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Federal Court Denies Toshiba’s Motion to Dismiss, Allowing Exchange Act Claims Covering Transactions in Unsponsored ADS to Proceed Alongside Japanese Law Claims Covering Common Shares

Recently, the United States District Court for the Central District of California denied the Toshiba's motion to dismiss the Second Amended Complaint (“Amended Complaint”) filed in the Toshiba securities litigation.  As we previously wrote, in 2016, the district court dismissed the case, holding both that transactions in Toshiba’s unsponsored American Depositary Receipts (ADRs) are not “domestic” transactions as required by Morrison, and also that the plaintiffs’ Japanese law claims must be dismissed due to comity concerns and on forum non conveniens grounds.  Then, as we discussed here, in 2018, the Ninth Circuit reversed this decision, holding that Toshiba ADR trades are domestic, and allowed the defendants to file the Amended Complaint asserting more specific allegations about Toshiba’s connection to the ADR trades.  

The plaintiffs filed the Amended Complaint in August of 2019.  In the Amended Complaint, the plaintiffs again alleged that Toshiba violated the U.S. Securities Exchange Act of 1934 and Japan’s Financial Instruments & Exchange Act (“JFIEA”).  The proposed class consists of: (1) all persons who purchased ADRs shares on the Over-the-Counter Market (“OTC Market”), and (2) all citizens of the United States who purchased shares of Toshiba common stock.  According to the plaintiffs, their claims arise from Toshiba’s deliberate use of improper accounting over a period of at least six years to inflate its pre-tax profits by more than $2.6 billion and conceal at least $1.3 billion in impairment losses at its U.S. nuclear business.

Toshiba moved to dismiss, again arguing that the complaint failed to adequately plead that the ADR transactions were domestic.  Toshiba contended that the amended complaint did not allege a domestic transaction because the allegations demonstrated that the plaintiffs purchased the underlying securities in a foreign transaction before converting the foreign stock into ADRs.  The court disagreed, noting that the Amended Complaint contained numerous allegations explaining the nature of the ADR transactions, including:

  • The placement of the buy order, the payment of the purchase price, and transfer of the title to the securities took place within the territorial jurisdiction of the United States.
  • The plaintiffs’ purchase of the ADRs was directed by its outside investment manager from the investment manager’s New York office.
  • The OTC Market trading platform was located in New York.
  • The ADRs were issued by Citibank’s New York office, and transfer of title was recorded in Citibank’s New York office.
  • The plaintiffs paid for the ADRs from a New York based bank.

The court concluded that, taking these allegations as true, the plaintiffs had “plausibly alleged that [they] incurred irrevocable liability to take and pay for the ADRs in the United States.”

The court also rejected Toshiba’s argument that the Amended Complaint did not adequately plead Toshiba’s involvement in the establishment of the ADR program.  The court noted that the Amended Complaint now alleged the details about the ADR transactions that the Ninth Circuit found lacking in the prior complaint, specifically: “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.”  The court also highlighted the Amended Complaint’s allegations that one of Toshiba’s depositary banks, Bank of New York Mellon, was one of Toshiba’s largest ten shareholders during the Class Period, and “it is unlikely that [that] many shares could have been acquired on the open market without the consent, assistance or participation of Toshiba.”  Thus, the court concluded that the plaintiffs had “sufficiently alleged Toshiba’s plausible participation in the establishment of the ADR program.”

Lastly, the court denied Toshiba’s motion to dismiss the JFIEA claims covering common share transactions on the Tokyo exchange.  The court noted that Toshiba had not provided “significant argument or support” for its contention that the JFIEA claim must be dismissed under comity and forum non conveniens principals.  It appears that rather than rebrief the issue, Toshiba relied on its argument from previous briefing conducted prior to the Ninth Circuit remanding the case.  In a terse footnote, the court stated that it “declines to review prior briefing made for a separate motion.”

As the case progresses through discovery, we expect class certification will be hotly contested, and Toshiba may also move for summary judgment particularly with respect to common share transactions.  However, the court’s decision provides good authority for plaintiffs seeking to bring claims covering unsponsored ADRs.

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Joel D. Rothman

Special Counsel

Joel D. Rothman is an attorney who handles commercial, securities, insurance, and employment litigation matters for Mintz clients. Joel advises institutional investors on securities class actions, represents shareholders in merger disputes, and counsels insurers in coverage disputes.