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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 12 minutes read

US Securities Fraud Liability for Non-US Issuers of Securities Subject to Unsponsored ADRs: New Ruling Opens Up Additional Defense Strategies

Non-US issuers of securities with unsponsored ADRs in US capital markets may have gained a new defense strategy, a federal court in Los Angeles held earlier this month.[1]  The latest ruling is part of a long-winding case against Toshiba, alleging fraud under US federal securities laws, about which we have written in the past.  The federal district court initially dismissed the case, but the dismissal was reversed on appeal by the Ninth Circuit Court of Appeals, whose jurisdiction covers the western part of the United States.  That reversal allowed the lawsuit to proceed to the next procedural stages: discovery and certification of a proposed class of international shareholders of Toshiba.  In its most recent ruling, the federal district court declined to certify the class, finding that the lead plaintiff’s unsponsored Toshiba ADRs had initially been purchased outside the United States and were therefore outside of the territorial scope of US securities laws.

The ruling presents some interesting takeaways for non-US companies that have unsponsored ADRs in the United States:

  • You have a new defense strategy. In recent years, a rising number of defendants have been able to end or limit securities class actions by defeating class certification. The latest Toshiba ruling could provide a new argument that companies with unsponsored ADRs can raise when opposing class certification.  The pivotal issue will be the location where the plaintiff incurred irrevocable liability when it purchased ADRs.  If the location where irrevocable liability attaches falls outside the United States, defendants may now have a new strategy to pursue at the class certification stage.
  • And new arguments you can make.  While it is possible that plaintiffs may attempt to find a class representative that acquired its securities in the US, defendants could still argue that the question of where irrevocable liability attached when each class member purchased unsponsored ADRs would predominate over any class-wide issues, thereby barring class certification.
  • But these lawsuits won’t go away.  The ruling comes at a fairly advanced procedural stage, especially after plaintiffs had access to discovery.  Defendants in similar cases may be able to use the case to argue that discovery should be phased, with the first phase being limited to the class certification issues, and full discovery being open only after a class is certified.
  • And it does not change liability for sponsored ADRs.  The ruling does not impact the exposure that non-US issuers of sponsored ADRs face in the United States, which means all non-US Levels 2 and 3 issuers, and many Level 1 issuers.
  • Nor does it heal the existing circuit split in US law.  The ruling also does not heal the circuit split between the Ninth Circuit (West Coast) and Second Circuit (New York, Connecticut and Vermont) in the treatment of securities fraud liability for non-US issuers with unsponsored ADR programs, a topic we previously analyzed.  It is likely that plaintiffs will continue to exploit the more favorable Ninth Circuit law, and file their actions in that Circuit.
  • You can take steps to mitigate risk.  As we have previously explained, non-US issuers of securities with an unsponsored ADR program can take concrete steps to mitigate their exposure, which we have discussed here

The Early Toshiba Saga

Unsponsored ADRs.  Toshiba is established under Japanese law and headquartered in Tokyo.  Its common stock trades on the Tokyo and Nagoya stock exchanges.  In September 2015, Toshiba revised its pre-tax profits downwards for fiscal years 2008 to 2014 by a total of $2.6 billion.  The restated profits were the result of Toshiba’s admission of “widespread, deliberately fraudulent accounting practices” that ultimately caused a loss of approximately $7.6 billion in Toshiba’s market capitalization.[2]

Plaintiff Automotive Industries Pension Trust Fund filed a lawsuit against Toshiba in 2015 in federal court in Los Angeles (the District Court) on behalf of a putative class of purchasers of Toshiba’s unsponsored, over-the-counter ADRs.  Plaintiff alleged that Toshiba violated Section 10(b) of the Securities Exchange Act of 1934, which prohibits fraudulent practices “in connection with the purchase or sale of securities,” including ADRs.[3]

ADRs are negotiable certificates that represent a beneficial interest in (but not legal title to) certain shares of a non-US company.[4]  As was the case for the Toshiba ADRs, they are most often issued by US banks who have acquired the underlying shares of the non-US company before converting such shares to ADRs.  ADRs can be either “sponsored” or “unsponsored.”  ADRs are “sponsored” when the non-US company enters into an agreement with the US depository institution for the bank to perform administrative and custodial services for the ADR holders.  The issuing bank and the non-US company jointly register sponsored ADRs with the US Securities and Exchange Commission (the SEC), after which the ADRs can be listed on US stock exchanges. 

