Eight years after the U.S. Supreme Court ruled that the federal securities laws only applied to securities acquired domestically, courts continue to differ over how to apply that “transactional test” to American Depositary Receipts (“ADRs”), tradeable certificates issued by U.S. banks that correspond to shares of foreign stock.
In the latest example, Stoyas, et al. v. Toshiba Corp., the Ninth U.S. Circuit Court of Appeals has ordered a lower court to give purchasers of Toshiba ADRs the opportunity to pursue a case against the Japanese company under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The district judge had dismissed the lawsuit, which involves ADRs acquired on an over-the-counter (“OTC”) market, not ones listed on a stock exchange.
In its July 17 ruling to reverse and remand, the Ninth Circuit said plaintiffs could successfully argue that their ADR purchases met the conditions established by the Supreme Court in its 2010 decision in Morrison v. National Australia Bank Ltd., which found the Exchange Act could only apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” The three-judge panel cited plaintiffs’ claims that the Toshiba ADRs were purchased in the United States by U.S. entities from depositary banks based in New York and stated, “Accordingly, an amended complaint could almost certainly allege sufficient facts to establish that [the plaintiffs] purchased [their] Toshiba ADRs in a domestic transaction.”
The Ninth Circuit opinion explicitly rejected the Second Circuit Appeals Court’s reasoning in Parkcentral Global Hub v. Porsche Automobile Holdings, and in so doing effectively created a different set of standards in the two federal jurisdictions where most traditional securities lawsuits are brought—the Ninth Circuit, which includes California, and the Second Circuit, based in New York. The Ninth Circuit panel put the Stoyas case on hold after Toshiba said it planned to ask the Supreme Court to resolve the split.
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