On January 28, 2020, in a case that potentially expands the liability of foreign companies, the US District Court for the Central District of California denied a foreign defendant’s motion to dismiss securities law claims brought by US purchasers of its unsponsored, unlisted American Depository Receipts (ADRs). Specifically, in Stoyas v. Toshiba Corp., — F. Supp. 3d —, No. 15-cv-4194, 2020 WL 466629 (C.D. Cal. Jan. 28, 2020), the District Court held that Plaintiffs sufficiently pled that their purchases of Defendant’s unsponsored ADRs on the over-the-counter (OTC) market constituted domestic transactions in securities, as well as alleging the Defendant’s plausible participation in the establishment of the ADR program so that the Defendant’s alleged conduct was “in connection with” Plaintiffs’ purchases. The District Court permitted Plaintiffs’ separate claims under Japanese securities laws to go forward as well, concluding that principles of international comity and forum non conveniens did not bar the exercise of supplemental jurisdiction over such claims.


In June 2015, Plaintiffs filed a class action lawsuit under Sections 10(b) and 20(a) of the US Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder, as well as claims under Japan’s Financial Instruments & Exchange Act (JFIEA), against Defendant Toshiba Corporation (Toshiba) based on the alleged deliberate use of improper accounting practices. The District Court dismissed the Plaintiffs’ complaint with prejudice, 191 F. Supp. 3d 1080 (C.D. Cal. 2016), concluding that the OTC market on which the ADRs were exchanged was not an “exchange” under the Exchange Act and that the Plaintiffs failed to adequately plead Defendant’s involvement in the ADR transaction at issue. The District Court also dismissed the Plaintiffs’ claims under JFIEA on the basis of international comity and forum non conveniens.

On appeal, the US Court of Appeals for the Ninth Circuit, 896 F.3d 933 (9th Cir. 2018), reversed the District Court’s decision in light of Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), and relevant Second Circuit Court of Appeals cases. In Morrison, the US Supreme Court held that US securities laws only apply extraterritorially to (1) “transactions listed on domestic exchanges” and (2) “domestic transactions in other securities.” The Ninth Circuit agreed with the District Court that the OTC market did not qualify as an “exchange” under Morrison’s first prong. It held, however, that ADRs were “securities” under the Exchange Act and would therefore be subject to US securities laws if purchased in a “domestic transaction.” In determining whether a transaction is “domestic,” the Ninth Circuit adopted the Second Circuit’s standard in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), which provides that a “transaction occurs when the parties incur irrevocable liability.” The Ninth Circuit acknowledged that specific allegations regarding this irrevocable liability standard, i.e., where purchasers incurred the liability to take and pay for securities and where sellers incurred the liability to deliver securities, in addition to allegations regarding Defendant’s involvement in the ADR transaction to make its alleged conduct to be “in connection with” Plaintiffs’ purchases as required by Section 10(b), were missing from Plaintiffs’ complaint. To that end, the Ninth Circuit remanded the case for Plaintiffs to amend their complaint.

After the US Supreme Court denied Defendant’s petition for certiorari to review the Ninth Circuit’s decision, Plaintiffs filed a second amended complaint (SAC) with the District Court.

The District Court’s decision

On remand, the District Court denied the Defendant’s motion to dismiss the SAC.

First, the District Court held that Plaintiffs adequately alleged that the ADR transaction was “domestic” under Morrison. The Plaintiffs alleged, for instance, that the tasks carried out by the broker, the placement of buy orders, the payment of the purchase price and the transfer of title all took place in a single transaction in the United States, which the District Court held led to a “plausible inference that the parties incurred irrevocable liability within the United States.” In contrast, the Defendant argued that the Plaintiffs would have first purchased Toshiba stock in a foreign transaction and then, in a second transaction, deposited the shares with the issuer in exchange for the ADRs at issue here. The court stated if “discovery ultimately reveals that the ADR transaction involved an initial purchase of common stock in a foreign transaction, as the Defendant contends, [that] can be a matter properly raised at the summary judgment stage.”

Second, the District Court held that the Plaintiffs sufficiently pled that the Defendant’s alleged conduct was “in connection with” the ADR transaction. In reaching this conclusion, the District Court focused on whether the Defendant participated in or consented to the establishment of the unsponsored ADR program. The District Court pointed, for instance, to Plaintiffs’ allegations regarding “the nature of the . . . ADRs, the OTC Market, the Toshiba ADR program, including the depositary institutions that offer Toshiba ADRs, the Form F-6s, the trading volume, the contractual terms, and Toshiba’s plausible consent to the sale of its stock in the United States as ADRs.” Further, the District Court focused on the Plaintiffs’ allegation that the Bank of New York Mellon, one of Toshiba’s ten largest shareholders and one of the depositary institutions for Toshiba ADRs, held 1.3 percent of Toshiba’s outstanding stock, and the Plaintiffs’ assertion that it is unlikely for that many shares to be obtained without the consent, assistance or participation of Toshiba. Based on the foregoing, the District Court concluded that the Plaintiffs sufficiently alleged Toshiba’s plausible participation in the establishment of the ADR program.

The District Court next analyzed whether comity or forum non conveniens principles warranted dismissal of the Plaintiffs’ claims. Because the Plaintiffs and the proposed class were all US nationals and plausibly satisfied Morrison’s requirements to plead a domestic transaction, the District Court held the allegations in the case were “sufficient to permit this case to move forward in this forum.” The District Court also stated that “[i]n light of the court’s conclusion that Plaintiffs have sufficiently alleged Securities Exchange Act claims, the court concludes that comity and forum non conveniens do not compel dismissal of Plaintiffs’ JFIEA claim.” The District Court did not elaborate on the latter point, noting that it declined to review prior briefing on this issue to which the Defendant referred the Court. In light of the foregoing, the District Court decided to continue to exercise supplemental jurisdiction over the Plaintiffs’ JFIEA claim.


Stoyas signals the potential expansion of liability for foreign entities who have unsponsored ADRs issued in the US. One critical feature will be the extent to which the foreign entity participates in, or consents to, the unsponsored ADR program in order to make any alleged misconduct to be “in connection with” the purchase and sale of the ADRs. Foreign entities therefore might wish to review the degree to which they are involved in unsponsored ADR programs as part of a comprehensive risk analysis of potential liability under US securities laws.

Stoyas might also open the door for courts to exercise supplemental jurisdiction over foreign-law claims where US investors adequately allege US securities claims in the same suit.

One thing is for certain: Stoyas bears watching as the case proceeds into discovery and as to how persuasive the decision is for other US federal courts.