Toshiba’s ADRs, however, are unsponsored: Toshiba had no formal involvement with their issuance by US banks, or with the registration of its ADRs with the SEC.  Because unsponsored ADRs cannot trade on US national exchanges, Toshiba’s ADRs were sold on an “over-the-counter” market allegedly located in New York and operated by OTC Link, which was allegedly based in New York.[5]

Toshiba’s First Motion to Dismiss.  A threshold question in determining the viability of the Plaintiff’s claims against Toshiba was whether Plaintiff alleged a transaction within the territorial scope of the Exchange Act.  Pursuant to the US Supreme Court’s decision in Morrison v. National Australia Bank, Ltd.,[6] Section 10(b) of the Exchange Act applies only to (1) transactions in securities listed on domestic exchanges, and (2) domestic transactions in other securities.[7]

Applying Morrison, the District Court initially concluded on May 26, 2016 that Plaintiff had not sufficiently alleged that it purchased its Toshiba ADRs in a domestic transaction, and that therefore its purchases fell outside the territorial scope of Section 10(b).  The District Court also found that amending the complaint would be futile, and therefore dismissed Plaintiff’s Exchange Act claims with prejudice.

The Ninth Circuit’s Reversal.  On July 17, 2018, the Ninth Circuit reversed the District Court’s decision.  Although the Ninth Circuit agreed that Plaintiff had not sufficiently alleged a “domestic transaction,” the Ninth Circuit found that the District Court should have granted Plaintiff leave to fix this inadequacy.  The Ninth Circuit held that a securities transaction is “domestic”—and therefore within the territorial scope of the Exchange Act—if “the purchaser incurred irrevocable liability within the United States to take and pay for a security,” or “the seller incurred irrevocable liability within the United States to deliver a security.”[8]  In the Ninth Circuit’s view, Plaintiff could “almost certainly” allege that it purchased Toshiba’s ADRs in a domestic transaction, given that Plaintiff alleged that (i) it purchased ADRs in the United States from a US bank, (ii) its own headquarters and operations were within the United States, and (iii) the over-the-counter trading system on which Plaintiff bought its ADRs was operated in the United States.

The Second Motion to Dismiss.  After the US Supreme Court denied Toshiba’s request to appeal the Ninth Circuit’s decision,[9] the case was remanded to the District Court and Plaintiff filed a second amended complaint.  Toshiba again moved to dismiss for failure to allege a “domestic transaction.”  In denying Toshiba’s motion in a January 2020 order, the District Court focused on Plaintiff’s allegations that its purchase order was directed by an investment manager in New York, that a broker in New York routed the purchase order to an over-the-counter trading platform located in New York, that the depository bank (Citibank) issued the ADRs from its offices in New York, that Plaintiff made payment from a New York bank, and a transfer of title was recorded in New York.[10]  The District Court determined that these allegations, if true, would show that Plaintiff incurred irrevocable liability in the United States.[11]

The District Court rejected Toshiba’s argument that because the ADRs were issued by Citibank, they required Plaintiff (or its agent) to first purchase Toshiba shares on a non-US exchange before creating ADRs—and, as a result, irrevocable liability attached outside the US.  Acknowledging the potential merit of Toshiba’s argument, the District Court nevertheless rejected the argument “[a]t the pleading stage.” [12]  To do otherwise would require the District Court to “disregard” Plaintiff’s allegations, which the District Court was required to accept as true in evaluating a motion to dismiss.[13]  However, if discovery revealed that Plaintiff’s ADR transactions involved an initial purchase of common stock in a non-US jurisdiction, then this issue would be “properly raised at the summary judgment stage.”[14]

