CLASS CERTIFICATION DENIED FOR CLASS OF PURCHASERS OF UNSPONSORED ADRs

On January 25, 2022, Judge Dean Pregerson of the Central District of California issued a decision denying class certification in the case Stoyas v. Toshiba, 2:15-cv-04194-DDP-JC, 2022 WL 220920 (C.D. Cal. Jan. 25, 2022). The decision hinged on whether the plaintiffs had purchased Toshiba securities in the United States, and thus satisfied the typicality requirements for class certification. Judge Pregerson ultimately determined that the Toshiba securities were not purchased in the United States, and therefore the plaintiffs had not satisfied their typicality requirements. 

The suit was filed against Toshiba on June 4, 2016, alleging violations of the U.S. Securities Exchange Act of 1935 (the “Exchange Act”) and the Financial Instruments & Exchange of Japan (“JFIEA”) in connection with allegations of accounting fraud and misrepresentations by Toshiba. The Automotive Industries Pension Trust Fund (“AIPTF”) was appointed lead plaintiff and New England Teamsters & Trucking Industry Pension Fund (“NETTPF”) joined as a named plaintiff. 

According to the decision, AIPTF purchased 36,000 shares of unsponsored Toshiba American Depository Receipts (“ADRs”) on March 23, 2015 through transactions on the over-the-counter market in the United States. Unsponsored ADRs are implemented by a U.S. depository bank without the cooperation of the issuing foreign company. Through AIPTF’s transactions, it acquired an ownership interest in 216,000 shares of common stock issued by Toshiba. NETTPF purchased 343,000 shares of Toshiba’s common stock in transactions taking place between April 1, 2015 and October 27, 2015. The plaintiffs alleged that they employed the services of professional investment managers to direct the purchase and sale of the relevant securities. 

Plaintiffs moved for certification of a class of securities purchasers who purchased securities listed under the symbols TOSYY or TOSBF between May 8, 2012 and November 12, 2015 using over-the-counter markets (i.e. purchasers of ADRs) and all citizens and residents of the United States who purchased shares of Toshiba common stock between May 8, 2012 and November 12, 2015. 

The defendants opposed certification of the class arguing, among other things, that AIPTF had not satisfied the typicality requirement of Federal Rule of Civil Procedure 23(a). The thrust of defendants’ argument was that AIPTF could not satisfy the typicality requirement with respect to its Exchange Act claims because AIPTF did not acquire Toshiba securities in the United States as required by the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). The defendants argued that AIPTF actually purchased its Toshiba shares as common stock in Japan, and therefore the transaction was outside the scope of the Exchange Act. 

The key question before the court was whether plaintiff incurred irrevocable liability to take and pay for the securities in the United States as opposed to in Japan. Plaintiffs, of course, argued that irrevocable liability occurred in the United States when its investment manager’s broker executed its order for Toshiba ADRs. The court rejected this argument, instead looking to the process by which ADRs are created. According to the court, the ability to acquire an ADR is dependent on the purchase of underlying shares of common stock that are then be converted to ADRs. Only once the irrevocable liability had occurred for the purchase of the common stock, could an ADR then be created for plaintiff. Essentially, because the common stock underlying the ADR was purchased on a foreign exchange, the entire transaction was a foreign transaction and not covered by the Exchange Act. On these grounds, the court denied plaintiffs’ motion for certification of the ADR class. 

This decision highlights the importance of understanding the type of security transaction at issue when determining whether a client has standing to bring Exchange Act claims involving foreign issuers.