One of the enduring questions following in the wake of the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank is whether transactions in a non-U.S. company’s unsponsored Level I American Depository Receipts (ADRs) can be the subject of a damages action under the U.S. Securities laws. As I noted in a blog post at the time (here), a prior federal district court decision in the long-running Toshiba securities class action lawsuit established that a non-U.S. company whose Level I ADRs trade in the U.S. can be the subject of a U.S. securities suit – even if the ADRs are unsponsored. However, a recent decision at the class certification stage in the same Toshiba case suggests that while claimants may well be able to plead a claim based on trading in unsponsored Level I ADRs, the claimants may or may not be able to sustain the claim as a class action – or, at a minimum, the question of whether the claim can go forward as a class action can depend on minute details about how the named plaintiffs’ ADR transactions actually took place.



Toshiba is based in Japan. Its common shares trades on the Tokyo stock exchange. Toshiba has unsponsored Level I ADRs trading in the U.S. (meaning that Toshiba ADRs were set up in the U.S. by a depositary bank, without Toshiba’s involvement). After Toshiba was ensnared in an accounting scandal, it was hit with a U.S. securities class action lawsuit.  The complaints in the securities lawsuit asserted claims both under U.S. and Japanese securities laws. The district court dismissed the lawsuit, holding among other things the OTC (where the Toshiba ADRs trade) is not a national exchange and there was no securities transaction in the U.S. between Toshiba and the ADR investors. The district court also declined to hear the claims under the Japanese securities laws in light of principles of comity.


The plaintiffs in the Toshiba lawsuit appealed to the Ninth Circuit, which reversed the lower court’s ruling. The appellate court considered the case in light of the U.S. Supreme Court’s 2010 holding in Morrison v. National Australia Bank, which held that the U.S. securities laws apply to “transactions on a national securities exchange” (the first prong) and to “domestic transactions in other securities” (the second prong). While the appellate court agreed that the OTC is not a national exchange (and therefore the plaintiffs’ claims did not meet the first prong of the Morrison standard), the question was whether or not the U.S. trading in the ADRs is a “domestic transaction in other securities” under Morrison’s second prong.


The Ninth Circuit adopted the Second Circuit’s standard in the Absolute Activist Investor case providing that a transaction is “domestic” if “irrevocable liability” is incurred in the U.S.  The Ninth Circuit remanded the case back to the district court to allow the plaintiffs the opportunity to plead that irrevocable liability was established in U.S. sufficiently to permit a determination that the Toshiba ADR transactions involved domestic transactions in other securities under the Morrison test. The U.S. Supreme Court denied the defendants’ petition for a writ of certiorari and the case returned to the district court for further proceedings.


On remand to the district court, the plaintiffs filed a second amended consolidated complaint seeking to establish that their ADR transaction were sufficiently domestic. The defendants renewed their motion to dismiss, arguing that the plaintiffs had failed to allege a domestic transaction and that the plaintiffs had failed to allege that the defendants’ allegedly wrongful conduct was “in connection with” the plaintiff’s purchase of the ADRs.


As discussed in detail here, on January 20, 2020, Central District of California Judge Dean Pregerson denied the defendants’ renewed motion to dismiss.  Judge Pregerson first concluded that the plaintiffs’ amended complaint sufficiently alleged that their purchase of ADR securities was a domestic transaction, because the plaintiffs had pled sufficient allegations to support the conclusion that “irrevocable liability” for the securities transaction had taken place in the U.S.  Among other things, the plaintiffs had alleged that location of the broker, the tasks carried out by the broker, the placement of the purchase order, the passing of title, and the payment were all in or had all taken place in the U.S., all of which Judge Pregerson said were relevant to the domestic transaction inquiry.


The defendants had tried to argue that the nature of the transaction was that the investors had first purchased the underlying foreign-traded securities and then the depositary institution had “converted” the ownership of the shares into unsponsored ADR. Judge Pregerson declined to consider this allegation, saying that it would require him to disregard the plaintiffs’ allegations (which he could not do at the motion to dismiss stage), but noting that the defendants could if they chose to do so raise the arguments again at a later stage in the proceedings.


The plaintiffs subsequently filed a motion for class certification. The plaintiffs sought to have two classes certified. The plaintiffs had first sought to have a class of “American Securities Purchasers” certified, representing all persons who had purchased securities using the facilities of the OTC Market; and, separate, the plaintiffs had sought to have a class certified that consisted of all U.S. citizens and residents who purchased shares of Toshiba 6502 common stock, referred to as “6502 Purchasers.”


Defendants opposed the motion, arguing that because of the specific details of how the named plaintiffs had acquired their ADRs, the named plaintiffs’ claims were not typical of the class the purported class the plaintiffs’ claims failed to meet the “typicality” requirement that is one of the prerequisites for class certification.


The January 7, 2022 Order

In a January 7, 2022 order (here), Judge Pregerson denied the plaintiffs’ motion for class certification. In his order, Judge Pregerson separately addressed each of the two classes that the plaintiffs had sought to have certified. Judge Pregerson declined to certify a class with respect to the American Securities Purchasers because the lead plaintiffs’ claims were not typical as the lead plaintiff had not purchased its ADRs in a domestic transaction. Judge Pregerson declined to certify a class as to the 6502 Purchasers because the question of whether the named plaintiffs had sufficient standing to assert claims under Japanese law was a question more suitable for consideration on a motion for summary judgment rather than in a motion for class certification.


