legal recovery options well beyond ADRs.
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Things got more interesting when the 9th U.S. Circuit Court of Appeals in San Francisco reinstated a case brought by purchasers of unsponsored Toshiba Corp. ADRs not related to the company but instead issued by banks and sold on over-the-counter markets. In its July 2018 order to reverse and remand the case led at this point by its plaintiffs, the $1.2 billion Automotive Industries Pension Trust Fund and the $2.9 billion New England Teamsters & Trucking Industry Pension Fund, the 9th Circuit said the ADR purchases met the conditions set by the Morrison decision, and that the Exchange Act could only apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”
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The repercussion of letting the 9th Circuit prevail will go far beyond the $12 billion market in unsponsored ADRs and negatively impact the multitrillion-dollar derivatives market as well, warned the U.S. Chamber of Commerce’s brief, while the Securities Industry and Financial Markets Association and its European counterparts, as well as officials from Japan and the U.K., warned that it would seriously harm worldwide securities markets and put the U.S. in direct conflict with foreign jurisdictions.
“The issuer community is really looking at the implications of the Toshiba case beyond just its impact on ADRs,” said Daniel S. Sommers, partner with the Cohen Milstein Sellers & Toll PLLC law firm in Washington, who views the appellate ruling in Toshiba as legally sound and “fully faithful to the Supreme Court's bright line approach in Morrison.”
He cautions that the high court might take a pass on the case in part because the 2nd Circuit's Porsche opinion upon which Toshiba relies “is extremely fact-bound” and specific to that case, he said.
If the Supreme Court hears the case and favors the 2nd Circuit's approach in Porsche, “there will be a much more narrow view of the kinds of securities cases that can take place here in the U.S.,” Mr. Sommers said.
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