The District Court’s Class Certification Decision

On February 19, 2021, after approximately 13 months of discovery, Plaintiff moved to certify a class of plaintiffs consisting of purchasers of Toshiba’s unsponsored ADRs “using the facilities of the OTC Market.”[15]

To act as a representative plaintiff that prosecutes claims on behalf of absent class members, the proposed class plaintiff must show that, among other things, its claims are typical of the claims of the class members.  The purpose of this requirement is to ensure that the interests of the representative plaintiff align with the interest of the class.

Toshiba argued that Plaintiff could not satisfy this typicality requirement for its Exchange Act claims because, unlike the members of the proposed class, Plaintiff did not acquire Toshiba securities in the United States, and thus was subject to unique defenses.  In particular, Toshiba argued that Plaintiff initially purchased its securities as shares of Toshiba common stock traded on the Tokyo Stock Exchange, before such common shares were converted into ADRs.  According to Toshiba, Plaintiff incurred irrevocable liability in Japan, and did not execute a “domestic transaction” within the territorial scope of the Exchange Act.[16]

The District Court agreed.  The evidence showed that Plaintiff’s investment manager, ClearBridge Advisors LLC placed a market order on Plaintiff’s behalf for Toshiba’s unsponsored ADRs in New York, through its broker, Barclays Capital LE, also located in New York.[17]  Barclays traders in New York and Japan then purchased Toshiba’s common stock on the Tokyo Stock Exchange for conversion into ADRs, knowing that it had a ready and willing purchaser, and it was at “th[is] moment” that Plaintiff “was bound to take and pay for the ADRs, once converted.”[18]  When Barclays executed the purchase of ordinary stock in Japan, it was acting as ClearBridge’s agent and did not take on any risk of loss.  ClearBridge, through its market order, was “bound to complete the ADR trade, beginning with the trade of underlying Toshiba common stock.”[19]  “[T]he triggering event that caused ClearBridge (and by extension [Plaintiff]) to incur irrevocable liability occurred in Japan when Barclays acquired the shares of Toshiba common stock on the Tokyo stock exchange.”[20]

As a result, Plaintiff “purchased the ADRs in a [non-US] transaction.”  Because Plaintiff could not establish that it “purchased the ADRS in a domestic transaction” within the territorial scope of the Exchange Act, it could “not satisfy the typicality requirement,” and the District Court denied class certification of Plaintiff’s Exchange Act claims.[21]

Plaintiffs have appealed again to the Ninth Circuit.  They argue that the District Court’s examination of the location of the “underlying stock purchase—what it labeled a ‘triggering event’” “added another criterion to the Morrison” test that contravenes both Morrison and the Ninth Circuit’s own earlier ruling in Toshiba.

Implications for Non-US Issuers

The early Toshiba saga shows that, at least before courts in the Ninth Circuit, securities class action plaintiffs can successfully allege a “domestic transaction” within the territorial scope of the Exchange Act based on their unilateral purchases of a non-US issuer’s unsponsored ADRs.  This could make it more difficult for non-US companies with unsponsored ADR programs to dispose of securities class actions at the early, pre-discovery stages of a lawsuit.

The most recent ruling denying class certification may temper the effects of these previous decisions. The rules governing class action lawsuits in US federal courts are intended to provide an efficient mechanism for addressing common injuries that, if litigated by each plaintiff separately, might not justify the cost of a lawsuit.  Denial of class certification—a rare event in securities class actions—precludes access to these efficiencies and, as a result, typically facilitates favorable settlements for defendants based on only a single plaintiff’s alleged loss.  Plaintiffs’ counsel often work on a contingency basis, collecting fees only if there is a settlement or judgment.  Plaintiffs’ counsel may be less willing to carry the significant burden and risk of litigating Exchange Act claims on behalf of purchasers of unsponsored ADRs when there is a material risk that class certification is denied.