In rejecting the plaintiffs’ motion with respect to the proposed American Securities Purchasers class, Judge Pregerson noted that the plaintiffs had “ascribed little importance to the first step of the ADR conversion process: the purchase of Toshiba common stock.” The specific steps involved in the name plaintiffs’ ADR transaction showed that the ADR purchase, through a U.S-based brokerage, was “contingent upon the purchase of the underlying shares of common stock that could be converted into ADRs.” The common stock purchase had taken place in Japan, when the securities traders had acquired common stock on the Tokyo Stock Exchange.


Judge Pregerson reasoned that the traders had purchased the Toshiba common stock in Japan specifically for the plaintiffs’ ADR transaction; had there been no ADR transaction, the traders would not have advanced monies to acquire the common stock shares. According, the moment that the traders completed the Tokyo Stock Exchange purchase, the plaintiffs “became logically and legally bound to perform its contractual obligations” to buy the ADRs, even if the common shares had not yet been converted to ADRs. The plaintiffs therefore “incurred irrevocable liability” for the ADRs when the common stock was purchased in Japan, and, accordingly, the transaction was not “domestic” as required under Morrison’s second prong.


Judge Pregerson’s rejection of the proposed class with respect to the plaintiffs’ claims involved questions of whether or not the plaintiffs had adequate standing to assert the claims and whether or not the plaintiffs were appropriately asserting all of the claims potentially available under Japanese law. These claims depended on underlying facts, as well as Japanese legal issues, that Judge Pregerson said were more appropriately dealt with in a summary judgment motion; accordingly, he denied the plaintiffs’ motion to certify the class of 6502 Purchasers without prejudice.



The plaintiffs in this long-running lawsuit (it was first filed in 2015) are in a precarious predicament. The district court has declined to certify a class concerning their U.S. securities law claim, and they have at best only an argumentative basis for the ability to try to certify a class as to their Japanese securities law claims. What happens next remains to be seen, but the plaintiffs may seek to have Judge Pregerson’s denial of class certification taken up by the Ninth Circuit. Judge Pregerson may decline to certify an interlocutory appeal until the Japanese law claims summary judgment and class certification issues have been resolved, so that the appellate court can consider all the issues at once.


Judge Pregerson’s rulings with respect to the plaintiffs’ U.S. ADR claims do raise the issue of where things stand with respect to other prospective plaintiffs’ ability to assert and to sustain claims based on transactions in unsponsored Level I ADRs.


It does seem based on Judge Pregerson’s prior rulings in the Toshiba case that there are no absolute prohibitions on claimants seeking to assert U.S. securities law claims based on transactions in unsponsored Level I ADRs. However, Judge Pregerson’s rulings in the Toshiba case at the class certification stage suggest that while prospective claimants may be able to plead U.S. securities law claims based on transactions in unsponsored Level I ADRs, the claimants may or may not be able to sustain those claims, based on the specific details surrounding the claimants’ transactions and where the various components of the transaction took place.


In that regard, it is important to note that Judge Pregerson did not hold that a class of purchasers of unsponsored Level I ADRs could never be certified. Judge Pregerson specifically noted the “possibility” that based on different facts “a purchaser might acquire unsponsored ADRs in a domestic transaction.” The important distinction in this case is that the facts presented showed with respect to the transaction in which these plaintiffs acquired their ADRs that “the underlying shares of Toshiba common stock were purchased in Japan, on the Tokyo Stock Exchange,” prior to their conversion to ADRs. Because the plaintiffs “irrevocable liability” attached when the Tokyo Stock Exchange purchase took place, the ADR transaction was not a “domestic transaction.”


Where does that leave us with respect to the question of whether or not U.S. securities law claims can be asserted with respect to transactions in unsponsored Level I ADRs?


The bottom line is that it is possible for companies whose unsponsored Level I ADRs trade in the U.S. to be subject to a U.S. securities lawsuit in connection with transactions in those securities; as this case shows, plaintiffs may be able to raise sufficient allegations to plead a U.S. securities law claim based on transactions in unsponsored Level I ADRs. Whether or not the claimants ultimately will be able to sustain these kinds of claims as a class action will depend on the very specific details of the plaintiffs’ own transactions in the unsponsored Level I ADRs.


One final note about these developments in the Toshiba case. As Jonathan Richman of the Proskauer law firm noted in his January 10, 2022 memo about the class certification rulings in Toshiba, Judge Pregerson’s rulings show “the importance of examining the facts underlying particular transactions in unlisted, unsponsored ADRs.” The plaintiffs, able to rely in the allegations in their complaint, were able to sufficiently portray the transactions as domestic as to be able to survive the motion to dismiss. However, the defendants were able to show that the plaintiffs’ complaint “had not explained that the New York action had all depended on the prior purchase of the common stock on the Tokyo Stock Exchange.”  As Richman noted “the development of those facts ended up changing the outcome” of the class certification motions, and, therefore, of the case.