Presumably, future representative plaintiffs asserting Exchange Act claims on behalf of purchasers of unsponsored ADRs could seek to cure any defect in the “typicality” requirement for class certification by bringing a class action on behalf of only those purchasers of pre-existing ADRs for which no conversion from non-US-listed common stock is necessary, or who otherwise incurred irrevocable liability in the US.  Time will tell how large this pool of investors is.  As importantly, for a lawsuit to proceed as a class action, issues common to class members must predominate over individualized issues.  And Exchange Act claims based on purchases of unsponsored ADRs may well require individualized investigation into the location of each class member’s purchase, no matter how the class of plaintiffs is defined.[22]  

Despite the welcome ramifications of the District Court’s recent decision for non-US companies with unsponsored ADRs, such companies still should be cautious if they become aware of unsponsored ADR programs in their shares.


[1] Stoyas v. Toshiba Corp., 2022 U.S. Dist. LEXIS 3996 (C.D. Cal. Jan. 7, 2022).

[2] See Toshiba Corp. v. Stoyas, 424 F. Supp. 3d 821, 824 (C.D. Cal. 2020).

[3] Plaintiff also asserted claims for violations of Japanese securities laws on behalf of purchasers of Toshiba’s unsponsored ADRs.  Another proposed lead plaintiff sought to bring only Japanese securities-law claims on behalf of a class of US citizens or residents who purchased Toshiba common stock on Japanese stock exchanges.  See Stoyas, 2022 U.S. Dist. LEXIS 3996, at *3-4.

[4] See Toshiba Corp. v. Stoyas, 896 F.3d 933, 940 (9th Cir. 2018).

[5] Toshiba, 424 F. Supp. 3d at 826.

[6] 561 U.S. 247 (2010).

[7] Id. at 267.

[8] Toshiba, 896 F.3d at 948.

[9] Toshiba Corp. v. Auto Indus. Pension Trust Fund, 139 S. Ct. 2766 (2019).

[10] Toshiba, 424 F. Supp. 3d at 826.

[11] Id.

[12] Id. at 826-27.

[13] Id. 

[14] In contrast to a motion to dismiss, which tests only the sufficiency of a plaintiff’s allegations, a motion for summary judgment tests the sufficiency of admissible evidence.

[15] Stoyas, 2022 U.S. Dist. LEXIS 3996, at *3-4.

[16] Id. Irrevocable liability “attaches once the transaction is fully executed and the parties have committed to perform their obligations under the agreement.” Id. at *8.

[17] Id. at *8.

[18] Id. at *10.

[19] Id. at *13.  The District Court rejected Plaintiff’s argument that irrevocable liability occurred when Barclays contacted ClearBridge to notify it of the price and exchange rate for the ADRs and to ask if ClearBride agreed, acts which took place in New York and after Barclays has already purchased Toshiba common shares on the Tokyo Exchange.  Id. at *9-10.  Consistent with the nature of a market order—through which a buyer places an order for immediate execution at the best available price—Barclays sent the details of the trade to ClearBridge as a courtesy, and thus did not need ClearBridge’s approval of the price before it could purchase Toshiba’s common shares in Japan.

[20] Id. at *13.

[21] Id.  Plaintiff also brought claims pursuant to Japanese securities laws.  The arguments Toshiba raised against class certification of these Japanese-law claims were “potentially dispositive” and therefore “more appropriate to a motion for summary judgment.”  Id. at *18.  As a result, the District Court denied Plaintiff’s class certification motion as to the Japanese-law claims, but without prejudice to a renewed motion for class certification should these claims survive a motion for summary judgment.  Id.

[22] See In re Petrobras Sec. Litig., 862 F.3d 250, 272 (2d Cir. 2017) (“On the available record, the investigation of domesticity appears to be an ‘individualized question’ requiring putative class members to ‘present evidence that varies from member to member. . . .’ These transaction-specific facts are not obviously ‘susceptible to class-wide proof . . . .’”).


litigation, corporate governance